UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Name of Registrant, State of IRS Employer
Commission Incorporation, Address of Principal Identification
File Number Executive Offices and Telephone Number Number
1-9894 WPL HOLDINGS, INC. 39-1380265
(a Wisconsin corporation)
222 West Washington Avenue
Madison, Wisconsin 53703
Telephone (608)252-3311
0-337 WISCONSIN POWER AND LIGHT COMPANY 39-0714890
(a Wisconsin corporation)
222 West Washington Avenue
Madison, Wisconsin 53703
Telephone (608)252-3311
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each
Exchange on Which
Registrant Title of Class Registered
WPL Holdings,
Inc. Common Stock, $.01 Par Value New York Stock Exchange
WPL Holdings,
Inc. Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
Registrant Title of Class
Wisconsin Power and Light Company Preferred Stock (Accumulation
without Par Value)
Indicate by check mark whether each of the registrants (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 each 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of each registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-K or any amendment to this Form 10-K. [ X]
The aggregate market value of the voting stock held by nonaffiliates as of
January 31, 1997 is as follows:
WPL Holdings, Inc. $861.7 million
Wisconsin Power and Light Company $46.5 million
Number of shares outstanding for each class of common stock as of January
31, 1997:
WPL Holdings, Inc. Common Stock, $.01 par value,
30,773,735 shares
Wisconsin Power and Light Company Common Stock, $5 par value,
13,326,601 shares (all of which
are owned beneficially and of
record by WPL Holdings, Inc.)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statements relating to each registrant's 1997 Annual
Meeting of Shareowners are incorporated by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
Page
Part I Number
Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders Executive Officers of 16
the Registrants 17
Part II
Item 5. Market for Registrants' Common Equity and
Related Stockholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of 19
Operations
Item 8. Financial Statements and Supplementary 20
Data
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial 89
Disclosures
Part III
Item 10. Directors and Executive Officers of the
Registrants 89
Item 11. Executive Compensation 89
Item 12. Security Ownership of Certain Beneficial
Owners and Management 89
Item 13. Certain Relationships and Related 89
Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 90
Signatures 103
Financial Statement Schedules 109
<PAGE>
PART I
ITEM 1. BUSINESS
WPL Holdings, Inc.
WPL Holdings, Inc. (WPLH) was incorporated under the laws of the State of
Wisconsin on April 22, 1981, and operates as a holding company with both
utility and nonutility businesses. It is the parent company of a public
utility, Wisconsin Power and Light Company (WP&L) and its related
subsidiaries and of Heartland Development Corporation (HDC), the parent
corporation for the nonutility businesses. WPLH has no employees who are
not also employees of WP&L and/or HDC. Refer to Item 8 "Financial
Statements and Supplementary Data, Notes to Consolidated Financial
Statements," Note 13 for financial information related to WPLH's business
segments.
Proposed Merger
WPLH, IES Industries Inc. (IES) and Interstate Power Company (IPC) have
entered into an Agreement and Plan of Merger, as amended (Merger
Agreement), dated November 10, 1995, which provides for the combination of
all three companies. The new company will be named Interstate Energy
Corporation (IEC).
IES is a holding company headquartered in Cedar Rapids, Iowa, and is the
parent company of IES Utilities Inc. (IES Utilities) and IES Diversified
Inc. (IES Diversified). IES Utilities supplies electric and gas service
to approximately 336,000 and 176,000 customers, respectively, in Iowa.
IES Diversified and its principal subsidiaries are primarily engaged in
the energy-related, transportation and real estate development businesses.
IPC, a public utility headquartered in Dubuque, Iowa, supplies electric
and gas service to approximately 165,000 and 49,000 customers,
respectively, in northeast Iowa, northwest Illinois and southern
Minnesota.
The proposed merger, which will be accounted for as a pooling of
interests, was approved by the respective shareowners on September 5, 1996.
The merger is conditioned on the receipt of approvals of several federal
and state regulatory agencies. The status of these approvals is as
follows:
On January 15, 1997, the Federal Energy Regulatory Commission (FERC)
issued an order in which it accepted several provisions of the IEC merger
application without the need for public hearings. The FERC has set
limited issues for hearing, including generation market power in the
transmission-constrained Wisconsin Upper Michigan System (WUMS) subregion
in Wisconsin. The FERC has also ordered the merger partners to attempt to
negotiate a wholesale customer protection mechanism with those intervenors
who are not satisfied with the four year rate freeze proposed in the
application. If an agreement between the merger partners and the
intervenors is not reached, the FERC will decide the issue. A final
decision on the merger is expected to be issued by the FERC by the end of
the third quarter of 1997.
IES and IPC announced in 1996 their intentions to hold retail electric
prices to their current levels until at least January 1, 2000. The
companies made the proposal as part of their testimony in the IEC merger
application filed with the Iowa Utilities Board (IUB). The application
was later withdrawn and resubmitted on January 2, 1997 and the same rate
freeze proposal was included in the resubmittal. The proposal excludes
price changes due to government-mandated programs, such as energy
efficiency cost recovery, or unforeseen dramatic changes in operations.
Hearings before the IUB are expected to commence in the summer of 1997
with approval expected by the end of the third quarter of 1997.
In March of 1996, an application requesting approval of the merger was
filed with the Public Service Commission of Wisconsin (PSCW). On February
13, 1997, the PSCW voted to delay hearings on the proposed merger. The
hearings are currently scheduled for June 4, 1997, with a decision
anticipated in the third quarter of 1997. Legislation was introduced in
the Wisconsin State Senate in February 1997 which could delay the PSCW
approval of the merger. WPLH cannot predict the outcome of such
legislation.
In March of 1996, an application requesting approval of the merger was
also submitted to the Illinois Commerce Commission (ICC). The ICC
conducted hearings on November 12, 1996 and final briefs were filed on
December 23, 1996. A decision is pending.
On January 15, 1997, the Minnesota Public Utilities Commission (MPUC)
announced that it had approved the IEC merger without hearings, subject to
a number of technical conditions, which WPLH anticipates will not be
opposed by the merger partners. Included in these conditions is a four
year rate freeze for IEC's electric and gas customers in the state of
Minnesota.
An application to establish IEC as a registered holding company under the
Public Utility Holding Company Act of 1935 (1935 Act) was submitted to the
Securities and Exchange Commission (SEC). The period for comments by
interested parties closed on November 5, 1996. A decision on the
application is expected at the end of the third quarter of 1997. The SEC
historically has interpreted the 1935 Act to preclude registered holding
companies, with limited exceptions, from owning both electric and gas
utility systems. As part of the application, IEC has requested a ruling
on whether it would be allowed to continue its ownership in gas
operations.
An impact review of the merger on market power, which is required by the
Hart-Scott-Rodino Antitrust Improvements Act, was completed by the U.S.
Department of Justice (DOJ). All requirements of this review have been
satisfied. If the merger is not consummated before July 7, 1997, the
merger partners will be required to submit new information to the DOJ.
An application was filed with the Nuclear Regulatory Commission (NRC) to
approve the transfer of the licenses of IES for the Duane Arnold Energy
Center nuclear facility and of WP&L for the Kewaunee Nuclear Power Plant
to IEC. Both plants are jointly owned with other companies. The
application, which was filed on October 1, 1996, is pending.
Refer to Note 2 "Notes to Consolidated Financial Statements" for
additional information. For detailed unaudited pro forma financial
statements for IEC refer to Item 14.
WP&L
WP&L, incorporated in Wisconsin on February 21, 1917, as the Eastern
Wisconsin Electric Company, is a public utility predominately engaged in
the transmission and distribution of electric energy and the generation
and bulk purchase of electric energy for sale. WP&L also transports,
distributes and sells natural gas purchased from gas suppliers. Nearly
all of WP&L's customers are located in south and central Wisconsin. WP&L
operates in municipalities pursuant to permits of indefinite duration
which are regulated by Wisconsin law. WP&L does not derive a material
portion of its revenues from any one customer.
WP&L owns all of the outstanding capital stock of South Beloit Water, Gas
and Electric Company (South Beloit), a public utility supplying electric,
gas and water service, principally in Winnebago County, Illinois, which
was incorporated on July 23, 1908. WP&L also owns varying interests in
several other subsidiaries and investments which are not material to
WP&L's operations.
Regulation
WP&L is subject to regulation by the PSCW as to retail utility rates and
service, accounts, issuance and use of proceeds of securities, certain
additions and extensions to facilities and in other respects. The PSCW is
comprised of three Commissioners appointed by the Governor and ratified by
the Wisconsin State Senate. WP&L is required to file a rate case with the
PSCW every two years with requests for rate relief based on a forward-
looking test year period. South Beloit is subject to regulation by the
ICC for retail utility rates and service, accounts, issuance and use of
proceeds of securities, certain additions and extensions to facilities and
in other respects.
The PSCW's inquiries into the future structure of the natural gas and
electric utility industries are ongoing. The stated goal of the PSCW in
the natural gas docket is to move all gas supply activities out of the
existing regulated distribution utilities and allow affiliated units to
compete for the supply business. The goal of the electric utility
restructuring process is to create open access transmission and
distribution services for all customers with competitive generation and
customer service markets. Additional proceedings as well as consultation
with the legislature are planned prior to a target implementation date
after the year 2000.
The FERC has jurisdiction under the Federal Power Act over certain of the
electric utility facilities and operations, wholesale rates and accounting
practices of WP&L and in certain other respects. Certain of WP&L's
natural gas facilities and operations are subject to the jurisdiction of
the FERC under the Natural Gas Act. WP&L is presently exempt from all
provisions of the Public Utility Holding Company Act of 1935, except
provisions relating to the acquisition of securities of other public
utility companies.
The FERC is currently developing regulation which will begin to provide
open access to electric utility transmission facilities for wholesale
customers subject to certain approved FERC tariffs. WP&L believes its
existing open access tariffs position it well to compete under such market
conditions.
With respect to environmental matters impacting WP&L and its subsidiaries,
the United States Environmental Protection Agency administers certain
federal statutes and has delegated the administration of other
environmental initiatives to the Wisconsin Department of Natural Resources
(DNR). In addition, the DNR has jurisdiction over air and water quality
standards associated with fossil fuel fired electric generation and the
level and flow of water, safety and other matters pertaining to
hydroelectric generation.
WP&L is subject to the jurisdiction of the NRC with respect to the
Kewaunee Nuclear Power Plant (Kewaunee) and to the jurisdiction of the
United States Department of Energy (DOE) with respect to the disposal of
nuclear fuel and other radioactive wastes from Kewaunee.
Employees
At December 31, 1996, WP&L employed 2,339 persons, of whom 1,827 were
considered electric utility employees, 308 were considered gas utility
employees and 204 were considered other utility employees. WP&L has a 3-
year contract with members of the International Brotherhood of Electrical
Workers, Local 965, that is in effect until May 31, 1999 which covers
1,617 of WP&L's employees.
Electric Operations
General
WP&L provides electricity in a service territory of approximately
16,000 square miles in 35 counties in southern and central Wisconsin and 4
counties in northern Illinois. As of December 31, 1996, WP&L provided
retail electric service to approximately 385,000 customers in 615 cities,
villages and towns, and wholesale service to 24 municipal utilities, one
privately owned utility, 3 rural electric cooperatives, one Native
American nation and to the Wisconsin Public Power, Inc. system for the
provision of retail service to 9 communities.
Electric operations represented 77.6 percent of WP&L's total operating
revenues and 87.2 percent of WP&L's total operating income for the year
ended December 31, 1996.
Electric sales are seasonal to some extent with the yearly peak normally
occurring in the summer months. WP&L also experiences a smaller winter
peak in December or January. The maximum net hourly peak load on the
electric system was 2,124 megawatts and occurred on August 6, 1996. The
winter system peak of 1,901 megawatts occurred on December 18, 1996.
During the year ended December 31, 1996, about 69.6 percent of total
kilowatthour requirements were generated by company-owned and
jointly-owned facilities and the remaining 30.4 percent was purchased.
WP&L's electric generating facilities include: four coal-fired generating
stations (including nine units; four jointly owned), seven natural-gas-
fired peaking units, eight hydro-electric plants (two jointly owned), one
gas-fired steam generating plant and one nuclear power plant (jointly
owned). Refer to Item 2 "Properties" for additional information regarding
electric generating facilities.
WP&L owns 21,753 miles of electric transmission and distribution lines and
363 substations located adjacent to the communities served. WP&L is
interconnected with other utilities in Wisconsin and neighboring states
and is a member of the Mid-Continent Area Power Pool Resource Transmission
Group (MAPP RTG) and Power and Energy Market. Although currently a member
of the Mid-America Interconnected Network, Inc. (MAIN), WP&L officially
notified the MAIN board of directors of its intentions to withdraw from
MAIN, effective December 31, 1997.
Fuel
In 1996, approximately 84.0 percent of WP&L's net kilowatthour generation
of electricity was fueled by coal and 12.7 percent by nuclear fuel
(provided by WP&L's 41 percent ownership interest in Kewaunee). The
remaining electricity generated was produced by hydroelectric, oil-fired
and natural gas generation.
Coal
WP&L's primary fuel source is coal. To ensure an adequate supply of coal,
WP&L has entered into certain long-term coal contracts. These contracts
include a demand or take-or-pay clause under which payments are required
if contracted quantities are not purchased. Refer to Note 11a in "Notes
to Consolidated Financial Statements" for details relating to these long-
term coal purchase commitments. WP&L anticipates that its average fuel
costs will likely increase in the future, due to cost escalation
provisions in existing coal and transportation contracts. WP&L's
management believes that any increases in costs associated with these
contracts will be incorporated in future rates and as such will not have a
material effect on operating results.
The estimated coal requirements of WP&L's generating units (including
jointly-owned facilities) for the years 1997 through 2001 total about 40
million tons. Present coal supply contracts and transportation contracts
(excluding extension options) cover approximately 46 percent and 63
percent, respectively, of these estimated requirements. WP&L will seek
renewals of existing contracts or additional sources of supply and
negotiate new or additional transportation contracts to satisfy these
requirements and to comply with environmental regulations.
Purchased Power
During the year ended December 31, 1996, about 30.4 percent of WP&L's
total kilowatthour requirements were met through purchased power. Refer
to Note 11b in "Notes to Consolidated Financial Statements" for details
relating to long-term purchase power commitments.
Nuclear
Kewaunee is jointly-owned by WP&L (41 percent), Wisconsin Public Service
Corporation (41.2 percent) and Madison Gas & Electric Company (17.8
percent). Wisconsin Public Service Corporation (WPSC) is the operator.
The plant began commercial operation in 1974. Kewaunee operates with a
NRC license which expires in 2013.
The supply of nuclear fuel for the Kewaunee plant is dependent upon the
mining and milling of uranium ore to uranium concentrates, the conversion
of uranium concentrates to uranium hexafluoride, the enrichment of the
uranium hexafluoride and the fabrication of the enriched uranium into
usable fuel assemblies. After a region (approximately one-third of the
nuclear fuel assemblies in the reactor) of spent fuel is removed from the
reactor, it is placed in temporary storage for cooling in a spent fuel
pool at the plant site. Permanent storage is addressed below. Presently,
there are no operating facilities in the United States reprocessing
commercial nuclear fuel. A discussion of the nuclear fuel supply for
Kewaunee, which requires approximately 300,000 pounds of uranium
concentrates per year follows:
(a) Requirements for uranium are met through spot market or contract
purchases of uranium. An inventory policy, which takes advantage
of economical spot market purchases of uranium, results in
maintaining inventories sufficient for up to two reactor reloads
of fuel, excluding in-process uranium.
(b) Uranium hexafluoride, from inventory and from spot market
purchases, was used to satisfy converted material requirements in
1996. Conversion services relating to uranium hexafluoride are
purchased on the spot market. Contracts exist with primary
suppliers for services in 1997, 1998 and 1999.
(c) In 1996, enrichment services were procured from COGEMA, Inc.
pursuant to a contract executed in 1983 and last amended in 1995.
Enrichment services are also purchased from the United States
Enrichment Corporation under the terms of the utility services
contract. This contract is in effect for the life of Kewaunee.
The Kewaunee owners over the next ten years are committed to take
70 percent of their annual enrichment services requirements in
alternate years 1997, 1999, 2001, 2003, and 2005 from the United
States Enrichment Corporation.
(d) Fuel fabrication requirements through March 15, 2001 are covered
by contract with Siemens Power Corporation.
(e) Beyond the stated periods for Kewaunee, additional contracts for
uranium concentrates, conversion to uranium hexafluoride,
fabrication and spent fuel storage will have to be procured. The
prices for the foregoing are currently expected to increase
slightly.
The National Energy Policy Act of 1992 provides that both the Federal
government and the nuclear utilities fund the decontamination and
decommissioning of the three federal gaseous diffusion plants in the
United States. This will require the owners of Kewaunee to pay an
additional $19.2 million in current dollars over the next 15 years plus
an adjustment for inflation. At December 31, 1996 the remaining liability
was $ 13.1 million of which WP&L's share was $5.4 million. WP&L's share
including interest amounted to an annual payment of approximately $554,000
in 1996.
If for any reason Kewaunee was forced to permanently suspend operations,
fuel related obligations are as follows: (1) there are no financial
penalties associated with present uranium supply, conversion service and
enrichment agreements and (2) the fuel fabrication contract contains force
majeure and termination for convenience provisions. The maximum exposure
could be as much as $550,000 as of the end of 1996. Uranium inventories
could be sold on the spot market.
In September 1996, Kewaunee was taken out of service for a scheduled
refueling and maintenance outage which was originally projected to be of
five weeks duration. Additional information relating to the Kewaunee
outage can be found elsewhere in this report in Item 7 "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations."
Physical decommissioning is expected to occur during the period 2014 to
2021 with additional expenditures being incurred during the period 2022 to
2039 related to the storage of spent nuclear fuel at the site. The
undiscounted amount of decommissioning costs estimated to be expended
between the years 2003 and 2039 is $611 million. Wisconsin utilities
operating nuclear generating plants are required by the PSCW to establish
external trust funds to provide for the decommissioning of such plants.
WP&L's share of the decommissioning costs is estimated to be $176 million
(in 1996 dollars) based on a 1992 site-specific study, using the immediate
dismantlement method of decommissioning. WP&L's annual contribution to
the external trust fund for decommissioning was $10.7 million in 1996.
Retail rate order UR-110, expected to be issued by the PSCW in April 1997,
will likely increase the annual contribution to approximately $16 million.
The market value of the investments in the funds established by WP&L at
December 31, 1996, totaled $90.7 million. Additionally, in July 1994, the
PSCW issued a generic order covering utilities that have nuclear
generation. This order standardizes the escalation assumptions to be used
in determining nuclear decommissioning liabilities. The inflation
assumptions applied in UR-110 were as follows: labor, 4.12 percent; burial
costs, 10.42 percent; energy, 3.66 percent; and other, 8.00 percent.
After-tax earnings on the tax-qualified and non-qualified decommissioning
funds are assumed to be 5.6 percent and 7.0 percent, respectively.
Pursuant to the Nuclear Waste Policy Act of 1982, the DOE has entered into
a contract with WP&L to accept, transport and dispose of spent nuclear
fuel beginning no later than January 31, 1998. The DOE has announced that
it will delay the acceptance of spent nuclear fuel beyond 1998. A fee to
offset the costs of the DOE's disposal for all spent fuel used since
April 7, 1983 has been assessed by the DOE at one mill per net
kilowatthour of electricity generated and sold by Kewaunee. An additional
one-time fee was paid for the disposal of spent nuclear fuel used to
generate electricity prior to April 7, 1983. Spent fuel is currently
stored at Kewaunee. The existing capacity of the spent fuel storage
facility will enable storage of the projected quantities of spent fuel
through April 2001. Kewaunee is currently evaluating options for the
storage of additional quantities beyond 2001. Several options are
available. An investment of approximately $2.5 million could provide
additional storage sufficient to meet on-site spent fuel storage needs
until 2013, the expiration of the current operating license.
The Low-Level Radioactive Waste Policy Act of 1980, as amended, provides
that states may enter into compacts to provide for regional low-level
waste disposal facilities. Wisconsin is a member of the Midwest
Interstate Low-Level Radioactive Waste Compact. Ohio has been selected as
the host state for the Midwest Compact and is proceeding with the
preliminary phases of site selection. In July 1995, the Barnwell, South
Carolina disposal facility again began accepting waste materials from
outside its region. The Kewaunee owners expect to have sufficient storage
space either on site or through shipments to Barnwell to satisfy low
level radioactive waste disposal needs until the Ohio facility accepts low
level radioactive waste materials.
The Kewaunee capability factor was 71.3 percent in 1996, compared to a
projected industry average of 79.8 percent. The comparable amounts for
1995 were 83.1 percent and 84.5 percent, respectively. The lower Kewaunee
percent for 1996 reflects the extended shutdown of Kewaunee for the repair
of the steam generator tubes.
Recovery of Electric Fuel Costs and Purchased Power
In WP&L's current rate order, UR-109, the PSCW approved elimination of the
retail electric fuel adjustment clause for a two year trial period, 1995-
1996. For that period, retail rates remained unchanged even when fuel
costs and purchased power varied from forecasted levels established in the
rate proceeding. At the PSCW hearings on March 4, 1997, it was determined
that with rate case UR-110, WP&L will reinstate the retail electric fuel
adjustment clause.
Under the fuel adjustment clause, rates are based on estimated per unit
fuel costs and purchased power established during rate proceedings and are
not subject to change by fuel cost and purchased power fluctuations unless
actual costs are outside specified limits. If actual costs vary from the
estimated costs by more than +/- 10 percent in a month or by more than +/-
3 percent for the test year to date, projected annual variances are then
estimated. If the projected annual variance is more than +/- 3 percent,
rates are subject to hearings and a increase or decrease by the PSCW.
WP&L's wholesale rates and South Beloit's retail rates contain fuel
adjustment clauses pursuant to which rates are adjusted monthly to reflect
changes in the costs of fuel.
Environmental Matters
WP&L cannot precisely forecast the effect of future environmental
regulations by federal, state and local authorities upon its generating,
transmission and other facilities, or its operations, but has taken steps
to anticipate the future while meeting the requirements of current
environmental regulations. The Clean Air Act Amendments of 1977 and
subsequent amendments to the Clean Air Act, as well as the new laws
affecting the handling and disposal of solid and hazardous wastes, could
affect the siting, construction and operating costs of both present and
future generating units.
Under the Federal Clean Water Act, National Pollutant Discharge
Elimination System permits for generating station discharge into water
ways are required to be obtained from the DNR to which the permit program
has been delegated. These permits must be periodically renewed. WP&L has
obtained such permits for all of its generating stations or has filed
timely applications for renewals of such permits.
Air quality regulations promulgated by the DNR in accordance with federal
standards impose statewide restrictions on the emission of particulates,
sulfur dioxide, nitrogen oxides and other air pollutants and require
permits from the DNR for the operation of emission sources. WP&L
currently has the necessary permits to operate its generating facilities.
While periodic exceedances in air emissions may occur, management promptly
responds to these events and works with the DNR to resolve any permit
compliance issues. With the passage of the new federal Clean Air Act
Amendments, the state is required to include these provisions into their
permit requirements. WP&L has submitted timely Title V permit
applications in compliance with schedules set forth by the regulators.
WP&L has also completed application for Phase II permits under the Clean
Air Act in compliance with the time lines identified. The state Title V
operating permits, when issued, will consolidate all existing air permit
conditions and regulatory requirements into one permit for each facility.
Permits have been or are expected to be issued in 1997. Until such time,
the facilities will continue to operate under their existing permit
conditions.
Pursuant to Section 144.386(2) of the Wisconsin Statutes, WP&L has
submitted data and plans for 1997 sulfur dioxide emissions compliance.
Actual 1996 emissions are being reported to the DNR. WP&L is currently in
compliance with the state requirement. WP&L will continue to make any
necessary operational changes in fuel types and power plant dispatch to
comply with the system emissions limit of 1.2 pounds SO per million BTU.
2
WP&L's compliance strategy for Wisconsin's sulfur dioxide law (discussed
above) and the Federal Clean Air Act Amendments required plant upgrades at
its generating facilities. The majority of these projects were completed
in 1993. WP&L has installed continuous emission monitoring systems at all
of its coal-fired boilers in compliance with federal requirements.
Monitoring for sulfur dioxide was also required by Title IV of the Federal
Clean Air Act at WP&L's South Fond du Lac combustion turbine site. These
requirements were also met. Additional monitoring systems for nitrogen
oxides were required in 1996 at the combustion turbine site. WP&L has
installed these monitors, and completed certification tests for the
equipment. No significant investments are anticipated at this time to
meet the requirements of the Federal Clean Air Act Amendments.
Pursuant to Section 311(j)(5) of the Clean Water Act, WP&L has submitted a
facility response plan for the South Fond du Lac combustion turbine site.
The plan addresses pollution prevention and spill response activities for
those facilities with capacity to store in excess of one million gallons
of oil.
WP&L maintains licenses for all of its ash disposal facilities and
regularly reports to the DNR groundwater data and quantities of ash
landfilled or reused. The landfills are operated according to a Plan of
Operation approved by the DNR. WP&L monitors hazardous materials use and
hazardous waste generation at its facilities. Annual reports are filed
with the DNR on quantities stored and generated as required by the
Superfund Amendments and Reauthorizaton Act and the Resource Conservation
Recovery Act.
WP&L's accumulated pollution abatement expenditures adjusted for
accumulated retirements totaled $135 million as of December 31, 1996. The
major expenditures consist of about $60 million for the installation of
electrostatic precipitators for the purpose of reducing particulate
emissions from WP&L's coal-fired generating stations and approximately $75
million for other pollution abatement equipment at the Columbia, Edge-
water, Kewaunee, Nelson Dewey, Rock River and Blackhawk plants.
Expenditures during 1996 totaled approximately $2.6 million. Estimated
future pollution abatement expenditures total $0.6 million through 1997.
WP&L's estimated pollution abatement expenditures are subject to
continuing review and are revised from time to time due to escalation of
construction costs, changes in construction plans and changes in
environmental regulations.
See "Electric Operations - Nuclear" for information concerning the
disposal of spent nuclear fuel and high level nuclear waste.
<TABLE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED ELECTRIC STATISTICS
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Area served (end of period):
Cities, villages and towns
served--retail 615 610 607 609 611
Customers served (end of
period):
Residential and Farm 336,933 329,643 322,924 316,870 310,702
Industrial 815 795 776 714 727
Commercial 45,669 44,730 43,793 42,884 42,287
Sales to Other Utilities 90 48 42 39 39
Other 1,730 1,294 1,256 1,236 950
------- ------- ------- ------- -------
Total 385,237 376,510 368,791 361,743 354,705
======= ======= ======= ======= =======
Sales--kilowatt-hours (in
thousands):
Residential and Farm 2,979,826 2,937,825 2,776,895 2,751,363 2,614,439
Industrial 3,985,672 3,872,520 3,764,953 3,540,082 3,377,132
Commercial 1,814,324 1,773,406 1,688,349 1,629,911 1,551,823
Sales to Other Utilities 5,245,812 3,109,385 2,574,121 2,388,131 2,208,419
Other 57,757 54,042 54,518 51,073 55,230
---------- ---------- ---------- ---------- ---------
Total 14,083,391 11,747,178 10,858,836 10,360,560 9,807,043
========== ========== ========== ========== =========
Electric operating revenues (in
thousands):
Residential and Farm $201,690 $199,850 $194,242 $184,176 $171,887
Industrial 143,734 140,562 140,487 132,903 128,467
Commercial 105,319 102,129 101,382 95,977 91,707
Sales to Other Utilities 131,836 97,350 86,400 78,955 77,485
Other 6,903 6,433 9,236 11,176 8,189
------- ------- ------- ------- -------
Total 589,482 546,324 531,747 503,187 477,735
======= ======= ======= ======= =======
Percent of generation by fuel
type:
Coal 84.00% 81.10% 80.40% 80.30% 79.80%
Nuclear 12.70% 15.30% 16.80% 16.50% 17.40%
Hydroelectric 2.40% 2.20% 2.40% 2.90% 2.60%
Natural gas 0.80% 1.30% 0.30% 0.20% 0.10%
Oil 0.10% 0.10% 0.10% 0.10% 0.10%
------- ------- ------- ------- -------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
System capacity---at time of
system peak: (kWh's)
Company plants (including
jointly owned) 2,300,000 2,176,000 2,193,000 2,019,000 1,934,000
Firm purchased (sold) power 68,000 57,000 40,000 83,000 110,000
--------- --------- --------- --------- ---------
Total 2,368,000 2,233,000 2,233,000 2,102,000 2,044,000
System peak demand 2,124,000 2,197,000 2,002,000 1,971,000 1,782,000
--------- --------- --------- --------- ---------
Reserve margin at time of
peak 244,000 36,000 231,000 131,000 262,000
======== ======== ========= ========= =========
Average annual electric bill
per residential and farm
customer $599 $606 $602 $581 $553
Average annual kilowatt-hour
use per residential and farm
customer 8,844 8,912 8,599 8,683 8,415
</TABLE>
Gas Operations
General
As of December 31, 1996, WP&L provided retail natural gas service to
approximately 151,000 customers in 243 cities, villages and towns in
22 counties in southern and central Wisconsin and one county in northern
Illinois. Gas operations represented 21.8 percent of WP&L's total
operating revenues and 12.1 percent of WP&L's total operating income for
the year ended December 31, 1996.
WP&L's gas sales follow a seasonal pattern. There is an annual base load
of gas used for heating, cooking, water heating and other purposes, with a
large peak occurring during the heating season. Near-record cold on
January 30, 1996 resulted in sales volumes of 250,390 dekatherms.
Gas Supplies
Prior to 1995, WP&L passed on its cost incurred from natural gas suppliers
and pipeline companies on a dollar-for-dollar basis to its customers. In
1995, the PSCW approved implementation of a performance-based rate
mechanism for Wisconsin gas customers. Under this mechanism, fluctuations
in the commodity cost of gas above or below a prescribed commodity price
index will increase or decrease WP&L's margin on gas sales. Both benefits
and exposures are subject to customer sharing provisions. Specifically,
to the extent WP&L purchases its gas supply below the index price, it will
retain 50 percent of the first $1.151 million in savings; 25 percent of
the next $1.151 million; and 10 percent of the next $2.878 million.
WP&L's share of the incentive is capped at $1.150 million on a pre-tax
basis. The balance of the savings is returned to customers. Under UR-
110, expected to be issued in April 1997, the sharing will be 60 percent
customers and 40 percent WP&L.
During 1996, WP&L paid the two pipeline companies serving WP&L (ANR
Pipeline and Northern Natural Gas Company) $1.3 million in FERC Order 636
transition costs representing costs incurred by these pipelines in
transitioning from full service natural gas commodity providers to open
access gas transmission companies. In addition, WP&L incurred $0.7
million of take-or-pay costs paid to pipelines to reform its gas contracts
from the pre-Order 636 time period. Both categories of costs were fully
recovered from WP&L's gas customers. Customers served under South
Beloit's gas rate schedules continue to pay for gas on a traditional
purchase gas adjustment basis.
In providing gas commodity service to retail gas customers, WP&L
administers a diversified portfolio of transportation contracts with ANR
Pipeline and Northern Natural Gas Company allowing access to gas supplies
from the states of Oklahoma, Louisiana, Texas, and the province of
Alberta, Canada. WP&L's transportation contracts provide a maximum daily
delivery capability of 239,131 dekatherms per day of natural gas as
follows:
ANR Pipeline Northern Natural Gas Company Non-Traditional
148,075 Dt 75,056 Dt 16,000 Dt
Two non-traditional arrangements provide WP&L with gas delivered directly
to its "city gate" using the vendors' transportation contract with ANR
Pipeline.
WP&L's contracts also allow access to gas stored in underground storage
fields in the states of Michigan, New Mexico and Oklahoma. Gas purchased
in the summer and delivered in the winter comprise 25 percent of WP&L's
annual gas requirements.
WP&L maintains purchase agreements with over 80 suppliers of natural gas
from all gas producing regions of the U.S. and Canada. These include 8
contracts providing for long-term gas deliveries (i.e., with terms ranging
from 6 months to 10 years). These contracts provided 50 percent of WP&L's
annual gas purchases in 1996. In addition to its direct purchase and
sales of natural gas, WP&L provided transportation service to 190
customers who purchased their own gas, pursuant to WP&L's transportation
tariffs. These customers represent 31 percent of total gas moved through
WP&L's natural gas distribution pipe.
Refer to Note 11b in "Notes to Consolidated Financial Statements" relating
to long-term purchase gas commitments.
Manufactured Gas Plant Sites
WP&L has a current or previous ownership interest in 11 properties
associated in the past with the production of manufactured gas. Some of
these sites do contain coal tar waste products which may present an
environmental hazard. WP&L owns five of these sites, three are currently
owned by municipalities and the remaining three are currently owned by
private companies.
