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, 1997
or
[ ] 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
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: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
Preferred Stock (Accumulation without Par Value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past (90) days. Yes X
No _____
Indicate 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 the 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]
Aggregate market value of the voting stock held by nonaffiliates as of
January 31, 1998: $52.3 million
Number of shares outstanding of each class of common stock as of January
31, 1998:
Common Stock, $5 par value, 13,236,601 shares outstanding
(all of which are owned beneficially and of record by WPL
Holdings, Inc.)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 1998 Annual Meeting of
Shareowners will, upon filing with the Securities and Exchange Commission,
be incorporated by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
Page
Part I Number
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of 14
Security Holders
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary
Data 30
Item 9. Changes in and Disagreements with
Accountants on Accounting and 49
Financial Disclosures
Part III
Item 10. Directors and Executive Officers of
the Registrant 49
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain
Beneficial Owners and Management 50
Item 13. Certain Relationships and Related
Transactions 50
Part IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 51
Signatures 55
<PAGE>
FORWARD-LOOKING STATEMENTS
Refer to the "Forward-Looking Statements" section in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(MD&A) for information and disclaimers regarding forward-looking
statements contained in this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
PROPOSED MERGER
WPL Holdings, Inc. (WPLH), the parent company of Wisconsin Power and Light
Company (WP&L), IES Industries Inc. (IES) and Interstate Power Company
(IPC) are in the process of completing a three-way merger (Merger) forming
Interstate Energy Corporation (Merged Company). In connection with the
Merger, IES will be merged with and into WPLH forming the Merged Company
and IPC will become a subsidiary of the Merged Company. In addition,
following the Merger, the holding companies for the nonregulated
businesses of the former WPLH and IES (Heartland Development Corporation
(HDC) and IES Diversified Inc. (Diversified), respectively) will be merged
into each other. The resulting company from this merger will be referred
to as New Diversified. As a result of the Merger, the first tier
subsidiaries of the Merged Company will include: WP&L, IES Utilities Inc.
(IESU), IPC, New Diversified and Alliant Services Company (the subsidiary
formed to provide administrative services as required under the Public
Utility Holding Company Act of 1935). Among various other regulatory
constraints, the Merged Company will operate as a registered public
utility holding company subject to the limitations imposed by the Public
Utility Holding Company Act of 1935. For additional information regarding
the terms of the Merger, see Note 2 of the "Notes to Consolidated
Financial Statements."
The merger partners currently anticipate cost savings resulting from the
Merger of approximately $749 million over a ten-year period, net of
transaction costs and costs to achieve the savings of approximately $78
million. Approximately $22 million of these costs had been incurred
through December 31, 1997. Upon consummation of the Merger, the merger
partners estimate the Merged Company will expense approximately $40 million
of additional merger-related costs (e.g., required payments to or for
financial advisors, employee retirements and separations, attorneys,
accountants, etc.). 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 entire amount of
estimated costs savings will actually be realized. In addition, 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 Merger, net of costs incurred to achieve such savings, will be subject
to regulatory review and approval.
As part of the approval process for the Merger, WP&L has agreed to various
rate freezes not to exceed four years commencing on the effective date of
the Merger (see "Liquidity and Capital Resources - Rates and Regulatory
Matters" in Item 7. MD&A for a further discussion).
Assuming capture of the anticipated merger-related synergies and no
significant legislative or regulatory changes affecting WP&L, WP&L does
not expect the merger-related electric and natural gas price freezes to
have a material adverse effect on its financial position or results of
operations.
WP&L
WPLH is the parent company of WP&L and its subsidiaries and of HDC, the
parent corporation for nonregulated businesses. WP&L, incorporated in
Wisconsin in 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 municipal-
ities pursuant to permits of indefinite duration which are regulated by
Wisconsin law. At December 31, 1997, WP&L supplied electric and gas
service to approximately 393,000 and 155,000 customers, respectively.
WP&L also has approximately 32,000 water customers. The water operations
are immaterial to WP&L overall. In 1997, 1996 and 1995 WP&L had no single
customer for which electric and/or gas sales accounted for 10% or more of
WP&L's consolidated revenues.
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 in 1908.
WP&L also owns varying interests in several other subsidiaries and
investments which are not material to WP&L's operations.
EMPLOYEES
At December 31, 1997, WP&L had 2,175 full-time employees of which 1,490
were bargaining unit employees. WP&L has a three-year contract with
members of the International Brotherhood of Electrical Workers, Local 965,
that is in effect until June 1, 1999.
CAPITAL EXPENDITURE AND INVESTMENT AND FINANCING PLANS
Refer to the "Liquidity and Capital Resources" section in Item 7. MD&A for
a discussion of anticipated construction and acquisition expenditures for
1998-2002 and the assumptions in financing future capital requirements.
REGULATION
WP&L is subject to regulation by the Public Service Commission of
Wisconsin (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 of Wisconsin and ratified by
the State Senate. WP&L is generally 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. However, as one of the conditions of the
Merger, the PSCW required WP&L to freeze retail electric, natural gas,
and water rates at current levels for a period of four years. The PSCW
also regulates the type and amount of investments in non-utility
businesses.
South Beloit is subject to regulation by the Illinois Commerce Commission
(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 ICC is comprised of five commissioners appointed
by the Governor of Illinois. Requests for rate relief must be decided
within 11 months.
The Federal Energy Regulatory Commission (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. In addition, certain natural gas facilities and
operations of WP&L are subject to the jurisdiction of the FERC under the
Natural Gas Act.
With respect to environmental matters impacting WP&L, the United States
Environmental Protection Agency administers certain federal statutes and
has delegated the administration of other environmental initiatives to the
applicable state environmental agencies. In addition, the state agencies
have 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 Nuclear Regulatory Commission
(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.
Refer to the "Utility Industry Outlook" and "Liquidity and Capital
Resources - Rates and Regulatory Matters" sections in Item 7. MD&A for
additional information regarding regulation.
YEAR 2000
Refer to the "Other Matters - Year 2000" section in Item 7. MD&A for a
discussion of WP&L's Year 2000 system conversion initiatives.
UTILITY INDUSTRY OUTLOOK
Refer to the "Utility Industry Outlook" section in Item 7. MD&A for a
discussion of various competitive issues impacting WP&L's operations.
ELECTRIC OPERATIONS
WP&L provides electricity in a service territory of approximately 16,000
square miles in 35 counties in southern and central Wisconsin and four
counties in northern Illinois. As of December 31, 1997, WP&L provided
retail electric service to approximately 393,000 customers in 615 cities,
villages and towns, and wholesale service to 25 municipal utilities, one
privately owned utility, three rural electric cooperatives, one Native
American nation and to the Wisconsin Public Power, Inc. system for the
provision of retail service to 14 communities.
Electric operations represented 79.8% of WP&L's total operating revenues
and 90.5% of WP&L's total operating income for the year ended December 31,
1997.
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 2,253 megawatts and occurred on July 16, 1997.
Refer to Item 2. "Properties" for additional information regarding
electric facilities.
Fuel
In 1997, approximately 86% of WP&L's net kilowatthour generation of
electricity by company-owned and jointly-owned facilities was fueled by
coal and 10% by nuclear fuel (provided by WP&L's 41% ownership interest in
Kewaunee). The remaining electricity generated was produced by hydro-
electric, oil-fired and natural gas generation. The 1997 WP&L coal
percentage was higher than anticipated due to the outage at the Kewaunee
plant as discussed in Item 7. MD&A. As a result, the coal portion of
generation is expected to be slightly lower in future years.
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.
Present coal supply contracts and transportation contracts (excluding
extension options) cover approximately 34% and 42%, respectively, of
WP&L's estimated coal requirements for the years 1998 through 2002. 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, 1997, about 36.7% 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.
General
Subsequent to the consummation of the Merger, WP&L, IESU and IPC expect to
realize reduced electric production costs through the joint dispatch of
systems and increased marketing opportunities in the wholesale and
interchange markets through electric interconnections with other
utilities.
WP&L's facilities are interconnected with certain neighboring utilities
and WP&L participates as a member of the Mid-Continent Area Power Pool
(MAPP). This pool is comprised of 20 utilities which are Transmission
Owning Members (TOMs) and 51 energy-related companies providing services
in the upper midwest region of the United States, and operates pursuant
to an agreement which provides for the interchange of electric energy, the
sharing of responsibilities for production capacity and reserve and the
supply of electric energy.
Nuclear
Kewaunee, a 535-megawatt (nameplate capacity) pressurized water reactor
plant, is operated by Wisconsin Public Service Corporation (WPSC) and is
jointly owned by WPSC (41.2%), WP&L (41.0%), and Madison Gas & Electric
Company (MG&E) (17.8%). The Kewaunee operating license expires in 2013.
As a co-owner of a nuclear generating unit, WP&L is subject to the
jurisdiction of the NRC. The NRC has broad supervisory and regulatory
jurisdiction over the construction and operation of nuclear reactors,
particularly with regard to public health, safety and environmental
considerations.
The operation and design of nuclear power plants is under constant review
by the NRC. WP&L has complied with and is currently complying with all
NRC requests for data relating to these reviews. As a result of such
reviews, further changes in operations or modifications of equipment may
be required, the cost of which cannot currently be estimated. WP&L's
anticipated nuclear-related construction expenditures for 1998-2002 are
approximately $43 million. Refer to the "Liquidity and Capital Resources
- Capital Requirements" section in Item 7. MD&A for a further discussion.
Kewaunee received the highest score possible (1) in the area of
maintenance and a "good" rating (2) in the areas of plant operations,
engineering and plant support during the NRC's last Systematic Assessment
of Licensee Performance (SALP) report which was received in 1997.
Under the Price-Anderson Amendments Act of 1988 (1988 Act), WP&L currently
has the benefit of public liability coverage which would compensate the
public in the event of an accident at a commercial nuclear power plant.
The 1988 Act permits such coverage to rise with increased availability of
nuclear insurance and the changing number of operating nuclear plants
subject to retroactive premium assessments. The 1988 Act provides for
inflation indexing (Consumer Price Index every fifth year) of the
retroactive premium assessments.
As an outgrowth of the Three Mile Island Nuclear Power Plant (TMI)
experience, nuclear plant owners have initiated a cooperative insurance
program designed to help cover business interruption expenses for
participating utilities arising from a possible nuclear plant event. WP&L
is a participant in this program. This type of insurance is an industry
response intended to lessen the cost burden on customers in the event of a
lengthy plant shutdown.
In the unlikely event of a catastrophic loss at Kewaunee, the amount of
insurance available may not be adequate to cover property damage,
decontamination and premature decommissioning. Uninsured losses, to the
extent not recovered through rates, would be borne by WP&L and could have
a material adverse effect on its financial position and results of
operations. Refer to Note 11f of the "Notes to Consolidated Financial
Statements" for a further discussion of insurance matters relating to
Kewaunee.
WPSC purchases uranium concentrates, conversion services, enrichment
services, and fabrication services for nuclear fuel assemblies at
Kewaunee. New fuel assemblies replace used assemblies that are removed
from the reactor every 18 months and placed in storage at the plant site
pending removal by the DOE. Uranium concentrates, conversion services,
and enrichment services are purchased at spot market prices, through a bid
process, or using existing contracts.
A uranium inventory policy requires that sufficient inventory exist for up
to two reactor reloads of fuel. As of December 31, 1997, 960,000 pounds
of yellowcake or its equivalent were held in inventory for Kewaunee.
Two contracts are in place to provide conversion services for Kewaunee
nuclear fuel for reloads in 1998 and 2000. A contract with Cogema, Inc.
provides a fixed quantity of enrichment services through the year 2001.
Additional enrichment services will be acquired under a contract with the
United States Enrichment Corporation which is in effect for the life of
Kewaunee or by purchases on the spot market. A contract with Siemens
Power Corporation provides fuel fabrication services through March 15,
2001, for Kewaunee. This contract contains force majeure and termination
provisions.
If, for any reason, Kewaunee was forced to suspend operations permanently,
fuel-related obligations are as follows: (1) there are no financial
penalties associated with the present uranium supply, conversion service,
and enrichment agreements, and (2) the fuel fabrication contract contains
force majeure and termination provisions. As of the end of 1997, the
maximum exposure would not be expected to exceed $550,000. Uranium
inventories could be sold on the spot market.
Power Supply
Refer to "Other Matters - Power Supply" in Item 7. MD&A for a discussion
of power supply concerns in the State of Wisconsin.
Electric Environmental Matters
WP&L is regulated in environmental protection matters by a number of
federal, state and local agencies. Such regulations are the result of a
number of environmental protection laws passed by the U.S. Congress, state
legislatures and local governments and enforced by federal, state and
county agencies. The laws impacting WP&L's operations include the Clean
Water Act; Clean Air Act, as amended by the Clean Air Act Amendments of
1990; National Environmental Policy Act; Resource Conservation and
Recovery Act; Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and
Reauthorization Act of 1986; Occupational Safety and Health Act; National
Energy Policy Act of 1992 and a number of others. WP&L regularly secures
and renews federal, state and local permits to comply with the
environmental protection laws and regulations. Costs associated with such
compliance have increased in recent years and are expected to increase
moderately in the future.
Refer to "Other Matters - Environmental" in Item 7. MD&A for a further
discussion of WP&L's electric environmental matters.
<TABLE>
<CAPTION>
WISCONSIN POWER AND LIGHT COMPANY
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C>
Electric Operating Information
Operating Revenues ('000s):
Residential $199,633 $201,690 $199,850 $194,242 $184,176
Commercial 107,132 105,319 102,129 101,382 95,977
Industrial 152,073 143,734 140,562 140,487 132,903
-------- -------- -------- -------- --------
Total from ultimate customers 458,838 450,743 442,541 436,111 413,056
Sales for resale 160,917 131,836 97,350 86,400 78,955
Other 14,388 6,903 6,433 9,236 11,176
-------- -------- ------- -------- --------
Total $634,143 $589,482 $546,324 $531,747 $503,187
======== ======== ======= ======== ========
Electric Sales ('000s MWH):
Residential 2,974 2,980 2,938 2,777 2,751
Commercial 1,878 1,814 1,773 1,688 1,630
Industrial 4,256 3,986 3,873 3,765 3,540
------- ------- -------- -------- --------
Total from ultimate customers 9,108 8,780 8,584 8,230 7,921
Sales for resale 5,824 5,246 3,109 2,574 2,388
Other 60 57 54 55 52
-------- ------- --------- -------- --------
Total 14,992 14,083 11,747 10,859 10,361
======== ======== ======= ======== ========
Customers (End of Period):
Residential 343,637 336,933 329,643 322,924 316,870
Commercial 46,823 45,669 44,730 43,793 42,884
Industrial 855 815 795 776 714
Other 1,875 1,820 1,342 1,298 1,275
-------- ------- -------- ------- -------
Total 393,190 385,237 376,510 368,791 361,743
======== ======== ======= ======== ========
Other Selected Electric Data:
System capacity at time of peak
demand (MW):
Company-owned 2,337 2,300 2,176 2,193 2,019
Firm purchases and sales
(net) 145 68 57 40 83
-------- -------- -------- -------- --------
Total 2,482 2,368 2,233 2,233 2,102
======== ======== ======== ======== ========
Maximum peak hour demand (MW) 2,253 2,124 2,197 2,002 1,971
Sources of electric energy ('000s MWH):
Steam 8,587 8,687 8,323 7,821 7,616
Nuclear 970 1,301 1,555 1,625 1,565
Hydroelectric 234 244 222 228 276
Purchases 5,744 4,494 2,227 1,786 1,488
Other 121 59 86 24 6
-------- -------- ------- ------- --------
Total 15,656 14,785 12,413 11,484 10,951
======== ========= ======== ======== =========
Cooling degree days 369 408 982 637 630
Revenue per KWH from ultimate
customers (in cents) 5.04 5.13 5.16 5.30 5.21
</TABLE>
GAS OPERATIONS
As of December 31, 1997, WP&L provided retail natural gas service to
approximately 155,000 customers in 243 cities, villages and towns in 22
counties in southern and central Wisconsin and one county in northern
Illinois. Gas operations represented 19.6% of WP&L's total operating
revenues and 9.8% of WP&L's total operating income for the year ended
December 31, 1997.
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.
Gas Supplies
Prior to 1995, WP&L passed on its costs 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. Effective with the UR-110 rate order on April 29, 1997, to
the extent WP&L purchases its gas supply below the index price, WP&L will
retain 40% of the savings. The balance of the savings is returned to
customers. The same sharing mechanism exists for gas that is purchased at
a cost above the index price.
With the advent of FERC Order 636 (Order 636), issued in 1992, the nature
of WP&L's gas supply portfolio has changed. Order 636, among other
things, eliminated the interstate pipelines' obligation to serve and now
requires WP&L to purchase virtually 100% of its gas supply requirements
from non-pipeline suppliers. WP&L has enhanced access to competitively-
priced gas supply and more flexible transportation services as a result of
Order 636.
In providing gas commodity service to retail gas customers, WP&L
administers a diversified portfolio of transportation contracts with ANR
Pipeline (ANR) and Northern Natural Gas Company (NNG) 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 242,580 dekatherms (Dth) per day of
natural gas as follows:
ANR NNG Non-Traditional
122,124 Dth 75,056 Dth 45,400 Dth
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 approximately 24% of
WP&L's annual gas requirements.
WP&L maintains purchase agreements with over 50 suppliers of natural gas
from all gas producing regions of the U.S. and Canada. These include six
contracts providing for long-term gas deliveries (i.e., with terms ranging
from six months to ten years). These contracts provided 54% of WP&L's
annual gas purchases in 1997. In addition to its direct purchase and
sales of natural gas, WP&L provided transportation service to 178
customers who purchased their own gas, pursuant to WP&L's transportation
tariffs. These customers represent approximately 40% of total gas moved
through WP&L's natural gas distribution pipe.
Refer to Note 11b of the "Notes to Consolidated Financial Statements" for
a discussion of WP&L's long-term purchase gas commitments.
Gas Environmental Matters
Refer to "Other Matters - Environmental" in Item 7. MD&A for a discussion
of WP&L's gas environmental matters as well as Item 3. "Legal Proceedings"
for additional information related to manufactured gas plant (MGP) sites.
<TABLE>
<CAPTION>
WISCONSIN POWER AND LIGHT COMPANY
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Gas Operating Information
Operating Revenues ('000s):
Residential $84,513 $90,382 $70,382 $71,555 $71,632
Commercial 45,456 46,703 35,411 38,516 37,993
Industrial 8,378 11,410 17,984 22,629 23,196
Transportation and other 17,536 17,132 15,388 6,946 4,449
------- ------- ------- ------- -------
Total $155,883 $165,627 $139,165 $139,646 $137,270
======== ======== ======== ======== ========
Gas Sales ('000s Dekatherms):
Residential 12,770 14,297 12,690 11,956 12,001
Commercial 8,592 9,167 8,245 8,128 7,994
Industrial 1,714 1,997 2,144 3,113 3,497
Transportation and other 17,595 18,567 16,870 9,279 8,487
-------- -------- -------- -------- ---------
Total 40,671 44,028 39,949 32,476 31,979
======== ======== ========= ========= =========
Customers at End of Period (Excluding
Transportation and Other):
Residential 137,827 133,580 129,576 124,938 120,829
Commercial 16,653 16,083 15,724 15,270 14,826
Industrial 488 529 566 561 549
-------- -------- -------- -------- --------
Total 154,968 150,192 145,866 140,769 136,204
======== ======== ======== ======== =========
Other Selected Gas Data:
Heating degree days 7,350 8,124 7,431 7,170 7,351
Revenue per dekatherm sold
(excluding transportation and
other) $6.00 $5.83 $5.36 $5.72 $5.65
Purchased gas costs per dekatherm
sold (excluding transportation
and other) $4.30 $4.12 $3.64 $3.82 $3.85
</TABLE>
ITEM 2. PROPERTIES
WP&L's principal electric generating stations at December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
Name and Location Major Fuel 1997 Summer Capability
of Station Type in Kilowatts
<S> <C> <C>
Kewaunee Nuclear Power Plant, Kewaunee, WI Nuclear 211,200 (1)
Rock River Generating Station, Janesville, WI Coal 161,000
Nelson Dewey Generating Station, Cassville, WI Coal 226,000
Edgewater Generating Station #3, Sheboygan, WI Coal 74,000
Edgewater Generating Station #4, Sheboygan, WI Coal 233,200 (2)
Edgewater Generating Station #5, Sheboygan, WI Coal 301,500 (3)
Columbia Energy Center, Portage, WI Coal 485,100 (4)
--------
Total Coal 1,480,800
Blackhawk Generating Station, Beloit, WI Gas 60,000
Rock River Combustion Turbine, Janesville, WI Gas and Oil 151,400
South Fond du Lac Combustion Turbine
Units 2 and 3, Fond du Lac, WI Gas and Oil 169,700
Sheepskin Combustion Turbine, Edgerton, WI Gas and Oil 36,700
---------
Total Gas and Oil 417,800
Kilbourn Hydro Plant, Wisconsin Dells, WI Hydro 9,500
Prairie du Sac Hydro Plant, Prairie du Sac, WI Hydro 30,000
Petenwell/Castle Rock Hydro Plants,
Wisconsin Rapids, WI Hydro 13,300 (5)
4 small units at various locations Hydro 2,070
Total Hydro -------- 54,870
---------
Total generating capability 2,164,670
=========
(1) Represents WP&L's 41% ownership interest in this 515,000 Kw
generating station. The plant is operated by WPSC.
(2) Represents WP&L's 68.2% ownership interest in this 342,000 Kw
generating station. The plant is operated by WP&L.
(3) Represents WP&L's 75% ownership interest in this 402,000 Kw
generating station. The plant is operated by WP&L.
(4) Represents WP&L's 46.2% ownership interest in this 1,050,000 Kw
generating station. The plant is operated by WP&L.
(5) Represents WP&L's 33.3% ownership interest in this 40,000 Kw
hydro plant. The plant is operated by Wisconsin River Power
Company.
</TABLE>
WP&L owns 2,701 miles of electric transmission lines and 362 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.
<PAGE>
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 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 settlement agreement whereby WP&L will pay
$3.3 million of the expected $3.8 million cost of remediating the
property. Costs in excess of $3.8 million will be split between WP&L and
Beloit on a 90%/10% basis with WP&L paying the 90%. WP&L currently
believes that these costs will be recoverable in rates. In addition, WP&L
intends to seek to recover the payment from insurers.
In management's judgment, the probability is remote that this action will
have a material adverse impact on WP&L's financial condition.
Environmental Matters
The information required by Item 3 is included in this Form 10-K under
Item 8 - "Notes to Consolidated Financial Statements," Note 11c and
"Other Matters - Environmental" in Item 7. MD&A.
Rate Matters
The information required by Item 3 is included in "Liquidity and Capital
Resources - Rates and Regulatory Matters" in Item 7. MD&A.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
WPLH is the sole common shareowner of all 13,236,601 shares of WP&L Common
Stock currently outstanding. Cash dividends paid per share of WP&L's
Common Stock during 1997 and 1996 to WPLH were $4.41 and $4.99,
respectively.
In the retail rate order effective April 29, 1997, the PSCW ordered that
it must approve the payment of dividends by WP&L to its parent company
that are in excess of the level forecasted in the rate order ($58.3
million), if such dividends would reduce WP&L's average common equity
ratio below 52.00% of total capitalization. Based on a 13-month average
for 1997, WP&L's common equity ratio was 52.56%.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(In Millions)
<S> <C> <C> <C> <C> <C>
Operating revenues $795 $759 $690 $688 $644
Net income available for
common stock $68 $79 $75 $68 $60
Cash dividends declared on
common stock $58 $66 $57 $56 $54
Total assets (at December 31) $1,665 $1,678 $1,641 $1,585 $1,551
Long-term obligations, net (at
December 31) $420 $371 $376 $394 $393
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MD&A)
PROPOSED MERGER
WPL Holdings, Inc. (WPLH), the parent company of Wisconsin Power and Light
Company (WP&L), IES Industries Inc. (IES) and Interstate Power Company
(IPC) are in the process of completing a three-way merger (Merger) forming
Interstate Energy Corporation (Merged Company). In connection with the
Merger, IES will be merged with and into WPLH forming the Merged Company
and IPC will become a subsidiary of the Merged Company. In addition,
following the Merger, the holding companies for the nonregulated
businesses of the former WPLH and IES (Heartland Development Corporation
(HDC) and IES Diversified Inc. (Diversified), respectively) will be merged
into each other. The resulting company from this merger will be referred
to as New Diversified. As a result of the Merger, the first tier
subsidiaries of the Merged Company will include: WP&L, IES Utilities Inc.
(IESU), IPC, New Diversified and Alliant Services Company (the subsidiary
formed to provide administrative services as required under the Public
Utility Holding Company Act of 1935). Among various other regulatory
constraints, the Merged Company will operate as a registered public
utility holding company subject to the limitations imposed by the Public
Utility Holding Company Act of 1935. For additional information regarding
the terms of the Merger, see Note 2 of the "Notes to Consolidated
Financial Statements" of WP&L included elsewhere in this Form 10-K to the
Securities and Exchange Commission (SEC).