Through ongoing investigations and studies, WP&L confirmed that there was
no contamination at two of the sites and only a minimal likelihood of
contamination at a third site. As WP&L has received close out letters
from the DNR for these three sites, WP&L has no further obligation at
these sites. WP&L has also implemented DNR- approved remediation plans at
two additional sites in the last several years. An air
sparging/biosparging remediation system was implemented at one of the
sites, while excavation and disposal of the coal tar residue and
contaminated soils was implemented at the other. Groundwater monitoring
is ongoing at both sites.
WP&L currently estimates that the remaining remediation costs associated
with the former manufactured gas plant sites is $74 million. The estimate
includes the costs of feasibility studies, data collection, soil and
groundwater remediation activities and ongoing monitoring activities
through 2027. The estimate is based on a number of factors including the
estimated extent and volume of contaminated soil and/or groundwater. The
estimate is also premised in part on a remediation method that involves
treatment or removal of contaminated soil. Based on recent approvals from
the DNR, WP&L may be able to implement a less-costly containment and
control remediation strategy at two of the remaining sites. WP&L plans to
implement this remediation at these two sites in 1997. If remediation is
successful, management believes there may be a significant reduction in
the estimated liability.
Changes in the liability do not immediately impact the earnings of WP&L.
Under the current rate making treatment approved by the PSCW, the costs
expended in the environmental remediation of these sites are deferred and
collected from gas customers over a five year period after new rates are
implemented. Management believes future costs will also be recovered in
rates.
See "Item 3. Legal Proceedings" for information related to the
manufactured gas plant sites.
<TABLE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED GAS STATISTICS
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Area served (end of period):
Cities, villages and towns
served--retail 243 242 239 217 194
Customers served (end of period):
Residential 133,580 129,576 124,938 120,829 116,642
Commercial and Industrial 16,309 15,976 15,531 15,088 14,656
Interruptible 303 257 272 261 262
Transport and other 252 284 240 85 109
-------- -------- -------- -------- --------
Total 150,444 146,093 140,981 136,263 131,669
======== ======== ======== ======== ========
Sales--Therms (in thousands) (a):
Residential 142,974 126,903 119,562 120,005 114,131
Commercial and Industrial 98,095 91,316 87,487 87,038 82,087
Interruptible 13,480 12,148 24,809 27,872 25,497
Transport and other 185,735 169,121 142,252 84,877 71,167
-------- -------- -------- -------- --------
Total 440,284 399,488 374,110 319,792 292,882
======== ======== ======== ======== ========
Gas operating revenues (in
thousands):
Residential $90,382 $70,382 $71,555 $71,632 $63,699
Commercial and Industrial 50,270 39,456 41,918 40,748 37,154
Interruptible 5,261 3,708 8,777 11,247 14,589
Transport and other 19,714 25,619 29,681 13,643 3,920
-------- -------- -------- -------- --------
Total 165,627 139,165 151,931 137,270 119,362
======== ======== ======== ======== ========
Average annual gas bill per
residential and farm heating
customer $677 $543 $573 $593 $546
Average annual residential and
farm heating use -- therms 1,070 979 957 993 978
(a) One therm equals 100,000 British Thermal Units and is a measure of the heat content
of natual gas.
</TABLE>
HDC
Incorporated in 1988, HDC is the parent company of all nonutility
businesses. HDC and its principal subsidiaries are engaged in business
development in three major areas: (1) environmental and engineering
services; (2) affordable housing; and (3) energy services. None of the
nonutility businesses contributed 10% or more of WPLH's consolidated
revenues during 1996. The environmental and engineering service business
contributed 11 percent of consolidated revenues in the years ended
December 31, 1995 and 1994. The revenues at the environmental and
engineering service business were lower in 1996 due to a softening market
for environmental services.
At year-end 1996, HDC employed 739 persons: 662 in the area of
environmental engineering and consulting, 37 in the area of affordable
housing, 32 in the area of energy services and 8 at the HDC level.
Environmental Engineering and Consulting
WP&L acquired RMT, Inc. (RMT) in 1983, and it subsequently became a
wholly-owned subsidiary of HDC in 1988. In 1992, HDC transferred its
ownership in RMT to Heartland Environmental Holding Company (HEHC), a
wholly-owned subsidiary of HDC and the parent company for HDC's
environmental and engineering services activities. In 1993, HDC acquired
Jones & Neuse, Inc. (J&N) based in Austin, Texas. On December 31, 1996,
HDC transferred ownership in J&N to RMT, Inc.
RMT is a Madison, Wisconsin based environmental engineering and consulting
company that serves clients nationwide in a variety of industrial segment
markets. The most significant of these markets are chemical companies,
pulp and paper processors, oil and gas providers, foundries and other
manufacturers. RMT specializes in solid and hazardous waste management,
ground water quality protection, industrial design and hygiene
engineering, air and water pollution control, and laboratory services.
Affordable Housing
Formed by HDC in 1988, Heartland Properties, Inc. (HPI) is responsible for
the acquisition, development, financing and syndication of a $231
million portfolio of high-quality affordable housing developments in
Wisconsin and the Midwest. HPI has a majority ownership interest in 62 of
these properties. As of December 31, 1996, HPI's investment in affordable
housing properties was $113 million, net of depreciation.
To facilitate HPI's development and financing efforts in the affordable
housing market, HDC incorporated Capital Square Financial Corporation in
1992 to provide mortgage banking services, and Heartland Capital Company
LLC in 1994 to provide construction financing services.
Heartland Retirement Services (HRS), organized in 1993, provides a
comprehensive range of housing products for older adults. In January
1996, this business was sold.
Energy Services
Heartland Energy Group, Inc (HEG) was formed in 1995 as the parent company
for HDC's energy services businesses. The two most significant components
of HEG as of December 31, 1996, were Heartland Energy Services, Inc. (HES)
and ENSERV, Inc.
HES, formed in 1993, provides energy supplies to industrial and wholesale
customers. Since March 1994, HES has been actively involved in the buying
and selling of natural gas, providing gas supply as well as complete fuel
management services. HES received federal marketing authority for
electricity in September 1994, and operates an energy scheduling and
coordination center which buys and sells electricity throughout the United
States. The initial electric transaction was made in June 1995.
ENSERV offers turnkey project development and implementation for customer
energy supply initiatives. Services include project feasibility,
engineering, financing, and management.
In January 1997, ENSERV, the natural gas marketing business of HES and
Industrial Energy Applications (IEA), the energy marketing subsidiary of
IES Industries, Inc., formed a joint venture.
Discontinued Operations
In December 1995, HDC committed to plans for the disposition of the
primary operations of A&C Enercom Consultants, Inc. (A&C), which was
acquired by HDC in 1993. A&C, a utility services company based in
Atlanta, Georgia, provides a variety of energy consulting services
including marketing and demand side management. The sale of substantially
all the assets of these operations in a cash transaction was completed in
January 1996.
ITEM 2. PROPERTIES
WP&L
The following table gives information with respect to electric generating
facilities of WP&L (including WP&L's portion of those facilities jointly-
owned).
1996
Summer
Capability Ownership
WP&L Interest
Portion in in
Type and Location Name Fuel Kilowatts Facility
Steam 100%
Beloit, WI Blackhawk Natural Gas 60,000 100%
Janesville, WI Rock River Coal 161,000 100%
Cassville, WI Nelson Dewey Coal 226,000 100%
Sheboygan, WI Edgewater #3 Coal 74,000 100%
Sheboygan, WI Edgewater #4 Coal 233,200 68.2%
Sheboygan, WI Edgewater #5 Coal 301,500 75%
Kewaunee, WI Kewaunee Nuclear 211,200 41%
Portage, WI Columbia Coal 485,100 46.2%
Energy Center
Hydro
Wisconsin Dells, WI Kilbourn Hydro 9,500 100%
Prairie du Sac, WI Prairie du Hydro 30,000 100%
Sac
Wisconsin River Petenwell/ Hydro 13,300 33%
Power Co. Castle Rock
4 small units at Hydro 2,070 100%
various locations
Combustion Turbine
Janesville, WI Rock River Natural Gas 151,400 100%
or Oil
Fond du Lac, WI South Fond du Natural Gas 169,700 100%
Lac Units 2 or Oil
and 3
Edgerton, WI Sheepskin Natural Gas 36,700 100%
or Oil
---------
Total 2,164,670
=========
WP&L owns 21,753 miles of electric transmission and distribution lines and
363 substations located adjacent to the communities served. Substantially
all of WP&L's facilities are subject to the lien of its first mortgage
bond indenture.
HDC
The following table gives information as of December 31, 1996 with respect
to rental properties associated with HDC's affordable housing project
developments, through its HPI subsidiary.
Location Housing Development Resident Type
Property:
Antigo, WI The Depot Families
Appleton, WI Lincoln Mills Families/Elderly
Appelton, WI Ravine Mills Families/Elderly
Appelton, WI The Mills II Families/Elderly
Beloit, WI Beloit Water Tower Place Families
Chisholm, MN Lincoln Square Families
DePere, WI Lawton Foundry Families
Madison, WI The Avenue Disabled/Families
Marinett, WI Dunlap Square Families/Elderly
Marshfield, WI The Woodlands Families/Elderly
Mc Farland, WI The Cottages Families/Elderly
Sheboygan Falls, WI Brickner Woolen Mills Families/Elderly
Sheboygan, WI Jung Apartments Families
Sheboygan, WI Sunnyside Townhouses Families
Sun Prairie, WI Vandenburg Heights Families
Verona, WI Sugar Creek Senior
Housing Elderly
Madison, WI YWCA Women & Homeless
Various Other Families, Elderly,
Singles, Disabled
& Homeless
Occupancy rates in the 62 properties/investments owned by HPI averaged 92
percent during 1996.
HPI also maintains a minor equity ownership in development properties
where the majority interest was subsequently sold to outside investors.
This equity ownership is not considered material in relation to WPLH's
consolidated financial statements. HPI remains contingently liable for
minimum property financial performance guarantees for a period of time on
many of the properties sold. Those contingent obligations have been
accrued for or are otherwise not considered likely to have a material
effect on WPLH's consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
On July 20, 1995, the City of Beloit (Beloit) filed a suit against WP&L in
the Circuit Court of Rock County, Wisconsin alleging that, based on
negligence, nuisance and trespass, WP&L caused damage to Beloit through
the contamination of property owned by Beloit as a result of the
historical operation of manufactured gas plants on the property prior to
Beloit's acquisition of the property. The suit seeks damages equal to the
cost of cleaning up the property, for the decrease in the value of the
property, and to compensate Beloit for lost development opportunities for
the property as well as consequential damages and costs of the action.
Beloit and WP&L entered into a Stipulation upon which the Court issued an
Order staying further proceedings in the action pending further
environmental investigation of the property and pending WP&L's
determination of the extent of liability insurance coverage for the
claims.
In management's judgement, the probability is remote that this action will
have a material adverse impact on WPLH's financial condition.
Environmental Matters
The information required by Item 3 is included in Item 8 of this Form 10-K
in Note 11c of "Notes to Consolidated Financial Statements."
Rate Matters
The information required by Item 3 is included in Item 7 of this Form 10-K
within the Management's Discussion and Analysis of Financial Condition and
Results of Operations narrative under the caption "Liquidity and Capital
Resources, Rates and Regulatory Matters."
<TABLE>
Recent Rate Case Proceedings
<CAPTION>
Increase Ordered or
Increase (Decrease) Requested Negotiated Date
Type of (Decrease) Ordered or % Return on % Return on Increase
Rate Case Service Application Test Requested Negotiated Common Common (Decrease)
Designation (a) Date Year ($ Millions) ($ Millions) Equity Equity Effective
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WP&L Retail (PSCW)
6680-UR-103 e,g,w 02-29-88 1988-89 14.7 5.5 13.25 13.10 10-18-88
6680-UR-104 e,g,w 12-30-88 1989-90 17.4 5.3 13.10 13.00 11-12-89
6680-UR-105 e,g,w 12-29-89 1990-91 9.0 (10.8) 13.10 12.90 08-01-90
6680-UR-106 e,g,w 12-28-90 1991-92 18.7 (0.1) 13.25 12.90 08-01-91
6680-UR-107 e,g,w 12-30-91 1992-93 17.8 (0.9) 13.10 12.40 01-01-93
6680-UR-108 e,g,w 01-04-93 1993-94 24.5 17.7 12.60 11.60 10-01-93
6680-UR-109 e,g,w 02-01-94 1995-96 3.8 (11.6) 12.20 11.50 01-01-95
6680-UR-110 e,g,w 04-01-96 1997-98 16.0 N/A 11.90 N/A N/A
WP&L Wholesale
(FERC)
ER87-554 e 07-31-87 1987-88 (1.2) (.9) 13.00 (b) 01-01-88
ER93 e 05-28-93 1993-94 2.0 2.0 11.00 (b) 10-01-93
South Beloit (ICC)
85-0505 e,w 11-08-85 1985-86 1.4(c) .9 15.00 13.80 09-27-86
(a) e-electric, g-gas, w-water.
(b) Return on equity was not specified in the negotiated settlement
agreement.
(c) On May 7, 1986, South Beloit Water, Gas and Electric Co. adjusted the
increase requested downward to $1.1 million.
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANTS
Executive Officers of WPL Holdings, Inc
Erroll B. Davis, Jr., 52, was elected President effective January 1990 and
Chief Executive Officer effective July 1990 and has been a board member
since March 1988.
Lance W. Ahearn, 47, was elected President of HDC effective April 1990,
and Chief Executive Officer effective May 1990.
Edward M. Gleason, 56, was elected Corporate Secretary effective December
1993 and Vice President, Treasurer effective October 1993. He previously
served as Vice President, Finance and Treasurer of WP&L from 1986 to 1993.
Mr. Gleason functions as principal financial officer of WPL Holdings, Inc.
Steven F. Price, 44, was appointed Assistant Corporate Secretary and
Assistant Treasurer effective April 1992. He previously served as Cash
Management Supervisor of WP&L from 1987 to 1992.
Executive Officers of WP&L
Erroll B. Davis, Jr., 52, was elected President and Chief Executive
Officer effective August 1988 and has been a board member since April
1984.
A.J. (Nino) Amato, 45, was appointed Senior Vice President effective
October 1993. He previously served as Vice President, Marketing and
Strategic Planning from 1992 to 1993 and Vice President, Marketing and
Communications from 1989 to 1992.
William D. Harvey, 47, was appointed Senior Vice President effective
October 1993. He previously served as Vice President, Natural Gas and
General Counsel from 1992 to 1993 and Vice President, General Counsel from
1990 to 1992.
Eloit G. Protsch, 43, was appointed Senior Vice President effective
October 1993. He previously served as Vice President, Customer Services
and Sales from 1992 to 1993 and Vice President and General Manager, Energy
Services from 1989 to 1992.
Daniel A. Doyle, 38, was appointed Vice President, Power Production
effective April 1996. He previously served as Vice President, Finance,
Controller and Treasurer from 1994 to 1996, as Controller and Treasurer
from 1993 to 1994 and Controller from 1992 to 1993. Prior to joining the
Company, he was Controller of Central Vermont Public Service Corporation
from 1988 to 1992.
Barbara J. Swan, 45, was elected Vice President, General Counsel effective
December 1994. She previously served as General Counsel from 1993 to 1994
and Associate General Counsel from 1987 to 1993.
Pamela J. Wegner, 49, was elected Vice President, Information Services and
Administration effective October 1994. Prior to joining the Company, she
was the Administrator of the Division of Finance and Program Management in
the Wisconsin Department of Administration from 1987 to 1994.
Kim K. Zuhlke, 43, was elected Vice President, Customer Services and Sales
effective October 1993. He previously served as Director of Marketing and
Sales Services from 1991 to 1993.
Joseph E. Shefchek, 40, was elected Assistant Vice President,
Environmental Affairs and Research effective December 1994. He previously
served as Director of Environmental Affairs and Research from 1991 to
1994.
Edward M. Gleason, 56, was elected Controller, Treasurer and Corporate
Secretary of WP&L effective May 1996. He served as Corporate Secretary
from 1993 to 1996. He previously served as Vice President, Finance and
Treasurer from 1986 to 1993.
Susan J. Kosmo, 50, was elected Assistant Controller effective September
1995. She previously served as Trust Investments and Investor Relations
Supervisor from 1992 to 1995 and Financial Relations Supervisor from 1989
to 1992.
David A. Ramos, 40, was elected Assistant Controller effective January
1995. He previously served as Manager of Budgets, Rates and Cost
Accounting from 1994 to 1995, Manager of Budgets and Rates from 1992 to
1994 and Manager of Rates and Financial Planning from 1990 to 1992.
Steven F. Price, 44, was elected Assistant Corporate Secretary effective
April 1992. He previously served as Cash Management Supervisor from 1987
to 1992.
Robert A. Rusch, 34, was elected Assistant Treasurer effective September
1995. He previously served as Financial Analyst from 1989 to 1995.
NOTE: All ages are as of December 31, 1996. None of the executive
officers listed above is related to any member of the Board of
Directors or nominee for director of either registrant.
Executive officers of have no definite terms of office and serve at the
pleasure of the respective Boards of Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
WPLH's Common Stock trades on the New York Stock Exchange.
Quarterly Price Ranges and Dividends with respect to the Common
Stock are as follows:
<TABLE>
<CAPTION>
1996 1995
Quarter High Low Dividend High Low Dividend
<S> <C> <C> <C> <C> <C> <C>
First $32 $29 7/8 $0.4925 $31 $27 1/4 $0.485
Second 32 7/8 28 5/8 0.4925 30 27 1/2 0.485
Third 32 7/8 28 7/8 0.4925 29 3/8 27 1/2 0.485
Fourth 29 5/8 27 1/2 0.4925 31 3/4 29 1/4 0.485
---- --- --- --- ----- --- --- --- --- -----
Year $32 7/8 $27 1/2 $1.97 $31 3/4 $27 1/4 $1.94
=== === === === ===== === === === === =====
</TABLE>
Stock price at December 31, 1996: 28 1/8
At December 31, 1996, there were approximately 37,108 holders of record of
WPLH Common Stock including underlying holders in WPLH's Dividend
Reinvestment and Stock Purchase Plan.
In accordance with the terms of the Merger Agreement (refer to Item 1
"Business, Proposed Merger" above), WPLH is not permitted to declare or
pay any dividends on any of its capital stock other than the obligations
that exist with respect to WP&L's Cumulative Preferred Stock, and regular
quarterly dividends on WPLH's Common Stock may not exceed 105 percent of
the common stock dividends from the prior year.
Effective with the formation of the holding company, all $5 par value
Common Stock of WP&L was converted into WPLH Common Stock. WPLH is now
the sole common shareowner of all 13,326,601 shares of WP&L Common Stock
outstanding at December 31, 1996. Cash dividends paid per share of WP&L
Common Stock during 1996 and 1995 to WPLH were $1.24 and $1.07, respectively,
for each quarter.
In the retail rate order effective January 1, 1995, the PSCW ordered that
no dividend payment in excess of the level forecasted for 1995 ($58.1
million) may be paid, if such dividend payments would reduce WP&L's
average common equity ratio below the test year forecasted level of 51.93
percent. Based on PSCW decisions on March 4, 1997, this percent will
increase to 51.98 percent with rate case UR-110. At December 31, 1996,
WP&L's common equity ratio was 53.53 percent.
ITEM 6. SELECTED FINANCIAL DATA
WPL Holdings, Inc. - Refer to Item 8 Financial Statements and Supplemental
Data under the heading "WPL Holdings, Inc."
Wisconsin Power and Light Company - Refer to Item 8 Financial Statements
and Supplemental Data under the heading "Wisconsin Power and Light
Company"
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WPL Holdings, Inc. - Refer to Item 8 Financial Statements and
Supplementary Data under the heading "WPL Holdings, Inc."
Wisconsin Power and Light Company - Refer to Item 8 Financial Statements
and Supplementary Data under the heading "Wisconsin Power and Light
Company"
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
WPL Holdings, Inc. Number
Selected Financial Data 22
Management's Financial Discussion and Analysis of Financial
Condition and Results of Operations 22
Report of Management 36
Report of Independent Public Accountants 37
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 38
Consolidated Balance Sheets, December 31, 1996 and 1995 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 40
Consolidated Statements of Capitalization, December 31, 1996
and 1995 41
Consolidated Statements of Common Shareowners' Investment for
the Years Ended December 31, 1996, 1995 and 1994 42
Notes to Consolidated Financial Statements 43
Wisconsin Power and Light Company
Selected Financial Data 58
Management's Financial Discussion and Analysis of Financial
Condition and Results of 58
Operations
Report of Management 69
Report of Independent Public Accountants 70
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 71
Consolidated Balance Sheets, December 31, 1996 and 1995 72
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 73
Consolidated Statements of Capitalization, December 31, 1996
and 1995 74
Consolidated Statements of Common Shareowners' Investment for
the Years Ended December 31, 1996, 1995 and 1994 75
Notes to Consolidated Financial Statements 76
<PAGE>
WPL HOLDINGS, INC. AND SUBSIDIARIES
1996
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL STATEMENTS
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
1996 1995 1994 1993 1992
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Operating revenues $933 $807 $796 $739 $673
Income from continuing
operations $73 $72 $66 $64 $58
Per share $2.38 $2.33 $2.17 $2.15 $2.10
Discontinued operations ($1) ($13) ($1) ($1) ---
Per share ($0.04) ($0.43) ($0.04) ($0.04) ---
Net income available for common
shareowners $72 $58 $65 $63 $58
Per share $2.34 $1.90 $2.13 $2.11 $2.10
Cash dividends paid per share $1.97 $1.94 $1.92 $1.90 $1.86
Total assets (at December 31) $1,901 $1,872 $1,806 $1,762 $1,566
Long-term debt, net (at
December 31) $363 $430 $448 $425 $418
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (MD&A)
WPLH (the Company), IES Industries, Inc. (IES) and Interstate Power Co.
(IPC) have entered into an Agreement and Plan of Merger, as amended
(Merger Agreement), dated November 10, 1995, which provides for the
combination of all three companies. As a result of the transactions
contemplated by the Merger Agreement, the combined company, Interstate
Energy Corporation (IEC), anticipates cost savings of approximately $749
million over a ten-year period, net of transaction costs and costs to
achieve the savings of approximately $14 million and $64.4 million,
respectively. The estimate of potential cost savings constitutes a
forward-looking statement and actual results may differ materially from
this estimate. The estimate is necessarily based upon various assumptions
that involve judgments with respect to, among other things, future
national and regional economic and competitive conditions, technological
developments, inflation rates, regulatory treatments, weather conditions,
financial market conditions, future business decisions and other
uncertainties. No assurance can be given that the estimated costs savings
will actually be realized.
The merger which is conditioned upon, among other things, receipt of
certain regulatory and governmental approvals is expected to close by the
end of the third quarter of 1997. As part of the approval process,
management has proposed rate freezes to be implemented in certain
jurisdictions for periods not to exceed four years. See Note 2 of "Notes
to Consolidated Financial Statements" for additional information regarding
the proposed merger.
1996 COMPARED WITH 1995
OVERVIEW
The Company reported consolidated net income from continuing operations of
$73.2 million or $2.38 per share for 1996, as compared to $71.6 million
or $2.33 per share for 1995. Earnings per share for 1996 and 1995 were
$2.34 and $1.90, respectively, reflecting the impact of the discontinued
operations of A&C Enercom Consultants, Inc. (A&C) which is discussed in
Note 12 of "Notes to Consolidated Financial Statements".
The increase in earnings in 1996 primarily reflects the operations of the
Company's utility subsidiary, Wisconsin Power and Light Company (WP&L).
Continued customer growth in the service territory and increased power
marketing activity contributed to a $9 million increase in electric margin
in 1996 as compared with 1995. Gas margins also increased due primarily
to higher weather-driven sales. (See "Electric Operations" and "Gas
Operations" below). In addition, a $3.4 million after-tax gain on the
sale of a combustion turbine was recognized during 1996. These events
were partially offset by higher plant maintenance and depreciation
expenses in 1996.
Heartland Development Corporation (HDC), parent company of the Company's
nonregulated operations, reported a loss from continuing operations of
$3.5 million for 1996 compared with a loss from continuing operations of
$1.5 million for 1995. HDC's 1996 results were adversely impacted by
contract losses early in 1996 associated with the start-up of the energy
service business as well as a softening market for the environmental
service business. Partially offsetting these losses was an after-tax
gain of $2.5 million in 1996, related to the sale of HDC's investment in
assisted living properties.
During 1996, the Company incurred $3.2 million in expenses associated with
its proposed merger with IES and IPC. See Note 2 of "Notes to Consolidated
Financial Statements" for additional information.
The Company also recognized a 1996 after-tax loss of $1.3 million
resulting from additional fees and expenses related to the discontinued
operations of A&C which is discussed in Note 12 of "Notes to Consolidated
Financial Statements".
<TABLE>
Electric Operations
<CAPTION>
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Residential
and Farm $201,690 $199,850 1% 2,979,826 2,937,825 1% 336,933 329,643 2%
Industrial 143,734 140,562 2% 3,985,672 3,872,520 3% 815 795 3%
Commercial 105,319 102,129 3% 1,814,324 1,773,406 2% 45,669 44,730 2%
Sales to Other
Utilities 131,836 97,350 35% 5,245,812 3,109,385 69% 90 48 88%
Other 6,903 6,433 7% 57,757 54,042 7% 1,730 1,294 34%
------- ------- ---------- ---------- ------- -------
Total 589,482 546,324 8% 14,083,391 11,747,178 20% 385,237 376,510 2%
======= ======= ==== ========== ========== ==== ======= ======= ====
Electric
Production Fuels 114,470 116,488 (2%)
Purchased Power 81,108 44,940 80%
------- -------
Margin $393,904 $384,896 2%
======= ======= ====
</TABLE>
Electric margin increased $9.0 million, or 2 percent, during 1996
compared with 1995 primarily due to higher sales to commercial and
industrial customers as well as other utilities combined with reduced
costs per kWh for electric production fuels and purchased power. Although
fuel and purchased power costs declined on a per kWh basis, purchased
power expense increased by 80 percent. This increase was due to WP&L's
higher level of sales to other utilities as well as a $5.0 million
increase in purchased power related to the purchase of replacement power
during the extended 1996 refueling outage at the Kewaunee Nuclear Power
Plant ( Kewaunee) . Partially offsetting increased purchased power costs
were slightly lower delivered coal and nuclear fuel costs per kWh.
<TABLE>
Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $90,382 $70,382 28% 142,974 126,903 13% 133,580 129,576 3%
Commercial and
Industrial 50,270 39,456 27% 98,095 91,316 7% 16,309 15,976 2%
Interruptible 5,261 3,708 42% 13,480 12,148 11% 303 257 18%
Transportation
and other 19,714 25,619 (23%) 185,735 169,121 10% 252 284 (11%)
------- ------- ------- ------- ------- -------
Total 165,627 139,165 19% 440,284 399,488 10% 150,444 146,093 3%
======= ======= ==== ======= ======= ==== ======= ======= ====
Purchased Gas 104,830 84,002 25%
------- -------
Margin $60,797 $55,163 10%
======= ======= ====
</TABLE>
Gas margin increased $5.6 million, or 10 percent, during 1996 compared
with 1995 primarily as a result of higher sales. Therm sales increased 10
percent due to a combination of colder weather during the first five
months of 1996 as compared to 1995 and customer growth of 3 percent. The
19 percent increase in gas revenues reflects not only the higher therm
sales but also the pass through of higher natural gas costs to WP&L's
customers as described below.
Effective January 1, 1995, PSCW approved the replacement of the purchased
gas adjustment clause with an adjustment mechanism based on a prescribed
commodity price index. Fluctuations in WP&L's commodity cost of gas as
compared to the price index are subject to a customer sharing mechanism
with WP&L's gains or losses limited to $1.1 million. Due to favorable gas
procurement activities in both 1996 and 1995, WP&L realized favorable
contributions to gas margin in those years of $1.1 million and $0.8
million, respectively.
Fees, Rents, Non-Utility Energy Sales and Other Revenues
Fees, rents, non-utility energy sales and other revenues primarily reflect
sales and revenues of the Company's nonregulated subsidiaries,
consolidated under HDC, as adjusted for discontinued operations.
Revenues of the principal businesses of HDC were as follows:
1996 1995
Environmental and engineering services $84.8 $88.6
Energy marketing 73.8 12.6
Other 14.9 16.4
----- -----
$173.5 $117.6
===== =====
Energy marketing revenues were higher due to an increase in the volume of
electric power and natural gas sales by the energy marketing subsidiary.
The subsidiary meets these sales commitments through spot market purchases
and short-term purchase contracts. (See "Other Operation and Cost of Non-
Utility Energy"). Revenues at the environmental and engineering business
were lower in 1996 due to a softening market for environmental services.
In addition to the revenues of the nonregulated businesses, other
revenues also include the water operations of WP&L. These revenues were
$4.2 million in both 1996 and 1995.
Other Operation and Cost of Non-Utility Energy
Other operation and cost of non-utility energy expense includes expenses
related to WP&L, the parent company and the nonregulated businesses of
HDC. The distribution of other operations expense was as follows:
1996 1995
$141.9 $139.9
Utility operations
Non-regulated businesses
and parent company operations 177.2 113.4
------ ------
$319.1 $253.3
====== ======
The increase in operations expense associated with the nonregulated
businesses is primarily a result of increased volume at the energy
marketing subsidiary. Several commitments made in early 1996 resulted
in substantial losses. On a comparative basis, the non-utility energy
marketing business incurred net losses of 17 cents per share in 1996 and 3
cents per share in 1995.
The environmental and engineering services business also incurred higher
contract related costs which were partially offset by labor and benefit
savings. The environmental and engineering services business lost 4 cents
per share in 1996 as compared to a 7 cent per share contribution in 1995.
Operating expenses in the affordable housing business were significantly
reduced in 1996 as operations support was outsourced and development
activity was curtailed. After adjusting for the tax benefits and credits
associated with this business, the affordable housing business contributed
approximately 8 cents per share in 1996 including 2 cents per share
related to the sale of two properties. In 1995, the affordable housing
business contributed 4 cents per share.
Maintenance
Maintenance expense increased due to higher plant maintenance and the
extended 1996 refueling outage at Kewaunee (See "Capital Requirements"
section below).
Depreciation and Amortization
Depreciation and amortization expense increased $4.4 million as a result
of property additions and greater amortization of contributions in aid of
construction (a reduction of expense) in 1995.
Interest Expense and Other
The $9.1 million increase in other income is the result of two significant
gains recognized in 1996. The sale of a combustion turbine by WP&L
resulted in other income of $5.7 million. In addition, HDC recognized a
gain of $4.2 million on the sale of its investment in assisted living
properties. Interest expense was lower in 1996 as compared to 1995 as a
result of less short-term debt outstanding and a slight decrease in
interest rates.
Income Taxes
Income taxes increased for 1996 as a result of higher taxable income.
The effective tax rate on continuing operations was 35.4 percent and 32.5
percent for 1996 and 1995, respectively. The lower rate in 1995 was the
result of prior years' tax contingencies resolved favorably in 1995 and
increased non-deductible merger expenses in 1996.
1995 COMPARED WITH 1994
OVERVIEW
Earnings per share decreased to $1.90 in 1995 from $2.13 in 1994
reflecting the 43-cent impact of discontinued operations arising from the
sale of A&C, which is discussed in Note 12 of "Notes to Consolidated
Financial Statements." Earnings per share from continuing operations
increased to $2.33 in 1995 as compared to $2.17 in 1994, after reflecting
a restatement of the prior year for discontinued operations.
The 16-cent increase per share from continuing operations reflects the
impact of two non-recurring items in 1994 as well as higher earnings in
1995 at WP&L. The higher earnings at WP&L were primarily the result of
higher electric and gas margins (see "Electric Operations" and "Gas
Operations" below) and aggressive cost management.
The two non-recurring items affecting net income for 1994 were the
reversal of a coal contract penalty and costs associated with early
retirement and severance programs. The coal contract item relates to a
Wisconsin Supreme Court decision which reversed a coal contract penalty
assessed against WP&L in 1989. The following break out presents the
recurring aspects of 1995 and 1994 operations.
1995 1994
Earnings per share, as reported $1.90 $2.13
Per share impact of discontinued 0.43 0.04
------ ------
Earnings per share from continuing 2.33 2.17
Significant non-recurring items:
Coal contract penalty reversal ----- (0.16)
Early retirement and severance costs ----- 0.27
------ ------
Earnings per share from continuing
before non-recurring items $2.33 $2.28
====== ======
HDC reported a loss from continuing operations of $1.5 million in 1995 and
a gain of $0.1 million in 1994. The decline in earnings is primarily the
result of higher interest expense and new business development costs.
<TABLE>
Electric Operations
<CAPTION>
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
and Farm $199,850 $194,242 3% 2,937,825 2,776,895 6% 329,643 322,924 2%
Industrial 140,562 140,487 0% 3,872,520 3,764,953 3% 795 776 2%
Commercial 102,129 101,382 1% 1,773,406 1,688,349 5% 44,730 43,793 2%
Sales to other
Utilities 97,350 86,400 13% 3,109,385 2,574,121 21% 48 42 14%
Other 6,433 9,236 (30%) 54,042 54,518 (1%) 1,294 1,256 3%
------- ------- ---------- ---------- ------- -------
Total 546,324 531,747 3% 11,747,178 10,858,836 8% 376,510 368,791 2%
======= ======= === ========== ========== === ======= ======= ===
Electric
Production Fuels 116,488 123,469 (6%)
Purchased Power 44,940 37,913 16%
------- -------
Margin $384,896 $370,365 4%
======= ======= ===
</TABLE>
Electric margin increased 4 percent during 1995 compared with 1994
primarily due to higher sales combined with reduced aggregate costs per
kWh for electric production fuels and purchased power. Kilowatthour
sales increased 8 percent due to a much warmer summer than normal,
increased sales to other utilities, a 2 percent growth in customers, and
continued economic strength in the service territory. Partially
offsetting these sales increases was a 2.8 percent decrease in retail
electric rates effective January 1, 1995.
A record setting heat wave resulted in WP&L setting a system peak of 2,197
megawatts on July 31, 1995. This reflects a 9.7 percent increase over
the previous record system peak of 2,002 megawatts set in 1994.
While overall kWh sales increased, the aggregate costs of electric
production fuels and purchased power remained relatively unchanged. The
stability of these costs reflects lower coal and transportation costs at
WP&L's generating units in 1995 as well as the availability of attractive
purchased power opportunities in the bulk power market.
<TABLE>
Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $70,382 $71,555 (2%) 126,903 119,562 6% 129,576 124,938 4%
Commercial and
Industrial 39,456 41,918 (6%) 91,316 87,487 4% 15,976 15,531 3%
Interruptible 3,708 8,777 (58%) 12,148 24,809 (51%) 257 272 (6%)
Transportation
and other 25,619 29,681 (14%) 169,121 142,252 19% 284 240 18%
------- ------- ------- ------- ------- -------
Total 139,165 151,931 (8%) 399,488 374,110 7% 146,093 140,981 4%
======= ======= === ======= ======= === ======= ======= ===
Purchased Gas 84,002 100,942 (17%)
------- -------
Margin $55,163 $50,989 8%
======= ======= ===
</TABLE>
Gas margin increased 8 percent during 1995 compared with 1994 primarily as
a result of higher sales volumes and favorable gas procurement strategies.
Therm sales increased 7 percent principally due to residential customer
growth reflecting the favorable economic conditions in WP&L's service
territory and colder than normal weather in the fourth quarter, offsetting
a mild January and February. The 8 percent decrease in gas revenues was
the result of a pass through to customers of the lower cost of purchased
gas. Under the rate structure discussed previously, reductions in
revenues resulting solely from such pass through would not be expected to
have a material impact on earnings. The gas incentive program authorized
by the PSCW also resulted in additional pre-tax earnings of $0.8 million
in 1995.
Fees, Rents, Non-Utility Energy Sales and Other Revenues
Fees, rents, non-utility energy sales and other revenues primarily reflect
sales and revenues of the Company's nonregulated subsidiaries,
consolidated under HDC, as adjusted for discontinued operations.
Revenues of the principal businesses of HDC were as follows:
1995 1994
Environmental and engineering $88.6 $87.7
Energy marketing 12.6 2.0
Other 16.4 18.2
------ ------
$117.6 $107.9
====== ======
While revenues of the environmental and engineering services business were
relatively unchanged, margins were lower in 1995 reflecting greater price
competition in that industry. Energy marketing revenues increased due to
the development of power marketing activities and increased gas
transactions in 1995. Due to uncertainties as to the future of the
affordable housing tax credit program, HDC discontinued making additional
commitments in this area in 1995.
In addition to the revenues of the nonregulated businesses, other
revenues also include the water operations of WP&L. These revenues were
$4.2 million and $4.1 million, respectively, in 1995 and 1994.
Other Operation and Cost of Non-Utility Energy
Other operation and cost of non-utility energy expense includes expenses
related to WP&L, the parent company and the nonregulated businesses of
HDC. The distribution of operations expense was as follows:
1995 1994
Utility operations $139.9 $151.0
Non-regulated businesses
and parent company operations 113.4 97.8
----- -----
$253.3 $248.8
===== =====
The decline in utility-related operations expense principally reflects the
impact of a $13.7 million pre-tax charge for early retirement and
severance costs in 1994. While WP&L was able to achieve savings in 1995
from its continued reengineering of operations, these savings were offset
somewhat by higher conservation expenses.
The increase in operations expense associated with the nonregulated
businesses and parent company principally reflects higher costs at the
energy marketing subsidiary. In addition, this business experienced
additional administrative costs associated with new business development
resulting in an operating loss in 1995 of 3 cents per share and in 1994 of
2 cents per share.
The environmental and engineering services business also incurred higher
operations costs in 1995. However, as a result of realigning its
business in 1995 through the sale of selected operations, as discussed in
the "Interest Expense and Other" section below, the environmental and
engineering services business was able to maintain a 7 cent per share
contribution to earnings in both 1995 and 1994.
Operating expenses exceeded operating revenue in the affordable housing
business, however, after adjusting for the tax benefits and credits
associated with this business, the affordable housing business contributed
approximately 4 cents per share in 1995 and 3 cents per share in 1994.
Depreciation and Amortization
The increase in depreciation and amortization expense in 1995 is primarily
the result of property additions at WP&L.
Interest Expense and Other
Interest expense increased due to the higher levels of short-term debt and
higher short-term interest rates. During the second quarter of 1995,
WP&L repurchased $18 million of Series V bonds from private investors.
WP&L used short-term debt to acquire the Series V bonds. WP&L applied
revenue requirement neutral accounting treatment to these acquired bonds
consistent with regulatory requirements.
Interest expense and other in 1994 also includes pre-tax income of $8.8
million related to a Wisconsin Supreme Court decision which reversed a
coal contract penalty assessed against WP&L in 1989. In addition, income
associated with the allowance for funds used during construction (AFUDC)
decreased in 1995 due to significantly lower construction work-in-progress
amounts and a lower FERC AFUDC rate.
Interest expense and other also includes $2.2 million associated with the
gain on the sale of various investments and environmental consulting
divisions in 1995 by HDC.
Income Taxes
Despite higher operating income in 1995, the income tax expense was
unchanged due to prior years' tax contingencies favorably resolved in
1995. The effective income tax rate on continuing operations was 32.5
percent and 34.1 percent for 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is primarily determined by the level of cash
generated from its utility operations and the funding requirements of
WP&L's ongoing construction and maintenance programs. WP&L finances its
construction expenditures through internally generated funds supplemented,
when required, by outside financing.
During 1996, 1995 and 1994, the Company generated sufficient cash flows
from operations, the sale of other property and equipment and short-term
borrowing to cover operating expenses, cash dividends and investing
activities. Cash flows from operations increased to $191 million for
1996, compared with $186 million and $168 million in 1995 and 1994,
respectively. The decrease in cash flows used for investing activities
was primarily attributable to $36.3 million received from the sale of a
combustion turbine by WP&L as well as $24.9 million from the sale of a
subsidiary and investment at HDC.
Rates and Regulatory Matters
Effective January 1, 1995, for the two-year period ended December 31,
1996, the PSCW, in rate order UR-109, authorized a 2.8 percent annual
decrease in electric rates, a 0.5 percent annual increase in gas rates and
a decline in the allowed return on common equity to 11.5 percent from the
previous 11.6 percent. See Note 1J of the "Notes to Consolidated
Financial Statements" for additional information.
WP&L submitted its biennial rate case filing with the PSCW on April 1,
1996, for the test year beginning January 1, 1997. In the filing WP&L
requested rate increases of $13.4 million or 3.0 percent for Wisconsin
retail electric customers and $2.4 million or 1.6 percent for Wisconsin
natural gas customers. This request was based on an 11.9 percent return
on common equity. Technical hearings were completed in November 1996.
WP&L filed additional testimony subsequent to the conclusion of the
November 1996 hearings regarding recovery of replacement power and
operations and maintenance expenses for the extended outage at Kewaunee.
Because of this additional filing, a final rate order is not expected
until April 1997. Refer to "Subsequent Events" for further information
relating to this rate order.
Industry Outlook
The primary business of the Company is that of WP&L, which is subject to
regulation by the PSCW and the FERC. The PSCW's inquiries into the future
structure of the natural gas and electric utility industries are ongoing.
The stated goal of the PSCW in the natural gas docket is to move all gas
supply activities out of the existing regulated distribution utilities and
allow independent units to compete for the business. The goal of the
electric restructuring process is to create open access transmission and
distribution services for all customers with competitive generation and
customer service markets. Additional proceedings as well as consultation
with the legislature are planned prior to a target implementation date
after the year 2000. The Company cannot currently predict what impact, if
any, these proceedings may have on its future financial condition or
results of operations. The Company believes, however, that it is well
positioned to compete in a deregulated environment. WP&L's rates to all
customer classes are competitive within the state of Wisconsin and below
the average in the Midwest region.
On April 24, 1996, the FERC issued two orders (No. 888 and 889) that will
promote competition by opening access to the nation's wholesale power
market. The new orders require public utilities that own, control or
operate transmission systems to provide other companies with the same
transmission access/service that they provide to themselves. The Company
presently has on file with the FERC a pro forma open access transmission
tariff, filed in compliance with FERC Order No. 888. On November 13,
1996, the FERC accepted the non-rate terms and conditions of WP&L's tariff
for filing without modification. On September 20, 1996, the FERC extended
the deadline for compliance with Order No. 889 to January 3, 1997 which
was met by WP&L through participation in a regional Open Access Same-Time
Information System.
On September 26, 1996, the PSCW issued an order which establishes the
minimum Standards for a Wisconsin Independent System Operator (Standards).
The Standards will be applied by the PSCW in Advance Plan proceedings,
merger review cases, transmission construction cases and other proceedings
as appropriate. The order provides that the Standards will be reviewed
and revised as necessary in light of ongoing regional and national events,
such as FERC requirements or policy, regional institutions, or relevant
actions of neighboring states.
On November 18, 1996, WP&L submitted applications and subsequently became
a member of both the MAPP RTG and the Power and Energy Market. WP&L
declined membership in the MAPP Regional Reliability Council and will
continue its membership in the Mid-American Interconnected Network, Inc.
(MAIN) through 1997.
As described in Note 1H of the "Notes to Consolidated Financial
Statements," WP&L complies with the provisions of Statement of Financial
Accounting Standards (SFAS No. 71 ) " Accounting for the Effects of
Certain Types of Regulation." In the event WP&L determines that it no
longer meets the criteria for following SFAS 71, the accounting impact
would be an extraordinary, non-cash charge to operations of an amount that
could be material. Criteria that give rise to the discontinuance of SFAS
71 include (1) increasing competition that restricts WP&L's ability to
establish prices to recover specific costs and (2) a significant change in
the manner in which rates are set by regulators from cost-based regulation
to another form of regulation. WP&L periodically reviews these criteria
to ensure that the continuing application of SFAS 71 is appropriate. WP&L
believes that it still meets the requirements of SFAS 71.
Financing and Capital Structure
The level of short-term borrowing fluctuates based on seasonal corporate
needs, the timing of long-term financing, and capital market conditions.
The Company's operating subsidiaries generally borrow on a short-term
basis to provide interim financing of construction and capital
expenditures in excess of available internally generated funds. The
subsidiaries periodically reduce their outstanding short-term borrowing
through the issuance of long-term debt and through the Company's
additional investment in their common equity. To maintain flexibility in
its capital structure and to take advantage of favorable short-term rates,
the Company also uses proceeds from the sales of accounts receivable and
unbilled revenues to finance a portion of its long-term cash needs. The
Company also anticipates that short-term debt funds will continue to be
available at reasonable costs due to strong ratings by independent utility
analysts and rating services. Commercial paper has been rated A-1+ by
Standard & Poor's Corp. and P-1 by Moody's Investors Service. The
Company's bank lines of credit of $120 million at December 31, 1996 are
available to support these borrowings.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate and commodity price risks. The Company
enters into interest rate swap agreements to reduce the impact of changes
in interest rates on its floating-rate long-term debt, short-term debt and
the sales of its accounts receivable. The total notional amount of
interest rate swaps was $89 million and $123 million, respectively, for
the years ended December 31, 1996 and 1995. The Company uses swaps,
futures and options to hedge the price risks associated with the purchase
and sale of stored gas at WP&L and with the purchases and sales of gas and
electric power at the energy marketing subsidiary.
The Company's capitalization at December 31, 1996, including the current
maturities of long-term debt, variable rate demand bonds and short-term
debt, consisted of 48 percent common equity, 5 percent preferred stock and
47 percent debt. The common equity to total capitalization ratio at
December 31, 1996, increased to 48 percent from 47 percent at December 31,
1995.
The retail rate order effective January 1, 1995 requires WP&L to maintain
a utility common equity level of 51.93 percent of total utility
capitalization. In addition, the PSCW ordered that it must approve the
payment of dividends by WP&L to the Company if such dividends would reduce
WP&L's average common equity ratio below 51.93 percent. At December 31,
1996 WP&L's common equity ratio was 53.5 percent. Refer to "Subsequent
Events" for further information relating to the new rate order.
In accordance with the terms of the Merger Agreement (see Note 2 of "Notes
to Consolidated Financial Statements"), the Company may not declare or pay
any dividends on any of its capital stock other than the obligations that
exist with respect to cumulative preferred stock, and regular quarterly
dividends on common stock provided they do not exceed 105 percent of the
common stock dividends from the prior year.
Capital Requirements
The Company's largest subsidiary, WP&L, is a capital-intensive business
and requires large investments in long-lived assets. Therefore, the
Company's most significant capital requirements relate to construction
expenditures at WP&L. Estimated capital requirements for the next five
years are as follows:
Capital Requirements
(in millions)
1997 1998 1999 2000 2001
Construction expenditures
Electric $88.7 $89.2 $89.9 $90.6 $91.3
Gas, water and common 45.0 43.8 44.3 44.7 45.2
Nuclear fuel 11.4 6.8 9.4 11.4 6.1
AFUDC 2.1 2.1 2.1 2.1 2.1
----- ----- ----- ----- -----
Total construction
expenditures 147.2 141.9 145.7 148.8 144.7
Changes in working capital and
other 22.6 16.8 (5.4) 13.9 13.6
----- ----- ----- ----- -----
Total construction and
operating capital 169.8 158.7 140.3 162.7 158.3
Long-term debt maturities 55.0 8.9 0.0 1.9 0.0
Manufactured gas plant
remediation 5.0 1.0 0.5 0.5 0.5
----- ----- ----- ----- -----
Total capital requirements $229.8 $168.6 $140.8 $165.1 $158.8
===== ===== ===== ===== ======
Included in the construction expenditure estimates, in addition to
recurring additions and improvements to the distribution and
transmission systems, are expenditures related to upgrading computer
systems in order to improve productivity and customer service. Electric
expenditures include the annual contribution to external trust funds to
fund the decommissioning of Kewaunee. These amounts are recorded in
depreciation expense and recovered in rates. WP&L expects to contribute
$19.7 million annually to this fund. Refer to "Subsequent Events" for
further information relating to the new rate order.
WP&L has a 41 percent ownership interest in Kewaunee. During a scheduled
refueling and maintenance outage of the plant in September 1996, steam
generator tube degradation was discovered which required that the tubes be
repaired before the plant could resume operation. A laser weld repair
process was implemented to address the problem. During testing of the
success of this process in early February 1997, it was discovered that
further repair work or tube plugging would be required for a portion of
the welded tubes. Further investigation is ongoing which may delay the
return of the plant to service beyond the first quarter of 1997.
WP&L's costs associated with these tube repairs are estimated at $2.3
million of which $1.4 million was expensed in 1996. Additional costs
associated with the purchase of replacement power, estimated at
approximately $500,000 per week, were not recoverable from customers under
the retail rate order in effect at the time of the outage. However, if
the outage were to extend beyond the implementation of a PSCW rate order
expected to be issued in April 1997, replacement power costs incurred
subsequent to that order will be recovered through a surcharge mechanism.
Refer to "Subsequent Events" for further information relating to the new
rate order.
Repairs using laser technology may be only temporary because corrosion
will continue at a rate which cannot be accurately forecasted. Because of
these uncertainties, the PSCW, on January 3, 1997, approved accelerated
cost recovery of the remaining depreciation costs and unfunded
decommissioning liability based on an expected end of plant life of 2002
rather than the currently licensed end of life of 2013. The accelerated
depreciation and decommissioning expense will be incorporated with the
retail rate order expected to be issued in April of 1997. Based on a 1992
site specific study, WP&L's share of the costs to decommission Kewaunee
was estimated at $142 million. Assuming an annual inflation rate of 6.5
percent, WP&L's liability in current year dollars is approximately $180
million. As of December 31, 1996, $90.7 million, net of tax, was
available in external trust funds to meet this liability. See Note 11 of
the "Notes to Consolidated Financial Statements" for additional
information. Refer to "Subsequent Events" for further information
relating to the new rate order.
Currently, the owners of Kewaunee have different views of the future
market value of energy which impact on the desirability of replacing the
steam generators. During the first quarter of 1996, Wisconsin Public
Service Corporation filed an application with the PSCW seeking approval to
replace the steam generators in 1999. The total cost of the generator
replacement would be approximately $89 million. A PSCW decision on this
application is expected in October 1997. In addition, the joint owners
continue to analyze and discuss other options related to the future of
Kewaunee including various ownership transfer alternatives. If it should
become necessary to retire Kewaunee permanently, WP&L would replace the
Kewaunee generation through a combination of power purchases, increased
generation at existing WP&L generating units and new generating unit
additions, if necessary.
The net book value of WP&L's share of Kewaunee as of December 31, 1996 was
$51.4 million, excluding the value of nuclear fuel.
Certain matters discussed concerning Kewaunee are forward-looking
statements and can generally be identified as such because the content of
the statement include the phrase the Company "expects," or other words of
similar import. Similarly, statements that describe the Company's future
plans, objectives and goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties
which could cause actual results and outcomes to differ materially from
those currently anticipated. In addition to the matters discussed above,
factors that could affect actual results or outcomes include the timing
and nature of regulatory responses and approvals, technological
developments and advancements regarding repair of the steam generator
tubes, the useful life of the repairs affected and the cost of purchased
electric power or additional generating facilities to replace the power
generated by Kewaunee.
The staff of the Securities and Exchange Commission also has questioned
certain of the current accounting practices of the electric utility
industry, including the Company, regarding the recognition, measurement
and classification of decommissioning costs for nuclear generating
stations in financial statements of electric utilities. In response to
these questions, the Financial Accounting Standards Board (FASB) has
decided to review the accounting for closure and removal costs, including
decommissioning of nuclear power plants.
Capital requirements for HDC, generally consist of funds used for business
acquisition activity and to provide for changes in working capital for the
operations of existing businesses. In addition to those items mentioned
above, requirements at HDC over the next five years are expected to
emphasize growth in the energy and environmental services businesses
through additional investments in joint ventures and acquisitions.
Capital Resources
One of the Company's objectives is to finance utility construction
expenditures through WP&L's internally generated funds supplemented, when
required, by outside financing. With this objective in place, WP&L has
financed 71 percent of its construction expenditures during 1996 from
internal sources. However, during the next five years, the Company
expects this percentage to increase primarily due to relatively stable
level of construction expenditures and higher depreciation rates
beginning in 1997. External financing sources such as the issuance of
long-term debt and short-term borrowings will be used by WP&L to finance
the remaining construction expenditure requirements for this period.
Expectations are that approximately $105 million of long-term debt will be
issued in 1997. HDC's financing of capital requirements will be
accomplished through internally generated funds, supplemented by external
borrowings and equity contributions from the Company.
NEW ACCOUNTING PRONOUNCEMENT
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes standards for asset and liability recognition when transfers
occur. This statement, effective January 1, 1997, is not expected to
materially impact the Company's financial position or results of
operations.
Effective January 1, 1997, the Company adopted the provisions of Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities." This
Statement provides authoritative guidance for recognition, measurement,
display and disclosure of environmental remediation liabilities in
financial statements. The Company has recorded environmental remediation
liabilities of $74.1 million at December 31, 1996. Adoption of SOP 96-1
is not expected to have a material impact on the Company's financial
position or results of operations.
INFLATION
The impacts of inflation on WP&L are currently mitigated through
ratemaking methodologies, customer growth, and productivity improvements.
Inflationary impacts on the nonregulated businesses are not anticipated
to be material to the Company.
OTHER EVENTS
Union Contract
WP&L and the International Brotherhood of Electrical Workers, Local 965,
reached agreement on a new three-year collective bargaining contract on
June 14, 1996. The new agreement includes increases in the base wage
during the first, second and third years of the contract of 3 percent, 3
percent and 3.25 percent, respectively. The new agreement was effective
retroactive to June 1, 1996, with wages retroactive to May 26, 1996, which
was the beginning of a pay period. At the end of 1996, the contract
covered 1,617 of WP&L's employees which represents approximately 69
percent of the total employees at WP&L.
Sale of Business Segment
The Company's financial statements reflect the discontinuance of
operations of A&C its former utility energy and marketing consulting
business in 1995. See Note 12 of "Notes to Consolidated Financial
Statements" for additional information.
Environmental
WP&L cannot precisely forecast the effect of future environmental
regulations by federal, state and local authorities on its generation,
transmission and other facilities, or its operations, but has taken steps
to anticipate the future while meeting the requirements of current
environmental regulations. The Clean Air Act Amendments of 1977 and
subsequent amendments to the Clean Air Act, as well as the new laws
affecting the handling and disposal of solid and hazardous wastes, could
affect the siting, construction and operating costs of bothpresent and
future generating units.
Under the Federal Clean Water Act, National Pollutant Discharge
Elimination System permits for generating station discharge into water
ways are required to be obtained from the DNR to which the permit program
has been delegated. These permits must be periodically reviewed. WP&L
has obtained such permits for all of its generating stations or has filed
timely applications for renewals of such permits.
Air quality regulations promulgated by the DNR in accordance with federal
standards impose statewide restrictions on the emission of particulates,
sulfur dioxide, nitrogen oxides and other air pollutants and require
permits from the DNR for the operation of emission sources. WP&L
currently has the necessary permits to operate its generating facilities.
While periodic exceedances in air emissions may occur, management promptly
acts on them and works with the DNR to resolve any permit compliance
issues. With the passage of the new Federal Clean Air Act Amendments, the
state is required to include these provisions in its permit requirements.
WP&L has submitted Title V permit applications in compliance with
schedules set forth by the regulators.
WP&L has also completed application for Phase II permits under the Clean
Air Act in compliance with the time lines identified. The state Title V
operating permits, when issued, will consolidate all existing air permit
conditions and regulatory requirements into one permit for each facility.
Permits have been or are expected to be issued in 1997. Until such time,
the facilities will continue to operate under their existing permit
conditions.
WP&L's compliance strategy for Wisconsin's sulfur dioxide law (discussed
above) and the Federal Clean Air Act Amendments required plant upgrades at
its generating facilities. The majority of these projects were completed
in 1993. WP&L has installed continuous emission monitoring systems at
all of its coal fired boilers in compliance with federal requirements.
Monitoring for sulfur dioxide was also required by Title IV of the Federal
Clean Air Act at WP&L's South Fond du Lac, Wisconsin combustion-turbine
site. These requirements were also met. Additional monitoring systems
for nitrogen oxides were required in 1996 at the combustion turbine site.
WP&L has installed these monitors, and completed certification tests for
the equipment. No significant additional investments are anticipated at
this time to meet the requirements of the Federal Clean Air Act
Amendments.
For a discussion of the Company's liability regarding environmental
remediation at certain manufactured gas plant sites formerly operated by
WP&L, see Note 11 of "Notes to Consolidated Financial Statements."
Subsequent Event
WP&L submitted its biennial rate case filing (UR-110) with the PSCW on
April 1, 1996, for the test year beginning January 1, 1997. In the
filing, WP&L requested rate increases of $13.4 million or 3.0 percent for
Wisconsin retail electric customers and $2.4 million or 1.6 percent for
Wisconsin natural gas customers. This request was based on an 11.9
percent return on common equity. On March 4, 1997, the PSCW finalized
certain decisions relating to this rate case. For a description of this
filing, refer to "Rates and Regulatory Matters" above. The following
decisions were reached: authorization of a surcharge to collect
replacement power costs while Kewaunee is out of service; authorization of
an increase in the return on equity to 11.7 percent from its current level
of 11.5 percent; a requirement to maintain a utility common equity level
of 51.98 percent as compared to the current level of 51.93 percent;
reinstatement of the electric fuel adjustment clause; and continuation of
a modified gas performance based ratemaking incentive mechanism.
Preliminary estimates for UR-110 indicate an $11.2 million or 2.5 percent
reduction for Wisconsin retail electric customers and a $1.3 million or
2.3 percent reduction for Wisconsin natural gas customers. Although the
PSCW has publicly announced the foregoing decisions, a final order in
WP&L's rate case is not expected to be issued by the PSCW until April
1997.
As previously discussed in the MD&A under "Capital Requirements," Kewaunee
is in the process of using laser technology for tube repairs and further
investigation is ongoing which may delay the return of the plant to
service beyond the first quarter of 1997. Because of these uncertainties,
the PSCW, on January 3, 1997, approved accelerated cost recovery of the
remaining depreciation costs and unfunded decommissioning liability based
on an expected end of plant life of 2002 rather than the currently
licensed end of life of 2013. The accelerated depreciation and
decommissioning expense will be incorporated with the retail rate order
UR-110. Based on the March 4, 1997 decisions by the PSCW, WP&L expects to
recover in rates an additional $3.0 million annually related to the
accelerated depreciation of Kewaunee and to increase the annual
contribution to the external decommissioning trust funds to $16 million
from its current level of $10.7 million. The forecasted level of the
contribution included in the capital requirements section was $19.7
million. After-tax earnings on the tax-qualified and non-qualified
decommissioning funds are assumed to be 5.6 percent and 7.0 percent,
respectively.
Based on a 1992 site specific study, WP&L's share of the costs to
decommission Kewaunee was estimated at $142 million. WP&L's share of the
decommissioning costs of Kewaunee was previously established to be $180
million (in 1996 dollars) using an annual inflation rate of 6.5 percent.
The inflation assumptions applied in UR-110 were as follows: labor, 4.12
percent; burial costs, 10.42 percent; energy 3.66 percent; and other, 8.00
percent for a weighted average inflation rate of 5.44 percent. Based on
this revised inflation rate, WP&L's liability in current year dollars is
approximately $176 million. As of December 31, 1996, $90.7 million, net
of tax, was available in external trust funds to meet this liability. See
Note 11 of the "Notes to Consolidated Financial Statements" for additional
information. The undiscounted amount of decommissioning costs estimated
to be expended between the years 2014 and 2050 was $1,016 million. Based
on the revised funding plan this amount was decreased to $611 million to
be expended between the years 2003 and 2039.
Kewaunee has been out of service since September 21, 1996, when it was
shut down for a refueling and maintenance outage. Start-up has been
delayed by problems associated with repairing the tubes in Kewaunee's two
steam generators. In early February, testing of the laser welding repair
of the tubes revealed unexpected problems with the quality of the welds.
After further inspection and laboratory testing, WPSC is now planning to
undertake additional repairs which could allow Kewaunee to return to service
in the June 1997 time frame.
The additional repairs involve removing metal sleeves that were installed
previously to repair the corroded tubes. New, slightly longer sleeves will
be installed to cover the areas of concern in the original steam generator
tubes. WPSC's management believes that the NRC will approve this repair
process because it only requires minor changes to the presently approved
sleeving process. The cost of the additional repairs is expected to be
between $4.5 million and $10.0 million, depending on the number of
previously repaired sleeves that can remain in service. WP&L's shares of
the costs is in the range of $1.8 to $4.1 million based on its 41.0%
ownership in the plant.
Dividend Declaration
On January 22, 1997, the Board of Directors of the Company declared a
quarterly dividend on WPLH Common Stock. The dividend is 50 cents per
share payable February 15 to shareowners of record on January 31, 1997.
Selected Consolidated Quarterly Financial Data (Unaudited)
The summarized quarterly financial data below were not audited by
independent public accountants, but reflect all adjustments necessary, in
the opinion of the Company, for a fair presentation of the data. The
quarterly amounts can be affected by seasonal weather conditions. Refer
to MD&A for a discussion of the impacts of weather.
Operating Operating Net Earnings
Revenues Income Income per Share
Quarter Ended (in thousands except per share data)
1996:
March 31 $260,877 $54,162 $31,680 $1.03
June 30 208,293 31,127 16,539 0.54
September 30 212,263 28,867 12,596 0.41
December 31 251,411 27,348 11,093 0.36
1995:
March 31 $215,874 $44,701 $19,653 $0.64
June 30 175,990 21,427 6,939 0.23
September 30 196,131 41,923 20,709 0.67
December 31 219,260 37,947 11,131 0.36
<PAGE>
REPORT ON THE FINANCIAL INFORMATION
WPL Holdings, Inc. management is responsible for all the information
appearing in this annual report and for the accuracy and internal
consistency of that information. The consolidated financial statements
that follow have been prepared in accordance with generally accepted
accounting principles. In addition to selecting appropriate accounting
principles, management is responsible for the manner of presentation and
for the reliability of the financial information. In fulfilling that
responsibility, it is necessary for management to make estimates based on
currently available information and judgments of current conditions and
circumstances.
Through a well-developed system of internal controls, management seeks to
ensure the integrity and objectivity of the financial information
presented in this report. This system of internal control is designed to
provide reasonable assurance that the assets of the company are
safeguarded and that the transactions are executed according to
management's authorizations and are recorded in accordance with the
appropriate accounting principles.
The Board of Directors participates in the financial information reporting
process through its Audit Committee.
Erroll B. Davis Jr.
President and Chief Executive Officer
WPL Holdings, Inc.
Edward M. Gleason
Vice President, Treasurer and Corporate Secretary
Principal Financial Officer
WPL Holdings, Inc.