The merger partners currently anticipate cost savings resulting from the
Merger of approximately $749 million over a ten-year period, net of
transaction costs and costs to achieve the savings of approximately $78
million. Approximately $22 million of these costs had been incurred through
December 31, 1997. Upon consummation of the Merger, the merger partners
estimate the Merged Company will expense approximately $40 million of
additional merger-related costs (e.g., required payments to or for
financial advisors, employee retirements and separations, attorneys,
accountants, etc.). 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 entire amount of
estimated cost savings will actually be realized. In addition, 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 Merger, net of costs incurred to achieve such savings, will be subject
to regulatory review and approval.
As part of the approval process for the Merger, WP&L has agreed to various
rate freezes not to exceed four years commencing on the effective date of
the Merger (see "Liquidity and Capital Resources - Rates and Regulatory
Matters" for a further discussion).
Assuming capture of the anticipated merger-related synergies and no
significant legislative or regulatory changes affecting WP&L, WP&L does
not expect the merger-related electric and natural gas price freezes to
have a material adverse effect on its financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K (including MD&A)
that are not of historical fact are forward-looking statements intended to
qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. From time to time, WP&L
(including its consolidated subsidiaries) may make other forward-looking
statements within the meaning of the federal securities laws that involve
judgments, assumptions and other uncertainties beyond the control of WP&L.
These forward-looking statements may include, among others, statements
concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes
in the utility industry, planned capital expenditures, financing needs and
availability, statements of WP&L's expectations, beliefs, future plans and
strategies, anticipated events or trends and similar comments concerning
matters that are not historical facts. Investors and other users of the
forward-looking statements are cautioned that such statements are not a
guarantee of future performance of WP&L and that such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in, or implied by, such
statements. Some, but not all, of the risks and uncertainties include
weather effects on sales and revenues, competitive factors, general
economic conditions in WP&L's service territory, federal and state
regulatory or government actions, the operations of the Kewaunee Nuclear
Power Plant (Kewaunee), the ability of the Merged Company to successfully
integrate the operations of WPLH, IES and IPC and changes in the rate of
inflation.
UTILITY INDUSTRY OUTLOOK
WP&L competes in an ever-changing utility industry. Set forth below is an
overview of this evolving marketplace.
Electric energy generation, transmission, and distribution are in a period
of fundamental change in the manner in which customers obtain, and energy
suppliers provide, energy services. As legislative, regulatory, economic
and technological changes occur, electric utilities are faced with
increasing pressure to become more competitive. Such competitive pressures
could result in loss of customers and an incurrence of stranded costs
(i.e., assets and other costs rendered unrecoverable as the result of
competitive pricing). To the extent stranded costs cannot be recovered
from customers, they would be borne by security holders.
WP&L realized 98% of its electric utility revenues in 1997 in Wisconsin
and 2% in Illinois. Approximately 75% of the electric revenues in 1997
were regulated by the Public Service Commission of Wisconsin (PSCW) while
the other 25% were regulated by the Federal Energy Regulatory Commission
(FERC ). WP&L realized 96% of its gas utility revenues in 1997 in
Wisconsin and 4% in Illinois.
Federal Regulation
WP&L is subject to regulation by the FERC. The National Energy Policy Act
of 1992 addresses several matters designed to promote competition in the
electric wholesale power generation market. In 1996, FERC issued final
rules (FERC Orders 888 and 889) requiring electric utilities to open their
transmission lines to other wholesale buyers and sellers of electricity.
In March 1997, FERC issued orders on rehearing for Orders 888 and 889
(Orders 888-A and 889-A). In response to FERC Orders 888 and 888-A, WP&L
has on file with the FERC pro forma open access transmission tariffs. In
response to FERC Orders 889 and 889-A, WP&L is participating in a regional
Open Access Same-Time Information System. WP&L cannot predict the long-
term consequences of these rules on its results of operations or financial
condition.
FERC Order 888 permits utilities to seek recovery of legitimate, prudent
and verifiable stranded costs associated with providing open access and
transmission services. FERC does not have jurisdiction over retail
distribution and, consequently, the final FERC rules do not provide for
the recovery of stranded costs resulting from retail competition. The
various states retain jurisdiction over the question of whether to permit
retail competition, the terms of such retail competition, and the recovery
of any portion of stranded costs that are ultimately determined to have
resulted from retail competition.
Wisconsin Regulation
WP&L is subject to regulation by the PSCW. 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
accommodate competition but not create it." The PSCW has followed a
measured approach to restructuring the natural gas industry in Wisconsin.
The PSCW has determined that customer classes will be deregulated (i.e.,
the gas utility would no longer have an obligation to procure gas
commodity for customers, but would still have a delivery obligation) in a
step-wise manner, after each class has been demonstrated to have a
sufficient number of gas suppliers available. In 1997, a number of
working groups were established by the PSCW and these working groups are
addressing numerous subjects which need to be resolved before deregulation
may proceed.
The short-term goals of the electric restructuring process are to ensure
reliability of the state's electric system and development of a robust
wholesale electric market. The longer-term goal is to establish
prerequisite safeguards to protect customers prior to allowing retail
customer choice. The PSCW is following a timetable to make this latter
determination on allowing customer choice in 1999-2000.
On September 26, 1996, the PSCW issued an order which establishes the
minimum standards for a Wisconsin Independent System Operator (ISO). 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. In approving the Merger, the PSCW gave the
merger partners a choice of either filing their own ISO proposal, giving
notice of their intent to join a regional ISO or spinning off existing
transmission assets and operations into a separate independent
transmission company. IESU, IPC and WP&L developed an ISO proposal of
their own. However, the PSCW did not believe it met the PSCW's ISO
guidelines. IESU, IPC and WP&L subsequently asked the PSCW to permit them
to join the Midwest ISO, a regional ISO that has been filed with FERC.
The member companies of the ISO would retain ownership of the facilities,
but the ISO would assume control of the facilities, set rates for access
and assure fair treatment for all companies seeking access. Various other
proposals for ISOs, which are being monitored by the merger partners, have
been proposed by other entities.
In addition to the ISO proceedings, the PSCW has issued an order outlining
its policies and principles for Public Benefits (low-income assistance,
energy efficiency, renewable generation and environmental research and
development) including funding levels, administration of the funds and how
funds should be collected from customers. The PSCW has proposed
increasing funding levels through utility rates by $50 to $75 million
statewide. Legislation to implement this proposal is being developed and
likely will be introduced in 1998.
The PSCW has also initiated a Service Quality administrative rulemaking
process to establish measurement and reporting requirements for
reliability of service, call center answering times, safety, tree
trimming, generation, transmission and distribution inspection and
maintenance plans, etc. A hearing was held on these issues in March 1998.
Illinois Regulation
South Beloit is subject to regulation by the Illinois Commerce Commission.
The State of Illinois has passed electric deregulation legislation
requiring customer choice of electric supplier for all customers by May 1,
2002.
Summary
WP&L complies with the provisions of Statement of Financial Accounting
Standards No. 71 (SFAS 71) "Accounting for the Effects of Certain Types of
Regulation." SFAS 71 provides that rate-regulated public utilities record
certain costs and credits allowed in the ratemaking process in different
periods than for nonregulated 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 becomes no longer subject to the provisions
of SFAS 71 as a result of competitive restructurings or otherwise, a
write-down of related regulatory assets and possibly other charges would
be required, unless some form of transition cost recovery is established
by the appropriate regulatory body that would meet the requirements under
generally accepted accounting principles for continued accounting as
regulatory assets during such recovery period. In addition, WP&L would be
required to determine any impairment of other assets and write-down any
impaired assets to their fair value. Management believes WP&L meets the
requirements of SFAS 71.
WP&L cannot currently predict the long-term consequences of the
competitive and restructuring issues described above on its results of
operations or financial condition. The major objective is to allow WP&L
to better prepare for a competitive, deregulated utility industry. The
strategy for dealing with these emerging issues includes seeking growth
opportunities, continuing to offer quality customer service, ongoing cost
reductions and productivity enhancements.
RESULTS OF OPERATIONS - 1997 COMPARED WITH 1996
Overview
WP&L reported consolidated net income available for common stock of $67.9
million for 1997, as compared to $79.2 million for 1996. The decrease in
earnings in 1997 was primarily due to lower gas and electric margins,
higher depreciation expense and the recognition of a gain on the sale of a
combustion turbine in 1996.
Gas and electric margins were down $4.2 and $2.0 million, respectively, in
1997 as compared to 1996. The decrease in gas margin was primarily due to
lower weather-driven sales to residential customers as well as a 2.2%
average retail gas rate decrease which went into effect on April 29, 1997.
The lower electric margin was the result of a 2.4% average retail electric
rate decrease effective April 29, 1997, as well as higher purchased power
expense due to an extended outage at Kewaunee. Sales to other utilities
and continued economic strength in WP&L's service territory partially
offset the impact of the decline in margin. In addition, income in 1997
was lower than 1996 due to increased expenses for plant maintenance,
depreciation and interest.
<TABLE>
Electric Operations
<CAPTION>
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $199,633 $201,690 (1%) 2,973,932 2,979,826 - 343,637 336,933 2%
Commercial 107,132 105,319 2% 1,877,640 1,814,324 3% 46,823 45,669 3%
Industrial 152,073 143,734 6% 4,255,637 3,985,672 7% 855 815 5%
Sales for resale 160,917 131,836 22% 5,823,521 5,245,812 11% 122 90 36%
Other 14,388 6,903 108% 61,330 57,757 6% 1,753 1,730 1%
-------- -------- ---------- ---------- -------- --------
Total 634,143 589,482 8% 14,992,060 14,083,391 6% 393,190 385,237 2%
=========== ========== ==== ======== ======== ===
Electric
Production Fuels 116,812 114,470 2%
Purchased Power 125,438 81,108 55%
-------- --------
Margin $391,893 $393,904 (1%)
======== ======== =====
</TABLE>
Electric revenues increased $44.7 million, or 8%, in 1997 as compared with
1996. Continued customer growth, economic strength in the service area
and increased sales to other utilities offset the impact of cooler summer
weather and warmer weather during the winter months of 1997. Revenues
were also affected by an average retail rate decrease of 2.4% effective
April 29, 1997. Other revenues increased in 1997 compared with 1996 due
to increases in conservation services. Refer to the "Liquidity and Capital
Resources - Rates and Regulatory Matters" section below for further
discussion of these rate modifications.
Despite higher electric revenues, electric margin decreased $2.0 million,
or 1%, as compared with 1996. The decline in margin reflects the impact
of the shutdown at Kewaunee throughout most of the first half of 1997 for
steam generator tube repairs as well as several temporary, routine outages
at WP&L's coal-fired plants through the first five months of 1997. These
outages caused a greater reliance on more costly purchased power to meet
customer requirements. The PSCW ordered a temporary customer surcharge
effective April 29, 1997 through July 1, 1997, to allow WP&L to recover a
portion of the higher purchased power costs associated with the Kewaunee
outage. Refer to the "Liquidity and Capital Resources - Capital
Requirements" section below for further discussion of the Kewaunee plant
outage. The Kewaunee outage and increased sales to other utilities
resulted in a 55% increase in the cost of purchased power.
For a discussion of electric capacity and reliability refer to "Other
Matters - Power Supply" section below.
<TABLE>
Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $ 84,513 $ 90,382 (6%) 127,704 142,974 (11%) 137,827 133,580 3%
Commercial 45,456 46,703 (3%) 85,917 91,665 (6%) 16,653 16,083 4%
Industrial 8,378 11,410 (27%) 17,144 19,974 (14%) 488 529 (8%)
Transportation
and other 17,536 17,132 2% 175,943 185,671 (5%) 358 252 42%
------- ------- ------- ------- ------- -------
Total 155,883 165,627 (6%) 406,708 440,284 (8%) 155,326 150,444 3%
======= ======= ===== ======= ======= =====
Purchased Gas 99,267 104,830 (5%)
------- -------
Margin $ 56,616 $ 60,797 (7%)
======= ======= =====
</TABLE>
Gas revenues decreased $9.7 million, or 6%, in 1997 as compared with 1996.
The decline in revenues and margin reflected an average retail rate
decrease of 2.2%, effective April 29, 1997, and lower sales. Therm sales
declined by 8% due to warmer weather in the winter months of 1997. This
decrease was directly reflected in the decline in revenues and
corresponding $4.2 million, or 7%, decrease in margin. WP&L realized
favorable contributions to gas margin of $0.6 million and $1.1 million for
1997 and 1996, respectively, through its gas incentive program. Refer to
the "Liquidity and Capital Resources - Rates and Regulatory Matters"
section below for further discussion of this adjustment mechanism.