January 30, 1997
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowners of WPL Holdings, Inc.:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of WPL Holdings, Inc. (a Wisconsin
corporation) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, cash flow and common
shareowners' investment for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
the Company'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 WPL Holdings, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 30, 1997
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
(in thousands except for per share data)
Operating revenues:
Electric $589,482 $546,324 $531,747
Gas 165,627 139,165 151,931
Fees, rents, non-utility
energy sales and other 177,735 121,766 112,039
------- ------- -------
932,844 807,255 795,717
------- ------- -------
Operating expenses:
Electric production fuels 114,470 116,488 123,469
Purchased power 81,108 44,940 37,913
Purchased gas 104,830 84,002 100,942
Other operation and cost of
non-utility energy 319,154 253,277 248,847
Maintenance 46,492 42,043 41,227
Depreciation and amortization 90,683 86,319 80,351
Taxes other than income 34,603 34,188 33,788
------- ------- -------
791,340 661,257 666,537
------- ------- -------
Operating income 141,504 145,998 129,180
------- ------- -------
Interest expense and other:
Interest expense 42,027 43,559 37,686
Allowance for funds used
during construction (3,208) (2,088) (4,038)
Other (15,644) (6,509) (10,245)
------- ------- -------
23,175 34,962 23,403
------- ------- -------
Income from continuing operations
before income taxes 118,329 111,036 105,777
Income taxes 41,814 36,108 36,043
Preferred dividend requirement
of subsidiary 3,310 3,310 3,310
------- ------- -------
Income from continuing
operations 73,205 71,618 66,424
------- ------- -------
Discontinued operations:
Loss from operation of
discontinued subsidiary, net
of applicable tax benefits of
$1,451 and $632 --- 2,212 1,174
Loss on disposal of subsidiary,
net of applicable tax benefit
of $575 and tax expense of
$3,271 1,297 10,974 ---
------- ------- -------
1,297 13,186 1,174
------- ------- -------
Net income $71,908 $58,432 $65,250
======= ======= =======
Earnings per share:
Income from continuing
operations $2.38 $2.33 $2.17
Discontinued operations (0.04) (0.43) (0.04)
------- ------- -------
Net income $2.34 $1.90 $2.13
======= ======= =======
Weighted average number of shares
of common stock outstanding 30,790 30,774 30,671
======= ======= =======
Cash dividends paid per share $1.97 $1.94 $1.92
======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
ASSETS (in thousands)
Utility plant:
Plant in service--
Electric $1,729,311 $1,665,611
Gas 227,809 217,678
Water 23,905 22,518
Common 152,093 136,943
--------- ---------
2,133,118 2,042,750
Less--accumulated provision
for depreciation 967,436 887,562
--------- ---------
1,165,682 1,155,188
Construction work in progress 55,519 36,996
Nuclear fuel, net 19,368 18,867
--------- ---------
1,240,569 1,211,051
--------- ---------
Other property and equipment:
Rental, net 112,913 102,206
Other, net 16,350 42,563
--------- ---------
129,263 144,769
--------- ---------
Investments:
Nuclear decommissioning trust funds 90,671 73,357
Other investments 15,408 12,628
--------- ---------
106,079 85,985
--------- ---------
Current assets:
Cash and equivalents 11,070 11,386
Net accounts receivable and unbilled
revenue, less allowance for
doubtful accounts of $1,524 and
$1,735, respectively 88,798 94,648
Coal, at average cost 15,841 14,625
Materials and supplies, at average cost 19,915 20,723
Gas in storage, at average cost 9,992 6,319
Prepayments and other 26,786 27,987
--------- ---------
172,402 175,688
--------- ---------
Restricted cash 6,848 3,266
--------- ---------
Deferred charges:
Regulatory assets 160,877 170,269
Other 84,493 81,386
--------- ---------
245,370 251,655
--------- ---------
TOTAL ASSETS $1,900,531 $1,872,414
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization (See Consolidated Statements
of Capitalization):
Common shareowners' investment $607,355 $597,470
Subsidiary preferred stock not
mandatorily redeemable 59,963 59,963
Long-term debt, net 362,564 430,362
--------- ---------
1,029,882 1,087,795
--------- ---------
Current liabilities:
Current maturities of long-term debt 67,626 3,397
Variable rate demand bonds 56,975 56,975
Short-term debt 102,779 109,525
Accounts payable and accruals 106,486 94,898
Accrued payroll and vacation 14,500 14,299
Accrued taxes 4,669 6,483
Accrued interest 9,085 9,214
Other 45,218 26,783
--------- ---------
407,338 321,574
--------- ---------
Other credits:
Accumulated deferred income taxes 245,686 241,150
Accumulated deferred investment
tax credits 36,931 38,842
Accrued environmental remediation costs 74,075 76,852
Deferred credits and other 106,619 106,201
--------- ---------
463,311 463,045
--------- ---------
Commitments and contingencies (Note 11)
TOTAL CAPITALIZATION AND LIABILITIES $1,900,531 $1,872,414
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
(in thousands)
Cash flows generated from (used
for) operating activities:
Net income $71,908 $58,432 $65,250
Adjustments to reconcile net
income to net cash generated
from operating activities:
Depreciation and amortization 90,683 86,319 80,351
Deferred income taxes 14,540 10,716 12,299
Investment tax credit restored (1,911) (1,916) (1,926)
Amortization of nuclear fuel 6,057 7,787 6,707
Allowance for equity funds used
during construction (2,270) (1,425) (3,009)
(Gain) loss on sale of
subsidiary and investment (4,149) 10,974 ---
(Gain) loss on sale of other
property and equipment (5,676) --- ---
Changes in assets and liabilities:
Restricted cash (3,582) (49) 3,495
Net accounts receivable and
unbilled revenue 5,850 (23,183) (3,842)
Inventories (4,081) 3,750 1,057
Prepayments and other 1,201 2,292 (7,028)
Accounts payable and accruals 11,661 19,966 (6,320)
Accrued taxes (1,814) 88 6,965
Other, net 12,302 12,166 13,774
------- ------- -------
Net cash from (used for)
operating activities 190,719 185,917 167,773
------- ------- -------
Cash flows generated from (used for)
financing activities:
Common stock cash dividends, less
dividends reinvested (60,656) (59,701) (49,357)
Proceeds from issuance of long-
term debt 1,370 756 24,993
Reduction of long-term debt (5,000) (18,000) ---
Net change in short-term debt (6,746) 45,024 (27,401)
Other, net (1,367) 941 (1,064)
------- ------- -------
Net cash from (used for)
financing activities (72,399) (30,980) (52,829)
------- ------- -------
Cash flows generated from (used for)
investing activities:
Proceeds from sale of other
property and equipment 36,264 --- ---
Additions to utility plant,
excluding AFUDC (120,732) (99,746) (119,272)
Additions to nuclear fuel (6,558) (7,258) (8,103)
Allowance for borrowed funds
used during construction (938) (663) (1,029)
Dedicated decommissioning
trust funds (17,314) (21,566) (1,988)
Proceeds from sale of subsidiary
and investments 24,930 --- ---
Purchase of other property and
equipment (20,824) (26,696) (13,127)
Other, net (13,464) 5,105 16,380
------- ------- -------
Net cash from (used for)
investing activities (118,636) (150,824) (127,139)
------- ------- -------
Net increase (decrease) in cash
and equivalents (316) 4,113 (12,195)
Cash and equivalents at beginning of year 11,386 7,273 19,468
------- ------- -------
Cash and equivalents at end of year $11,070 $11,386 $7,273
======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year:
Interest on debt $35,855 $39,984 $36,914
Preferred stock dividends of
subsidiary $3,310 $3,310 $3,310
Income taxes $39,795 $29,499 $22,902
Non-cash financing activities:
Dividends reinvested --- --- $9,653
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1996 1995
(in thousands except
for share data)
Common shareowners' investment:
Common stock $.01 par value, authorized
100,000,000 shares, issued and
outstanding--30,773,735 and 30,773,588
shares, respectively $308 $308
Additional paid-in capital 303,856 305,223
Reinvested earnings 303,191 291,939
------- -------
607,355 597,470
------- -------
Preferred stock:
Wisconsin Power and Light Company--
Cumulative, without par value,
authorized 3,750,000 shares, maximum
aggregate stated value $150,000,000:
Preferred stock without mandatory
redemption, $100 stated value--
4.50% series, 99,970 shares outstanding 9,997 9,997
4.80% series, 74,912 shares outstanding 7,491 7,491
4.96% series, 64,979 shares outstanding 6,498 6,498
4.40% series, 29,957 shares outstanding 2,996 2,996
4.76% series, 29,947 shares outstanding 2,995 2,995
6.20% series, 150,000 shares outstanding 15,000 15,000
Cumulative, without par value, $25 stated value-
6.50% series, 599,460 shares outstanding 14,986 14,986
------- -------
59,963 59,963
------- -------
Long-term debt:
Wisconsin Power and Light Company--
First mortgage bonds:
Series L, 6.25%, due 1998 8,899 8,899
1984 Series A, variable rate, due 2014
(4.60% at 12/31/96) 8,500 8,500
1988 Series A, variable rate, due 2015
(4.25% at 12/31/96) 14,600 14,600
1990 Series V, 9.3%, due 2025 27,000 32,000
1991 Series A, variable rate, due 2015
(5.00% at 12/31/96) 16,000 16,000
1991 Series B, variable rate, due 2005
(5.00% at 12/31/96) 16,000 16,000
1991 Series C, variable rate, due 2000
(5.00% at 12/31/96) 1,000 1,000
1991 Series D, variable rate, due 2000
(5.00% at 12/31/96) 875 875
1992 Series W, 8.6%, due 2027 90,000 90,000
1992 Series X, 7.75%, due 2004 62,000 62,000
1992 Series Y, 7.6%, due 2005 72,000 72,000
1992 Series Z, 6.125%, due 1997 55,000 55,000
------- -------
371,874 376,874
------- -------
Heartland Development Corporation--
Multifamily Housing Revenue Bonds issued by
various housing and community development
authorities, due 2004-2024, 2.00% - 7.55% 37,445 38,326
Other mortgage notes payable, due 1997-2042,
0% - 10.75% 45,086 42,834
------- -------
82,531 81,160
------- -------
WPL Holdings, Inc.--
8.96% Senior notes, due 1997 10,000 10,000
8.59% Senior notes, due 2004 24,000 24,000
------- -------
34,000 34,000
------- -------
Less--
Current maturities (67,626) (3,397)
Variable rate demand bonds (56,975) (56,975)
Unamortized discount and premium, net (1,240) (1,300)
------- -------
362,564 430,362
------- -------
TOTAL CAPITALIZATION $1,029,882 $1,087,795
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMMON
SHAREOWNERS' INVESTMENT
Year Ended December 31,
1996 1995 1994
(in thousands except for
per share data)
Common stock:
Balance at beginning of year $308 $308 $305
Issued in connection with dividend
reinvestment plan --- --- 3
------- ------- -------
Balance at end of year 308 308 308
------- ------- -------
Additional paid-in capital:
Balance at beginning of year 305,223 304,442 297,916
Received in connection with dividend
reinvestment plan --- --- 9,650
Other (1,367) 781 (3,124)
------- ------- -------
Balance at end of year 303,856 305,223 304,442
------- ------- -------
Reinvested earnings:
Balance at beginning of year 291,939 293,048 284,745
Net income
71,908 58,432 65,250
Cash dividends ($1.97 per share, $1.94
per share and $1.92 per share,
respectively) (60,656) (59,701) (59,010)
Expense of issuing stock and other --- 160 2,063
------- ------- -------
Balance at end of year 303,191 291,939 293,048
------- ------- -------
TOTAL COMMON SHAREOWNERS' INVESTMENT $607,355 $597,470 $597,798
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as otherwise indicated)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General
The consolidated financial statements include the accounts of WPL
Holdings, Inc. (WPLH) and its consolidated subsidiaries (collectively the
Company). WPLH is an investor-owned holding company whose primary
operating company, Wisconsin Power & Light Company (WP&L), is engaged
principally in the generation, transmission, distribution and sale of
electric energy and the purchase, distribution, transportation and sale of
natural gas primarily in the state of Wisconsin. WP&L's principal
consolidated subsidiary is South Beloit Water, Gas and Electric Co. The
Company also has various non-utility subsidiaries which are primarily
engaged in the environmental and engineering service, affordable housing
and energy marketing businesses.
All subsidiaries for which the Company owns directly or indirectly more
than 50% of the voting stock are included as consolidated subsidiaries.
All significant intercompany balances and transactions have been
eliminated from the consolidated financial statements.
Investments for which the Company has at least a 20% interest are
generally accounted for under the equity method of accounting. These
investments are stated at acquisition cost, increased or decreased for the
Company's equity in undistributed net income or loss, which is included in
other income and deductions in the consolidated statements of income.
Investments that do not meet the criteria for consolidation or the equity
method of accounting are accounted for under the cost method.
b. Regulation
WP&L's financial records are maintained in accordance with the uniform
system of accounts prescribed by its regulators. The Public Service
Commission of Wisconsin (PSCW) and the Illinois Commerce Commission (ICC)
have jurisdiction over retail electric and gas revenues. The Federal
Energy Regulatory Commission (FERC) has jurisdiction over wholesale
electric revenues.
c. 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
d. Cash and Equivalents
The Company considers all highly liquid debt instruments purchased and
investments with a maturity of three months or less to be cash
equivalents.
e. Utility Plant and Other Property and Equipment
Utility plant and other property and equipment are recorded at original
cost. Utility plant costs include financing costs that are capitalized
using the FERC method for allowance for funds used during construction
(AFUDC). The AFUDC capitalization rate for 1996, 1995 and 1994 was 10.23
%, 6.68% and 10.15%, respectively. These capitalized costs are recovered
in rates as the cost of the utility plant is depreciated.
Normal repairs, maintenance and minor items of utility plant and other
property and equipment are expensed. Ordinary utility plant retirements,
including removal costs less salvage value, are charged to accumulated
depreciation upon removal from utility plant accounts, and no gain or loss
is recognized. Upon retirement or sale of other property and equipment,
the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in other income and deductions.
f. Depreciation
The Company uses the straight-line method of depreciation. For utility
plant, straight-line depreciation is computed on the average balance of
depreciable property at individual straight-line PSCW approved rates that
consider the estimated useful life and removal cost or salvage value as
follows:
1996 1995 1994
Electric 3.3% 3.3% 3.2%
Gas 3.7% 3.7% 3.7%
Water 2.6% 2.5% 2.5%
Common 8.1% 7.9% 7.9%
Depreciation expense related to WP&L's share of the decommissioning of the
Kewaunee Nuclear Power Plant is discussed in Note 11 "Commitments and
Contingencies". WP&L will implement higher depreciation rates effective
January 1, 1997.
Estimated useful lives related to other property and equipment are from 4
to 12 years for equipment and 31.5 to 40 years for buildings.
g. Nuclear Fuel
Nuclear fuel is recorded at its original cost and is amortized to expense
based upon the quantity of heat produced for the generation of
electricity. This accumulated amortization assumes spent nuclear fuel
will have no residual value. Estimated future disposal costs of such fuel
are expensed based on kilowatthours generated.
h. Regulatory Assets and Liabilities
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," provides that rate-regulated
public utilities such as WP&L record certain costs and credits allowed in
the ratemaking process in different periods than for unregulated entities.
These are deferred as regulatory assets or regulatory liabilities and are
recognized in the consolidated statements of income at the time they are
reflected in rates. If a portion of WP&L's operations become no longer
subject to the provisions of SFAS No. 71, a write-off of regulatory assets
and liabilities would be required, unless some form of transition cost
recovery is established by the appropriate regulatory body.
As of December 31, 1996 and 1995, regulatory created assets include the
following:
1996 1995
Environmental remediation costs
(Note 11) $81,431 $81,431
Tax related (Note 6) 57,198 62,796
Jurisdictional plant differences 7,603 7,517
Decontamination and decommissioning
costs of Federal enrichment facilities 6,061 6,555
Other 8,584 11,970
------- -------
Total $160,877 $170,269
======= =======
As of December 31, 1996 and 1995, WP&L had recorded regulatory related
liabilities of $33,901 and $37,898, respectively. These liabilities are
primarily tax related.
i. Revenue
The Company accrues revenues for services provided but not yet billed at
month-end.
j. Rate Matters
Effective January 1, 1995, for the two-year period ended December 31,
1996, the PSCW in rate order UR-109, authorized a 2.8 percent annual
decrease in electric rates, a 0.5 percent annual increase in gas rates and
a decline in the allowed return on common equity to 11.5 percent from 11.6
percent. Further, the PSCW approved certain incentive programs described
below:
1. The electric fuel adjustment mechanism, which allowed costs to
fluctuate within a 3 percent band width, was eliminated. The
elimination of the adjustment mechanism did not have a material
impact on earnings.
2. The automatic purchased gas adjustment clause was eliminated and
replaced by a performance based rate (PBR) mechanism. Fluctuations
in the commodity cost of gas above or below a prescribed commodity
price index increase or decrease WP&L's margin on gas sales. Both
benefits and exposures are subject to customer sharing provisions.
WP&L's share is capped at $1.1 million pre-tax. For 1996 and 1995,
WP&L earned $1.1 million and $0.8 million, respectively, under this
PBR mechanism.
3. In order to promote air quality and delivery system reliability,
there are SO2 emissions and service reliability performance and
incentive clauses. Positive incentives available under these clauses
include $1.5 million pre-tax for the SO2 emissions and $0.5 million
pre-tax for the service reliability. WP&L's earnings are also
negatively exposed for equal amounts. For 1996 and 1995, WP&L
collected $2.0 million pre-tax in revenues and also deferred $2.6 and
$2.1 million pre-tax in revenues, respectively.
WP&L made its required biennial rate case filing with the PSCW on April 1,
1996. Technical hearings took place during 1996. A final order is
expected in April of 1997.
k. Income Taxes
The Company follows the liability method of accounting for deferred income
taxes, which requires the establishment of deferred tax liabilities and
assets, as appropriate, for all temporary differences between the tax
basis of assets and liabilities and the amounts reported in the financial
statements using currently enacted tax rates as shown in Note 6.
Investment tax credits are accounted for on a deferred basis and reflected
in income ratably over the life of the related utility plant. As part of
the affordable housing business, the Company is eligible to claim
affordable housing and historic rehabilitation credits. These tax credits
reduce current federal taxes to the extent the Company has consolidated
taxes payable.
l. Reclassifications
Certain reclassifications have been made to the prior years financial
statements to conform with the current year presentation.
NOTE 2. PROPOSED MERGER OF THE COMPANY
On November 10, 1995, the Company, IES Industries Inc. (IES), and
Interstate Power Company (IPC) entered into an Agreement and Plan of
Merger, as amended (Merger Agreement), providing for: a) IPC becoming a
wholly-owned subsidiary of the Company, and b) the merger of IES with and
into the Company, which merger will result in the combination of IES and
the Company as a single holding company (collectively, the Proposed
Merger). The new holding company will be named Interstate Energy
Corporation (IEC). The Proposed Merger, which will be accounted for as a
pooling of interests and is intended to be tax-free for federal income tax
purposes, has been approved by the respective Boards of Directors and
shareholders. It is still subject to approval by several federal and
state regulatory agencies. The companies expect to receive the regulatory
approvals by the end of the third quarter of 1997.
The summary below contains selected unaudited pro forma financial data for
the year ended December 31, 1996. The financial data should be read in
conjunction with the historical consolidated financial statements and
related notes of the Company, IES and IPC and in conjunction with the
unaudited pro forma combined financial statements and related notes of IEC
included in the Form 10-K Annual Report of WPL Holdings, Inc. The pro
forma combined earnings per share reflect the issuance of shares
associated with the exchange ratios discussed below.
<TABLE>
<CAPTION>
PRO FORMA
WPLH IES IPC COMBINED
(in thousands except per share data) (as reported) (as reported) (as reported) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues $932,844 $973,912 $326,084 $2,232,840
Income from Continuing Operations $73,205 $60,907 $25,860 $159,972
Earnings per share from Continuing
Operations $2.38 $2.04 $2.69 $2.12
Assets at December 31, 1996 $1,900,531 $2,125,562 $639,200 $4,665,293
Long-term obligations, net at
December 31, 1996 $430,190 $744,298 $188,731 $1,363,219
</TABLE>
Under the terms of the Merger Agreement, the outstanding shares of the
Company's common stock will remain unchanged and outstanding as shares of
IEC. Each outstanding share of IES common stock will be converted to 1.14
shares of IEC common stock. Each share of IPC common stock will be
converted to 1.11 shares of IEC common stock. It is anticipated that IEC
will retain the Company's common share dividend payment level as of the
effective time of the merger. On January 22, 1997, the Board of Directors
of the Company declared a quarterly dividend of $0.50 per share. This
represents an annual rate of $2.00 per share.
IES is a holding company headquartered in Cedar Rapids, Iowa, and is the
parent company of IES Utilities Inc. (IES Utilities) and IES Diversified
Inc. (IES Diversified). IES Utilities supplies electric and gas service
to approximately 336,000 and 176,000 customers, respectively, in Iowa.
IES Diversified and its principal subsidiaries are primarily engaged in
the energy-related, transportation and real estate development businesses.
IPC, an operating public utility headquartered in Dubuque, Iowa, supplies
electric and gas service to approximately 165,000 and 49,000 customers,
respectively, in northeast Iowa, northwest Illinois and southern
Minnesota.
IEC will be the parent company of WP&L, IES Utilities and IPC and will
be registered under the Public Utility Holding Company Act of 1935, as
amended (1935 Act). The Merger Agreement provides that these operating
utility companies will continue to operate as separate entities for a
minimum of three years beyond the effective date of the merger. In
addition, the non-utility operations of the Company and IES Diversified
will be combined shortly after the effective date of the merger under one
entity to manage the diversified operations of IEC. The corporate
headquarters of IEC will be in Madison, Wisconsin.
The Securities and Exchange Commission (SEC) historically has interpreted
the 1935 Act to preclude registered holding companies, with limited
exceptions, from owning both electric and gas utility systems. Although
the SEC has recommended that registered holding companies be allowed to
hold both gas and electric utility operations if the affected states
agree, it remains possible that the SEC may require as a condition to its
approval of the Proposed Merger that the Company, IES and IPC divest their
gas utility properties, and possibly certain non-utility ventures of the
Company and IES, within a reasonable time after the effective date of the
Proposed Merger.
NOTE 3. JOINTLY OWNED UTILITY PLANTS
WP&L participates with other Wisconsin utilities in the construction and
operation of several jointly owned utility generating plants. Each of the
respective owners is responsible for the financing of its portion of the
construction costs. Kilowatt-hour generation and operating expenses are
divided on the same basis of ownership with each owner reflecting its
respective costs in its consolidated statements of income. The chart
below represents WP&L's proportionate share of such plants as reflected in
the consolidated balance sheets at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
Accumulated Accumulated
Plant Provision Provision
Ownership Inservice MW Plant in for Plant in for
Interest % Date Capacity Service Depreciation CWIP Service Depreciation CWIP
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal:
Columbia Energy 1975 &
Center 46.2 1978 1,023 $161,811 $86,375 $1,581 $160,348 $79,521 $881
Edgewater Unit 4 68.2 1969 330 50,796 28,056 702 50,762 26,759 216
Edgewater Unit 5 75.0 1985 380 228,805 73,697 51 229,429 68,515 0
Nuclear:
Kewaunee Nuclear
Power Plant 41.0 1974 535 131,207 80,577 810 132,211 76,096 836
------- ------- ----- ------- ------- -----
Total $572,619 $268,705 $3,144 $572,750 $250,891 $1,933
======= ======= ===== ======= ======= =====
</TABLE>
NOTE 4. NET ACCOUNTS RECEIVABLE
WP&L has a contract with a financial organization to sell, with limited
recourse, certain accounts receivable and unbilled revenues. These
receivables include customer receivables, sales to other public utilities
and billings to the co-owners of the jointly owned electric generating
plants that WP&L operates. The contract allows WP&L to sell up to $150
million of receivables at any time. Expenses related to the sale of
receivables are paid to the financial organization under this contract,
and include, along with various other fees, a monthly discount charge on
the outstanding balance of receivables sold that approximated a 5.90
percent annual rate during 1996. These costs are recovered in retail
utility rates as an operating expense. All billing and collection
functions remain the responsibility of WP&L. The contract expires August
16, 1998, unless extended by mutual agreement.
As of December 31, 1996 and 1995, the balance of sold accounts receivable
that had not been collected totaled $86.5 million and $79.5 million,
respectively. During 1996, the monthly proceeds from the sale of accounts
receivable averaged $86.6 million, compared with $77.5 million in 1995.
The Company does not have any significant concentrations of credit risk in
the December 31, 1996 and 1995 net accounts receivable balances.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes standards for asset and
liability recognition when transfers occur. This statement, effective
January 1, 1997, specifies conditions when control has been surrendered
which determines if sale treatment of the receivables would be allowed.
At the present time, this new standard is not expected to materially
impact the Company's financial position or results of operations.
NOTE 5. EMPLOYEE BENEFIT PLANS
a. Pension Plans
WP&L has noncontributory, defined benefit retirement plans covering
substantially all employees. The benefits are based upon years of service
and levels of compensation. The projected unit credit actuarial cost
method was used to compute net pension costs and the accumulated and
projected benefit obligations. WP&L's policy is to fund the pension cost
at an amount that is at least equal to the minimum funding requirements
mandated by the Employee Retirement Income Security Act (ERISA) and that
does not exceed the maximum tax deductible amount for the year.
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets at December 31,
1996 and 1995:
1996 1995
Accumulated benefit obligation
Vested benefits ($161,031) ($157,111)
Non-vested benefits (3,298) (2,755)
------- -------
Total (164,329) (159,866)
Projected benefit obligation (189,653) (184,937)
Plan assets at fair value 218,920 202,343
------- -------
Plan assets in excess of
projected benefit obligation 29,267 17,406
Unrecognized net transition asset (14,480) (16,928)
Unrecognized prior service cost 3,712 4,022
Unrecognized net loss 15,011 24,685
------- -------
Prepaid pension costs $33,510 $29,185
======= =======
Assumed rate of return on plan
assets 9.00% 9.00%
===== =====
Discount rate of projected benefit
obligation 7.50% 7.25%
===== =====
Range of assumed rate increases for
future compensation levels 3.50-4.50% 3.50-4.50%
========== ==========
The net pension cost (benefit) recognized in the consolidated statements
of income for 1996, 1995 and 1994 included the following components:
1996 1995 1994
Service cost $5,072 $3,879 $5,123
Interest cost on projected
benefit obligation 13,625 12,911 12,051
Actual return on assets (24,962) (31,548) 1,016
Amortization and deferrals 5,452 15,103 (17,795)
------- ------- -------
Net pension cost
(benefit) ($813) $345 $395
======= ======= =======
b. Other Postretirement Benefits
WP&L accrues for the expected cost of postretirement health-care and life
insurance benefits during the employees' years of service based on
actuarial methodologies that closely parallel pension accounting
requirements. WP&L elected delayed recognition of the transition
obligation in accordance with current accounting principles and is
amortizing the discounted present value of the transition obligation to
expense over 20 years. For WP&L, the cost of providing postretirement
benefits, including the transition obligation, is being recovered in
retail rates under current regulatory practices.
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets at December 31,
1996 and 1995:
1996 1995
Accumulated benefit obligation
Retirees ($32,244) ($35,639)
Fully eligible active plan
participants ($4,954) ($6,261)
Other active plan participants (9,396) (8,091)
------- -------
Total (46,594) (49,991)
Plan assets at fair value 13,801 11,768
------- -------
Accumulated benefit obligation in
excess of plan assets (32,793) (38,223)
Unrecognized transition obligation 23,532 25,003
Unrecognized prior service cost (294) ---
Unrecognized net loss (5,045) 1,166
------- -------
Accrued postretirement benefits
liability ($14,600) ($12,054)
======= =======
Assumed rate of return on plan assets 9.00% 9.00%
======= =======
Discount rate of projected benefit
obligation 7.50% 7.25%
====== =======
Medical cost trend on paid charges:
Initial trend rate 9.00% 9.00%
====== =======
Ultimate trend rate 5.00% 5.00%
====== =======
The net postretirement benefits cost recognized in the consolidated
statements of income for 1996, 1995 and 1994 included the following
components:
1996 1995 1994
Service cost $1,804 $1,495 $1,739
Interest cost on projected benefit
obligation 3,375 3,567 3,135
Actual return on assets (1,351) (2,051) (253)
Amortization of transition
obligation 1,471 1,471 1,527
Amortization and deferrals 371 1,313 (381)
------- ------- -------
Net pension cost (benefit) $5,670 $5,795 $5,767
======= ======= =======
Increasing the medical cost trend rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation as
of December 31, 1996 by $2.0 million and the aggregate of the service and
interest cost components of the net periodic postretirement benefit cost
for the year by $0.3 million.
c. Long-Term Equity Incentive Plan
The Company has a long-term equity incentive plan which permits the grant
of non-qualified stock options and equivalent performance units. SFAS No.
123, "Accounting for Stock Based Compensation Plans," establishes
standards of financial accounting and reporting for stock-based
compensation plans. As allowed under SFAS No. 123, the Company elected to
continue to apply APBO No. 25, "Accounting for Stock Issued to Employees",
in accounting for stock based compensation plans. Proforma disclosures
pursuant to SFAS No. 123 for stock options have not been presented as the
impact would not change reported earnings per share.
NOTE 6. INCOME TAXES
The following table reconciles the statutory federal income tax rate to
the effective income tax rate on continuing operations:
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit 6.8 6.0 5.3
Investment tax credits restored (1.6) (1.7) (1.9)
Amortization of excess deferred taxes (1.4) (1.5) (1.6)
Affordable housing and historical tax
credits (5.0) (4.5) (4.6)
Other differences, net 1.6 (0.8) 1.9
----- ----- -----
Effective income tax 35.4% 32.5% 34.1%
===== ===== =====
The breakdown of income tax expense as reflected in the consolidated
statements of income is as follows:
1996 1995 1994
Current federal $32,817 $25,867 $26,793
Current state 9,700 7,240 5,673
Deferred 7,078 9,908 10,321
Investment tax credit restored (1,912) (1,916) (1,926)
Affordable housing and historical
tax credits (5,869) (4,991) (4,818)
------- ------- -------
$41,814 $36,108 $36,043
======= ======= =======
The temporary differences that resulted in accumulated deferred income
taxes (assets) and liabilities as of December 31, 1996 and 1995, are as
follows:
1996 1995
Property tax related $229,263 $220,428
Investment tax credit related (19,886) (20,915)
Decommissioning related 14,541 12,613
Other 21,768 29,024
------- -------
$245,686 $241,150
======= =======
NOTE 7. SHORT-TERM DEBT AND LINES OF CREDIT
The Company and its subsidiaries maintain committed bank lines of credit,
most of which are at the bank prime rates, to obtain short-term borrowing
flexibility, including pledging lines of credit as security for any
commercial paper outstanding. Amounts available under these lines of
credit totaled $120 million as of December 31, 1996. Information
regarding short-term debt and lines of credit is as follows:
1996 1995 1994
As of year end--
Lines of credit borrowings $ ---- $ ---- $ ----
Commercial paper outstanding $59,500 $56,500 $50,500
Notes payable outstanding $43,279 $53,025 $14,001
Discount rates on commercial
paper 5.35-5.65% 5.73-5.77% 5.64-6.12%
Interest rates on notes
payable 5.28-6.31% 5.80-6.42% 6.04-6.07%
For the year ended--
Maximum month-end amount of
short-term debt $103,500 $117,000 $81,000
Average amount of short-term
debt (based on daily
outstanding balances) $60,800 $68,725 $61,835
Average interest rate on
short-term debt 5.72% 5.95% 4.49%
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate and commodity price risks.
Interest rate swaps: WP&L enters into interest rate swap agreements to
reduce the impact of changes in interest rates on its floating-rate debt
and fees associated with the sale of its accounts receivable. The
notional principal amount of interest rate swaps outstanding as of
December 31, 1996, was $89.0 million. Average variable rates are based on
rates implied in the forward yield curve at the reporting date. The
average pay and receive rates associated with these agreements are 5.08
percent and 4.78 percent, respectively. The swap agreements have contract
maturities from two days to three years. It is not WP&L's intent to
terminate these contracts, however, the total cost to WP&L if it were to
terminate all of the agreements existing at December 31, 1996, is $0.1
million.
In 1995, WP&L entered into an interest rate forward contract related to
the anticipated issuance of $60 million of long-term debt securities. The
securities were not issued in 1996 and the forward contract was closed
which resulted in a gain of $0.8 million to WP&L. The gain was deferred
and will be recognized as an adjustment to interest expense over the life
of the bonds expected to be issued during 1997 as discussed in Note 10(b).
Gas Swaps: WP&L uses gas commodity swaps to reduce the impact of price
fluctuations on gas purchased and injected into storage during the summer
months and withdrawn and sold at current market prices during the winter
months. Variances between underlying commodity prices and financial
contracts on these agreements are deferred and recognized as increases or
decreases in the cost of gas at the time the storage gas is sold. At
December 31, 1996 and 1995, the commodity swap agreements outstanding were
immaterial.
Other: The Company's non-utility energy marketing business periodically
uses commodity futures contracts, options and swaps to hedge the impact of
natural gas and electric power price fluctuations on its purchase and sale
commitments. Gains and losses on these instruments are deferred and
recognized in income as adjustments to the costs of energy when the
related transaction being hedged is finalized. At December 31, 1996 and
1995, the instruments outstanding were immaterial.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at December 31, 1996
and 1995, and the basis upon which they were estimated are as follows:
Cash, nuclear decommissioning trust funds and short-term debt: The
carrying amount of cash and short-term debt approximates fair value due to
their short maturities. As of December 31, 1996 and 1995, the
investments in the nuclear decommissioning trust, which are carried at
fair value, included a net unrealized gain of $9.4 million and $4.7
million, respectively.
Cumulative Preferred Stock of WP&L: The estimated fair value of the
preferred stock is $47.7 million and $49.3 million at December 31, 1996
and 1995, respectively. These amounts are based on the market yield of
similar securities and quoted market prices.
Long-Term Debt: At December 31, 1996 and 1995, the estimated fair value
of long-term debt is $435.9 million and $523.6 million, respectively.
These amounts are based upon the market yield of similar securities and
quoted market prices.
Since WP&L is subject to regulation, any gains or losses related to the
difference between the carrying amount and the fair value of WP&L's
nuclear decommissioning trust funds and long-term debt may not be realized
by the Company's shareholders.
NOTE 10. CAPITALIZATION
a. Common Shareowners' Investment
During 1996, 1995 and 1994, respectively, the Company issued 0, 0 and
337,980 new shares of common stock through its Dividend Reinvestment and
Stock Purchase Plan and 401(k) Savings Plan, generating proceeds of $0, $0
and $9.6 million, respectively.
In February 1989, the Board of Directors of the Company declared a
dividend distribution of one common stock purchase right (right) on each
outstanding share of the Company's common stock. Each right would
initially entitle shareowners to buy one-half of one share of the
Company's common stock at an exercise price of $60.00 per share, subject
to adjustment. The rights are not currently exercisable, but would become
exercisable if certain events occurred related to a person or group
acquiring or attempting to acquire 20 percent or more of the outstanding
shares of common stock. The rights expire on February 22, 1999, unless
redeemed or exchanged earlier by the Company.
A retail rate order effective January 1, 1995, requires WP&L to maintain a
utility common equity level of 51.93 percent of total utility
capitalization during the test years January 1, 1995 to December 31, 1996.
In addition, the PSCW ordered that it must approve the payment of
dividends by WP&L to the Company that are in excess of the level
forecasted in the rate order ($58.1 million), if such dividends would
reduce WP&L's average common equity ratio below 51.93 percent. At December
31, 1996, WP&L's common equity ratio was 53.53 percent.
b. Long-Term Debt
Substantially, all of WP&L's utility plant is secured by its first
mortgage bonds. In addition, the Company's long term debt includes notes
payable and revenue bonds related to its affordable housing properties.