Other Operation Expense
Other operation expense decreased $8.9 million due to a reduction in
conservation expense of $8.8 million resulting from the retail rate order,
effective April 29, 1997. Partially offsetting this decrease was an
additional $3.0 million of operating expense in the fourth quarter of
1997, associated with an early retirement program for eligible bargaining
unit employees.
Maintenance Expense
Maintenance expense increased $1.6 million as a result of higher plant
maintenance expenses at Kewaunee and several of WP&L's coal-fired plants,
as discussed above under "Electric Operations."
Depreciation and Amortization Expense
Depreciation and amortization expense increased $19.4 million due to
higher depreciation rates approved by the PSCW, effective January 1, 1997,
and property additions. The increases approved by the PSCW included
higher depreciation expense for Kewaunee, based on the use of an
accelerated plant end-of-life, increased contributions to the nuclear
decommissioning trust fund and other items. (See "Liquidity and Capital
Resources - Capital Requirements" for additional information).
Interest Expense and Other
Interest expense and other increased $4.4 million primarily due to the
recognition in 1996 of a gain on the sale of a combustion turbine.
Income Taxes
The decrease in income taxes between periods reflects lower taxable income
and an adjustment of prior period taxes.
RESULTS OF OPERATION - 1996 COMPARED WITH 1995
Overview
WP&L reported consolidated net income available for common stock of $79.2
million in 1996 as compared to $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.
<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 $201,690 $199,850 1% 2,979,826 2,937,825 1% 336,933 329,643 2%
Commercial 105,319 102,129 3% 1,814,324 1,773,406 2% 45,669 44,730 2%
Industrial 143,734 140,562 2% 3,985,672 3,872,520 3% 815 795 3%
Sales for resale 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%, 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%. 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 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 46,703 35,411 32% 91,665 82,448 11% 16,083 15,724 2%
Industrial 11,410 17,984 (37%) 19,974 21,435 (7%) 529 566 (7%)
Transportation 17,132 15,388 11% 185,671 168,702 10% 252 227 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 margins increased $5.6 million, or 10%, during 1996 compared with 1995
primarily as a result of higher sales. Therm sales increased 10% due to a
combination of colder weather during the first five months of 1996 as
compared to 1995, and customer growth of 3%. The 19% 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. WP&L realized
favorable contributions to gas margins of $1.1 million and $0.8 million
for 1996 and 1995, respectively, due to favorable gas procurement
activities. Refer to the "Liquidity and Capital Resources - Rates and
Regulatory Matters" section below for further discussion of this
adjustment mechanism.
Maintenance Expense
Maintenance expense increased $4.4 million due to higher plant maintenance
and the extended 1996 refueling outage at Kewaunee (See "Liquidity and
Capital Resources - 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 $4.1 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% and 36.7% 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities at WP&L decreased to $149 million in
1997 compared with $188 million in 1996 primarily due to a reduction in
net income and the change in working capital. Cash flows used for
financing decreased to $0.4 million in 1997 as compared to $77.4 million
in 1996 resulting from a net increase in the amount of long-term debt
outstanding during 1997. Cash flows used for investing activities were
significantly lower in 1996 as compared with 1997 and 1995 due to the
proceeds received in 1996 from the sale of other property and equipment.
Times interest earned before income taxes for WP&L for 1997, 1996 and 1995
was 4.47, 5.33 and 4.67, respectively.
The capital requirements of WP&L will be primarily attributable to its
construction program and its debt maturities. WP&L anticipates that
future capital requirements will be met by cash generated from operations
and external financing. The level of cash generated from operations is
partially dependent upon economic conditions, legislative activities,
environmental matters and timely regulatory recovery of utility costs.
WP&L's liquidity and capital resources will be affected by costs
associated with environmental and regulatory issues. Emerging competition
in the utility industry could also impact WP&L's liquidity and capital
resources, as discussed previously in the "Utility Industry Outlook"
section.
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets, and
costs of external financing, are dependent on creditworthiness.
The debt ratings of WP&L are as follows:
Standard &
Moody's Poor's
(As of (As of
3/26/98) 3/2/98)
Secured long-term debt Aa2 AA
Corporate credit rating (a) N/A AA-
Unsecured long-term debt Aa3 A+
(a) The "Corporate credit rating" is the overall rating of the parent
company and is used by Standard & Poor's but not by Moody's.
Effective with the Merger, WP&L expects to participate in a
utility money pool which will be funded, as needed, by the Merged
Company through the issuance of commercial paper. This utility money
pool will replace the commercial paper program previously in effect
at WP&L.
The following material long-term debt financing activities took place
at WP&L in 1997 -
- On April 28, 1997, WP&L entered into an interest rate forward contract
to hedge interest rate risk related to the anticipated issuance of $105
million of long-term debt securities. The securities were issued on
June 30, 1997 (7.00% interest rate, maturing in 2007) and the forward
contract was settled which resulted in a cash payment of $3.8 million
by WP&L. This payment is being recognized as an adjustment to interest
expense over the life of the new debt securities to approximate the
interest rate implicit in the forward contract.
- WP&L utilized the net proceeds from the issuance of the $105 million of
debt securities described above to repay maturing short-term debt,
finance utility construction expenditures and to repay at maturity $55
million of WP&L's First Mortgage Bonds, Series Z, 6.125%.
Other than periodic sinking fund requirements which will not require
additional cash expenditures, WP&L has $10.8 million of long-term debt
that will mature prior to December 31, 2002. Depending upon market
conditions, it is currently anticipated that a majority of the maturing
debt will be refinanced with the issuance of long-term securities. WP&L
currently has no authority from the PSCW or the SEC to issue additional
long-term debt but is evaluating its future financing needs and will make
the necessary regulatory filings as needed.
Under the most restrictive terms of its indentures, WP&L could have issued
at least $276 million of long-term debt at December 31, 1997. In
addition, at December 31, 1997, WP&L could have issued 2,700,775
additional shares of Cumulative Preferred Stock.
For interim financing, WP&L is authorized by the PSCW to issue $138
million of short-term debt and at December 31, 1997 had $81 million
outstanding. In addition to providing for ongoing working capital needs,
this availability of short-term financing provides WP&L flexibility in the
issuance of long-term securities. The level of short-term borrowing
fluctuates based on seasonal corporate needs, the timing of long-term
financing, and capital market conditions. To maintain flexibility in its
capital structure and to take advantage of favorable short-term rates,
WP&L also uses the proceeds from the sale of accounts receivable and
unbilled revenues to finance a portion of its long-term cash needs. WP&L
anticipates that short-term debt will continue to be available at
reasonable costs due to current ratings by independent utility analysts
and rating services.
WP&L had bank lines of credit of $70 million at December 31, 1997
available to support its borrowings of which none of this amount was
utilized at December 31, 1997. Commitment fees are paid to maintain these
lines and there are no conditions which restrict the unused lines of
credit. From time to time, WP&L may borrow from banks and other financial
institutions in lieu of commercial paper, and has agreements with several
financial institutions for such borrowings. There are no commitment fees
associated with these agreements and there were no borrowings outstanding
under these agreements at December 31, 1997.
Given the above financing flexibility available to WP&L, management
believes it has the necessary financing capabilities in place to
adequately finance its capital requirements for the foreseeable future.
Capital Requirements
General
Capital expenditure and investment and financing plans are subject to
continual review and change. The capital expenditure and investment
programs may be revised significantly as a result of many considerations,
including changes in economic conditions, variations in actual sales and
load growth compared to forecasts, requirements of environmental, nuclear
and other regulatory authorities, acquisition opportunities, the
availability of alternate energy and purchased power sources, the ability
to obtain adequate and timely rate relief, escalations in construction
costs and conservation and energy efficiency programs.
WP&L's levels of utility construction and acquisition expenditures are
projected to be $133 million in 1998, $136 million in 1999, $138 million
in 2000, $141 million in 2001 and $144 million in 2002. WP&L anticipates
funding the large majority of its utility construction and acquisition
expenditures during 1998-2002 through internally generated funds,
supplemented by external financings as needed. With this objective in
place, WP&L financed 73% of its construction expenditures during 1997 from
internal sources.
Nuclear Facilities
Kewaunee, a 535-megawatt (nameplate capacity) pressurized water reactor
plant, is operated by Wisconsin Public Service Corporation (WPSC) and is
jointly owned by WPSC (41.2%), WP&L (41.0%), and Madison Gas & Electric
Company (MG&E) (17.8%). The Kewaunee operating license expires in 2013.
Kewaunee returned to service on June 12, 1997 after having been out of
service since September 21, 1996 for refueling, routine maintenance, and
repair of the two steam generators. The original Kewaunee steam generator
tubes are susceptible to corrosion. Tubes are repaired by inserting
sleeves (tubes within tubes) in the original steam generator tubes. The
most recent repair was undertaken when previously repaired tubes failed.
The repair consisted of removing old sleeves and inserting new slightly
longer sleeves which cover the areas of concern in the original steam
generator tubes. The new sleeves will be inspected during the next
refueling and maintenance outage which is scheduled for the Fall of 1998.
As of this filing, Kewaunee had remained in continuous operation since the
plant was returned to service with the exception of a one-week outage for
replacement of a reactor coolant pump seal. Kewaunee is operating at 97%
of rated capacity because certain steam generator tubes have been removed
from service rather than repaired.
In accordance with PSCW authorization, WP&L had deferred $3.1 million at
December 31, 1997, associated with Kewaunee steam generator repair costs.
In March 1998, the PSCW approved recovery of these costs through a
customer surcharge effective April 1, 1998 through May 31, 1998.
On March 15, 1996, WPSC filed an application with the PSCW for permission
to replace the Kewaunee steam generators. Public hearings were held in
January 1998 and a decision is expected in the second quarter of 1998.
The total cost of replacing the two steam generators would be
approximately $89.0 million of which WP&L's share would be $36.5 million.
Because of work already completed, the elapsed time from placing a firm
order for steam generators to receiving delivery has been shortened to
approximately 22 months.
The owners of Kewaunee have differing views on the desirability of
proceeding with the steam generator replacement project. Although the new
resleeving repair technology may allow the plant to remain in service for
an extended period of time, WPSC favors replacement at the earliest
possible date because of reliability and cost concerns related to steam
generator repairs. WP&L and MG&E have been unwilling to support
replacement. If the steam generator replacement project receives PSCW
approval, the issues related to the continued operation and future
ownership would still need to be resolved before steam generator
replacement could proceed. 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 purchased power, increased generation at existing WP&L
generating units and new generating unit additions, if necessary.
The PSCW has directed the owners of Kewaunee to develop depreciation and
decommissioning cost levels based on an expected plant end-of-life of 2002
versus a license end-of-life of 2013. This was prompted by the
uncertainty regarding the expected useful life of the plant without steam
generator replacement. At December 31, 1997, the net carrying amount of
WP&L's investment in Kewaunee was approximately $45.7 million. The
current cost of WP&L's share of the estimated costs to decommission
Kewaunee is $181.3 million and exceeds the trust assets at December 31,
1997 by $68.9 million. The costs of decommissioning are assumed to
escalate at an annual rate of 5.83%. WP&L's retail customers in the
Wisconsin jurisdiction are responsible for approximately 80% of WP&L's
share of Kewaunee costs.
As a result of accelerating the recovery of WP&L's share of Kewaunee
related costs, depreciation expense and decommissioning funding will
increase approximately $3.0 million (from $4.8 million to $7.8 million)
and $5.4 million (from $10.7 million to $16.1 million), respectively, on
an annualized basis. During 1997, $6.5 million of depreciation expense
related to unrecovered plant investment was recognized compared to $4.8
million which was recognized in 1996. During 1997, decommissioning
expense associated with funding increased to $14.3 million from $10.7
million in 1996. The $14.3 million represents a combination of the annual
funding levels in accordance with UR-109 through April 29, 1997 and UR-110
post-April 29, 1997. Customer rates, which became effective in Wisconsin
on April 29, 1997, are designed to recover the accelerated Kewaunee
depreciation and decommissioning costs.
Refer to the "Other Matters - Environmental" section for a discussion of
various issues impacting WP&L's future capital requirements.
Rates and Regulatory Matters
In November 1997, as part of its merger approval, FERC accepted a proposal
by WP&L which provides for a four-year freeze on wholesale electric prices
beginning with the effective date of the Merger.
In connection with its approval of the Merger, the PSCW accepted a WP&L
proposal to freeze rates for four years following the date of the Merger.
A re-opening of an investigation into WP&L's rates during the rate freeze
period, for both cost increases and decreases, may occur only for single
events that are not Merger-related and have a revenue requirement impact
of $4.5 million or more.
In rate order UR-110, the PSCW approved new rates effective April 29, 1997
through 1998. On average, WP&L's retail electric rates declined by 2.4%
and retail gas rates declined by 2.2%. Other items included in the rate
order were: authorization of a surcharge to collect replacement power
costs while Kewaunee remained out of service for the period effective
April 29, 1997 through July 1, 1997; authorization of an increase in the
return on equity to 11.7% from 11.5%; reinstatement of the electric fuel
adjustment clause; continuation of a modified gas performance based
ratemaking incentive mechanism; and a modified SO2 incentive. In
addition, the PSCW ordered that it must approve the payment of dividends
by WP&L to its parent company that are in excess of the level forecasted
in the rate order ($58.3 million), if such dividends would reduce WP&L's
average common equity ratio below 52.00% of total capitalization. Based
on a 13-month average for 1997, WP&L's common equity ratio was 52.56%.
The retail electric rates are based in part on forecasted fuel and
purchase power costs. Under PSCW rules, Wisconsin utilities can seek
emergency rate increases if these costs are more than three percent higher
than the estimated costs used to establish rates. In WP&L's case, actual
fuel costs since May 1997 have been higher than estimated and are expected
to remain well above the estimated levels in 1998. As a result, WP&L has
asked the PSCW to approve a rate increase. It is expected that the PSCW
will issue a decision in the second quarter of 1998. Any increase
approved by the PSCW will be implemented on a prospective basis.
The gas performance incentive was modified to eliminate the maximum gain
or loss to be recognized by WP&L. Previously, this incentive was limited
to $1.1 million to WP&L. The incentive includes a sharing mechanism,
whereby 40% of all gains and losses relative to current commodity prices
as well as other benchmarks are recognized by WP&L rather than refunded to
or recovered from customers.
OTHER MATTERS
Year 2000
WP&L utilizes software, embedded systems and related technologies
throughout its business that will be affected by the date change in the
Year 2000. An internal task force has been assembled to review and
develop the full scope, work plan and cost estimates to ensure that WP&L's
systems continue to meet its internal and customer needs.
Phase I of the project, which encompassed a review of the necessary
software modifications that will need to be made to WP&L's financial and
customer systems, has been completed. WP&L currently estimates that the
remaining costs to be incurred on this phase of the project will be
approximately $2 million to $5 million in the aggregate.
The task force has also begun Phase II of the project which is an
extensive review of WP&L's embedded systems for Year 2000 conversion
issues. The task force has inventoried critical embedded operating
systems and is working with the system vendors to ascertain Year 2000
compliance of these systems. The task force is also developing detailed
plans for testing and remediating critical systems (i.e., systems whose
failure could affect employee safety or business operations).
As part of an awareness effort, WP&L has also notified its utility
customers of its Year 2000 project efforts. Key suppliers are also being
contacted to confirm their Year 2000 readiness plans. Efforts are also
underway to develop contingency plans for critical embedded operating
systems. WP&L is currently unable to estimate the costs to be incurred on
this phase of the project but does believe that the costs will be
significant. An estimate of the expenses to be incurred on this phase of
the project is expected to be available by the third quarter of 1998.
The goal of WP&L is to have all the material Year 2000 conversions made
sufficiently in advance of December 31, 1999 to allow for unanticipated
issues. At this time, management is unable to determine if the
Year 2000 issue will have a material adverse effect on WP&L's financial
position or results of operations.
Labor Issues
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. At the end of 1997, the contract covered approximately 69%
of the total employees at WP&L.
Financial Instruments
WP&L has historically had only limited involvement with derivative
financial instruments and has not used them for trading purposes. They
have been used to manage well-defined interest rate and commodity price
risks. WP&L historically has entered 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 outstanding was $40
million at December 31, 1997. WP&L has used swaps, futures and options to
hedge the price risks associated with the purchase and sale of stored gas
at WP&L. On April 28, 1997, WP&L entered into an interest rate forward
contract to hedge interest rate risk related to the anticipated issuance
of $105 million of long-term debt securities. See Note 8 of the "Notes to
Consolidated Financial Statements" for additional information.
Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting
Comprehensive Income, was issued by the Financial Accounting Standards
Board (FASB) in the second quarter of 1997. SFAS 130 establishes
standards for reporting of comprehensive income and its components in a
full set of general purpose financial statements. SFAS 130 will require
reporting a total for comprehensive income which includes: (a) unrealized
holding gains/losses on securities classified as available-for-sale under
SFAS 115, (b) foreign currency translation adjustments accounted for under
SFAS 52, and (c) minimum pension liability adjustments made pursuant to
SFAS 87. SFAS 130 is effective for periods beginning after December 15,
1997.
Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures About Segments of an Enterprise and Related Information, was
issued by the FASB in the second quarter of 1997. SFAS 131 requires
disclosures for each business segment in a manner consistent with how
management disaggregates and evaluates the company, with the addition of
quarterly disclosure requirements and a finer partitioning of geographic
disclosures. SFAS 131 is effective for periods beginning after December
15, 1997.
Accounting for Obligations Associated with the Retirement of Long-Lived
Assets
The staff of the Securities and Exchange Commission 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
FASB is reviewing the accounting for closure and removal costs, including
decommissioning of nuclear power plants. If current electric utility
industry accounting practices for nuclear power plant decommissioning are
changed, the annual provision for decommissioning could increase relative
to 1997, and the estimated cost for decommissioning could be recorded as a
liability (rather than as accumulated depreciation), with recognition of
an increase in the cost of the related nuclear power plant. Assuming no
significant regulatory shift, WP&L does not believe that such changes, if
required, would have an adverse effect on its financial position or
results of operations due to its ability to recover decommissioning costs
through rates.
Inflation
WP&L does not expect the effects of inflation at current levels to have a
significant effect on its financial position or results of operations.
Environmental
The pollution abatement programs of WP&L are subject to continuing review
and are revised from time to time due to changes in environmental
regulations, changes in construction plans and escalation of construction
costs. While WP&L cannot precisely forecast the effect of future
environmental regulations on its operations, it has taken steps to
anticipate the future while also meeting the requirements of current
environmental regulations.
WP&L has current or previous ownership interests in 14 properties
previously associated with the production of gas at manufactured gas
plants (MGP) for which it may be liable for investigation, remediation and
monitoring costs relating to the sites.
WP&L is working pursuant to the requirements of various federal and state
agencies to investigate, mitigate, prevent and remediate, where necessary,
the environmental impacts to property, including natural resources, at and
around the sites in order to protect public health and the environment.
WP&L believes it has completed the remediaton at various sites, although
it is still in the process of obtaining final approval from the applicable
environmental agencies for some of these sites.
WP&L has recorded an environmental liability of $9.2 million at December
31, 1997 related to the MGP sites; such amount is based on the best
current estimate of the amount to be incurred for investigation,
remediation and monitoring costs for those sites where the investigation
process has been or is substantially completed, and the minimum of the
estimated cost range for those sites where the investigation is in its
earlier stages. It is possible that future cost estimates will be greater
than the current estimates as the investigation process proceeds and as
additional facts become known.
WP&L completed a comprehensive review of its MGP liability in the third
quarter of 1997. This review resulted in a $65 million reduction in the
recorded MGP liability, largely due to the approval by the Wisconsin
Department of Natural Resources (WDNR) of less costly containment and
control strategies as an alternative to excavation processes at various
sites. See Note 11 c. of the "Notes to Consolidated Financial Statements"
for additional information.
Under the current rate making treatment approved by the PSCW, the MGP
expenditures, net of any insurance proceeds, are deferred and collected
from gas customers over a five-year period after new rates are
implemented. As a result, a regulatory asset of $16.3 million at
December 31, 1997, has been recorded which reflects the probable future
rate recovery. Considering the current rate treatment, and assuming no
material change therein, WP&L believes that the clean-up costs incurred
for these MGP sites will not have a material adverse effect on its
financial position or results of operations.
The Clean Air Act Amendments of 1990 (Act) require emission reductions of
sulfur dioxide (SO2), nitrogen oxides (NOx) and other air pollutants to
achieve reductions of atmospheric chemicals believed to cause acid rain.
WP&L has met the provisions of Phase I of the Act and is in the process of
meeting the requirements of Phase II of the Act (effective in the year
2000). The Act also governs SO2 allowances, which are defined as an
authorization for an owner to emit one ton of SO2 into the atmosphere.
WP&L is reviewing its options to ensure it will have sufficient allowances
to offset its emissions in the future. WP&L believes that the potential
costs of complying with these provisions of Title IV of the Act will not
have a material adverse impact on its financial position or results of
operations.
The Act and other federal laws also require the United States
Environmental Protection Agency (EPA) to study and regulate, if necessary,
additional issues that potentially affect the electric utility industry,
including emissions relating to ozone transport, mercury and particulate
control as well as modifications to the Polychlorinated Biphenyl (PCB)
rules. In July 1997, the EPA issued final rules that would tighten the
National Ambient Air Quality Standards (NAAQS) for ozone and particulate
matter emissions. WP&L is currently reviewing the rules to determine what
impact they may have on operations.
In October 1997, the EPA issued a proposed rule to require 22 states,
including Wisconsin, to modify their State Implementation Plans (SIPs) to
address the ozone transport issue. The proposed rule would require WP&L
to reduce its NOx emissions at all of its plants to .15 lbs/mmbtu. WP&L
cannot presently predict the final outcome of this proposal but believes
that, under the terms of the proposed rule, it would be required to
install controls at its plants and that the costs related thereto would be
significant.
A global treaty has been negotiated that could require reductions of
greenhouse gas emissions from utility plants. Negotiators left
significant implementation and compliance questions open to resolution at
meetings to be held starting in November 1998. At this time, WP&L is
unable to predict whether Congress will ratify the treaty. Given the
uncertainty of the treaty ratification and the ultimate terms of the final
regulations, WP&L cannot currently estimate the impact the implementation
of the treaty would have on its operations.
The Nuclear Waste Policy Act of 1982 (NWPA) assigned responsibility to the
U.S. Department of Energy (DOE) to establish a facility for the ultimate
disposition of high level waste and spent nuclear fuel and authorized the
DOE to enter into contracts with parties for the disposal of such material
beginning in January 1998. WP&L entered into such contract and has made
the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S.
Treasury. WP&L was subsequently notified by the DOE that it was not able
to begin acceptance of spent nuclear fuel by January 31, 1998.
Furthermore, DOE has experienced significant delays in its efforts and
material acceptance is now expected to occur no earlier than 2010 with the
possibility of further delay being likely. WP&L is evaluating and
pursuing multiple options, including litigation and legislation to protect
its customers and its contractual and statutory rights that are diminished
by delays in the DOE program.
The NWPA assigns responsibility for interim storage of spent nuclear fuel
to generators of such spent nuclear fuel, such as WP&L. In accordance
with this responsibility, WP&L has been storing spent nuclear fuel on site
at Kewaunee since plant operations began. With minor modifications,
Kewaunee would have sufficient fuel storage capacity to the end of the
license life in 2013. Legislation is being considered on the federal
level to provide for the establishment of an interim storage facility as
early as 2002.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates
that each state must take responsibility for the storage of low-level
radioactive waste produced within its borders. Wisconsin is a member of
the six-state Midwest Interstate Low-Level Radioactive Waste Compact
(Compact) which is responsible for development of any new disposal
capability within the Compact member states. In June 1997, the Compact
commissioners voted to discontinue work on a proposed waste disposal
facility in the State of Ohio because the expected cost of such a facility
was comparably higher than other options currently available. Dwindling
waste volumes and continued access to existing disposal facilities were
also reasons cited for the decision. A disposal facility located near
Barnwell, South Carolina continues to accept the low-level waste and the
waste produced at Kewaunee is currently shipped to such site, thereby
minimizing the amount of low-level waste stored on-site. In addition,
given technological advances, waste compaction and the reduction in the
amount of waste generated, Kewaunee has on-site storage capability
sufficient to store low-level waste expected to be generated over at least
the next ten years, with continuing access to the Barnwell disposal
facility extending that on-site storage capability indefinitely.
The National Energy Policy Act of 1992 requires owners of nuclear power
plants to pay a special assessment into a "Uranium Enrichment
Decontamination and Decommissioning Fund." The assessment is based upon
prior nuclear fuel purchases. WP&L is recovering these costs from its
customers and at December 31, 1997 had a regulatory asset and a liability
of $5.9 million and $5.1 million recorded, respectively.
Power Supply
The power supply concerns of 1997 have raised awareness of the electric
system reliability challenges facing Wisconsin and the Midwest region.