Current maturities of long-term debt of the Company are as follows: $67.6
million in 1997, $11.5 million in 1998, $4.4 million in 1999, $4.1 million
in 2000 and $2.7 million in 2001.
On September 14, 1995, WP&L received an order from the PSCW authorizing
the sale of up to $60 million of long-term debt securities. WP&L had
expected to make an offering of the long-term debt securities before
December 31, 1996. WP&L did not make this offering and does not intend to
request an extension of this order. WP&L expects to request PSCW
permission for the sale of up to $105 million of long-term debt securities
to be issued before December 31, 1997. WP&L intends to use the net
proceeds from the sale of these securities to provide funds for the
retirement of Series Z Bonds and to repurchase on the open market Series V
and/or Series W Bonds. The remainder of the net proceeds will be used to
repay other short-term debt incurred by WP&L, to finance utility
construction expenditures and for general corporate purposes.
NOTE 11. COMMITMENTS AND CONTINGENCIES
a. Coal Contract Commitments
To ensure an adequate supply of coal, WP&L has entered into certain
long-term coal contracts. These contracts include a demand or take-or-pay
clause under which payments are required if contracted quantities are not
purchased. Purchase obligations on these coal and related rail contracts
total approximately 14.5 million tons through December 31, 2001. WP&L's
management believes it will meet minimum coal and rail purchase
obligations under the contracts. Minimum purchase obligations on these
contracts over the next five years are estimated to be $36 million in
1997, $37 million in 1998, $28 million in 1999, $9 million in 2000 and $9
million in 2001.
b. Purchased Power and Gas
Under firm purchased power and gas contracts, the Company is obligated as
follows (dollars in millions):
Purchased Power Purchased Gas
1997 $80.2 $71.6
1998 16.8 40.2
1999 20.2 30.7
2000 27.6 26.2
2001 28.9 21.6
Thereafter 84.9 46.1
c. Manufactured Gas Plant Sites
WP&L has a current or previous ownership interest in 11 properties
associated in the past with the production of manufactured gas. Some of
these sites may contain coal tar waste products which may present an
environmental hazard. WP&L owns five of these sites, three are currently
owned by municipalities and the remaining three are currently owned by
private companies.
Through ongoing investigations and studies, WP&L confirmed that there was
no contamination at two of the sites and only a minimal likelihood of
contamination at a third site. As WP&L has received close out letters
from the State of Wisconsin Department of Natural Resources (DNR) for
these three sites, WP&L has no further obligation at these sites. WP&L
has also implemented DNR- approved remediation plans at two additional
sites in the last several years. An air sparging/biosparging remediation
system was implemented at one of the sites, while excavation and disposal
of the coal tar residue and contaminated soils was implemented at the
other. Groundwater monitoring is ongoing at both sites.
WP&L currently estimates that the remaining remediation costs associated
with the former manufactured gas plant sites is $74 million. The estimate
includes the costs of feasibility studies, data collection, soil and
groundwater remediation activities and ongoing monitoring activities
through 2027. The estimate is based on a number of factors including the
estimated extent and volume of contaminated soil and/or groundwater. The
estimate is also premised in part on a remediation method that involves
treatment or removal of contaminated soil. Based on recent approvals from
the DNR, WP&L may be able to implement a less-costly containment and
control remediation strategy at two of the remaining sites. WP&L plans to
implement this remediation at these two sites in 1997. If remediation is
successful, management believes there may be a significant reduction in
the estimated liability.
Changes in the liability do not immediately impact the earnings of WP&L.
Under the current rate making treatment approved by the PSCW, the costs
expended in the environmental remediation of these sites are deferred and
collected from gas customers over a five year period after new rates are
implemented. Management believes future costs will also be recovered in
rates.
d. Spent Nuclear Fuel and Decommissioning Costs
WP&L's share of the decommissioning costs of Kewaunee Nuclear Power Plant
(Kewaunee) is estimated to be $180 million (in 1996 dollars, assuming the
plant is operating through 2013) based on a 1992 site-specific study,
using the immediate dismantlement method of decommissioning. The costs of
decommissioning are assumed to escalate at an annual rate of 6.5 percent.
The undiscounted amount of decommissioning costs estimated to be expended
between the years 2014 and 2050 is $1,016 million.
As required by the PSCW and FERC, WP&L makes annual contributions to
qualified and nonqualified external trust funds to provide for
decommissioning of Kewaunee. The Company's annual contribution is $10.7
million for the years ended December 31, 1996, 1995 and 1994. This amount
is fully recovered in rates. The after-tax income of the external trust
funds was $2.7 million, $2.8 million and $2.7 million for 1996, 1995 and
1994, respectively.
Decommissioning costs, which include the annual contribution to external
trust funds and earnings on the assets of these trusts, are recorded as
depreciation expense in the consolidated statements of income with the
cumulative amount included in the accumulated provision for depreciation
on the consolidated balance sheets. As of December 31, 1996, the total
decommissioning costs included in the accumulated provision for
depreciation were $90.7 million.
Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy
(DOE) is responsible for the ultimate storage and disposal of spent
nuclear fuel removed from nuclear reactors. Interim storage space for
spent nuclear fuel is currently provided at Kewaunee. Currently there is
on-site storage capacity for spent fuel through the year 2001. An
investment of approximately $2.5 million could provide additional storage
sufficient to meet spent fuel storage needs until the expiration of the
current operating license.
The following summarizes the investment at December 31, 1996 and 1995:
1996 1995
Original cost of nuclear fuel $166,342 $160,997
Less-Accumulated amortization 146,974 142,130
------- -------
Nuclear fuel, net $19,368 $ 18,867
======= =======
e. Nuclear Performance
In September 1996, Kewaunee was taken out of service for a scheduled
refueling and maintenance outage which was originally projected to be of
five weeks duration. During the outage, however, extensive tube
degradation was encountered which extended the outage through the first
quarter of 1997. The estimated costs attributable to the outage
extension are replacement power costs of $500,000 per week and WP&L's
share of the repair costs are approximately $2.3 million of which $1.4
million was expensed in 1996. Additional details of the Kewaunee outage
can be found elsewhere in this report in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
f. Nuclear Insurance
The Price Anderson Act provides for the payment of funds for public
liability claims arising from a nuclear incident. Accordingly, in the
event of a nuclear incident, WP&L, as a 41-percent owner of Kewaunee, is
subject to an overall assessment of approximately $32.5 million per
incident, not to exceed $4.1 million payable in any given year.
Through its membership in Nuclear Mutual Limited and Nuclear Electric
Insurance Limited, WP&L has obtained property damage and decontamination
insurance totaling $2 billion for loss from damage at Kewaunee. In
addition, WP&L maintains outage and replacement power insurance coverage
totaling $101.4 million in the event an outage exceeds 21 weeks.
g. Planned Capital Expenditures
Plans for the construction and financing of future additions to utility
plant can be found elsewhere in this report in "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
h. Loan Commitments
As of December 31, 1996, the Company's affordable housing subsidiary had
extended commitments to provide $24.7 million in nonrecourse, fixed rate,
permanent financing to developers which are secured by affordable housing
properties. The Company anticipates other lenders will ultimately finance
these properties.
NOTE 12. DISCONTINUED OPERATIONS
The Company's financial statements reflect the discontinuance of
operations of its utility energy and marketing consulting business in
1995. The discontinuance of this business resulted in a pre-tax loss in
the fourth quarter of 1995 of $7.7 million. The after tax loss on
disposition was $11.0 million reflecting the associated tax expense on
disposition due to the non-deductibility of the carrying value of goodwill
at sale. During 1996, the Company recognized an additional $1.3 million,
net of applicable income tax benefit, associated with the final
disposition of the business. Operating revenues, operating expenses,
other income and expense and income taxes for the discontinued operations
for the time periods presented have been excluded from income from
continuing operations. Interest expense has been adjusted for the amounts
associated with direct obligations of the discontinued operations.
Operating revenues, related losses, and income tax benefits associated
with the discontinued operations for the years ending December 31 were are
follows:
1995 1994
Operating revenues $24,979 $34,798
====== ======
Loss from discontinued operations
before income tax $3,663 $1,806
Income tax benefit 1,451 632
------ ------
Loss from discontinued operations $2,212 $1,174
====== ======
The assets and liabilities associated with discontinued operations
included in the balance sheets at December 31, 1996 and 1995, were as
follows:
1996 1995
Assets:
Other property and equipment, net
and investments $ 0 $ 1,612
Accounts receivable, net 253 4,942
Prepayments and other 222 333
Deferred charges 0 5,717
Liabilities:
Long-term debt, net 0 147
Current maturities of long-term
debt 0 65
Accounts payable and accruals 1,920 1,491
Other accrued liabilities 0 684
Deferred credits 0 736
------ -----
Net (liabilities) assets ($1,445) $9,481
====== =====
NOTE 13. SEGMENT INFORMATION
The following table sets forth certain information relating to the
Company's consolidated continuing operations:
1996 1995 1994
Operation information:
Customer revenues--
Electric-utility $589,482 $546,324 $531,747
Gas-utility 165,627 139,165 151,931
Environmental and
engineering services 84,859 88,574 87,673
Other 92,876 33,192 24,366
Operating income (loss)
Electric-utility $136,339 $134,180 $118,782
Gas-utility 18,929 16,963 13,075
Environmental and
engineering services 92 3,680 6,038
Other (a) (13,856) (8,825) (8,715)
Investment information:
Identifiable assets,
including allocated common
plant at December 31--
Electric-utility $1,225,321 $1,226,786 $1,176,670
Gas-utility 262,090 250,643 234,815
Environmental and
engineering services 33,508 38,116 41,187
Other 379,612 356,869 353,229
Other information:
Construction and nuclear
fuel expenditures--
Electric-utility $125,894 $122,297 $103,420
Gas-utility 17,978 16,905 20,319
Other 22,494 14,607 5,949
Depreciation and
amortization expense
Electric-utility $74,492 $71,379 $64,695
Gas-utility 9,756 9,629 8,082
Other 6,435 5,311 7,574
(a)Excludes the effects of affordable housing and historical tax credits
of $5.9 million, $5.0 million and $4.8 million in 1996, 1995 and 1994,
respectively.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
AND SUBSIDIARIES
1996
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL STATEMENTS
<PAGE>
SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
(in millions)
Operating revenues $759 $690 $688 $644 $601
Net income available for common $79 $75 $68 $60 $55
Total assets (at December 31) $1,678 $1,641 $1,585 $1,551 $1,414
Long-term debt, net (at $259 $319 $337 $336 $336
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (MD&A)
WPLH, the parent company of Wisconsin Power and Light Company (WP&L), has
entered into an Agreement and Plan of Merger, as amended (Merger
Agreement), dated November 10, 1995, with IES Industries Inc. (IES) and
Interstate Power Company (IPC). The Merger Agreement provides for the
combination of WPLH, IES and IPC. Following the merger, WP&L will be a
subsidiary of the combined company, Interstate Energy Corporation (IEC).
As a result of the merger, IEC, currently anticipates cost savings of
approximately $749 million over a ten-year period, net of transaction
costs and costs to achieve the savings of approximately $14 million and
$64.4 million, respectively. The estimate of potential cost savings
constitutes a forward-looking statement and actual results may differ
materially from this estimate. The estimate is necessarily based upon
various assumptions that involve judgments with respect to, among other
things, future national and regional economic and competitive conditions,
technological developments, inflation rates, regulatory treatments,
weather conditions, financial market conditions, future business decisions
and other uncertainties. No assurance can be given that the estimated
costs savings will actually be realized.
The merger, which is conditioned upon, among other things, receipt of
certain regulatory and governmental approvals, is expected to close by the
end of the third quarter of 1997. As part of the approval process,
management has proposed rate freezes to be implemented in certain
jurisdictions for periods not to exceed four years. See Note 2 of "Notes
to Consolidated Financial Statements" for additional information regarding
the proposed merger.
1996 COMPARED WITH 1995
OVERVIEW
WP&L reported consolidated net income of $79.2 million as compared with
net income of $75.3 million in 1995. The increase in earnings in 1996
primarily reflects continued customer growth in the service territory and
increased power marketing activity which contributed to a $9 million
increase in electric margin in 1996 as compared with 1995. Gas margins
also increased due primarily to higher weather-driven sales. (See
"Electric Operations" and "Gas Operations" below). In addition, a $3.4
million after-tax gain on the sale of a combustion turbine was recognized
during 1996. These events were partially offset by higher plant
maintenance and depreciation expenses in 1996.
During 1996, WP&L incurred $2.7 million after-tax in expenses associated
with its proposed merger with IES and IPC. See Note 2 of "Notes to
Consolidated Financial Statements" for additional information.
<TABLE>
Electric Operations
<CAPTION>
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
and Farm $201,690 $199,850 1% 2,979,826 2,937,825 1% 336,933 329,643 2%
Industrial 143,734 140,562 2% 3,985,672 3,872,520 3% 815 795 3%
Commercial 105,319 102,129 3% 1,814,324 1,773,406 2% 45,669 44,730 2%
Sales to Other
Utilities 131,836 97,350 35% 5,245,812 3,109,385 69% 90 48 88%
Other 6,903 6,433 7% 57,757 54,042 7% 1,730 1,294 34%
-------- -------- ---------- ---------- -------- --------
Total 589,482 546,324 8% 14,083,391 11,747,178 20% 385,237 376,510 2%
======== ======== ==== ========== ========== ==== ======== ======== =====
Electric
Production Fuels 114,470 116,488 (2%)
Purchased Power 81,108 44,940 80%
-------- --------
Margin $393,904 $384,896 2%
======== ======== ====
</TABLE>
Electric margin increased $9.0 million, or 2 percent, during 1996
compared with 1995 primarily due to higher sales to commercial and
industrial customers as well as other utilities combined with reduced
costs per kWh for electric production fuels and purchased power. Although
fuel and purchased power costs declined on a per kWh basis, purchased
power expense increased by 80 percent. This increase was due to WP&L's
higher level of sales to other utilities as well as a $5.0 million
increase in purchased power related to purchases of replacement power
during the extended 1996 refueling outage at the Kewaunee Nuclear Power
Plant ( Kewaunee). Partially offsetting increased purchased power costs
were slightly lower delivered coal and nuclear fuel costs per kWh.
<TABLE>
Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $90,382 $70,382 28% 142,974 126,903 13% 133,580 129,576 3%
Commercial and
Industrial 50,270 39,456 27% 98,095 91,316 7% 16,309 15,976 2%
Interruptible 5,261 3,708 42% 13,480 12,148 11% 303 257 18%
Transportation
and other 19,714 25,619 (23%) 185,735 169,121 10% 252 284 (11%)
-------- -------- -------- -------- -------- --------
Total 165,627 139,165 19% 440,284 399,488 10% 150,444 146,093 3%
======== ======== ==== ======== ======== ==== ======== ======== ====
Purchased Gas 104,830 84,002 25%
-------- --------
Margin $60,797 $55,163 10%
======== ======== ====
</TABLE>
Gas margin increased $5.6 million, or 10 percent, during 1996 compared
with 1995 primarily as a result of higher sales. Therm sales increased 10
percent due to a combination of colder weather during the first five
months of 1996 as compared to 1995 and customer growth of 3 percent. The
19 percent increase in gas revenues reflects not only the higher therm
sales but also the pass through of higher natural gas costs to WP&L's
customers as described below.
Effective January 1, 1995, the PSCW approved the replacement of the
purchased gas adjustment clause with an adjustment mechanism based on a
prescribed commodity price index. Fluctuations in WP&L's commodity cost
of gas as compared to the price index are subject to a customer sharing
mechanism with WP&L's gains or losses limited to $1.1 million. Due to
favorable gas procurement activities in both 1996 and 1995, WP&L realized
favorable contributions to gas margin in those years of $1.1 million and
$0.8 million, respectively.
Other Operation Expense
Other operation expense increased $2.0 million due to expenses associated
with the proposed merger (See Note 2 of "Notes to Consolidated Financial
Statements" for additional information) which were partially offset by a
decrease in operation expense due to cost saving efforts at Kewaunee.
Maintenance Expense
Maintenance expense increased $4.4 million due to higher plant maintenance
and the extended 1996 refueling outage at Kewaunee (See "Capital
Requirements" section below).
Depreciation
Depreciation expense increased $3.8 million as a result of property
additions and greater amortization of contributions in aid of construction
(a reduction of expense) in 1995.
Interest Expense and Other
Interest expense was lower in 1996 compared to 1995 by $2.3 million as a
result of less short-term debt outstanding and a slight decrease in
interest rates. Other income increased $5.0 million due to a $5.7 million
gain on the sale of a combustion turbine.
Income Taxes
Income taxes increased for 1996 as a result of higher taxable income.
The effective tax rate was 39.5 percent and 36.7 percent for 1996 and
1995, respectively. The lower rate in 1995 was the result of prior years'
tax contingencies resolved favorably in 1995 and increased non-deductible
merger expenses in 1996.
1995 COMPARED WITH 1994
OVERVIEW
Net income of WP&L increased to $75.3 million in 1995 compared with $68.2
million in 1994. Net income for 1994 was significantly affected by two
non-recurring items. These items were the reversal of a coal contract
penalty and costs associated with early retirement and severance programs.
The coal contract item relates to a Wisconsin Supreme Court decision which
reversed a coal contract penalty assessed against WP&L in 1989. The
following break out presents the recurring aspects of 1995 and 1994
operations (dollars in millions).
1995 1994
Net income, as reported $75.3 $68.2
Non-recurring items:
Coal contract penalty reversal --- ($5.3)
Early retirement and severance costs --- $8.2
----- -----
Net income before non-recurring items $75.3 $71.1
===== =====
The increase in the net income before non-recurring items primarily
reflects higher electric and gas margins, resulting from an increase in
weather related sales, and aggressive cost management.
<TABLE>
Electric Operations
<CAPTION>
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
and Farm $199,850 $194,242 3% 2,937,825 2,776,895 6% 329,643 322,924 2%
Industrial 140,562 140,487 0% 3,872,520 3,764,953 3% 795 776 2%
Commercial 102,129 101,382 1% 1,773,406 1,688,349 5% 44,730 43,793 2%
Sales to other
Utilities 97,350 86,400 13% 3,109,385 2,574,121 21% 48 42 14%
Other 6,433 9,236 (30%) 54,042 54,518 (1%) 1,294 1,256 3%
-------- -------- ---------- ---------- -------- --------
Total 546,324 531,747 3% 11,747,178 10,858,836 8% 376,510 368,791 2%
======== ======== ==== ========== ========== ==== ======== ======== ====
Electric
Production
Fuels 116,488 123,469 (6%)
Purchase Power 44,940 37,913 16%
-------- --------
Margin $384,896 $370,365 4%
======== ======== ====
</TABLE>
Electric margin increased 4 percent during 1995 compared with 1994
primarily due to higher sales combined with reduced aggregate costs per
kWh for electric production fuels and purchased power. Kilowatthour
sales increased 8 percent due to a much warmer summer than normal,
increased sales to other utilities, a 2 percent growth in customers, and
continued economic strength in the service territory. Partially
offsetting these sales increases was a 2.8 percent decrease in retail
electric rates effective January 1, 1995.
A record setting heat wave resulted in WP&L setting a system peak of 2,197
megawatts on July 31, 1995. This reflects a 9.7 percent increase over
the previous record system peak of 2,002 megawatts set in 1994.
While overall kWh sales increased, the aggregate costs of electric
production fuels and purchased power remained relatively unchanged. The
stability of these costs reflects lower coal and transportation costs at
WP&L's generating units in 1995 as well as the availability of attractive
purchased power opportunities in the bulk power market.
<TABLE>
Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $70,382 $71,555 (2%) 126,903 119,562 6% 129,576 124,938 4%
Commercial
and Industrial 39,456 41,918 (6%) 91,316 87,487 4% 15,976 15,531 3%
Interruptible 3,708 8,777 (58%) 12,148 24,809 (51%) 257 272 (6%)
Transportation
and other 25,619 29,681 (14%) 169,121 142,252 19% 284 240 18%
-------- -------- -------- -------- -------- --------
Total 139,165 151,931 (8%) 399,488 374,110 7% 146,093 140,981 4%
======== ======== ==== ======== ======== ==== ======== ======== ====
Purchased Gas 84,002 100,942 (17%)
-------- --------
Margin $55,163 $50,989 8%
======== ======== ====
</TABLE>
Gas margin increased 8 percent during 1995 compared with 1994 primarily as
a result of higher sales volumes and favorable gas procurement strategies.
Therm sales increased 7 percent principally due to residential customer
growth reflecting the favorable economic conditions in WP&L's service
territory and colder than normal weather in the fourth quarter of 1995,
offsetting a mild January and February. The 8 percent decrease in gas
revenues was the result of a pass through to customers of the lower cost
of purchased gas. Under the rate structure discussed previously
reductions in revenues resulting solely from such pass through would not
be expected to have a material impact on earnings. The gas incentive
program authorized by the PSCW also resulted in additional pre-tax
earnings of $0.8 million in 1995.
Operating Expenses
The decline in operations expense principally reflects the impact of a
$13.7 million charge for early retirement and severance costs in 1994.
While WP&L was able to achieve savings in 1995 from its continued
reengineering of operations, these savings were offset somewhat by higher
conservation expenses. The increase in depreciation expense in 1995 is
primarily the result of property additions at WP&L.
Interest Expense and Other
Interest expense increased due to the higher levels of short-term debt
and higher short-term interest rates. During the second quarter of 1995,
WP&L repurchased $18 million of its Series V bonds from private investors.
WP&L applied revenue requirement neutral accounting treatment to these
acquired bonds consistent with regulatory requirements.
Other income and deductions in 1994 includes after-tax income of $5.3
million related to a Wisconsin Supreme Court decision which reversed a
coal contract penalty assessed against WP&L in 1989. In addition, income
associated with the allowance for funds used during construction ("AFUDC")
decreased in 1995 due to significantly lower construction work in progress
amounts and a lower FERC AFUDC rate.
Income Taxes
Despite higher operating income in 1995, the income tax expense was
unchanged due to prior years' tax contingencies resolved in 1995.
LIQUIDITY AND CAPITAL RESOURCES
WP&L finances its construction expenditures through internally generated
funds supplemented, when required, by outside financing. During 1996,
1995 and 1994, WP&L generated sufficient cash flows from operations, the
sale of other property and equipment and short-term borrowing to cover
operating expenses, cash dividends and investing activities. Cash flows
from operations decreased to $188 million for 1996, compared with $196
million and $183 million in 1995 and 1994, respectively. The decrease in
cash flows used for investing activities in 1996 was primarily
attributable to $36.3 million received from the sale of a combustion
turbine.
Rates and Regulatory Matters
Effective January 1, 1995, for the two-year period ended December 31,
1996, the PSCW, in rate order UR-109, authorized a 2.8 percent annual
decrease in electric rates, a 0.5 percent annual increase in gas rates and
a decline in the allowed return on common equity to 11.5 percent from the
previous 11.6 percent . None of these events are expected to have a
material impact on earnings. See Note 1J of the "Notes to Consolidated
Financial Statements" for additional information.
WP&L submitted its biennial rate case filing with the PSCW on April 1,
1996, for the test year beginning January 1, 1997. In the filing, WP&L
requested rate increases of $13.4 million or 3.0 percent for Wisconsin
retail electric customers and $2.4 million or 1.6 percent for Wisconsin
natural gas customers. This request was based on an 11.9 percent return
on common equity. Technical hearings were completed in November 1996.
WP&L filed additional testimony subsequent to the conclusion of the
November 1996 hearings regarding recovery of replacement power and
operations and maintenance expenses for the extended outage at Kewaunee.
Because of this additional filing, a final rate order is not expected
until April 1997. Refer to "Subsequent Events" for further information
relating to the new rate order.
Industry Outlook
WP&L is subject to regulation by the PSCW and the FERC. The PSCW's
inquiries into the future structure of the natural gas and electric
utility industries are ongoing. The stated goal of the PSCW in the
natural gas docket is to move all gas supply activities out of the
existing regulated distribution utilities and allow independent units to
compete for the business. The goal of the electric restructuring process
is to create open access transmission and distribution services for all
customers with competitive generation and customer service markets.
Additional proceedings as well as consultation with the legislature are
planned prior to a target implementation date after the year 2000. WP&L
cannot currently predict what impact, if any, these proceedings may have
on its future financial condition or results of operations. WP&L
believes, however, that it is well positioned to compete in a deregulated
environment. WP&L's rates to all customer classes are competitive within
the State of Wisconsin and are below the average in the Midwest region.
On April 24, 1996, the FERC issued two orders (No. 888 and 889) that will
promote competition by opening access to the nation's wholesale power
market. The new orders require public utilities that own, control or
operate transmission systems to provide other companies with the same
transmission access/service that they provide to themselves. WP&L
presently has on file with the FERC a pro forma open access transmission
tariff, filed in compliance with FERC Order No. 888. On November 13,
1996, the FERC accepted the non-rate terms and conditions of WP&L's tariff
for filing without modification. On September 20, 1996, the FERC extended
the deadline for compliance with Order No. 889 to January 3, 1997, which
was met by WP&L through participation in a regional Open Access Same-Time
Information System.
On September 26, 1996, the PSCW issued an order which establishes the
minimum Standards for a Wisconsin Independent System Operator (Standards).
The Standards will be applied by the PSCW in Advance Plan proceedings,
merger review cases, transmission construction cases and other proceedings
as appropriate. The order provides that the Standards will be reviewed
and revised as necessary in light of ongoing regional and national events,
such as FERC requirements or policy, regional institutions, or relevant
actions of neighboring states.
On November 18, 1996, WP&L submitted applications and subsequently became
a member of both the MAPP RTG and the Power and Energy Market. WP&L
declined membership in the MAPP Regional Reliability Council and will
continue its membership in the Mid-American Interconnected Network, Inc.
(MAIN) through 1997.
As described in Note 1H of the "Notes to Consolidated Financial
Statements," WP&L complies with the provisions of Statement of Financial
Accounting Standards (SFAS No. 71), " Accounting for the Effects of
Certain Types of Regulation." In the event WP&L determines that it no
longer meets the criteria for following SFAS 71, the accounting impact
would be an extraordinary, non-cash charge to operations of an amount that
could be material. Criteria that give rise to the discontinuance of SFAS
71 include (1) increasing competition that restricts WP&L's ability to
establish prices to recover specific costs and (2) a significant change in
the manner in which rates are set by regulators from cost-based regulation
to another form of regulation. WP&L periodically reviews these criteria
to ensure that the continuing application of SFAS 71 is appropriate. WP&L
believes that it still meets the requirements of SFAS 71.
Financing and Capital Structure
The level of short-term borrowing fluctuates based on seasonal corporate
needs, the timing of long-term financing, and capital market conditions.
WP&L generally borrows on a short-term basis to provide interim financing
of construction and capital expenditures in excess of available internally
generated funds. WP&L periodically reduces its outstanding short-term
borrowings through the issuance of long-term debt and through WPLH's
additional investment in its common equity. To maintain flexibility in
its capital structure and to take advantage of favorable short-term rates,
WP&L also uses proceeds from the sales of accounts receivable and unbilled
revenues to finance a portion of its long-term cash needs. WP&L also
anticipates that short-term debt funds will continue to be available at
reasonable costs due to strong ratings by independent utility analysts and
rating services. Commercial paper has been rated A-1+ by Standard &
Poor's Corp. and P-1 by Moody's Investors Service. WP&L's bank lines of
credit of $70 million at December 31, 1996 are available to support these
borrowings.
WP&L has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage
well-defined interest rate and commodity price risks. WP&L enters into
interest rate swap agreements to reduce the impact of changes in interest
rates on its floating-rate long-term debt, short-term debt and the sales
of its accounts receivable. The total notional amount of interest rate
swaps was $89 million and $123 million, respectively, for the years ended
December 31, 1996 and 1995. WP&L uses swaps, futures and options to
hedge the price risks associated with the purchase and sale of stored gas.
WP&L's capitalization at December 31, 1996, including the current
maturities of long-term debt, variable rate demand bonds and short-term
debt, consisted of 54 percent common equity, 6 percent preferred stock and
40 percent debt. The common equity to total capitalization ratio at
December 31, 1996 increased to 54 percent from 53 percent at December 31,
1995.
The retail rate order effective January 1, 1995 requires WP&L to maintain
a utility common equity level of 51.93 percent of total utility
capitalization. In addition, the PSCW ordered that it must approve the
payment of dividends by WP&L to WPLH if such dividends would reduce WP&L's
average common equity ratio below 51.93 percent. At December 31, 1996,
WP&L's common equity ratio was 53.5 percent. Refer to "Subsequent Events"
for further information relating to the new rate order.
In accordance with the terms of the Merger Agreement (see Note 2 of the
"Notes to Consolidated Financial Statements"), WPLH may not declare or pay
any dividends on any of its capital stock other than the obligations that
exist with respect to cumulative preferred stock, and regular quarterly
dividends on common stock provided they do not exceed 105 percent of the
common stock dividends from the prior year.
Capital Requirements
WP&L operates a capital-intensive business and requires large investments
in long-lived assets. WP&L's most significant capital requirements relate
to construction expenditures. Estimated capital requirements for the next
five years are as follows:
Capital Requirements
(in millions)
1997 1998 1999 2000 2001
Construction expenditures
Electric $88.7 $89.2 $89.9 $90.6 $91.3
Gas, water and common 45.0 43.8 44.3 44.7 45.2
Nuclear fuel 11.4 6.8 9.4 11.4 6.1
AFUDC 2.1 2.1 2.1 2.1 2.1
----- ----- ----- ----- -----
Total construction
expenditures 147.2 141.9 145.7 148.8 144.7
Changes in working capital and
other 22.6 16.8 (5.4) 13.9 13.6
----- ----- ----- ----- -----
Total construction and
operating capital 169.8 158.7 140.3 162.7 158.3
Long-term debt maturities 55.0 8.9 0.0 1.9 0.0
Manufactured gas plant
remediation 5.0 1.0 0.5 0.5 0.5
----- ----- ----- ----- -----
Total capital requirements $229.8 $168.6 $140.8 $165.1 $158.8
===== ===== ===== ===== =====
Included in the construction expenditure estimates, in addition to
recurring additions and improvements to the distribution and transmission
systems, are expenditures related to upgrading computer systems in order
to improve productivity and customer service. Electric expenditures
include the annual contribution to external trust funds to fund the
decommissioning of Kewaunee. These amounts are recorded in depreciation
expense and recovered in rates. WP&L expects to contribute $19.7 million
annually to this fund. Refer to "Subsequent Events" for further
information relating to the new rate order.
WP&L has a 41 percent ownership interest in Kewaunee. During a scheduled
refueling and maintenance outage of the plant in September 1996, steam
generator tube degradation was discovered which required that the tubes be
repaired before the plant could resume operation. A laser weld repair
process was implemented to address the problem. During testing of the
success of this process in early February 1997, it was discovered that
further repair work or tube plugging would be required for a portion of
the welded tubes. Further investigation is ongoing which may delay the
return of the plant to service beyond the first quarter of 1997.
WP&L's costs associated with these tube repairs are estimated at $2.3
million of which $1.4 million was expensed in 1996. Additional costs
associated with the purchase of replacement power, estimated at
approximately $500,000 per week, were not recoverable from customers under
the retail rate order in effect at the time of the outage. However, if
the outage were to extend beyond the implementation of a PSCW rate order
expected to be issued in April 1997, replacement power costs incurred
subsequent to that order are expected to be recovered through a surcharge
mechanism. Refer to "Subsequent Events" for further information relating
to the new rate order.
Repairs using laser technology may be only temporary because corrosion
will continue at a rate which cannot be accurately forecasted. Because of
these uncertainties, the PSCW, on January 3, 1997, approved accelerated
cost recovery of the remaining depreciation costs and unfunded
decommissioning liability based on an expected end of plant life of 2002
rather than the currently licensed end of life of 2013. The accelerated
depreciation and decommissioning expense will be incorporated with the
retail rate order expected to be issued in April of 1997. Based on a 1992
site specific study, WP&L's share of the costs to decommission Kewaunee
was estimated at $142 million. Assuming an annual inflation rate of 6.5
percent, WP&L's liability in current year dollars is approximately $180
million. As of December 31, 1996, $90.7 million, net of tax, was
available in external trust funds to meet this liability. Refer to Note
11 "Notes to Consolidated Financial Statements" for additional
information. Refer to "Subsequent Events" for further information
relating to the new rate order.
Currently, the owners of Kewaunee have different views of the future
market value of energy which impact on the desirability of replacing the
steam generators. During the first quarter of 1996, Wisconsin Public
Service Corporation filed an application with the PSCW seeking approval to
replace the steam generators in 1999. The total cost of the generator
replacement would be approximately $89 million. A PSCW decision on this
application is expected in October 1997. In addition, the joint owners
continue to analyze and discuss other options related to the future of
Kewaunee, including various ownership transfer alternatives. If it should
become necessary to retire Kewaunee permanently, WP&L would replace the
Kewaunee generation through a combination of power purchases, increased
generation at existing WP&L generating units and new generating unit
additions, if necessary.
The net book value of WP&L's share of Kewaunee as of December 31, 1996 was
$51.4 million, excluding the value of nuclear fuel.
Certain matters discussed concerning Kewaunee are forward-looking
statements and can generally be identified as such because the content of
the statement include the phrase WP&L , "expects" or other words of
similar import. Similarly, statements that describe the WP&L's future
plans, objectives and goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties
which could cause actual results and outcomes to differ materially from
those currently anticipated. In addition to the matters discussed above,
factors that could affect actual results or outcomes include the timing
and nature of regulatory responses and approvals, technological
developments and advancements regarding repair of the steam generator
tubes, the useful life of the repairs effected and the cost of purchased
electric power or additional generating facilities to replace the power
generated by Kewaunee.
The staff of the Securities and Exchange Commission also has questioned
certain of the current accounting practices of the electric utility
industry, including WP&L, regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating stations in
financial statements of electric utilities. In response to these
questions, the Financial Accounting Standards Board (FASB) has decided to
review the accounting for closure and removal costs, including
decommissioning of nuclear power plants.
Capital Resources
One of WP&L's objectives is to finance utility construction expenditures
through WP&L's internally generated funds supplemented, when required, by
outside financing. With this objective in place, WP&L financed 70
percent of its construction expenditures during 1996 from internal
sources. However, during the next five years, WP&L expects this
percentage to increase primarily due relatively stable levels of
construction expenditures and higher depreciation rates beginning in 1997.
External financing sources such as the issuance of long-term debt and
short-term borrowings will be used by WP&L to finance the remaining
construction expenditure requirements for this period. Expectations are
that approximately $105 million of long-term debt will be issued in 1997.
NEW ACCOUNTING PRONOUNCEMENT
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes standards for asset and liability recognition when transfers
occur. This statement, effective January 1, 1997, is not expected to
materially impact WP&L's financial position or results of operations.
Effective January 1, 1997, WP&L adopted the provisions of Statement of
Position (SOP) 96-1, "Environmental Remediation Liabilities." This
Statement provides authoritative guidance for recognition, measurement,
display and disclosure of environmental remediation liabilities in
financial statements. WP&L has recorded environmental remediation
liabilities of $74.1 million at December 31, 1996. Adoption of SOP 96-1
is not expected to have a material impact on WP&L's financial position or
results of operations.
INFLATION
The impacts of inflation on WP&L are currently mitigated through
ratemaking methodologies, customer growth and productivity improvements.
OTHER EVENTS
Union Contract
WP&L and the International Brotherhood of Electrical Workers, Local 965,
reached agreement on a new three-year collective bargaining contract on
June 14, 1996. The new agreement includes increases in the base wage
during the first, second and third years of the contract of 3 percent, 3
percent and 3.25 percent, respectively. The new agreement was effective
retroactive to June 1, 1996, with wages retroactive to May 26, 1996, which
was the beginning of a pay period. At the end of 1996, the contract
covered 1,617 of WP&L's employees which represents approximately 69
percent of the total employees at WP&L.
Environmental
WP&L cannot precisely forecast the effect of future environmental
regulations by federal, state and local authorities on its generation,
transmission and other facilities, or its operations, but has taken steps
to anticipate the future while meeting the requirements of current
environmental regulations. The Clean Air Act Amendments of 1977 and
subsequent amendments to the Clean Air Act, as well as the new laws
affecting the handling and disposal of solid and hazardous wastes, could
affect the siting, construction and operating costs of both present and
future generating units.
Under the Federal Clean Water Act, National Pollutant Discharge
Elimination System permits for generating station discharge into water
ways are required to be obtained from the DNR to which the permit program
has been delegated. These permits must be periodically reviewed. WP&L
has obtained such permits for all of its generating stations or has filed
timely applications for renewals of such permits.
Air quality regulations promulgated by the DNR in accordance with federal
standards impose statewide restrictions on the emission of particulates,
sulfur dioxide, nitrogen oxides and other air pollutants and require
permits from the DNR for the operation of emission sources. WP&L
currently has the necessary permits to operate its generating facilities.
While periodic exceedances in air emissions may occur, management promptly
acts on them and works with the DNR to resolve any permit compliance
issues. With the passage of the new Federal Clean Air Act Amendments, the
state is required to include these provisions in its permit requirements.
WP&L has submitted Title V permit applications in compliance with
schedules set forth by the regulators. WP&L has also completed
application for Phase II permits under the Clean Air Act in compliance
with the time lines identified. The state Title V operating permits,
when issued, will consolidate all existing air permit conditions and
regulatory requirements into one permit for each facility. Permits have
been or are expected to be issued in 1997. Until such time, the
facilities will continue to operate under their existing permit
conditions.
WP&L's compliance strategy for Wisconsin's sulfur dioxide law (discussed
above) and the Federal Clean Air Act Amendments required plant upgrades at
its generating facilities. The majority of these projects were completed
in 1993. WP&L has installed continuous emission monitoring systems at
all of its coal fired boilers in compliance with federal requirements.
Monitoring for sulfur dioxide was also required by Title IV of the Federal
Clean Air Act at WP&L's South Fond du Lac , Wisconsin combustion-turbine
site. These requirements were also met. Additional monitoring systems
for nitrogen oxides were required in 1996 at the combustion turbine site.
WP&L has installed these monitors, and completed certification tests for
the equipment. No significant additional investments are anticipated at
this time to meet the requirements of the Federal Clean Air Act
Amendments.
For a discussion of WP&L's liability regarding environmental remediation
at certain manufactured gas plant sites formerly operated by WP&L, see
Note 11 of "Notes to Consolidated Financial Statements."
Subsequent Event
WP&L submitted its biennial rate case filing (UR-110) with the PSCW on
April 1, 1996, for the test year beginning January 1, 1997. In the
filing, WP&L requested rate increases of $13.4 million or 3.0 percent for
Wisconsin retail electric customers and $2.4 million or 1.6 percent for
Wisconsin natural gas customers. This request was based on an 11.9
percent return on common equity. On March 4, 1997, the PSCW finalized
certain decisions relating to this rate case. For a description of this
filing, refer to "Rates and Regulatory Matters" above. The following
decisions were reached: authorization of a surcharge to collect
replacement power costs while Kewaunee is out of service; authorization of
an increase in the return on equity to 11.7 percent from its current level
of 11.5 percent; a requirement to maintain a utility common equity level
of 51.98 percent as compared to the current level of 51.93 percent;
reinstatement of the electric fuel adjustment clause; and continuation of
a modified gas performance based ratemaking incentive mechanism.
Preliminary estimates for UR-110 indicate an $11.2 million or 2.5 percent
reduction for Wisconsin retail electric customers and a $1.3 million or
2.3 percent reduction for Wisconsin natural gas customers. Although the
PSCW has publicly announced the foregoing decisions, a final order in
WP&L's rate case is not expected to be issued by the PSCW until April
1997.
As previously discussed in the MD&A under "Capital Requirements," Kewaunee
is in the process of using laser technology for tube repairs and further
investigation is ongoing which may delay the return of the plant to
service beyond the first quarter of 1997. Because of these uncertainties,
the PSCW, on January 3, 1997, approved accelerated cost recovery of the
remaining depreciation costs and unfunded decommissioning liability based
on an expected end of plant life of 2002 rather than the currently
licensed end of life of 2013. The accelerated depreciation and
decommissioning expense will be incorporated with the retail rate order
UR-110. Based on the March 4, 1997 decisions by the PSCW, WP&L expects to
recover in rates an additional $3.0 million annually related to the
accelerated depreciation of Kewaunee and to increase the annual
contribution to the external decommissioning trust funds to $16 million
from its current level of $10.7 million. The forecasted level of the
contribution included in the capital requirements section was $19.7
million. After-tax earnings on the tax-qualified and non-qualified
decommissioning funds are assumed to be 5.6 percent and 7.0 percent,
respectively.
Based on a 1992 site specific study, WP&L's share of the costs to
decommission Kewaunee was estimated at $142 million. WP&L's share of the
decommissioning costs of Kewaunee was previously established to be $180
million (in 1996 dollars) using an annual inflation rate of 6.5 percent.
The inflation assumptions applied in UR-110 were as follows: labor, 4.12
percent; burial costs, 10.42 percent; energy 3.66 percent; and other, 8.00
percent for a weighted average inflation rate of 5.44 percent. Based on
this revised inflation rate, WP&L's liability in current year dollars is
approximately $176 million. As of December 31, 1996, $90.7 million, net
of tax, was available in external trust funds to meet this liability. See
Note 11 of the "Notes to Consolidated Financial Statements" for additional
information. The undiscounted amount of decommissioning costs estimated
to be expended between the years 2014 and 2050 was $1,016 million. Based
on the revised funding plan this amount was decreased to $611 million to
be expended between the years 2003 and 2039.
Kewaunee has been out of service since September 21, 1996, when it was
shut down for a refueling and maintenance outage. Start-up has been
delayed by problems associated with repairing the tubes in Kewaunee's two
steam generators. In early February, testing of the laser welding repair
of the tubes revealed unexpected problems with the quality of the welds.
After further inspection and laboratory testing, WPSC is now planning to
undertake additional repairs which could allow Kewaunee to return to service
in the June 1997 time frame.
The additional repairs involve removing metal sleeves that were installed
previously to repair the corroded tubes. New, slightly longer sleeves will
be installed to cover the areas of concern in the original steam generator
tubes. WPSC's management believes that the NRC will approve this repair
process because it only requires minor changes to the presently approved
sleeving process. The cost of the additional repairs is expected to be
between $4.5 million and $10.0 million, depending on the number of
previously repaired sleeves that can remain in service. WP&L's shares of
the costs is in the range of $1.8 to $4.1 million based on its 41.0%
ownership in the plant.
Selected Consolidated Quarterly Financial Data (Unaudited)
The summarized quarterly financial data below were not audited by
independent public accountants, but reflect all adjustments necessary, in
the opinion of WP&L, for a fair presentation of the data. The quarterly
amounts can be affected by seasonal weather conditions. Refer to MD&A for
a discussion of the impacts of weather.
Operating Operating Net
Revenues Income Income
Quarter Ended (in thousands)
1996:
March 31 $221,234 $59,958 $31,950
June 30 166,117 34,436 19,538
September 30 165,536 32,625 15,152
December 31 206,388 29,323 12,535
1995:
March 31 $187,342 $45,132 $20,899
June 30 149,557 22,972 8,846
September 30 165,481 42,678 21,124
December 31 187,292 42,041 24,473
<PAGE>
REPORT ON THE FINANCIAL INFORMATION
Wisconsin Power and Light Company's management is responsible for all the
information appearing in this annual report and for the accuracy and
internal consistency of that information. The consolidated financial
statements that follow have been prepared in accordance with generally
accepted accounting principles. In addition to selecting appropriate
accounting principles, management is responsible for the manner of
presentation and for the reliability of the financial information. In
fulfilling that responsibility, it is necessary for management to make
estimates based on currently available information and judgments of
current conditions and circumstances.
Through a well-developed system of internal controls, management seeks to
ensure the integrity and objectivity of the financial information
presented in this report. This system of internal control is designed to
provide reasonable assurance that the assets of the company are
safeguarded and that the transactions are executed according to
management's authorizations and are recorded in accordance with the
appropriate accounting principles.
The Board of Directors participates in the financial information reporting
process through its Audit Committee.
Erroll B. Davis Jr.
President and Chief Executive Officer
WPL Holdings, Inc.
Edward M. Gleason
Vice President, Treasurer and Corporate Secretary
Principal Financial Officer
WPL Holdings, Inc.
January 30, 1997
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Sharehowners of Wisconsin Power and Light Company:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Wisconsin Power and Light Company (a
Wisconsin corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, cash flow and common
shareowners' investment for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
WP&L'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 Wisconsin Power and
Light Company and subsidiaries as of December 31, 1996 and 1995, and the
results of operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 30, 1997
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
(in thousands)
Operating revenues:
Electric $589,482 $546,324 $531,747
Gas 165,627 139,165 151,931
Water 4,166 4,183 4,133
------- ------- -------
759,275 689,672 687,811
------- ------- -------
Operating expenses:
Electric production fuels 114,470 116,488 123,469
Purchased power 81,108 44,940 37,913
Purchased gas 104,830 84,002 100,942
Other operation 141,885 139,877 150,995
Maintenance 46,492 42,043 41,227
Depreciation 84,942 81,164 73,194
Taxes other than income 29,206 28,335 27,100
------- ------- -------
602,933 536,849 554,840
------- ------- -------
Operating income 156,342 152,823 132,971
------- ------- -------
Interest expense and other:
Interest expense 31,472 33,821 31,148
Allowance for funds used
during construction (3,208) (2,088) (4,038)
Other (8,215) (3,168) (10,361)
------- ------- -------
20,049 28,565 16,749
------- ------- -------
Income from operations
before income taxes 136,293 124,258 116,222
Income taxes 53,808 45,606 44,727
Preferred dividend requirement 3,310 3,310 3,310
------- ------- -------
Net income $79,175 $75,342 $68,185
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
1996 1995
ASSETS (in thousands)
Utility plant:
Plant in service
Electric $1,729,311 $1,665,611
Gas 227,809 217,678
Water 23,905 22,518
Common 152,093 136,943
---------- ----------
2,133,118 2,042,750
Less--accumulated provision
for depreciation 967,436 887,562
---------- ----------
1,165,682 1,155,188
Construction work in progress 55,519 36,996
Nuclear fuel, net 19,368 18,867
---------- ----------
1,240,569 1,211,051
---------- ----------
Other property and equipment, net 1,397 22,275
---------- ----------
Investments:
Nuclear decommissioning trust funds 90,671 73,357
Other investments 15,354 13,011
---------- ----------
106,025 86,368
---------- ----------
Current assets:
Cash and equivalents 4,167 4,671
Net accounts receivable and unbilled revenue 34,220 33,971
Coal, at average cost 15,841 14,625
Materials and supplies, at average cost 19,915 20,611
Gas in storage, at average cost 9,992 6,319
Prepayments and other 22,053 21,190
---------- ----------
106,188 101,387
---------- ----------
Deferred charges:
Regulatory assets 160,877 170,269
Other 62,758 49,815
---------- ----------
223,635 220,084
---------- ----------
TOTAL ASSETS $1,677,814 $1,641,165
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization (See Consolidated
Statements of Capitalization):
Common shareowners' investment $576,158 $563,070
Preferred stock not mandatorily redeemable 59,963 59,963
Long-term debt, net 258,660 318,599
---------- ----------
894,781 941,632
---------- ----------
Current liabilities:
Current maturities of long-term debt 55,000 ---
Variable rate demand bonds 56,975 56,975
Short-term debt 69,500 72,500
Accounts payable and accruals 92,719 82,428
Accrued payroll and vacation 11,687 11,011
Accrued taxes 3,616 7,795
Accrued interest 7,504 7,574
Other 34,424 22,356
---------- ----------
331,425 260,639
---------- ----------
Other credits:
Accumulated deferred income taxes 244,817 239,812
Accumulated deferred investment
tax credits 36,931 38,842
Accrued environmental remediation costs 74,075 76,852
Deferred credits and other 95,785 83,388
---------- ----------
451,608 438,894
---------- ----------
Commitments and contingencies (Note 11)
TOTAL CAPITALIZATION AND LIABILITIES $1,677,814 $1,641,165
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
(in thousands)
Cash flows generated from (used for)
operating activities:
Net income $82,485 $78,652 $71,495
Adjustments to reconcile net income
to net cash generated from
operating activities:
Depreciation 84,942 81,164 73,194
Deferred income taxes 14,540 10,716 12,299
Investment tax credit restored (1,911) (1,916) (1,926)
Amortization of nuclear fuel 6,057 7,787 6,707
Allowance for equity funds
used during construction (2,270) (1,425) (3,009)
Gain on sale of other property
and equipment (5,676) --- ---
Changes in assets and liabilities:
Net accounts receivable and
unbilled revenue (250) (12,281) 11,000
Inventories (4,193) 3,079 1,841
Prepayments and other (863) 1,121 (634)
Accounts payable and accruals 10,896 13,203 (4,406)
Accrued taxes (4,179) 496 6,495
Other, net 8,551 15,674 10,028
-------- -------- --------
Net cash from (used for)
operating activities 188,129 196,270 183,084
-------- -------- --------
Cash flows generated from (used for)
financing activities:
Common stock cash dividends, less
dividends reinvested (66,087) (56,778) (55,911)
Preferred stock dividends (3,310) (3,310) (3,310)
Retirement of first mortgage bonds (5,000) (18,000) ---
Net change in short-term debt (3,000) 22,000 (8,500)
Other, net --- --- 9,649
-------- -------- --------
Net cash from (used for) financing
activities (77,397) (56,088) (58,072)
-------- -------- --------
Cash flows generated from (used for)
investing activities:
Proceeds from sale of other
property and equipment 36,264 --- ---
Additions to utility plant,
excluding AFUDC (120,732) (99,746) (119,272)
Additions to nuclear fuel (6,558) (7,258) (8,103)
Allowance for borrowed funds used
during construction (938) (663) (1,029)
Dedicated decommissioning trust
funds (17,314) (21,566) (1,988)
Other, net (1,958) (8,512) 1,684
-------- -------- --------
Net cash from (used for)
investing activities (111,236) (137,745) (128,708)
-------- -------- --------
Net increase (decrease) in cash
and equivalents (504) 2,437 (3,696)
Cash and equivalents at beginning
of year 4,671 2,234 5,930
-------- -------- --------
Cash and equivalents at end of year $4,167 $4,671 $2,234
======== ======== ========
Supplemental disclosures of cash
flow information:
Cash paid during the year:
Interest on debt $28,786 $30,841 $30,156
Income taxes $48,622 $37,968 $29,642
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1996 1995
(in thousands except
for share data)
Common shareowners' investment:
Common stock $5 par value, authorized 18,000,000
shares, issued and outstanding--13,236,601
shares $66,183 $66,183
Premium on capital stock 197,423 $197,423
Capital surplus 1,747 1,747
Reinvested earnings 310,805 297,717
------- -------
576,158 563,070
------- -------
Preferred stock:
Cumulative, without par value, authorized
3,750,000 shares, maximum aggregate stated
value $150,000,000:
Preferred stock without mandatory redemption,
$100 stated value--
4.50% series, 99,970 shares outstanding 9,997 9,997
4.80% series, 74,912 shares outstanding 7,491 7,491
4.96% series, 64,979 shares outstanding 6,498 6,498
4.40% series, 29,957 shares outstanding 2,996 2,996
4.76% series, 29,947 shares outstanding 2,995 2,995
6.20% series, 150,000 shares outstanding 15,000 15,000
Cumulative, without par value, $25 stated value--
6.50% series, 599,460 shares outstanding 14,986 14,986
-------- --------
59,963 59,963
-------- --------
Long-term debt:
First mortgage bonds:
Series L, 6.25%, due 1998 8,899 8,899
1984 Series A, variable rate, due 2014
(4.60% at 12/31/96) 8,500 8,500
1988 Series A, variable rate, due 2015
(4.25% at 12/31/96) 14,600 14,600
1990 Series V, 9.3%, due 2025 27,000 32,000
1991 Series A, variable rate, due 2015
(5.00% at 12/31/96) 16,000 16,000
1991 Series B, variable rate, due 2005
(5.00% at 12/31/96) 16,000 16,000
1991 Series C, variable rate, due 2000
(5.00% at 12/31/96) 1,000 1,000
1991 Series D, variable rate, due 2000
(5.00% at 12/31/96) 875 875
1992 Series W, 8.6%, due 2027 90,000 90,000
1992 Series X, 7.75%, due 2004 62,000 62,000
1992 Series Y, 7.6%, due 2005 72,000 72,000
1992 Series Z, 6.125%, due 1997 55,000 55,000
-------- --------
371,874 376,874
-------- --------
Less--
Current maturities (55,000) ---
Variable rate demand bonds (56,975) (56,975)
Unamortized discount and premium, net (1,239) (1,300)
-------- --------
258,660 318,599
-------- --------
TOTAL CAPITALIZATION $894,781 $941,632
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMMON
SHAREOWNERS' INVESTMENT
Year Ended December 31,
1996
1995 1994
(in thousands)
Common stock:
Balance at beginning and end of year $66,183 $66,183 $66,183
Premium on capital stock:
Balance at beginning of year 197,423 197,423 187,774
Equity contribution from parent --- --- 9,649
------- ------- -------
Balance at end of year 197,423 197,423 197,423
Capital surplus:
Balance at beginning and end of year 1,747 1,747 1,747
Reinvested earnings:
Balance at beginning of year 297,717 279,153 267,000
Income before preferred dividends 82,485 78,652 71,494
Cash dividends on preferred stock (3,310) (3,310) (3,310)
Cash dividends to parent on
common stock (66,087) (56,778) (55,911)
Other --- --- (120)
-------- -------- --------
Balance at end of year 310,805 297,717 279,153
-------- -------- --------
TOTAL COMMON SHAREOWNERS' INVESTMENT $576,158 $563,070 $544,506
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as otherwise indicated)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General
Wisconsin Power and Light Company (WP&L) is a subsidiary of WPL Holdings,
Inc. (WPLH). WP&L is a public utility predominately engaged in the
transmission and distribution of electric energy and the generation and
bulk purchase of electric energy for sale. WP&L also transports,
distributes and sells natural gas purchased from gas suppliers. Nearly
all of WP&L's retail customers are located in south and central Wisconsin.
WP&L's principal consolidated subsidiary is South Beloit Water, Gas and
Electric Company.
b. Regulation
WP&L's financial records are maintained in accordance with the uniform
system of accounts prescribed by its regulators. The Public Service
Commission of Wisconsin (PSCW) and the Illinois Commerce Commission (ICC)
have jurisdiction over retail electric and gas revenues. The Federal
Energy Regulatory Commission (FERC) has jurisdiction over wholesale
electric revenues.
c. 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
d. Cash and Equivalents
WP&L considers all highly liquid debt instruments purchased and
investments with a maturity of three months or less to be cash
equivalents.
e. Utility Plant and Other Property and Equipment
Utility plant and other property and equipment are recorded at original
cost. Utility plant costs include financing costs that are capitalized
using the FERC method for allowance for funds used during construction
(AFUDC). The AFUDC capitalization rate for 1996, 1995 and 1994 was 10.23
%, 6.68% and 10.15%, respectively. These capitalized costs are recovered
in rates as the cost of the utility plant is depreciated.
Normal repairs, maintenance and minor items of utility plant and other
property and equipment are expensed. Ordinary utility plant retirements,
including removal costs less salvage value, are charged to accumulated
depreciation upon removal from utility plant accounts, and no gain or loss
is recognized. Upon retirement or sale of other property and equipment,
the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in other income and deductions.
f. Depreciation
WP&L uses the straight-line method of depreciation. For utility plant,
straight-line depreciation is computed on the average balance of
depreciable property at individual straight-line PSCW approved rates that
consider the estimated useful life and removal cost or salvage value as
follows:
1996 1995 1994
Electric 3.3% 3.3% 3.2%
Gas 3.7% 3.7% 3.7%
Water 2.6% 2.5% 2.5%
Common 8.1% 7.9% 7.9%
Depreciation expense related to WP&L's share of the decommissioning of the
Kewaunee Nuclear Power Plant is discussed in Note 11 "Commitments and
Contingencies". WP&L will implement higher depreciation rates effective
January 1, 1997.
Estimated useful lives related to other property and equipment are from 4
to 12 years for equipment and 31.5 to 40 years for buildings.
g. Nuclear Fuel
Nuclear fuel is recorded at its original cost and is amortized to expense
based upon the quantity of heat produced for the generation of
electricity. This accumulated amortization assumes spent nuclear fuel
will have no residual value. Estimated future disposal costs of such fuel
are expensed based on kilowatthours generated.
h. Regulatory Assets and Liabilities
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," provides that rate-regulated
public utilities such as WP&L record certain costs and credits allowed in
the ratemaking process in different periods than for unregulated entities.
These are deferred as regulatory assets or regulatory liabilities and are
recognized in the consolidated statements of income at the time they are
reflected in rates. If a portion of WP&L's operations become no longer
subject to the provisions of SFAS No. 71, a write-off of regulatory assets
and liabilities would be required, unless some form of transition cost
recovery is established by the appropriate regulatory body.
As of December 31, 1996 and 1995, regulatory created assets include the
following:
1996 1995
Environmental remediation costs (Note 11) $81,431 $81,431
Tax related (Note 6) 57,198 62,796
Jurisdictional plant differences 7,603 7,517
Decontamination and decommissioning
costs of Federal enrichment facilities 6,061 6,555
Other 8,584 11,970
------- -------
Total $160,877 $170,269
======= =======
As of December 31, 1996 and 1995, WP&L had recorded regulatory related
liabilities of $33,901 and $37,898, respectively. These liabilities are
primarily tax related.
i. Revenue
WP&L accrues revenues for services provided but not yet billed at month-
end.
j. Rate Matters
Effective January 1, 1995, for the two-year period ended December 31,
1996, the PSCW in rate order UR-109, authorized a 2.8 percent annual
decrease in electric rates, a 0.5 percent annual increase in gas rates and
a decline in the allowed return on common equity to 11.5 percent from 11.6
percent. Further, the PSCW approved certain incentive programs described
below:
1. The electric fuel adjustment mechanism, which allowed costs to
fluctuate within a 3 percent band width, was eliminated. The
elimination of the adjustment mechanism did not have a material
impact on earnings.
2. The automatic purchased gas adjustment clause was eliminated and
replaced by a performance based rate (PBR) mechanism. Fluctuations
in the commodity cost of gas above or below a prescribed commodity
price index increase or decrease WP&L's margin on gas sales. Both
benefits and exposures are subject to customer sharing provisions.
WP&L's share is capped at $1.1 million pre-tax. For 1996 and 1995,
WP&L earned $1.1 million and $0.8 million, respectively, under this
PBR mechanism.
3. In order to promote air quality and delivery system reliability,
there are SO2 emissions and service reliability performance and
incentive clauses. Positive incentives available under these clauses
include $1.5 million pre-tax for the SO2 emissions and $0.5 million
pre-tax for the service reliability. WP&L's earnings are also
negatively exposed for equal amounts. For 1996 and 1995, WP&L
collected $2.0 million pre-tax in revenues and also deferred $2.6 and
$2.1 million pre-tax in revenues, respectively.
WP&L made its required biennial rate case filing with the PSCW on April 1,
1996. Technical hearings took place during 1996. A final order is
expected in April of 1997.
k. Income Taxes
WP&L follows the liability method of accounting for deferred income taxes,
which requires the establishment of deferred tax liabilities and assets,
as appropriate, for all temporary differences between the tax basis of
assets and liabilities and the amounts reported in the financial
statements using currently enacted tax rates as shown in Note 6.
l. Reclassifications
Certain reclassifications have been made to the prior years financial
statements to conform with the current year presentation.
NOTE 2. PROPOSED MERGER OF THE COMPANY
On November 10, 1995, WPLH, IES Industries Inc. (IES), and Interstate
Power Company (IPC) entered into an Agreement and Plan of Merger, as
amended (Merger Agreement), providing for: a) IPC becoming a wholly-owned
subsidiary of WPLH, and b) the merger of IES with and into WPLH, which
merger will result in the combination of IES and WPLH as a single holding
company (collectively, the Proposed Merger). The new holding company will
be named Interstate Energy Corporation (IEC). The Proposed Merger, which
will be accounted for as a pooling of interests and is intended to be tax-
free for federal income tax purposes, has been approved by the respective
Boards of Directors and shareholders. It is still subject to approval by
several federal and state regulatory agencies. The companies expect to
receive the regulatory approvals by the end of the third quarter of 1997.
The summary below contains selected unaudited pro forma financial data for
the year ended December 31, 1996. The financial data should be read in
conjunction with the historical consolidated financial statements and
related notes of WPLH, IES and IPC and in conjunction with the unaudited
pro forma combined financial statements and related notes of IEC included
in the Form 10-K Annual Report of WPLH. The pro forma combined earnings
per share reflect the issuance of shares associated with the exchange
ratios discussed below.
WPLH IES IPC PRO FORMA
(in thousands except (as (as (as COMBINED
per share data) reported) reported) reported) (Unaudited)
Operating Revenues $932,844 $973,912 $326,084 $2,232,840
Income from Continuing
Operations $73,205 $60,907 $25,860 $159,972
Earnings per share from
Continuing Operations $2.38 $2.04 $2.69 $2.12
Assets at December 31,
1996 $1,900,531 $2,125,562 $639,200 $4,665,293
Long-term obligations,
net at December 31,
1996 $430,190 $744,298 $188,731 $1,363,219
Under the terms of the Merger Agreement, the outstanding shares of WPLH
common stock will remain unchanged and outstanding as shares of IEC. Each
outstanding share of IES common stock will be converted to 1.14 shares of
IEC common stock. Each share of IPC common stock will be converted to
1.11 shares of IEC common stock. It is anticipated that IEC will retain
WPLH's common share dividend payment level as of the effective time of the
merger. On January 22, 1997, the Board of Directors of WPLH declared a
quarterly dividend of $0.50 per share. This represents an annual rate of
$2.00 per share.
IES is a holding company headquartered in Cedar Rapids, Iowa, and is the
parent company of IES Utilities Inc. (IES Utilities) and IES Diversified
Inc. (IES Diversified). IES Utilities supplies electric and gas service
to approximately 336,000 and 176,000 customers, respectively, in Iowa.
IES Diversified and its principal subsidiaries are primarily engaged in
the energy-related, transportation and real estate development businesses.
IPC, an operating public utility headquartered in Dubuque, Iowa, supplies
electric and gas service to approximately 165,000 and 49,000 customers,
respectively, in northeast Iowa, northwest Illinois and southern
Minnesota.
IEC will be the parent company of WP&L, IES Utilities and IPC and will
be registered under the Public Utility Holding Company Act of 1935, as
amended (1935 Act). The Merger Agreement provides that these operating
utility companies will continue to operate as separate entities for a
minimum of three years beyond the effective date of the merger. In
addition, the non-utility operations of WPLH and IES Diversified will be
combined shortly after the effective date of the merger under one entity
to manage the diversified operations of IEC. The corporate headquarters
of IEC will be in Madison, Wisconsin.
The Securities and Exchange Commission (SEC) historically has interpreted
the 1935 Act to preclude registered holding companies, with limited
exceptions, from owning both electric and gas utility systems. Although
the SEC has recommended that registered holding companies be allowed to
hold both gas and electric utility operations if the affected states
agree, it remains possible that the SEC may require as a condition to its
approval of the Proposed Merger that WPLH, IES and IPC divest their gas
utility properties, and possibly certain non-utility ventures of WPLH and
IES, within a reasonable time after the effective date of the Proposed
Merger.
NOTE 3. JOINTLY OWNED UTILITY PLANTS
WP&L participates with other Wisconsin utilities in the construction and
operation of several jointly owned utility generating plants. Each of the
respective owners is responsible for the financing of its portion of the
construction costs. Kilowatt-hour generation and operating expenses are
divided on the same basis of ownership with each owner reflecting its
respective costs in its consolidated statements of income. The chart
below represents WP&L's proportionate share of such plants as reflected in
the consolidated balance sheets at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
Accumulated
Plant Provision Accumulated
Ownership Inservice MW Plant in for Plant in Provision for
Interest % Date Capacity Service Depreciation CWIP Service Depreciation CWIP
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal:
Columbia Energy 1975 &
Center 46.2 1978 1,023 $161,811 $86,375 $1,581 $160,348 $79,521 $881
Edgewater Unit 4 68.2 1969 330 50,796 28,056 702 50,762 26,759 216
Edgewater Unit 5 75.0 1985 380 228,805 73,697 51 229,429 68,515 0
Nuclear:
Kewaunee Nuclear
Power Plant 41.0 1974 535 131,207 80,577 810 132,211 76,096 836
------- ------- ------ ------- ------- ------
Total $572,619 $268,705 $3,144 $572,750 $250,891 $1,933
======= ======= ====== ======= ======= ======
</TABLE>
NOTE 4. NET ACCOUNTS RECEIVABLE
WP&L has a contract with a financial organization to sell, with limited
recourse, certain accounts receivable and unbilled revenues. These
receivables include customer receivables, sales to other public utilities
and billings to the co-owners of the jointly owned electric generating
plants that WP&L operates. The contract allows WP&L to sell up to $150
million of receivables at any time. Expenses related to the sale of
receivables are paid to the financial organization under this contract,
and include, along with various other fees, a monthly discount charge on
the outstanding balance of receivables sold that approximated a 5.90
percent annual rate during 1996. These costs are recovered in retail
utility rates as an operating expense. All billing and collection
functions remain the responsibility of WP&L. The contract expires August
16, 1998, unless extended by mutual agreement.