WP&L was among an 11-member group of Wisconsin energy suppliers that, on
October 1, 1997, recommended to the Governor of Wisconsin a series of
recommendations to improve electric reliability in the state. The
recommendations included additional transmission system capacity to
substantially increase Wisconsin's ability to import electricity from
other states in the region and additional power plant capacity in eastern
Wisconsin. As a result, WP&L and other Wisconsin-based utilities are
advocating faster PSCW approval of needed transmission projects.
On September 24, 1997, the PSCW ordered WP&L and two other Wisconsin
utilities to arrange for additional electric capacity to help maintain
reliable service for their customers. In response to this order, WP&L has
issued a Request for Proposal (RFP) for contracts to provide WP&L with an
additional 150 megawatts of electric capacity beginning as early as June
1, 1999. WP&L anticipates its RFP will result in a purchased power
arrangement with a contract period of three to eight years and contract
extension or "rollover" options. WP&L expects to award the contract at the
end of the second quarter of 1998.
Utility officials noted that it will take time to get new transmission and
power plant projects approved and built. While utility officials fully
expect to meet customer demands in 1998 and 1999, problems still could
arise if there are unexpected power plant outages, transmission system
outages or extended periods of extremely hot weather.
Selected Consolidated Quarterly Financial Data (Unaudited)
The following unaudited consolidated quarterly data of WP&L, in the
opinion of management, include adjustments which are normal and recurring
in nature necessary for the fair presentation of the results of operations
and financial position. The quarterly amounts were affected by, among
other items, rate activities, seasonal weather conditions and changes in
sales and operating expenses. Refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a
discussion of these items. Net income in both the first and second
quarter of 1997 was lower than the first and second quarter of 1996
primarily due to lower electric and gas margins. The lower margins
resulted from warmer weather and several temporary plant outages during
the first five months of 1997. In addition, a $3.4 million after-tax gain
was recognized on the sale of a combustion turbine in the second quarter
of 1996. Net income in the fourth quarter of 1997 was higher than the
fourth quarter of 1996 due to increased electric margin and reduced
maintenance expense. Electric margin improved in the fourth quarter of
1997 compared with the same period in 1996 due to higher sales and reduced
fuel costs per kwh. Maintenance costs were lower in the fourth quarter of
1997 compared with the same period in 1996 primarily due to increased
expenses in the fourth quarter of 1996 associated with the outage of
Kewaunee as previously discussed.
Net Income
Operating Operating Available for
Revenues Income Common Stock
Quarter Ended (In Thousands)
1997:
March 31 $231,005 $43,275 $22,523
June 30 176,065 20,694 10,216
September 30 180,192 33,769 14,409
December 31 207,455 41,371 20,776
1996:
March 31 $221,234 $59,808 $31,950
June 30 166,117 33,670 19,538
September 30 165,536 32,175 15,152
December 31 206,388 32,235 12,535
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Public Accountants 31
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 32
Consolidated Balance Sheets, December 31, 1997 and 1996 33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 34
Consolidated Statements of Capitalization, December 31, 35
1997 and 1996
Consolidated Statements of Common Shareowners' Investment
for the Years Ended December 31, 1997, 1996 and 1995 36
Notes to Consolidated Financial Statements 37
The supplementary data required by this Item are included in Item 7. under
the heading "Selected Consolidated Quarterly Financial Data (Unaudited)."
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowners 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, 1997 and 1996,
and the related consolidated statements of income, cash flows and common
shareowners' investment for each of the three years in the period ended
December 31, 1997. 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 Wisconsin Power and
Light Company and subsidiaries as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 30, 1998
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1997 1996 1995
(in thousands)
Operating revenues:
Electric $634,143 $589,482 $546,324
Gas 155,883 165,627 139,165
Water 4,691 4,166 4,183
------- ------- -------
794,717 759,275 689,672
------- ------- -------
Operating expenses:
Electric production fuels 116,812 114,470 116,488
Purchased power 125,438 81,108 44,940
Purchased gas 99,267 104,830 84,002
Other operation 131,398 140,339 139,322
Maintenance 48,058 46,492 42,043
Depreciation and amortization 104,297 84,942 81,164
Taxes other than income 30,338 29,206 28,335
------- ------- -------
655,608 601,387 536,294
------- ------- -------
Operating income 139,109 157,888 153,378
------- ------- -------
Interest expense and other:
Interest expense 32,607 31,472 33,821
Allowance for funds used
during construction (2,775) (3,208) (2,088)
Miscellaneous, net (3,796) (6,669) (2,613)
------- ------- -------
26,036 21,595 29,120
------- ------- -------
Income before income taxes 113,073 136,293 124,258
Income taxes 41,839 53,808 45,606
------- ------- -------
Net income 71,234 82,485 78,652
Preferred dividend requirement 3,310 3,310 3,310
------- ------- -------
Net income available for common
stock $67,924 $79,175 $75,342
======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
ASSETS (in thousands)
Utility plant:
Plant in service
Electric $1,790,641 $1,729,311
Gas 237,856 227,809
Water 24,864 23,905
Common 195,815 152,093
--------- ---------
2,249,176 2,133,118
Less--accumulated provision for
depreciation 1,065,726 967,436
--------- ---------
1,183,450 1,165,682
Construction work in progress 42,312 55,519
Nuclear fuel, net 19,046 19,368
--------- ---------
1,244,808 1,240,569
--------- ---------
Other property and equipment, net 684 1,397
--------- ---------
Investments:
Nuclear decommissioning trust
funds 112,356 90,671
Other investments 14,877 15,354
--------- ---------
127,233 106,025
--------- ---------
Current assets:
Cash and equivalents 2,492 4,167
Accounts receivable and unbilled
revenue 37,534 34,220
Coal, at average cost 18,857 15,841
Materials and supplies, at
average cost 19,274 19,915
Gas in storage, at average cost 12,504 9,992
Prepaid gross receipts tax 22,153 19,389
Prepayments and other 4,824 2,664
--------- ---------
117,638 106,188
--------- ---------
Deferred charges:
Regulatory assets 91,314 160,877
Other 82,927 62,758
--------- ---------
174,241 223,635
--------- ---------
TOTAL ASSETS $1,664,604 $1,677,814
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization (See Consolidated
Statements of Capitalization):
Common shareowners' investment $585,739 $576,158
Preferred stock not mandatorily
redeemable 59,963 59,963
Long-term debt, net 354,540 258,659
--------- ---------
1,000,242 894,780
--------- ---------
Current liabilities:
Current maturities of long-term
debt 8,899 55,000
Variable rate demand bonds 56,975 56,975
Short-term debt 81,000 69,500
Accounts payable and accruals 85,617 92,719
Accrued payroll and vacation 12,221 11,687
Accrued taxes - 3,616
Accrued interest 6,317 7,504
Other 25,162 34,425
--------- ---------
276,191 331,426
--------- ---------
Other credits:
Accumulated deferred income taxes 251,709 244,817
Accumulated deferred investment
tax credits 35,039 36,931
Accrued environmental remediation
costs 9,238 74,075
Deferred credits and other 92,185 95,785
--------- ---------
388,171 451,608
--------- ---------
Commitments and contingencies (Note
11)
TOTAL CAPITALIZATION AND
LIABILITIES $1,664,604 $1,677,814
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
(in thousands)
Cash flows generated from (used for)
operating activities:
Net income $71,234 $82,485 $78,652
Adjustments to reconcile net
income to net cash generated
from operating activities:
Depreciation and amortization 104,297 84,942 81,164
Deferred income taxes 4,957 8,217 10,716
Investment tax credit restored (1,892) (1,911) (1,916)
Amortization of nuclear fuel 4,444 6,057 7,787
Allowance for equity funds
used during construction (2,033) (2,270) (1,425)
(Gain) loss on disposition of
other property and equipment 710 (5,676) -
Changes in assets and
liabilities:
Net accounts receivable and
unbilled revenue (3,314) (250) (12,281)
Inventories (4,887) (4,193) 3,079
Prepayments and other (4,924) (863) 1,121
Accounts payable and accruals (7,755) 10,896 13,203
Accrued taxes (3,616) (4,179) 496
Other, net (8,528) 14,874 15,674
------- ------- -------
Net cash from (used for)
operating activities 148,693 188,129 196,270
------- ------- -------
Cash flows generated from (used for)
financing activities:
Common stock cash dividends (58,343) (66,087) (56,778)
Preferred stock dividends (3,310) (3,310) (3,310)
Retirement of first mortgage
bonds (55,000) (5,000) (18,000)
Issuance of long-term debt 105,000 - -
Net change in short-term debt 11,500 (3,000) 22,000
Other, net (221) - -
------- ------- -------
Net cash from (used for)
financing activities (374) (77,397) (56,088)
------- ------- -------
Cash flows generated from (used for)
investing activities:
Proceeds from sale of other
property and equipment - 36,264 -
Additions to utility plant,
excluding AFUDC (116,457) (120,732) (99,746)
Additions to nuclear fuel (4,123) (6,558) (7,258)
Allowance for borrowed funds
used during construction (742) (938) (663)
Dedicated decommissioning
trust funds (21,685) (17,314) (21,566)
Other, net (6,987) (1,958) (8,512)
------- ------- -------
Net cash from (used for)
investing activities (149,994) (111,236) (137,745)
------- ------- -------
Net increase (decrease) in cash and
equivalents (1,675) (504) 2,437
Cash and equivalents at beginning of
year 4,167 4,671 2,234
------- ------- -------
Cash and equivalents at end of year $2,492 $4,167 $4,671
======= ======= =======
Supplemental disclosures of cash
flow information:
Cash paid during the year:
Interest on debt $32,778 $28,786 $30,841
Income taxes $37,407 $48,622 $37,968
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
(in thousands except
per 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 320,386 310,805
------- -------
585,739 576,158
------- -------
Preferred stock:
Cumulative, without par value, authorized
3,750,000 shares, maximumaggregate
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 (3.80% at 12/31/97) 8,500 8,500
1988 Series A, variable rate, due
2015 (3.80% at 12/31/97) 14,600 14,600
1990 Series V, 9.3%, due 2025 27,000 27,000
1991 Series A, variable rate, due
2015 (5.05% at 12/31/97) 16,000 16,000
1991 Series B, variable rate, due
2005 (5.05% at 12/31/97) 16,000 16,000
1991 Series C, variable rate, due
2000 (5.05% at 12/31/97) 1,000 1,000
1991 Series D, variable rate, due
2000 (5.05% at 12/31/97) 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%, repaid 1997 - 55,000
Debentures, 7%, due 2007 105,000 -
------- -------
421,874 371,874
------- -------
Less-
Current maturities (8,899) (55,000)
Variable rate demand bonds (56,975) (56,975)
Unamortized discount and premium, net (1,460) (1,240)
------- -------
354,540 258,659
--------- -------
TOTAL CAPITALIZATION $1,000,242 $894,780
========= =======
The accompanying notes are an integral part of the consolidated
financial statements.
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMMON
SHAREOWNERS' INVESTMENT
Year Ended December 31,
1997 1996 1995
(in thousands)
Common stock:
Balance at beginning and end of
year $66,183 $66,183 $66,183
Premium on capital stock:
Balance at beginning and 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 310,805 297,717 279,153
Income before preferred
dividends 71,234 82,485 78,652
Cash dividends on preferred
stock (3,310) (3,310) (3,310)
Cash dividends to parent on
common stock (58,343) (66,087) (56,778)
------- ------- -------
Balance at end of year 320,386 310,805 297,717
------- ------- -------
TOTAL COMMON SHAREOWNERS'
INVESTMENT $585,739 $576,158 $563,070
======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions 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 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. 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.
Certain reclassifications have been made to the prior years financial
statements to conform with the current year presentation.
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 short-term liquid 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 rates for 1997, 1996 and 1995 were
6.22%, 10.23% and 6.68%, 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 regulatory-approved rates
that consider the estimated useful life and removal cost or salvage value
as follows:
1997 1996 1995
Electric 3.6% 3.3% 3.3%
Gas 3.8% 3.7% 3.7%
Water 2.7% 2.6% 2.5%
Common 11.9% 8.1% 7.9%
Depreciation expense related to WP&L's share of the decommissioning of the
Kewaunee Nuclear Power Plant (Kewaunee) is discussed in Note 11
"Commitments and Contingencies". WP&L implemented 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 No. 71 (SFAS 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 becomes no longer subject to the provisions of SFAS 71 as a
result of competitive restructuring or otherwise, a write-down of related
regulatory assets would be required, unless some form of transition cost
recovery is established by the appropriate regulatory body that would meet
the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period. In
addition, WP&L would be required to determine any impairment to other
assets and write-down such assets to their fair value. As of December
31, 1997 and 1996, regulatory-created assets include the following:
1997 1996
Environmental remediation costs (Note 11) $16.3 $81.4
Tax related 52.2 57.2
Jurisdictional plant differences 7.9 7.6
Decontamination and decommissioning
costs of federal enrichment facilities 5.9 6.1
Other 9.0 8.6
----- -----
$91.3 $160.9
===== ======
As of December 31, 1997 and 1996, WP&L had recorded regulatory-related
liabilities of $39.6 and $33.9, respectively. These liabilities are
primarily tax related.
i. Revenue
WP&L accrues revenues for services provided but not yet billed at month-
end.
j. Income Taxes
WP&L follows the liability method of accounting for deferred income taxes,
which requires the establishment of deferred tax assets and liabilities,
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.
NOTE 2. PROPOSED MERGER OF WPLH
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 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 (Merged Company). 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, shareowners, state regulatory
agencies and most of the federal agencies. It is still subject to approval
by the Securities and Exchange Commission (SEC). The companies expect to
receive SEC approval in the second quarter of 1998.
The summary below contains selected unaudited pro forma financial data for
the year ended December 31, 1997. The financial data should be read in
conjunction with the historical consolidated financial statements and
related notes thereto of WPLH and in conjunction with the unaudited pro
forma combined financial statements and related notes of the Merged
Company found later in this Form 10-K. 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 PRO FORMA COMBINED
(as reported) Adjustments (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues $919.3 $930.7 $331.8 $118.8 $2,300.6
Income from continuing
operations $61.3 $66.3 $26.7 $- $154.3
Earnings per share from
continuing operations
(basic and diluted) $1.99 $2.18 $2.74 $- $2.02
Assets at December 31, 1997 $1,861.8 $2,457.2 $638.7 ($6.0) $4,951.7
Long-term obligations, net at
December 31, 1997 $526.0 $882.4 $195.9 $- $1,604.3
</TABLE>
Under the terms of the Merger Agreement, the outstanding shares of WPLH's
common stock will remain unchanged and outstanding as shares of the Merged
Company's common stock, each outstanding share of IES common stock will be
converted to 1.14 shares of the Merged Company's common stock and each
share of IPC common stock will be converted to 1.11 shares of the Merged
Company's common stock. It is anticipated that the Merged Company will
retain WPLH's common share dividend payment level as of the effective time
of the merger. On January 16, 1998, 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. (IESU) and IES Diversified Inc.
(Diversified). IESU supplies electric and gas service to approximately
339,000 and 178,000 customers, respectively, in Iowa. 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 166,000 and 50,000 customers, respectively, in
northeast Iowa, northwest Illinois and southern Minnesota.
The Merged Company will be the parent company of WP&L, IESU 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 Proposed Merger. In
addition, the non-utility operations of WPLH and IES will be combined
shortly after the effective date of the Proposed Merger under one entity
to manage the diversified operations of the Merged Company. The corporate
headquarters of the Merged Company will be in Madison, Wisconsin.
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. Kilowatthour 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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
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>
Coal:
Columbia Energy 1975 &
Center 46.2 1978 1,023 $161.4 $89.2 $0.8 $161.8 $86.4 $1.6
Edgewater Unit 4 68.2 1969 330 51.5 29.5 1.0 50.8 28.0 0.7
Edgewater Unit 5 75.0 1985 380 229.4 79.8 0.1 228.8 73.7 0.0
Nuclear:
Kewaunee Nuclear
Power Plant 41.0 1974 535 132.0 86.6 0.3 131.2 80.6 0.8
----- ----- ----- ----- ----- -----
Total $574.3 $285.1 $2.2 $572.6 $268.7 $3.1
===== ===== ===== ===== ===== =====
</TABLE>
NOTE 4. UTILITY 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 $150.0
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 5.83% annual
rate during 1997. 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, 1997 and 1996, the balance of sold accounts receivable
that had not been collected totaled $91.0 and $86.5, respectively. During
1997, the monthly proceeds from the sale of accounts receivable averaged
$92.1, compared with $86.6 in 1996. As of December 31, 1997, the amount
of sold receivables subject to recourse was $8.2.
WP&L does not have any significant concentrations of credit risk in the
December 31, 1997 and 1996 utility 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.
This standard has not had any impact on 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 of 1974, as
amended (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, 1997 and
1996:
1997 1996
Accumulated benefit obligation
Vested benefits ($173.4) ($161.0)
Non-vested benefits (6.1) (3.3)
------- --------
Total (179.5) (164.3)
Projected benefit obligation (205.1) (189.6)
Plan assets at fair value 244.4 218.9
------- --------
Plan assets in excess of projected
benefit obligation 39.3 29.3
Unrecognized net transition asset (12.0) (14.5)
Unrecognized prior service cost 7.8 3.7
Unrecognized net loss 0.8 15.0
----- -----
Prepaid pension costs $35.9 $33.5
===== =====
Assumed rate of return on plan assets 9.00% 9.00%
===== =====
Discount rate of projected benefit
obligation 7.25% 7.50%
===== =====
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 1997, 1996 and 1995 included the following components:
1997 1996 1995
Service cost $4.8 $5.1 $3.9
Interest cost on projected 13.8 13.6 12.9
Actual return on assets (36.2) (25.0) (31.6)
Amortization and deferrals 15.1 5.5 15.1
---- ---- ----
Net pension cost (benefit) ($2.5) ($0.8) $0.3
==== ==== ====
During 1997, WP&L expensed $1.3 for an early retirement program for
eligible bargaining unit employees.
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. WP&L's policy is to fund
the postretirement cost at an amount that is at least equal to the minimum
funding requirements mandated by 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, 1997 and
1996:
1997 1996
Accumulated benefit obligation
Retirees ($31.4) ($32.2)
Fully eligible active plan
participants (4.4) (5.0)
Other active plan participants (11.3) (9.4)
---- ----
Total (47.1) (46.6)
Plan assets at fair value 16.1 13.8
---- ----
Accumulated benefit obligation in
excess of plan assets (31.0) (32.8)
Unrecognized transition obligation 21.0 23.5
Unrecognized prior service cost (0.3) (0.3)
Unrecognized net gain (8.3) (5.0)
---- ----
Accrued postretirement benefits
liability ($18.6) ($14.6)
==== ====
Assumed rate of return on plan assets 9.00% 9.00%
==== ====
Discount rate of projected benefit
obligation 7.25% 7.50%
==== ====
Medical cost trend on paid charges:
Initial trend rate 8.00% 9.00%
==== ====
Ultimate trend rate 5.00% 5.00%
==== ====
The net postretirement benefits cost recognized in the consolidated
statements of income for 1997, 1996 and 1995 included the following
components:
1997 1996 1995
Service cost $1.8 $1.8 $1.5
Interest cost on projected
benefit obligation 3.3 3.4 3.6
Actual return on assets (1.9) (1.3) (2.1)
Amortization of transition
obligation 1.5 1.5 1.5
Amortization and deferrals 0.5 0.3 1.3
---- ---- ----
Net postretirement
benefits cost $5.2 $5.7 $5.8
==== ==== ====
Increasing the assumed health-care cost trend rate by one percentage point
in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $2.7 and the aggregate of the
service and interest cost components of the net periodic postretirement
benefit cost for the year by $0.4.
During 1997, WP&L expensed $1.7 for an early retirement program for
eligible bargaining unit employees.
NOTE 6. INCOME TAXES
The following table reconciles the statutory federal income tax rate to
the effective income tax rate on continuing operations:
1997 1996 1995
Statutory federal income tax
rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 5.7 6.1 5.0
Investment tax credits restored (1.7) (1.4) (1.5)
Amortization of excess deferred
taxes (1.3) (1.3) (1.4)
Adjustment of prior period
taxes (2.1) -- --
Other differences, net 1.4 1.1 (0.4)
---- ---- ----
Effective income tax 37.0% 39.5% 36.7%
==== ==== ====
The breakdown of income tax expense as reflected in the consolidated
statements of income is as follows:
1997 1996 1995
Current federal $32.3 $37.9 $29.8
Current state 6.5 9.6 7.0
Deferred 4.9 8.2 10.7
Investment tax credit restored (1.9) (1.9) (1.9)
---- ---- ----
$41.8 $53.8 $45.6
==== ==== ====
The temporary differences that resulted in accumulated deferred income tax
(assets) and liabilities as of December 31, 1997 and 1996, are as follows:
1997 1996
Property related $287.2 $276.1
Investment tax credit related (23.5) (19.9)
Decommissioning related (16.0) (14.5)
Other 4.0 3.1
----- -----
$251.7 $244.8
===== =====
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 $70.0 as of December 31, 1997. Information regarding
short-term debt and lines of credit is as follows:
1997 1996 1995
As of year end--
Lines of credit borrowings - - -
Commercial paper outstanding $81.0 $59.5 $56.5
Notes payable outstanding - $10.0 $16.0
Discount rates on commercial
paper 5.48-5.90% 5.35-5.65% 5.73-5.77%
Interest rates on notes
payable N/A 5.95% 5.80-5.83%
For the year ended--
Maximum month-end amount of
short-term debt $81.0 $69.5 $80.0
Average amount of short-term
debt (based on daily
outstanding balances) $49.2 $33.9 $48.8
Average interest rate on
short-term debt 5.64% 5.86% 5.90%
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 and forward contracts: 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, 1997, was $40.0. 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 4.11% and 3.61%, respectively. The swap agreements have contract
maturities from three months to two years. It is not WP&L's intent to
terminate these contracts; however, the total cost to WP&L if it had
terminated all of the agreements existing at December 31, 1997, would have
been $0.2.
In 1995, WP&L entered into an interest rate forward contract related to
the anticipated issuance of $60.0 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 to WP&L. The gain was deferred and was
recognized as an adjustment to interest expense over the life of the debt
securities issued during 1997 as discussed in Note 10(b).
On April 28, 1997, WP&L entered into an interest rate forward contract to
hedge interest rate risk related to the anticipated issuance of $105.0 of
long-term debt securities. The securities were issued in June 1997 and
the forward contract was settled which resulted in a cash payment of $3.8
by WP&L. This payment was recognized as an adjustment to interest expense
over the life of the new debt securities to approximate the interest rate
implicit in the forward contract.
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. The notional amount of gas commodity swaps outstanding as of
December 31, 1997 was 4.8 million dekatherms. 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. It is not WP&L's intent to terminate
these contracts; however, the total cost to WP&L if it had terminated all
of the agreements existing at December 31, 1997, would have been a gain of
$1.0.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Current Assets and Current Liabilities - The carrying amount approximates
fair value due to the short maturities of these financial instruments.
Nuclear Decommissioning Trust Funds - As of December 31, 1997 and 1996,
the investments in the nuclear decommissioning trust fund are carried at
fair value, as reported by the trustee. The balance as shown on the
consolidated balance sheets included a net unrealized gain of $16.4 and
$9.4 as of December 31, 1997 and 1996, respectively.
Preferred Stock of WP&L - Based on quoted market prices for the same or
similar issues.
Long-Term Debt - Based upon the market yield of similar securities and
quoted market prices on the current rates for debt of the same remaining
maturities.
The estimated fair values of financial instruments at December 31, 1997
and 1996:
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Nuclear decommissioning
trust funds $112.4 $112.4 $90.7 $90.7
Preferred stock 60.0 51.7 60.0 47.7
Long-term debt, including
current portion 420.4 449.3 370.6 387.0
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 its shareowners.
NOTE 10. CAPITALIZATION
a. Common Shareowners' Investment
A retail rate order effective April 29, 1997, requires WP&L to maintain a
utility common equity level of 52.00% of total utility capitalization. In
addition, the PSCW ordered that it must approve the payment of dividends
by WP&L to its parent that are in excess of the level forecasted in the
rate order ($58.3), if such dividends would reduce WP&L's average common
equity ratio below 52.00% of total capitalization. Based on a 13-month
average for 1997, WP&L's common equity ratio was 52.56%.
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: $8.9 in 1998, $0.0 in 1999, $1.9 in 2000, $0.0 in 2001 and $0.0
in 2002.
In June 1997, WP&L issued $105.0 of 7.00% Debentures due June 15, 2007.
Approximately $50.0 of the net proceeds was used to repay maturing short-
term debt and finance utility construction expenditures. The balance of
the proceeds was used to retire the $55.0 of WP&L's First Mortgage Bonds,
Series Z, 6.125%, due July 15, 1997.