As of December 31, 1996 and 1995, the balance of sold accounts receivable
that had not been collected totaled $86.5 million and $79.5 million,
respectively. During 1996, the monthly proceeds from the sale of accounts
receivable averaged $86.6 million, compared with $77.5 million in 1995.
WP&L does not have any significant concentrations of credit risk in the
December 31, 1996 and 1995 net accounts receivable balances.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes standards for asset and
liability recognition when transfers occur. This statement, effective
January 1, 1997, specifies conditions when control has been surrendered
which determines if sale treatment of the receivables would be allowed.
At the present time, this new standard is not expected to materially
impact WP&L's financial position or results of operations.
NOTE 5. EMPLOYEE BENEFIT PLANS
a. Pension Plans
WP&L has noncontributory, defined benefit retirement plans covering
substantially all employees. The benefits are based upon years of service
and levels of compensation. The projected unit credit actuarial cost
method was used to compute net pension costs and the accumulated and
projected benefit obligations. WP&L's policy is to fund the pension cost
at an amount that is at least equal to the minimum funding requirements
mandated by the Employee Retirement Income Security Act (ERISA) and that
does not exceed the maximum tax deductible amount for the year.
The following table sets forth the funded status of the plans and amounts
recognized in WP&L's consolidated balance sheets at December 31, 1996 and
1995:
1996 1995
Accumulated benefit obligation
Vested benefits ($161,031) ($157,111)
Non-vested benefits (3,298) (2,755)
--------- ---------
Total (164,329) (159,866)
Projected benefit obligation (189,653) (184,937)
Plan assets at fair value 218,920 202,343
--------- ---------
Plan assets in excess of projected
benefit obligation 29,267 17,406
Unrecognized net transition asset (14,480) (16,928)
Unrecognized prior service cost 3,712 4,022
Unrecognized net loss 15,011 24,685
--------- ---------
Prepaid pension costs $33,510 $29,185
========= =========
Assumed rate of return on plan assets 9.00% 9.00%
========= =========
Discount rate of projected benefit
obligation 7.50% 7.25%
======== =========
Range of assumed rate increases for
future compensation levels 3.50-4.50% 3.50-4.50%
========== ==========
The net pension cost (benefit) recognized in the consolidated statements
of income for 1996, 1995 and 1994 included the following components:
1996 1995 1994
Service cost $5,072 $3,879 $5,123
Interest cost on projected
benefit obligation 13,625 12,911 12,051
Actual return on assets (24,962) (31,548) 1,016
Amortization and deferrals 5,452 15,103 (17,795)
-------- -------- ---------
Net pension cost (benefit) ($813) $345 $395
======== ======== =========
b. Other Postretirement Benefits
WP&L accrues for the expected cost of postretirement health-care and life
insurance benefits during the employees' years of service based on
actuarial methodologies that closely parallel pension accounting
requirements. WP&L elected delayed recognition of the transition
obligation in accordance with current accounting principles and is
amortizing the discounted present value of the transition obligation to
expense over 20 years. For WP&L, the cost of providing postretirement
benefits, including the transition obligation, is being recovered in
retail rates under current regulatory practices.
The following table sets forth the funded status of the plans and amounts
recognized in WP&L's consolidated balance sheets at December 31, 1996 and
1995:
1996 1995
Accumulated benefit obligation
Retirees ($32,244) ($35,639)
Fully eligible active plan participants ($4,954) ($6,261)
Other active plan participants (9,396) (8,091)
-------- --------
Total (46,594) (49,991)
Plan assets at fair value 13,801 11,768
-------- --------
Accumulated benefit obligation in
excess of plan assets (32,793) (38,223)
Unrecognized transition obligation 23,532 25,003
Unrecognized prior service cost (294) ---
Unrecognized net loss (5,045) 1,166
-------- --------
Accrued postretirement benefits
liability ($14,600) ($12,054)
======== ========
Assumed rate of return on plan assets 9.00% 9.00%
======== ========
Discount rate of projected benefit
obligation 7.50% 7.25%
======== ========
Medical cost trend on paid charges:
Initial trend rate 9.00% 9.00%
======== ========
Ultimate trend rate 5.00% 5.00%
======== ========
The net postretirement benefits cost recognized in the consolidated
statements of income for 1996, 1995 and 1994 included the following
components:
1996 1995 1994
Service cost $1,804 $1,495 $1,739
Interest cost on projected
benefit obligation 3,375 3,567 3,135
Actual return on assets (1,351) (2,051) (253)
Amortization of transition
obligation 1,471 1,471 1,527
Amortization and deferrals 371 1,313 (381)
------ ------ ------
Net pension cost (benefit) $5,670 $5,795 $5,767
====== ====== ======
Increasing the medical cost trend rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation as
of December 31, 1996 by $2.0 million and the aggregate of the service and
interest cost components of the net periodic postretirement benefit cost
for the year by $0.3 million.
c. Long-Term Equity Incentive Plan
WPLH has a long-term equity incentive plan which permits the grant of non-
qualified stock options and equivalent performance units. SFAS No. 123,
"Accounting for Stock Based Compensation Plans," establishes standards of
financial accounting and reporting for stock-based compensation plans. As
allowed under SFAS No. 123, WP&L elected to continue to apply APBO No. 25,
"Accounting for Stock Issued to Employees", in accounting for stock based
compensation plans. Proforma disclosures pursuant to SFAS No. 123 for
stock options have not been presented as the impact would not change
reported earnings per share.
NOTE 6. INCOME TAXES
The following table reconciles the statutory federal income tax rate to
the effective income tax rate on continuing operations:
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit 6.1 5.8 5.6
Investment tax credits restored (1.4) (1.5) (1.7)
Amortization of excess deferred taxes (1.3) (1.4) (1.5)
Affordable housing and historical tax
credits 0.0 (1.5) 1.3
Other differences, net 1.1 0.3 (0.2)
----- ----- -----
Effective income tax 39.5% 36.7% 38.5%
===== ===== =====
The breakdown of income tax expense as reflected in the consolidated
statements of income is as follows:
1996 1995 1994
Current federal $37,945 $29,847 $27,406
Current state 9,558 6,959 6,448
Deferred 8,217 10,716 12,799
Investment tax credit restored (1,912) (1,916) (1,926)
------ ------ ------
$53,808 $45,606 $44,727
====== ====== ======
The temporary differences that resulted in accumulated deferred income
taxes (assets) and liabilities as of December 31, 1996 and 1995, are as
follows:
1996 1995
Property tax related $223,386 $214,793
Investment tax credit related (19,886) (20,915)
Decommissioning related 14,541 12,613
Other 26,776 33,321
------- -------
$244,817 $239,812
======= ========
NOTE 7. SHORT-TERM DEBT AND LINES OF CREDIT
WP&L and its subsidiaries maintain committed bank lines of credit, most of
which are at the bank prime rates, to obtain short-term borrowing
flexibility, including pledging lines of credit as security for any
commercial paper outstanding. Amounts available under these lines of
credit totaled $70 million as of December 31, 1996. Information regarding
short-term debt and lines of credit is as follows:
1996 1995 1994
As of year end--
Lines of credit borrowings $ ---- $ ---- $ ----
Commercial paper outstanding $59,500 $56,500 $50,500
Notes payable outstanding $10,000 $16,000 $ ----
Discount rates on commercial
paper 5.35-5.65% 5.73-5.77% 5.64-6.12%
Interest rates on notes
payable 5.95% 5.80%-5.83% ----
For the year ended--
Maximum month-end amount of
short-term debt $69,500 $80,000 $50,500
Average amount of short-term
debt (based on daily
outstanding balances) $33,901 $48,760 $25,374
Average interest rate on
short-term debt 5.86% 5.90% 4.39%
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
WP&L has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-
defined interest rate and commodity price risks.
Interest rate swaps: WP&L enters into interest rate swap agreements to
reduce the impact of changes in interest rates on its floating-rate debt
and fees associated with the sale of its accounts receivable. The
notional principal amount of interest rate swaps outstanding as of
December 31, 1996, was $89.0 million. Average variable rates are based on
rates implied in the forward yield curve at the reporting date. The
average pay and receive rates associated with these agreements are 5.08
percent and 4.78 percent, respectively. The swap agreements have contract
maturities from two days to three years. It is not WP&L's intent to
terminate these contracts, however, the total cost to WP&L if it were to
terminate all of the agreements existing at December 31, 1996, is $0.1
million.
In 1995, WP&L entered into an interest rate forward contract related to
the anticipated issuance of $60 million of long-term debt securities. The
securities were not issued in 1996 and the forward contract was closed
which resulted in a gain of $0.8 million to WP&L. The gain was deferred
and will be recognized as an adjustment to interest expense over the life
of the bonds expected to be issued during 1997 as discussed in Note 10b.
Gas Swaps: WP&L uses gas commodity swaps to reduce the impact of price
fluctuations on gas purchased and injected into storage during the summer
months and withdrawn and sold at current market prices during the winter
months. Variances between underlying commodity prices and financial
contracts on these agreements are deferred and recognized as increases or
decreases in the cost of gas at the time the storage gas is sold. At
December 31, 1996 and 1995, the commodity swap agreements outstanding were
immaterial.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at December 31, 1996
and 1995, and the basis upon which they were estimated are as follows:
Cash, nuclear decommissioning trust funds and short-term debt: The
carrying amount of cash and short-term debt approximates fair value due to
their short maturities. As of December 31, 1996 and 1995, the
investments in the nuclear decommissioning trust, which are carried at
fair value, included a net unrealized gain of $9.4 million and $4.7
million, respectively.
Cumulative Preferred Stock of WP&L: The estimated fair value of the
preferred stock is $47.7 million and $49.3 million at December 31, 1996
and 1995, respectively. These amounts are based on the market yield of
similar securities and quoted market prices.
Long-Term Debt: At December 31, 1996 and 1995, the estimated fair value
of long-term debt is $331.9 million and $408.4 million, respectively.
These amounts are based upon the market yield of similar securities and
quoted market prices.
Since WP&L is subject to regulation, any gains or losses related to the
difference between the carrying amount and the fair value of WP&L's
nuclear decommissioning trust funds and long-term debt may not be realized
by it's shareholders.
NOTE 10. CAPITALIZATION
a. Common Shareowners' Investment
A retail rate order effective January 1, 1995, requires WP&L to maintain a
utility common equity level of 51.93 percent of total utility
capitalization during the test years January 1, 1995 to December 31, 1996.
In addition, the PSCW ordered that it must approve the payment of
dividends by WP&L to WPLH that are in excess of the level forecasted in
the rate order ($58.1 million), if such dividends would reduce WP&L's
average common equity ratio below 51.93 percent. At December 31, 1996,
WP&L's common equity ratio was 53.53 percent.
b. Long-Term Debt
Substantially, all of WP&L's utility plant is secured by its first
mortgage bonds. Current maturities of long-term debt of WP&L are as
follows: $55.0 million in 1997, $8.9 million in 1998, $0.0 million in
1999, $1.9 million in 2000 and $0.0 million in 2001.
On September 14, 1995, WP&L received an order from the PSCW authorizing
the sale of up to $60 million of long-term debt securities. WP&L had
expected to make an offering of the long-term debt securities before
December 31, 1996. WP&L did not make this offering and does not intend to
request an extension of this order. WP&L expects to request PSCW
permission for the sale of up to $105 million of long-term debt securities
to be issued before December 31, 1997. WP&L intends to use the net
proceeds from the sale of these securities to provide funds for the
retirement of Series Z Bonds and to repurchase on the open market Series V
and/or Series W Bonds. The remainder of the net proceeds will be used to
repay other short-term debt incurred by WP&L, to finance utility
construction expenditures and for general corporate purposes.
NOTE 11. COMMITMENTS AND CONTINGENCIES
a. Coal Contract Commitments
To ensure an adequate supply of coal, WP&L has entered into certain
long-term coal contracts. These contracts include a demand or take-or-pay
clause under which payments are required if contracted quantities are not
purchased. Purchase obligations on these coal and related rail contracts
total approximately 14.5 million tons through December 31, 2001. WP&L's
management believes it will meet minimum coal and rail purchase
obligations under the contracts. Minimum purchase obligations on these
contracts over the next five years are estimated to be $36 million in
1997, $37 million in 1998, $28 million in 1999, $9 million in 2000 and $9
million in 2001.
b. Purchased Power and Gas
Under firm purchased power and gas contracts, WP&L is obligated as follows
(dollars in millions):
Purchased Power Purchased Gas
1997 $64.2 $46.8
1998 16.8 40.2
1999 20.2 30.7
2000 27.6 26.2
2001 28.9 21.6
Thereafter 84.9 46.1
c. Manufactured Gas Plant Sites
WP&L has a current or previous ownership interest in 11 properties
associated in the past with the production of manufactured gas. Some of
these sites may contain coal tar waste products which may present an
environmental hazard. WP&L owns five of these sites, three are currently
owned by municipalities and the remaining three are currently owned by
private companies.
Through ongoing investigations and studies, WP&L confirmed that there was
no contamination at two of the sites and only a minimal likelihood of
contamination at a third site. As WP&L has received close out letters
from the State of Wisconsin Department of Natural Resources (DNR) for
these three sites, WP&L has no further obligation at these sites. WP&L
has also implemented DNR- approved remediation plans at two additional
sites in the last several years. An air sparging/biosparging remediation
system was implemented at one of the sites, while excavation and disposal
of the coal tar residue and contaminated soils was implemented at the
other. Groundwater monitoring is ongoing at both sites.
WP&L currently estimates that the remaining remediation costs associated
with the former manufactured gas plant sites is $74 million. The estimate
includes the costs of feasibility studies, data collection, soil and
groundwater remediation activities and ongoing monitoring activities
through 2027. The estimate is based on a number of factors including the
estimated extent and volume of contaminated soil and/or groundwater. The
estimate is also premised in part on a remediation method that involves
treatment or removal of contaminated soil. Based on recent approvals from
the DNR, WP&L may be able to implement a less-costly containment and
control remediation strategy at two of the remaining sites. WP&L plans to
implement this remediation at these two sites in 1997. If remediation is
successful, management believes there may be a significant reduction in
the estimated liability.
Changes in the liability do not immediately impact the earnings of WP&L.
Under the current rate making treatment approved by the PSCW, the costs
expended in the environmental remediation of these sites are deferred and
collected from gas customers over a five year period after new rates are
implemented. Management believes future costs will also be recovered in
rates.
d. Spent Nuclear Fuel and Decommissioning Costs
WP&L's share of the decommissioning costs of Kewaunee Nuclear Power Plant
(Kewaunee) is estimated to be $180 million (in 1996 dollars, assuming the
plant is operating through 2013) based on a 1992 site-specific study,
using the immediate dismantlement method of decommissioning. The costs of
decommissioning are assumed to escalate at an annual rate of 6.5 percent.
The undiscounted amount of decommissioning costs estimated to be expended
between the years 2014 and 2050 is $1,016 million.
As required by the PSCW and FERC, WP&L makes annual contributions to
qualified and nonqualified external trust funds to provide for
decommissioning of Kewaunee. WP&L's annual contribution is $10.7 million
for the years ended December 31, 1996, 1995 and 1994. This amount is
fully recovered in rates. The after-tax income of the external trust
funds was $2.7 million, $2.8 million and $2.7 million for 1996, 1995 and
1994, respectively.
Decommissioning costs, which include the annual contribution to external
trust funds and earnings on the assets of these trusts, are recorded as
depreciation expense in the consolidated statements of income with the
cumulative amount included in the accumulated provision for depreciation
on the consolidated balance sheets. As of December 31, 1996, the total
decommissioning costs included in the accumulated provision for
depreciation were $90.7 million.
Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy
(DOE) is responsible for the ultimate storage and disposal of spent
nuclear fuel removed from nuclear reactors. Interim storage space for
spent nuclear fuel is currently provided at Kewaunee. Currently there is
on-site storage capacity for spent fuel through the year 2001. An
investment of approximately $2.5 million could provide additional storage
sufficient to meet spent fuel storage needs until the expiration of the
current operating license.
The following summarizes the investment at December 31, 1996 and 1995:
1996 1995
Original cost of nuclear fuel $166,342 $160,997
Less-Accumulated amortization 146,974 142,130
------- -------
Nuclear fuel, net $ 19,368 $ 18,867
======= =======
e. Nuclear Performance
In September 1996, Kewaunee was taken out of service for a scheduled
refueling and maintenance outage which was originally projected to be of
five weeks duration. During the outage, however, extensive tube
degradation was encountered which extended the outage through the first
quarter of 1997. The estimated costs attributable to the outage
extension are replacement power costs of $500,000 per week and WP&L's
share of the repair costs are approximately $2.3 million of which $1.4
million was expensed in 1996. Additional details of the Kewaunee outage
can be found elsewhere in this report in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
f. Nuclear Insurance
The Price Anderson Act provides for the payment of funds for public
liability claims arising from a nuclear incident. Accordingly, in the
event of a nuclear incident, WP&L, as a 41-percent owner of Kewaunee, is
subject to an overall assessment of approximately $32.5 million per
incident, not to exceed $4.1 million payable in any given year.
Through its membership in Nuclear Mutual Limited and Nuclear Electric
Insurance Limited, WP&L has obtained property damage and decontamination
insurance totaling $2 billion for loss from damage at Kewaunee. In
addition, WP&L maintains outage and replacement power insurance coverage
totaling $101.4 million in the event an outage exceeds 21 weeks.
g. Planned Capital Expenditures
Plans for the construction and financing of future additions to utility
plant can be found elsewhere in this report in "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
NOTE 12. SEGMENT INFORMATION
The following table sets forth certain information relating to WP&L's
consolidated continuing operations:
1996 1995 1994
Operation information:
Customer revenues--
Electric $589,482 $546,324 $531,747
Gas 165,627 139,165 151,931
Water 4,166 4,183 4,133
Operating income (loss)
Electric $136,339 $134,180 $118,782
Gas 18,929 16,963 13,075
Water 1,074 1,680 1,114
Investment information:
Identifiable assets, including
allocated common plant at
December 31--
Electric $1,225,321 $1,226,786 $1,176,670
Gas 262,090 250,643 234,815
Water 21,389 20,111 18,791
Assets not allocated 169,014 143,625 154,848
Other information:
Construction and nuclear fuel
expenditures--
Electric $125,894 $122,297 $103,420
Gas 17,978 16,905 20,319
Water 1,669 2,124 2,149
Depreciation and amortization
expense
Electric $74,492 $71,379 $64,695
Gas 9,756 9,629 8,082
Water 694 156 417
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 relating to directors and nominees for
election of directors at the 1997 Annual Meetings of Shareowners is
incorporated herein by reference to the information under the caption
"Election of Directors" in each registrant's Proxy Statements for the 1997
Annual Meeting of Shareowners (the 1997 Proxy Statements). The 1997 Proxy
Statements will be filed with the Securities and Exchange Commission
within 120 days after the end of each registrant's fiscal year. The
information required by Item 10 relating to executive officers is included
in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the information under the captions "Compensation of Executive Officers"
and "Meetings and Committees of the Board-Compensation of Directors" (but
not including WPLH's Proxy Statement Report of the Compensation and
Personnel Committee on Executive Compensation) in each of the registrant's
1997 Proxy Statements. The 1997 Proxy Statements will be filed with the
Securities and Exchange Commission within 120 days after the end of each
registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the information under the caption "Ownership of Voting Securities" in each
of the registrant's 1997 Proxy Statements. The 1997 Proxy Statements will
be filed with the Securities and Exchange Commission within 120 days after
the end of each registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the information under the caption "Compensation of Executive Officers"
(but not including the Report of the Compensation and Personnel Committee
on Executive Compensation) in each of the registrant's 1997 Proxy
Statements. The 1997 Proxy Statements will be filed with the Securities
and Exchange Commission within 120 days after the end of each registrant's
fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) Consolidated Financial Statements
Refer to Index to Financial Statements at Item 8 "Financial
Statements and Supplementary Data."
(a) (2) Financial Statement Schedules
WPL Holdings, Inc.
Report of Independent Public Accountants on Schedules
Schedule I. Parent Company Financial Statements
Schedule II. Valuation and Qualifying Accounts and Reserves
Wisconsin Power and Light Company
Report of Independent Public Accountants on Schedules
Schedule II. Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not applicable or
not required, or because that required information is shown either in
the consolidated financial statements or in the notes thereto.
(a)(3) Exhibits Required by Securities and Exchange Commission Regulation
S-K
The following Exhibits are filed herewith or incorporated herein by
reference. Documents indicated by an asterisk (*) are incorporated
herein by reference.
2A* Agreement and Plan of Merger, dated as of November 10, 1995, by
and among WPL Holdings, Inc., IES industries Inc., Interstate
Power Company and AMW Acquisition, Inc. (incorporated by
reference to Exhibit 2.1 in WPLH's Current Report on Form 8-K,
dated November 10, 1995)
2B* Amendment No. 1 to Agreement and Plan of Merger and Stock Option
Agreements, dated May 22, 1996, by and among WPL Holdings, Inc.,
IES Industries Inc., Interstate Power Company, a Delaware
corporation, AMW Acquisition, Inc., WPLH Acquisition Co. and
Interstate Power Company, a Wisconsin corporation (incorporated
by reference to Exhibit 2.1 in WPLH's Current Report on Form 8-
K, dated May 22, 1996)
2C* Amendment No. 2 to Agreement and Plan of Merger, dated August
16, 1996, by and among WPL Holdings, Inc., IES Industries Inc.,
Interstate Power Company, a Delaware corporation, WPLH
Acquisition Co. and Interstate Power Company, a Wisconsin
corporation (incorporated by reference to Exhibit 2.1 in WPLH's
Current Report on Form 8-K, dated August 15, 1996)
2D* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, as amended, by and
among WPL Holdings, Inc. and IES Industries Inc. (incorporated
by reference to Annex B in WPLH's Registration Statement on Form
S-4 (No. 333-07931))
2E* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, as amended, by and
among WPL Holdings, Inc. and Interstate Power Company.
(incorporated by reference to Annex C in WPLH's Registration
Statement on Form S-4 (No. 333-07931))
2F* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, as amended, by and
among IES Industries Inc. and WPL Holdings, Inc. (incorporated
by reference to Annex D in WPLH's Registration Statement on Form
S-4 (No. 333-07931))
2G* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, as amended, by and
among IES Industries, Inc. and Interstate Power Company.
(incorporated by reference to Annex E in WPLH's Registration
Statement on Form S-4 (No. 333-07931))
2H* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, as amended, by and
among Interstate Power Company and WPL Holdings, Inc.
(incorporated by reference to Annex F in WPLH's Registration
Statement on Form S-4 (No. 333-07931))
2I* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, as amended, by and
among Interstate Power Company and IES Industries Inc.
(incorporated by reference to Annex G in WPLH's Registration
Statement on Form S-4 (No. 333-07931))
3A* Restated Articles of Incorporation of WPL Holdings, Inc.
(incorporated by reference to Exhibit 4.1 in WPLH's Form S-3
Registration Statement No. 33-59972)
3B* Form of Amendment of the Restated Articles of Incorporation of
WPL Holdings, Inc., providing for an increase in the number of
authorized shares of common stock from 100,000,000 to
200,000,000 (incorporated by reference to Exhibit 4.2 in WPLH's
Registration Statement on Form S-4 (No. 333-07931))
3C* By-Laws of WPL Holdings, Inc., as amended (incorporated by
reference to Exhibit 3B in WPLH's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996)
3D* Restated Articles of Incorporation of Wisconsin Power and Light
Company, as amended (incorporated by reference to Exhibit 3.1 of
WP&L's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994)
3E* By-Laws of Wisconsin Power and Light Company as Amended
(incorporated by reference to Exhibit 3B to WP&L Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996)
4A* Indenture of Mortgage or Deed of Trust dated August 1, 1941,
between Wisconsin Power and Light Company and First Wisconsin
Trust Company and George B. Luhman, as Trustees, filed as
Exhibit 7(a) in File No. 2-6409, and the indentures supplemental
thereto dated, respectively, January 1, 1948, September 1, 1948,
June 1, 1950, April 1, 1951, April 1, 1952, September 1, 1953,
October 1, 1954, March 1, 1959, May 1, 1962, August 1, 1968,
June 1, 1969, October 1, 1970, July 1, 1971, April 1, 1974,
December 1, 1975, May 1, 1976, May 15, 1978, August 1, 1980,
January 15, 1981, August 1, 1984, January 15, 1986, June 1,
1986, August 1, 1988, December 1, 1990, September 1, 1991,
October 1, 1991, March 1, 1992, May 1, 1992, June 1, 1992 and
July 1, 1992 (Second Amended Exhibit 7(b) in File No. 2-7361;
Amended Exhibit 7(c) in File No. 2-7628; Amended Exhibit 7.02 in
File No. 2-8462; Amended Exhibit 7.02 in File No. 2-8882; Second
Amendment Exhibit 4.03 in File No. 2-9526; Amended Exhibit 4.03
in File No. 2-10406; Amended Exhibit 2.02 in File No. 2-11130;
Amended Exhibit 2.02 in File No. 2-14816; Amended Exhibit 2.02
in File No. 2-20372; Amended Exhibit 2.02 in File No. 2-29738;
Amended Exhibit 2.02 in File No. 2-32947; Amended Exhibit 2.02
in File No. 2-38304; Amended Exhibit 2.02 in File No. 2-40802;
Amended Exhibit 2.02 in File No. 2-50308; Exhibit 2.01(a) in
File No. 2-57775; Amended Exhibit 2.02 in File No. 2-56036;
Amended Exhibit 2.02 in File No. 2-61439; Exhibit 4.02 in File
No. 2-70534; Amended Exhibit 4.03 File No. 2-70534; Exhibit 4.02
in File No. 33-2579; Amended Exhibit 4.03 in File No. 33-2579;
Amended Exhibit 4.02 in File No. 33-4961; Exhibit 4B to WP&L's
Form 10-K for the year ended December 31, 1988, Exhibit 4.1 to
WP&L's Form 8-K dated December 10, 1990, Amended Exhibit 4.26 in
File No. 33-45726, Amended Exhibit 4.27 in File No.33-45726,
Exhibit 4.1 to WP&L's Form 8-K dated March 9, 1992, Exhibit 4.1
to WP&L's Form 8-K dated May 12, 1992, Exhibit 4.1 to WP&L's
Form 8-K dated June 29, 1992 and Exhibit 4.1 to WP&L's Form 8-K
dated July 20, 1992)
4B* Rights Agreement, dated February 22, 1989, between WPL Holdings,
Inc. and Morgan Shareholder Services Trust Company (incorporated
by reference to Exhibit 4 in WPLH's Current Report on Form 8-K
dated February 27, 1989)
10A*# Executive Tenure Compensation Plan as revised November 1992
(incorporated by reference to Exhibit 10A in WPLH's Form 10-K
for the year ended December 31, 1992)
10B*# Form of Supplemental Retirement Plan, as revised November 1992
(incorporated by reference to Exhibit 10B in WPLH's Form 10-K
for the year ended December 31, 1992)
10C*# Forms of Deferred Compensation Plans, as amended June, 1990
(incorporated by reference to Exhibit 10C in WPLH's Form 10-K
for the year ended December 31, 1990)
10C.1*# Officer's Deferred Compensation Plan II, as adopted September
1992 (incorporated by reference to Exhibit 10C.1 in WPLH's Form
10-K for the year ended December 31, 1992)
10C.2*# Officer's Deferred Compensation Plan III, as adopted January
1993 (incorporated by reference to Exhibit 10C.2 in WPLH's Form
10-K for the year ended December 31, 1993)
10F*# Pre-Retirement Survivor's Income Supplemental Plan, as revised
November 1992 (incorporated by reference to Exhibit 10F in
WPLH's Form 10-K for the year ended December 31, 1992)
10H*# Wisconsin Power and Light Company Management Incentive Plan
(incorporated by reference to Exhibit 10H in WPLH's Form 10-K
for the year ended December 31, 1992)
10I*# Deferred Compensation Plan for Directors, as amended January 17,
1995 (incorporated by reference to Exhibit 10I in WPLH's Form
10-K for the year ended December 31, 1995)
10J*# WPL Holdings, Inc. Long-Term Equity Incentive Plan (incorporated
by reference to Exhibit 4.1 in WPLH's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994)
10K*# Key Executive Employment and Severance Agreement by and between
WPL Holdings, Inc. and E.B. Davis, Jr. (incorporated by
reference to Exhibit 4.2 in WPLH's Quarterly Report on Form 10-
Q for the quarter ended June 30, 1994)
10L*# Key Executive Employment and Severance Agreement by and between
WPL Holdings, Inc. and each of L.W. Ahearn, W.D. Harvey, E.G.
Protsch, and A.J. Amato (incorporated by reference to Exhibit
4.3 in WPLH's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994)
10M*# Key Executive Employment and Severance Agreement by and between
WPL Holdings, Inc. and each of E.M. Gleason, B.J. Swan, D.A.
Doyle, N.E. Boys, D.E. Ellestad, P.J. Wegner, and K.K. Zuhlke
(incorporated by reference to Exhibit 4.4 in WPLH's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994)
10N*# Restricted Stock Agreement -- Lance W. Ahearn (incorporated by
reference to Exhibit 10J in WPLH's Form 10-K for the year ended
December 31, 1992)
10O*# Restricted Stock Agreement -- Erroll B. Davis, Jr.
(incorporated by reference to Exhibit 10O in WPLH's Form 10-K
for the year ended December 31, 1994.)
21A Subsidiaries of WPL Holdings, Inc.
21B Subsidiaries of Wisconsin Power and Light Company
23 Consent of Independent Public Accountants
27A Financial Data Schedule of WPL Holdings, Inc.
27B Financial Data Schedule of Wisconsin Power and Light Company
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, both registrants agree
to furnish to the Securities and Exchange Commission, upon request, any
instrument defining the rights of holders of unregistered long-term debt
not filed as an exhibit to this Form 10-K. No such instrument authorizes
securities in excess of 10 percent of the total assets of either company.
# - A management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
WPL Holdings, Inc. (WPLH), IES Industries Inc. (IES), Interstate Power
Company (IPC), and certain related parties have entered into an Agreement
and Plan of Merger, dated as of November 10, 1995, as amended (the Merger
Agreement), providing for (a) the merger of IES with and into WPLH and (b)
the merger of IPC with a subsidiary of WPLH pursuant to which IPC will
become a subsidiary of WPLH (the above referenced mergers are collectively
referred herein to as the Mergers). In connection with the consummation
of the Mergers, WPLH will change its name to Interstate Energy
Corporation. Detailed information with respect to the Merger Agreement
and the proposed Mergers is contained in the Joint Proxy
Statement/Prospectus, dated July 11, 1996, as supplemented by the
Supplement to Joint Proxy Statement/Prospectus, dated August 21, 1996,
contained in WPLH's Registration Statements on Form S-4, Registration Nos.
333-07931 and 333-10401 relating to the meetings of shareowners of WPLH,
IES and IPC to vote on the Merger Agreement and related matters.
The following unaudited pro forma financial information combines the
historical consolidated balance sheets and statements of income of WPLH,
IES and IPC, including their respective subsidiaries, after giving effect
to the Mergers. The historical data for WPLH have been adjusted to reflect
the restatement of such data to account for certain discontinued
operations discussed in the notes hereto. The unaudited pro forma
combined balance sheet at December 31, 1996 gives effect to the Mergers
as if they had occurred at December 31, 1996. The unaudited pro forma
combined statements of income for each of the three years in the period
ended December 31, 1996 give effect to the Mergers as if they had occurred
at January 1, 1994. These statements are prepared on the basis of
accounting for the Mergers as a pooling of interests and are based on the
assumptions set forth in the notes thereto. In addition, the pro forma
financial information does not give effect to the expected synergies or
the cost to be incurred to achieve such synergies. The pro forma
financial information, however, does reflect the transaction costs to
effect the Mergers.
The following pro forma financial information has been prepared from, and
should be read in conjunction with, the historical consolidated financial
statements and related notes thereto of WPLH, IES and IPC. The following
information is not necessarily indicative of the financial position or
operating results that would have occurred had the Mergers been
consummated on the date, or at the beginning of the periods, for which the
Mergers are being given effect nor is it necessarily indicative of future
operating results or financial position.