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 12.5 million tons through December 31, 2002. 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 $36.0 in 1998,
$29.0 in 1999, $9.0 in 2000, $9.0 in 2001 and $4.0 in 2002.
b. Purchased Power and Gas
Under firm purchased power and gas contracts, WP&L is obligated as
follows:
Power Gas
1998 $72.0 $37.0
1999 76.3 32.7
2000 86.5 27.1
2001 38.1 22.4
2002 28.0 18.0
Thereafter 58.0 29.6
c. Manufactured Gas Plant Sites
WP&L has a current or previous ownership interest in 11 properties,
consisting of 14 individual sites, associated in the past with the
production of manufactured gas. Some of these sites contain coal tar
waste products which may present an environmental hazard. WP&L owns six
of these sites, three are currently owned by municipalities and the
remaining five are all or partially owned by private companies.
WP&L conducted a comprehensive review in the third quarter of 1997 of its
liability at each of the 14 sites. This comprehensive review considered
several recent significant developments and resulted in a reduction in the
estimate of the probable liability for cleanup. At December 31, 1997 the
liability is $9.2. In addition, management believes it is possible, but
not likely, that an additional $3.2 of remediation costs may be incurred.
In 1996, the Wisconsin Department of Natural Resources (DNR) approved less
costly containment and control strategies as an alternative to excavation
processes at two sites. The decline in the liability of approximately
$65.0 from December 31, 1996 to December 31, 1997, is due to the
successful implementation of these strategies at those two sites and
several additional sites. Further reductions in the liability resulted
from WP&L receiving an additional close out letter from the DNR, bringing
the total number of sites with close out letters to four.
The cleanup estimate discussed above 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. Changes in the estimate are
reasonably possible in the near term.
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, net of any
insurance proceeds, are deferred and collected from gas customers over a
five year period after new rates are implemented. Although no assurance
can be given, management currently believes future costs will also be
recovered in rates. The associated regulatory asset is $16.3 as of
December 31, 1997.
d. Spent Nuclear Fuel and Decommissioning Costs
The current cost of WP&L's share of the estimated costs to decommission
Kewaunee ($181.3), assuming early retirement, exceeds the trust assets at
December 31, 1997 ($112.4) by $68.9. The costs of decommissioning are
assumed to escalate at an annual rate of 5.83%.
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 $14.3
for 1997 and $10.7 for 1996 and 1995. Thess amounts are fully recovered
in rates. The after-tax income of the external trust funds was $3.2, $2.7
and $2.8 for 1997, 1996 and 1995, 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, 1997, the total
decommissioning costs included in the accumulated provision for
depreciation were $112.4 .
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 could provide additional storage
sufficient to meet spent fuel storage needs until the expiration of the
current operating license.
The following summarizes WP&L's investment in nuclear fuel at December 31,
1997 and 1996:
1997 1996
Original cost of nuclear fuel $169.6 $166.4
Less-Accumulated amortization 150.5 147.0
----- -----
Nuclear fuel, net $19.1 $ 19.4
===== =====
e. Nuclear Performance
WP&L has a 41% ownership interest in Kewaunee. Kewaunee resumed
operations on June 12, 1997 after being out of service since September 21,
1996 for refueling and repairs to the steam generator tubes. The joint
owners continue to analyze and discuss other options related to the future
of Kewaunee, including various ownership transfer alternatives.
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% owner of Kewaunee, is subject
to an overall assessment of approximately $32.5 per incident, not to
exceed $4.1 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 $1.8 billion for loss from damage at Kewaunee. In
addition, WP&L maintains outage and replacement power insurance coverage
totaling $101.4 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 under "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:
1997 1996 1995
Operation information:
Customer revenues--
Electric $634.1 $589.5 $546.3
Gas 155.9 165.6 139.2
Water 4.7 4.2 4.2
Operating income (loss)--
Electric $125.9 $136.3 $134.2
Gas 13.7 18.9 17.0
Water and other (a) (0.5) 2.7 2.2
Investment information:
Identifiable assets,
including allocated common
plant at December 31--
Electric $1,245.2 $1,225.3 $1,226.8
Gas 193.6 262.1 250.6
Water 22.4 21.4 20.1
Assets not allocated 203.4 169.0 143.6
Other information:
Construction,
decommissioning and
nuclear fuel--
Electric $123.8 $125.9 $122.3
Gas 15.3 18.0 16.9
Water 2.1 1.7 2.1
Depreciation expense--
Electric $91.2 $74.5 $71.4
Gas 12.3 9.8 9.6
Water 0.8 0.7 0.2
(a) Certain reclassifications have been made to the 1995 and 1996 figures
to conform with the 1997 presentation.
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 1998 Annual Meeting of Shareowners will be
incorporated herein by reference to the relevant information in WP&L's
Proxy Statement for the 1998 Annual Meeting of Shareowners (the 1998 Proxy
Statement) upon the filing of the 1998 Proxy Statement with the Securities
and Exchange Commission. The executive officers of the registrant as of
the date of this filing are as follows (figures following the names
represent the officer's age as of December 31, 1997):
Executive Officers of WP&L
Erroll B. Davis, Jr., 53, was elected President and Chief Executive
Officer effective August 1988 and has been a board member since April
1984. Mr. Davis was elected President of WPL Holdings, Inc. in January
1990 and Chief Executive Officer of WPL Holdings, Inc. in July 1990. He
has served as a director of WPL Holdings, Inc. since March 1998.
A.J. (Nino) Amato, 46, was elected Senior Vice President effective October
1993. He previously served as Vice President-Marketing and Strategic
Planning from 1992 to 1993.
William D. Harvey, 48, was elected Senior Vice President effective October
1993. He previously served as Vice President-Natural Gas and General
Counsel from 1992 to 1993.
Eliot G. Protsch, 44, was elected Senior Vice President effective October
1993. He previously served as Vice President-Customer Services and Sales
from 1992 to 1993.
Daniel A. Doyle, 39, was elected 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.
Barbara J. Swan, 46, 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, 50, 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, 44, 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, 41, 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, 57, was elected Corporate Treasurer, Controller and
Secretary of WP&L effective May 1996. He previously served as Corporate
Secretary of WP&L and WPL Holdings, Inc. and Vice President and Treasurer
of WPL Holdings, Inc. from 1993 to 1996 and Vice President-Finance and
Treasurer of WP&L from 1986 to 1993. Mr. Gleason functions as principal
financial officer of WPL Holdings, Inc. and WP&L.
Susan J. Kosmo, 51, was elected Assistant Controller effective September
1995. She previously served as Trust Investments and Investor Relations
Supervisor from 1992 to 1995.
David A. Ramos, 41, was elected Assistant Controller effective January
1995. He previously served as Manager of Budgets, Rates and Cost
Accounting from 1994 to 1995 and Manager of Budgets and Rates from 1992 to
1994.
Steven F. Price, 45, was elected Assistant Corporate Secretary effective
April 1992 at WPL Holdings, Inc. and WP&L and Assistant Treasurer
effective April 1992 at WPL Holdings, Inc.
Robert A. Rusch, 35, was elected Assistant Treasurer effective September
1995. He previously served as Financial Analyst from 1989 to 1995.
NOTE: None of the executive officers listed above is related to any
member of the Board of Directors or nominee for director.
Executive officers have no definite terms of office and serve at the
pleasure of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be incorporated herein by
reference to the relevant information in the 1998 Proxy Statement upon the
filing of the 1998 Proxy Statement with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 will be incorporated herein by
reference to the relevant information in the 1998 Proxy Statement upon the
filing of the 1998 Proxy Statement with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be incorporated herein by
reference to the relevant information in the 1998 Proxy Statement upon the
filing of the 1998 Proxy Statement with the Securities and Exchange
Commission.
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: None
All 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 to 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 to 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 to 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, by and among WPL
Holdings, Inc. and IES Industries Inc. (incorporated by
reference to Annex B to WPL Holdings, Inc.'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, by and among WPL
Holdings, Inc. and Interstate Power Company. (incorporated by
reference to Annex C to WPL Holdings, Inc.'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, by and among IES
Industries Inc. and WPL Holdings, Inc. (incorporated by
reference to Annex D to WPL Holdings, Inc.'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, by and among IES
Industries, Inc. and Interstate Power Company. (incorporated by
reference to Annex E to WPL Holdings, Inc.'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, by and among
Interstate Power Company and WPL Holdings, Inc. (incorporated
by reference to Annex F to WPL Holdings, Inc.'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, by and among
Interstate Power Company and IES Industries Inc. (incorporated
by reference to Annex G to WPL Holdings, Inc.'s Registration
Statement on Form S-4 (No. 333-07931))
3A* Restated Articles of Incorporation of WP&L, 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)
3B* By-Laws of WP&L, as amended (incorporated by reference to
Exhibit 3B to WP&L's 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 WP&L 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* Indenture, dated as of June 20, 1997, between WP&L and Firstar
Trust Company, as Trustee, relating to debt securities
(incorporated by reference to Exhibit 4.33 to Amendment No. 2 to
WP&L's Registration Statement on Form S-3 (Registration No. 33-
60917))
4C* Officers' Certificate, dated as of June 25, 1997, creating the
7% debentures due June 15, 2007 of WP&L (incorporated by
reference to Exhibit 4 to WP&L's Current Report on Form 8-K,
dated June 25, 1997)
10A*# Executive Tenure Compensation Plan as revised November 1992
(incorporated by reference to Exhibit 10A to WPL Holdings,
Inc.'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 to WPL Holdings,
Inc.'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 to WPL Holdings,
Inc.'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 to WPL
Holdings, Inc.'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 to WPL
Holdings, Inc.'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 to WPL
Holdings, Inc.'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 to WPL Holdings,
Inc.'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 to WPL Holdings,
Inc.'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 to WPL Holdings, Inc.'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 to WPL Holdings, Inc.'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 to WPL Holdings, Inc.'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 to WPL Holdings,
Inc.'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 to WPL Holdings, Inc.'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 to WPL Holdings,
Inc.'s Form 10-K for the year ended December 31, 1994.)
21 Subsidiaries of Wisconsin Power and Light Company
27 Financial Data Schedule of Wisconsin Power and Light Company
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant agrees
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% of the total assets of the company.
Documents incorporated by reference to filings made by WP&L under the
Securities Exchange Act of 1934, as amended, are under File No. 0-337.
Documents incorporated by reference to filings made by WPL Holdings, Inc.
under the Securities Exchange Act of 1934, as amended, are under File
No. 1-9894.
# - A management contract or compensatory plan or arrangement.
(b)Reports on Form 8-K: None
<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
30th day of March 1998.
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 30th day of
March 1998.
/s/ Erroll B. Davis, Jr. President, Chief Executive Officer and
Erroll B. Davis, Jr. Director (Principal Executive Officer)
/s/ Edward M. Gleason Corporate Treasurer, Controller and Corporate
Edward M. Gleason Secretary (Principal Financial and
Accounting Officer)
Director /s/ Milton E. Neshek Director
L. David Carley Milton E. Neshek
/s/ Rockne G. Flowers Director Director
Rockne G. Flowers Henry C. Prange
Director 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>
EXHIBIT INDEX
Exhibit No. Description
21 List of Subsidiaries
27 Financial Data Schedule [EDGAR version only]
EXHIBIT 21
SUBSIDIARIES OF WISCONSIN POWER AND LIGHT COMPANY
The subsidiaries and affiliates of WP&L as of December 31, 1997, were 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
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF WISCONSIN POWER AND LIGHT COMPANY AS
OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1244808
<OTHER-PROPERTY-AND-INVEST> 127917
<TOTAL-CURRENT-ASSETS> 117638
<TOTAL-DEFERRED-CHARGES> 174241
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1664604
<COMMON> 66183
<CAPITAL-SURPLUS-PAID-IN> 199170
<RETAINED-EARNINGS> 320386
<TOTAL-COMMON-STOCKHOLDERS-EQ> 585739
0
59963
<LONG-TERM-DEBT-NET> 354540
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 56975
<COMMERCIAL-PAPER-OBLIGATIONS> 81000
<LONG-TERM-DEBT-CURRENT-PORT> 8899
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 517488
<TOT-CAPITALIZATION-AND-LIAB> 1664604
<GROSS-OPERATING-REVENUE> 794717
<INCOME-TAX-EXPENSE> 41839
<OTHER-OPERATING-EXPENSES> 131398
<TOTAL-OPERATING-EXPENSES> 655608
<OPERATING-INCOME-LOSS> 139109
<OTHER-INCOME-NET> 3796
<INCOME-BEFORE-INTEREST-EXPEN> 101066
<TOTAL-INTEREST-EXPENSE> 29832
<NET-INCOME> 71234
3310
<EARNINGS-AVAILABLE-FOR-COMM> 67924
<COMMON-STOCK-DIVIDENDS> 58343
<TOTAL-INTEREST-ON-BONDS> 32778
<CASH-FLOW-OPERATIONS> 148693
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Earnings per share of common stock is not reflected because all of such shares
are held by WPL Holdings, Inc.
</FN>
</TABLE>