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
12/31/96
(In thousands)
<CAPTION>
WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
<S> <C> <C> <C> <C> <C>
ASSETS
UTILITY PLANT
Electric $1,729,311 $2,007,839 $853,007 $--- $4,590,157
Gas 227,809 175,472 68,047 --- 471,328
Other 175,998 126,850 ---- --- 302,848
--------- --------- -------- ------ ---------
Total 2,133,118 2,310,161 921,054 --- 5,364,333
Accumulated provision
for depreciation 967,436 1,030,390 426,471 --- 2,424,297
Construction work in progress 55,519 43,719 3,129 --- 102,367
Nuclear fuel--net 19,368 34,725 --- --- 54,093
--------- --------- -------- ------ ---------
Net utility plant 1,240,569 1,358,215 497,712 --- 3,096,496
OTHER PROPERTY, PLANT AND
EQUIPMENT --- NET AND
INVESTMENTS (NOTE 8) 144,671 314,071 453 --- 459,195
CURRENT ASSETS
Cash and cash equivalents 11,070 8,675 3,072 --- 22,817
Accounts receivable --- net 88,798 62,861 28,227 --- 179,886
Fossil fuel inventories, at
average cost 15,841 13,323 16,623 --- 45,787
Materials and supplies, at
average cost 29,907 22,842 6,214 --- 58,963
Prepayments and other 26,786 70,350 13,497 --- 110,633
--------- --------- -------- ------ ---------
Total current assets 172,402 178,051 67,633 --- 418,086
EXTERNAL DECOMMISSIONING FUND 90,671 59,325 --- --- 149,996
DEFERRED CHARGES AND OTHER 252,218 215,900 73,402 --- 541,520
--------- --------- -------- ------ ---------
TOTAL ASSETS $1,900,531 $2,125,562 $639,200 $--- $4,665,293
========= ========= ======= ======= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued)
12/31/96
(In thousands)
<CAPTION>
WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
<S> <C> <C> <C> <C> <C>
LIABILITIES AND EQUITY
CAPITALIZATION
Common Stock Equity:
Common Stock (Note 1) $308 $407,635 $33,848 ($441,033) $758
Other stockholders'
equity (Note 1 607,047 219,246 172,210 430,033 1,428,536
---------- --------- --------- --------- ----------
Total common stock equity 607,355 626,881 206,058 (11,000) 1,429,294
Preferred stock not mandatorily
redeemable 59,963 18,320 10,819 ---- 89,102
Preferred stock mandatory
sinking fund ---- ---- 24,147 ---- 24,147
Long-term debt ---net 362,564 701,100 171,731 ---- 1,235,395
---------- --------- --------- --------- ----------
Total capitalization 1,029,882 1,346,301 412,755 (11,000) 2,777,938
CURRENT LIABILITIES
Current maturities, sinking funds,
and capital lease obligations 67,626 23,598 17,000 ---- 108,224
Commercial paper, notes payable
and other 102,779 135,000 28,700 ---- 266,479
Variable rate demand bonds 56,975 ---- ---- ---- 56,975
Accounts payable and accruals 120,986 99,861 14,013 ---- 234,860
Taxes accrued 4,669 43,926 16,953 ---- 65,548
Other accrued liabilities 54,303 54,498 11,785 11,000 131,586
---------- --------- --------- --------- ----------
Total current liabilities 407,338 356,883 88,451 11,000 863,672
OTHER LIABILITIES
Deferred income taxes 245,686 262,675 99,303 ---- 607,664
Deferred investment tax credits 36,931 34,470 17,013 ---- 88,414
Accrued environmental remediation
costs 74,075 47,502 7,234 ---- 128,811
Capital lease obligations ---- 19,600 ---- ---- 19,600
Other liabilities and deferred
credits 106,619 58,131 14,444 ---- 179,194
---------- --------- --------- --------- ----------
Total other liabilities 463,311 422,378 137,994 ---- 1,023,683
---------- --------- --------- --------- ----------
TOTAL CAPITALIZATION AND
LIABILITIES $1,900,531 $2,125,562 $639,200 $ ---- $4,665,293
========== ========= ========= ========= ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share amounts)
<CAPTION>
WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric $589,482 $574,273 $276,620 $---- $1,440,375
Gas 165,627 273,979 49,464 ---- 489,070
Other 177,735 125,660 --- ---- 303,395
---------- --------- --------- --------- ----------
Total operating revenues 932,844 973,912 326,084 ---- 2,232,840
Operating Expenses
Electric production fuels 114,470 84,579 57,560 ---- 256,609
Purchased power 81,108 88,350 61,556 ---- 231,014
Cost of gas sold 104,830 217,351 31,617 ---- 353,798
Other operation 319,154 214,759 53,134 ---- 587,047
Maintenance 46,492 49,001 16,164 ---- 111,657
Depreciation and amortization 90,683 107,393 31,087 ---- 229,163
Taxes other than income
taxes 34,603 48,171 16,064 ---- 98,838
---------- --------- --------- --------- ----------
Total operating expenses 791,340 809,604 267,182 ---- 1,868,126
---------- --------- --------- --------- ----------
Operating Income 141,504 164,308 58,902 ---- 364,714
Other Income (Expense)
Allowance for equity funds
used during construction 2,270 (100) 13 ---- 2,183
Other income and
deductions ---net 15,644 (2,333) 3,763 ---- 17,074
---------- --------- --------- --------- ----------
Total other income (expense) 17,914 (2,433) 3,776 ---- 19,257
Interest Charges 41,089 52,619 16,222 ---- 109,930
---------- --------- --------- --------- ----------
Income from continuing
operations before income taxes
and preferred dividends 118,329 109,256 46,456 ---- 274,041
Income Taxes 41,814 47,435 18,133 ---- 107,382
Preferred dividends of
subsidiaries (Note 2) 3,310 914 2,463 ---- 6,687
---------- --------- --------- --------- ----------
Income from continuing
Operations (Notes 3 and 6) $73,205 $60,907 $25,860 $---- $159,972
========== ========= ========= ========= ==========
Average Common Shares
Outstanding (Note 1) 30,790 29,861 9,594 5,236 75,481
Earnings per share of Common
Stock from continuing
operations $2.38 $2.04 $2.69 $---- $2.12
===== ===== ===== ===== ====
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(In thousands, except per share amounts)
<CAPTION>
WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric $546,324 $560,471 $274,873 $ ---- $1,381,668
Gas 139,165 190,339 43,669 ---- 373,173
Other 121,766 100,200 ---- ---- 221,966
---------- --------- --------- --------- ----------
Total operating revenues 807,255 851,010 318,542 ---- 1,976,807
Operating Expenses
Electric production fuels 116,488 96,256 62,164 ---- 274,908
Purchased power 44,940 66,874 57,566 ---- 169,380
Cost of gas sold 84,002 141,716 25,888 ---- 251,606
Other operation 253,277 201,390 45,717 ---- 500,384
Maintenance 42,043 46,093 14,881 ---- 103,017
Depreciation and amortization 86,319 97,958 29,560 ---- 213,837
Taxes other than income
taxes 34,188 49,011 15,990 ---- 99,189
---------- --------- --------- --------- ----------
Total operating expenses 661,257 699,298 251,766 ---- 1,612,321
---------- --------- --------- --------- ----------
Operating Income 145,998 151,712 66,776 ---- 364,486
Other Income (Expense)
Allowance for equity funds
used during construction 1,425 386 ---- ---- 1,811
Other income and
deductions ---net 6,509 3,170 (2,872) ---- 6,807
---------- --------- --------- --------- ----------
Total other income (expense) 7,934 3,556 (2,872) ---- 8,618
Interest Charges 42,896 47,689 16,795 ---- 107,380
---------- --------- --------- --------- ----------
Income from continuing
operations before income taxes
and preferred dividends 111,036 107,579 47,109 ---- 265,724
Income Taxes 36,108 42,489 19,453 ---- 98,050
Preferred dividends of
subsidiaries (Note 2) 3,310 914 2,458 ---- 6,682
---------- --------- --------- --------- ----------
Income from continuing
Operations (Notes 3 and 6) $71,618 $64,176 $25,198 $---- $160,992
========== ========= ========= ========= ==========
Average Common Shares
Outstanding (Note 1) 30,774 29,202 9,564 5,140 74,680
Earnings per share of Common
Stock from continuing
operations $2.33 $2.20 $2.63 $---- $2.16
===== ===== ===== ===== =====
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994
(In thousands, except per share amounts)
<CAPTION>
WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric $531,747 $537,327 $261,730 $ ---- $1,330,804
Gas 151,931 165,569 45,920 ---- 363,420
Other 112,039 82,968 ---- ---- 195,007
-------- -------- -------- ------- ----------
Total operating revenues 795,717 785,864 307,650 ---- 1,889,231
Operating Expenses
Electric production fuels 123,469 85,952 61,384 ---- 270,805
Purchased power 37,913 68,794 58,339 ---- 165,046
Cost of gas sold 100,942 120,795 30,905 ---- 252,642
Other operation 248,847 176,863 51,917 ---- 477,627
Maintenance 41,227 52,841 17,160 ---- 111,228
Depreciation and amortization 80,351 86,378 28,212 ---- 194,941
Taxes other than income
taxes 33,788 46,308 16,298 ---- 96,394
-------- -------- -------- ------- ---------
Total operating expenses 666,537 637,931 264,215 ---- 1,568,683
-------- -------- -------- ------- ---------
Operating Income
129,180 147,933 43,435 ---- 320,548
Other Income (Expense)
Allowance for equity funds
used during construction 3,009 2,299 166 ---- 5,474
Other income and
deductions ---net 10,245 3,472 3,100 ---- 16,817
-------- -------- -------- ------- ---------
Total other income (expense) 13,254 5,771 3,266 ---- 22,291
Interest Charges 36,657 44,399 16,845 ---- 97,901
-------- -------- -------- ------- ---------
Income from continuing
operations before income taxes
and preferred dividends 105,777 109,305 29,856 ---- 244,938
Income Taxes 36,043 41,573 9,189 ---- 86,805
Preferred dividends of
subsidiaries (Note 2) 3,310 914 2,454 ---- 6,678
-------- -------- -------- ------- ---------
Income from continuing
Operations (Notes 3 and 6) $66,424 $66,818 $18,213 $---- $151,455
======== ======== ======== ======= =========
Average Common Shares
Outstanding (Note 1) 30,671 28,560 9,479 5,041 73,751
Earnings per share of Common
Stock from continuing
operations $2.17 $2.34 $1.92 $---- $2.05
===== ===== ===== ===== =====
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
<PAGE>
INTERSTATE ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. The pro forma combined financial statements reflect the conversion
of each share of IES Common Stock (no par value) outstanding into
1.14 shares of WPLH Common Stock ($.01 par value) and the conversion
of each share of IPC Common Stock ($3.50 par value) into 1.11 shares
of WPLH Common Stock ($.01 par value), and the continuation of each
share of WPLH Common Stock ($.01 par value) outstanding as one share
of Interstate Energy Common Stock, as provided in the Merger
Agreement. The pro forma adjustment to common stock equity restates
the common stock account to equal par value for all shares to be
issued ($.01 par value per share of Interstate Energy Common Stock)
and reclassifies the excess to other stockholders' equity. The pro
forma combined statements of income are presented as if the
companies were combined on January 1, 1994. The pro forma combined
balance sheet gives effect to the Mergers as if they occurred at
December 31, 1996.
The number of shares of common stock used for calculating per share
amounts is based on the exchange ratio shown below.
<TABLE>
<CAPTION>
As Pro As Pro As
Exchange reported forma reported forma reported Pro forma
Ratio 12/31/96 12/31/96 12/31/95 12/31/95 12/31/94 12/31/94
<S> <C> <C> <C> <C> <C> <C> <C>
IES 1.14 29,861 34,042 29,202 33,290 28,560 32,558
IPC 1.11 9,594 10,649 9,564 10,616 9,479 10,522
WPLH N/A 30,790 30,790 30,774 30,774 30,671 30,671
</TABLE>
2. The Preferred Stock of IPC has been reclassified in the pro forma
statements as preferred stock of subsidiary companies and deducted in
the determination of income from continuing operations which reflects
the holding company structure of the entity formed through the
Mergers.
3. IES's income from continuing operations for the year ended December
31, 1996 included costs incurred relating to its successful defense of
a hostile takeover attempt mounted by MidAmerican Energy Company. The
after-tax impact on income from continuing operations was a decrease
of $4.6 million.
Nonrecurring items affecting WPLH's performance for the year ended
December 31, 1996 included the impact of the sale of a combustion
turbine and the sale of WPLH's assisted-living real estate
investments. The after-tax impact of these items on continuing
operations was an increase of $5.9 million. Nonrecurring items
affecting WPLH's 1994 performance included the impact of early
retirement and severance programs and the reversal of a coal contract
penalty assessed by the Public Service Commission of Wisconsin which
was charged to income in 1989. The net after-tax impact of these
items on income from continuing operations for the year ended December
31, 1994 was a decrease of $8.3 million related to the early
retirement and severance programs offset by an increase of $4.9
million related to the coal contract penalty reversal.
4. The allocation between WPLH, IES and IPC and their customers of the
estimated cost savings of approximately $749 million over ten years
resulting from the Mergers, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval. Costs
arising from the proposed Mergers are currently estimated to be
approximately $78 million (including transaction costs of $11 million
related to fees for financial advisors, attorneys, accountants and
consultants). The estimate of potential cost savings constitutes a
forward-looking statement and actual results may differ materially
from this estimate. The estimate is necessarily based upon various
assumptions that involve judgments with respect to, among other
things, future national and regional economic and competitive
conditions, technological developments, inflation rates, regulatory
treatments, weather conditions, financial market conditions, future
business decisions and other uncertainties. No assurance can be given
that the estimated costs savings will actually be realized.
In addition to the $11 million remaining transaction costs, since the
announcement of the Merger Agreement on November 11, 1995, IES, IPC
and WPLH have collectively incurred $6 million of merger-related
transaction costs through December 31, 1996, which have been expensed
and are reflected in the combined income statements as presented. The
remaining merger-related $11 million of transaction costs have been
reflected in the pro forma balance sheet at December 31, 1996 such
that shareowners' equity has been reduced by $11 million and accrued
liabilities have been increased by $11 million. None of the
estimated cost savings, or costs to achieve such savings, have been
reflected in the pro forma combined financial statements.
5. Intercompany transactions (including purchased and exchange power
transactions) between WPLH, IES and IPC during the periods presented
were included in the determination of regulated rates and were not
material. Accordingly, no pro forma adjustments were made to
eliminate such transactions.
6. The financial statements of WPLH reflect the discontinuance of
operations of its utility energy and marketing consulting business in
1995. The discontinuance of this business resulted in a pre-tax loss
in the fourth quarter of 1995 of $7.7 million. The after-tax loss on
disposition was $11.0 million reflecting the associated tax expense on
disposition due to the non-deductibility of the carrying value of
goodwill at sale. During 1996, WPLH recognized an additional loss of
$1.3 million, net of applicable income tax benefit, associated with
the final disposition of the business. Operating revenues, operating
expenses, other income and expense and income taxes for the
discontinued operations for the time periods presented have been
excluded from income from continuing operations. Interest expense has
been adjusted for the amounts associated with direct obligations of
the discontinued operations.
Operating revenues, related losses, and income tax benefits associated
with the discontinued operations for the years ending December 31 were
are follows:
1995 1994
Operating revenues $24,979 $34,798
====== ======
Loss from discontinued
operations before income
tax $3,663 $1,806
Income tax benefit 1,451 632
------ ------
Loss from discontinued operations $2,212 $1,174
====== ======
7. Accounting principles have been consistently applied in the financial
statement presentations for WPLH, IES and IPC with one exception. IPC
does not include unbilled electric and gas revenues in its calculation
of total revenues. The utility subsidiaries of WPLH and IES accrue
unbilled revenues. The impact of this difference in accounting
principles among the companies does not have a material impact on the
unaudited pro forma combined financial statements as presented and,
accordingly, no adjustments have been made to conform accounting
principles.
8. At December 31, 1996, IES had a $20.0 million investment in Class A
common stock of McLeod, Inc. (McLeod), a $9.2 million investment in
Class B common stock and vested options that, if exercised, would
represent an additional investment of approximately $2.3 million.
McLeod provides local, long-distance and other telecommunications
services.
McLeod completed an Initial Public Offering (IPO) of its Class A
common stock in June 1996 and a secondary offering in November 1996.
As of December 31, 1996, IES is the beneficial owner of approximately
10.6 million total shares on a fully diluted basis. Class B shares
are convertible at the option of IES into Class A shares at any time
on a one-for-one basis. The rights of McLeod Class A common stock and
Class B common stock are substantially identical except that Class A
common stock has 1 vote per share and Class B common stock has 0.40
vote per share. IES currently accounts for this investment under the
cost method.
IES has entered into an agreement with McLeod which provides that for
two years commencing on June 10, 1996, IES cannot sell or otherwise
dispose of any of its securities of McLeod without the consent of the
McLeod Board of Directors. This contractual sale restriction results
in restricted stock under the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain
Investments in Debt and Equity Securities, until such time as the
restrictions lapse and such shares became qualified for sale within a
one year period. As a result, IES currently carries this investment
at cost.
The closing price of the McLeod Class A common stock on December 31,
1996, on the Nasdaq National Market, was $25.50 per share. The
current market value of the shares IES beneficially owns
(approximately 10.6 million shares) is currently impacted by, among
other things, the fact that the shares cannot be sold for a period of
time and it is not possible to estimate what the market value of the
shares will be at the point in time such sale restrictions are lifted.
In addition, any gain upon an eventual sale of this investment would
likely be subject to a tax.
Under the provisions of SFAS No. 115, the carrying value of the McLeod
investment will be adjusted to estimated fair value at the time such
shares become qualified for sale within a one year period; this will
occur on June 10, 1997, which is one year before the contractual
restrictions on sale are lifted. At that time, the adjustment to
reflect the estimated fair value of this investment will be reflected
as an increase in the investment carrying value with the unrealized
gain reported as a net of tax amount in other common shareholders'
equity until realized (i.e. until the shares are sold by IES).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the
17th day of March 1997.
WPL HOLDINGS, INC.
By: /s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 17th day of
March 1997.
/s/ Erroll B. Davis, Jr. President, Chief Executive Officer and
Erroll B. Davis, Jr. Director (principal executive officer)
/s/ Edward M. Gleason Vice President, Treasurer and Corporate
Edward M. Gleason Secretary (principal financial and
accounting officer)
/s/ L. David Carley Director /s/ Milton E. Neshek Director
L. David Carley Milton E. Neshek
/s/ Rockne G. Flowers Director /s/ Henry C. Prange Director
Rockne G. Flowers Henry C. Prange
/s/ Donald R. Haldeman Director /s/ Carol T. Toussaint Director
Donald R. Haldeman Carol T. Toussaint
/s/ Katharine C. Lyall Director /s/ Judith D. Pyle Director
Katharine C. Lyall Judith D. Pyle
/s/ Arnold M. Nemirow Director
Arnold M. Nemirow
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the
17th day of March 1997.
WISCONSIN POWER AND LIGHT COMPANY
By: /s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 17th day of
March 1997.
/s/ Erroll B. Davis, Jr. President, Chief Executive Officer
Erroll B. Davis, Jr. and Director (principal executive
officer)
/s/ Edward M. Gleason Controller, Treasurer and Corporate
Edward M. Gleason Secretary (principal financial and
accounting officer)
/s/ L. David Carley Director /s/ Milton E. Neshek Director
L. David Carley Milton E. Neshek
/s/ Rockne G. Flowers Director /s/ Henry C. Prange Director
Rockne G. Flowers Henry C. Prange
/s/ Donald R. Haldeman Director /s/ Carol T. Toussaint Director
Donald R. Haldeman Carol T. Toussaint
/s/ Katharine C. Lyall Director /s/ Judith D. Pyle Director
Katharine C. Lyall Judith D. Pyle
/s/ Arnold M. Nemirow Director
Arnold M. Nemirow
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
FINANCIAL STATEMENT SCHEDULES:
WPL Holdings, Inc.
I. Parent Company Financial Statements
II. Valuation and Qualifying Accounts and Reserves
Wisconsin Power and Light Company
II. Valuation and Qualifying Accounts and Reserves
NOTE: All other schedules are omitted because they are not applicable
or not required, or because that required information is shown either in
the financial statements or in the notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareowners of WPL Holdings, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in the 1996 Form 10-K of
WPL Holdings, Inc. and have issued our report thereon dated January 30,
1997. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. Supplemental Schedules I and II are the
responsibility of management and are presented for purposes of complying
with the Securities and Exchange Commission's rules and are not part of
the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 30, 1997
<PAGE>
SCHEDULE 1 - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDINGS, INC.
(Parent Company Only)
Supplemental Notes to Parent Company Only Financial Statements
The following are supplemental notes to the WPL Holdings, Inc. (the
Company) Parent Company Financial Statements and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in WPL Holdings, Inc. 1996 Annual Report, which are hereby
incorporated by reference.
Note A. The parent company files a consolidated federal income tax
return with its subsidiaries.
Note B. Net amounts due to (due from) affiliates result from
intercompany transactions including loans and an administrative
allowance.
Note C. Information regarding short term debt is as follows:
1996 1995
(in thousands)
As of end of year:
Notes payable $28,500 $37,000
Interest rates on notes
payable 5.28-6.31% 5.83-6.42%
For the year ended:
Maximum month-end amount of
short-term debt $34,000 $37,000
Average amount of short-term
debt $26,899 $19,965
Average interest rate on
short-term debt 5.55% 5.99%
Note D. During 1996, 1995 and 1994, Wisconsin Power and Light Company
allocated and billed certain administrative and general
expenses to the Company using an allocation method approved by
the Public Service Commission of Wisconsin. These expenses
totaled $1,516,585, $2,005,000 and $759,000 during 1996, 1995
and 1994, respectively.
Note E. Certain reclassifications have been made to prior years
financial statements to conform with the current year
presentation.
<PAGE>
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDINGS, INC.
(Parent Company Only)
STATEMENTS OF INCOME AND REINVESTED EARNINGS
As of December 31,
1996 1995 1994
(in thousands)
Income:
Undistributed subsidiary earnings
(loss) Wisconsin Power and Light
Company $79,175 $75,342 $68,185
Heartland Development Corporation (5,068) (14,647) (1,708)
Investment income and other 1,081 250 681
------ ------ ------
75,188 60,945 67,158
------ ------ ------
Expenses:
Operating (Note D) 2,136 2,443 1,978
Interest and other 1,437 1,248 842
------ ------ ------
3,573 3,691 2,820
------ ------ ------
Income before income tax benefit 71,615 57,254 64,338
------ ------ ------
Income tax benefit (expense):
Current 627 1,178 974
Deferred (334) 0 (62)
------- ------- -------
293 1,178 912
------- ------- -------
Net income 71,908 58,432 65,250
------- ------- -------
Reinvested earnings,
beginning of year 291,939 293,048 284,745
Cash dividends (60,656) (59,701) (59,010)
Other 0 160 2,063
------- ------- -------
Reinvested earnings,
end of year $303,191 $291,939 $293,048
======= ======= =======
<PAGE>
SCHEDULE 1 - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDINGS, INC.
(Parent Company Only)
BALANCE SHEETS
December 31,
1996 1995
ASSETS: (in thousands)
Current Assets
Cash and equivalents $3,817 $266
Notes receivable - affiliates
(Note B) 47,308 53,182
------- -------
51,125 53,448
------- -------
Accounts receivable from WPL Holdings
DRIP 150 150
------- -------
Tax benefit receivable 507 823
------- -------
Property and equipment, net 999 999
------- -------
Investments and other 1,948 200
------- -------
Investments in subsidiaries, at equity:
Wisconsin Power and Light Company 576,158 563,070
Heartland Development Corporation 41,115 49,145
------- -------
617,273 612,215
------- -------
Deferred income taxes 52 387
------- -------
Total assets $672,054 $668,222
======= =======
LIABILITIES AND CAPITALIZATION:
Current Liabilities:
Short term debt (Note C) $28,500 $37,000
Current maturities of long-term debt 10,000 ---
Accounts payable - affiliates
(Note B) 1,723 (17)
Accrued taxes --- (1,170)
Accrued interest and other 107 248
Dividends payable 308 254
------- -------
40,638 36,315
Long-term debt 24,000 34,000
Deferred credit 61 437
------- -------
64,699 70,752
------- -------
Capitalization:
Common stock, $.01 par value,
authorized 100,000,000 shares;
issued and outstanding-
30,773,735 and 30,773,588
shares, respectively 308 308
Additional paid-in capital 303,856 305,223
Reinvested earnings 303,191 291,939
------- -------
607,355 597,470
------- -------
Total Liabilities and
Capitalization $672,054 $668,222
======= =======
<PAGE>
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDING, INC.
(Parent Company Only)
STATEMENT OF CASH FLOW
For the years ended December 31,
1996 1995 1994
(in thousands)
Cash flows generated from (used
for) operating activities:
Net income $71,908 $58,432 $65,250
Undistributed earnings of
subsidiaries (4,952) (994) (7,467)
Equity investments in subsidiaries (106) 119 (9,649)
Depreciation --- 10 13
Deferred income taxes 335 (288) (62)
Changes in assets and liabilities:
Receivables 6,190 (24,028) (2,764)
Investments (1,748) 67 7
Accounts payable 1,740 129 (4,876)
Accrued taxes 1,170 (258) (818)
Accrued interest and other (141) 28 (519)
Dividends payable 54 26 80
Other (376) (778) 355
------- ------- -------
Net cash from (used for)
operating activities 74,074 32,465 39,550
Cash flows generated from (used
for) financing activities:
Issuance of long-term debt --- --- 23,537
Long-term debt maturities --- --- (56)
Net change in short term debt (8,500) 25,500 (21,402)
Common stock cash dividends
less dividends revinvested (60,656) (59,701) (49,357)
Other (1,367) 941 147
------- ------- -------
Net cash from (used for)
investing activities (70,523) (33,260) (47,131)
Net increase (decrease) in cash
and equivalents 3,551 (795) (7,581)
Cash and equivalents at beginning
of year 266 1,061 8,642
------- ------- --------
Cash and equivalents at end
of year $3,817 $266 $1,061
======= ======= ========
<PAGE>
<TABLE>
SCHEDULE II
WPL HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Deductions period
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts $1,735 $928 $1,139 [1] $1,524
====== ==== ====== =====
Year ended December 31, 1995
Allowance for doubtful accounts $1,964 $966 $1,195 [1] $1,735
====== ==== ====== =====
Year ended December 31, 1994
Allowance for doubtful accounts $1,662 $1,027 $725 [1] $1,964
====== ===== ==== =====
[1] Uncollectible accounts written off, net of recoveries
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareowners of Wisconsin Power and Light Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in the 1996 Form 10-K of
Wisconsin Power and Light Company and have issued our report thereon dated
January 30, 1997. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. Supplemental Schedule II is
the responsibility of WP&L's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements. The schedule has
been subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 30, 1997
<PAGE>
<TABLE>
SCHEDULE II
WISCONSIN POWER AND LIGHT COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Deductions period
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts $0 $0 $0 [1] $0
==== ==== ==== ====
Year ended December 31, 1995
Allowance for doubtful accounts $209 $0 $209 [1] $0
==== ==== ==== ====
Year ended December 31, 1994
Allowance for doubtful accounts $259 $150 $200 [1] $209
==== ==== ==== ====
[1] Uncollectible accounts written off, net of recoveries
</TABLE>
<PAGE>
Exhibit Index
For the Year Ended December 31, 1996
Item Description
21A Subsidiaries of WPL Holdings, Inc.
21B Subsidiaries of Wisconsin Power and Light Company
23 Consent of Independent Public Accountants
27A Financial Data Schedule of WPL Holdings, Inc.
27B Financial Data Schedule of Wisconsin Power and Light Company
EXHIBIT 21A
SUBSIDIARIES OF WPL HOLDINGS, INC.
The subsidiaries and affiliates of as of December 31, 1996, are as
follows:
Name of Subsidiary
% of Voting Stock Owned Directly or
Indirectly by the Company State of Incor.
A. Wisconsin Power and Light Company (100%) Wisconsin
1. South Beloit Water, Gas and Electric Company (100%) Illinois
2. REAC, Inc (100%) Wisconsin
3. Wisconsin River Power Company (33-1/3%) Wisconsin
4. Wisconsin Valley Improvement Company (13%) Wisconsin
B. Heartland Development Corporation (98.91%) Wisconsin
1. Energy Services
a. Heartland Energy Services, Inc. (100%) Wisconsin
b. Enserv, Inc. (100%) Wisconsin
2. Environmental Services
a. Environmental Holding Company (95%) Wisconsin
b. RMT, Inc. (100%) Wisconsin
c. Jones & Neuse, Inc. (100%) Wisconsin
d. QES, Inc. (100%) Wisconsin
3. Affordable Housing
a. Heartland Properties, Inc. (100%) Wisconsin
b. Tool Kit Property Management
Systems, Inc. (100%) Wisconsin
c. Capital Square Financial Corp. (100%) Wisconsin
d. Heartland Capital Co. (47%) Wisconsin
C. WPLH Acquisition Co. (100%) Wisconsin
EXHIBIT 21B
SUBSIDIARIES OF WISCONSIN POWER AND LIGHT COMPANY
The subsidiaries and affiliates of as of December 31, 1996, are as
follows:
Name of Subsidiary
% of Voting Stock Owned Directly or
Indirectly by the Company State of Incor.
A. South Beloit Water, Gas and Electric Company (100%) Illinois
B. REAC, Inc (100%) Wisconsin
C. Wisconsin River Power Company (33-1/3%) Wisconsin
D. Wisconsin Valley Improvement Company (13%) Wisconsin
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports on the consolidated financial statements and the financial
statement schedules of WPL Holdings, Inc. included in this WPL Holdings,
Inc. Form 10-K into WPL Holdings, Inc.'s previously filed Registration
Statements on Form S-8 (Nos. 33-6671, 2-78551 and 33-52215) and Form S-3
(No. 33-21482).
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 17, 1997
<TABLE> <S> <C>
<ARTICLE> UT
<NAME> WPL HOLDINGS, INC.
<CIK> 0000352541
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1240569
<OTHER-PROPERTY-AND-INVEST> 2335342
<TOTAL-CURRENT-ASSETS> 172402
<TOTAL-DEFERRED-CHARGES> 245370
<OTHER-ASSETS> 6848
<TOTAL-ASSETS> 1900531
<COMMON> 308
<CAPITAL-SURPLUS-PAID-IN> 303856
<RETAINED-EARNINGS> 303191
<TOTAL-COMMON-STOCKHOLDERS-EQ> 607355
0
59963
<LONG-TERM-DEBT-NET> 362564
<SHORT-TERM-NOTES> 43279
<LONG-TERM-NOTES-PAYABLE> 56975
<COMMERCIAL-PAPER-OBLIGATIONS> 59500
<LONG-TERM-DEBT-CURRENT-PORT> 67626
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 643269
<TOT-CAPITALIZATION-AND-LIAB> 1900531
<GROSS-OPERATING-REVENUE> 932844
<INCOME-TAX-EXPENSE> 41814
<OTHER-OPERATING-EXPENSES> 319154
<TOTAL-OPERATING-EXPENSES> 791340
<OPERATING-INCOME-LOSS> 141504
<OTHER-INCOME-NET> 15644
<INCOME-BEFORE-INTEREST-EXPEN> 115334
<TOTAL-INTEREST-EXPENSE> 38819
<NET-INCOME> 76515
3310
<EARNINGS-AVAILABLE-FOR-COMM> 73205
<COMMON-STOCK-DIVIDENDS> 60656
<TOTAL-INTEREST-ON-BONDS> 35855
<CASH-FLOW-OPERATIONS> 190719
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 0<F1>
<FN>
<F1>Applicable accounting rules do not require WPL Holdings, Inc. to report
earnings per share on a fully diluted basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<NAME> WISCONSIN POWER AND LIGHT COMPANY
<CIK> 0000107832
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1240569
<OTHER-PROPERTY-AND-INVEST> 107422
<TOTAL-CURRENT-ASSETS> 106188
<TOTAL-DEFERRED-CHARGES> 223635
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1677814
<COMMON> 66183
<CAPITAL-SURPLUS-PAID-IN> 199170
<RETAINED-EARNINGS> 310805
<TOTAL-COMMON-STOCKHOLDERS-EQ> 576158
0
59963
<LONG-TERM-DEBT-NET> 258660
<SHORT-TERM-NOTES> 10000
<LONG-TERM-NOTES-PAYABLE> 56975
<COMMERCIAL-PAPER-OBLIGATIONS> 59500
<LONG-TERM-DEBT-CURRENT-PORT> 55000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 601558
<TOT-CAPITALIZATION-AND-LIAB> 1677814
<GROSS-OPERATING-REVENUE> 759275
<INCOME-TAX-EXPENSE> 53808
<OTHER-OPERATING-EXPENSES> 141885
<TOTAL-OPERATING-EXPENSES> 602933
<OPERATING-INCOME-LOSS> 156342
<OTHER-INCOME-NET> 8215
<INCOME-BEFORE-INTEREST-EXPEN> 110749
<TOTAL-INTEREST-EXPENSE> 28264
<NET-INCOME> 82485
3310
<EARNINGS-AVAILABLE-FOR-COMM> 79175
<COMMON-STOCK-DIVIDENDS> 66088
<TOTAL-INTEREST-ON-BONDS> 28786
<CASH-FLOW-OPERATIONS> 188129
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>Earnings per share of common stock is not reflected because all of such shares
are held by WPL Holdings, Inc.
</FN>
</TABLE>
