SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
_______________________
Date of Report
(Date of earliest
event reported): May 18, 1998
Interstate Energy Corporation
(Exact name of registrant as specified in its charter)
Wisconsin 1-9894 39-1380265
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
222 West Washington Avenue, Madison, Wisconsin 53703
(Address of principal executive offices, including zip code)
(608) 252-3311
(Registrant's telephone number)
<PAGE>
Item 5. Other Events.
Set forth below is information included in a financial insert which
forms part of Interstate Energy Corporation's 1997 Annual Report to
Shareowners.
WPL HOLDINGS, INC.
IES INDUSTRIES INC.
INTERSTATE POWER COMPANY
(Merged as Interstate Energy Corporation,
doing business as Alliant Corporation)
1997 FINANCIAL INFORMATION
The following items are included in this financial insert:
1. Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) - the discussion of historical
results of operations focuses primarily on WPL Holdings, Inc.
(WPLH). This presentation is in accordance with the rules of the
Securities and Exchange Commission (SEC) since WPLH (now
Interstate Energy Corporation) was the surviving holding company
in the merger involving WPLH, IES Industries Inc. (IES) and
Interstate Power Company (IPC). The portions of MD&A which are
prospective in nature generally reflect a discussion of
Interstate Energy Corporation's operations on a post-merger
basis.
2. Selected Consolidated Quarterly Financial Data (Unaudited) - in
accordance with SEC rules, reflects WPLH results on a stand-
alone basis.
3. Consolidated Financial Statements and Related Notes - in
accordance with SEC rules, reflects WPLH results on a stand-
alone basis.
4. WPL Holdings, Inc. Selected Financial and Operating Statistics -
includes statistics for the last five years for WPLH on a stand-
alone basis.
5. IES Industries Inc. Selected Financial and Operating Statistics
- includes statistics for the last five years for IES Industries
Inc. on a stand-alone basis.
6. Interstate Power Company Selected Financial and Operating
Statistics - includes statistics for the last five years for
Interstate Power Company on a stand-alone basis.
TABLE OF CONTENTS
Page No.
- MD&A
- MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 3
- FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . 3
- UTILITY INDUSTRY OUTLOOK . . . . . . . . . . . . . . . . 4
- WPLH RESULTS OF OPERATIONS . . . . . . . . . . . . . . . 6
- PRO FORMA INFORMATION . . . . . . . . . . . . . . . . . . 12
- LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . 13
- OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . 21
- WPLH SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 26
- WPLH REPORT ON THE FINANCIAL INFORMATION . . . . . . . . . 28
- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . 29
- WPLH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
- CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . 30
- CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . 31
- CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . 32
- CONSOLIDATED STATEMENTS OF CAPITALIZATION . . . . . . . . 33
- CONSOLIDATED STATEMENTS OF COMMON SHAREOWNERS' INVESTMENT 34
- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . 35
- WPL HOLDINGS, INC. SELECTED FINANCIAL AND OPERATING
STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . 50
- IES INDUSTRIES INC. SELECTED FINANCIAL AND OPERATING
STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . 53
- INTERSTATE POWER COMPANY SELECTED FINANCIAL AND OPERATING
STATISTICS . . . . . . . . . . . . . . . . . . . . . . . . 56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
MERGER
In April 1998, WPL Holdings, Inc. (WPLH), IES Industries Inc. (IES)
and Interstate Power Company (IPC) completed the three-way merger (Merger)
forming Interstate Energy Corporation (Merged Company). In connection with
the Merger, IES was merged with and into WPLH forming the Merged Company
and IPC became 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) were merged. The resulting
company from this merger is referred to as New Diversified. As a result of
the Merger, the first tier subsidiaries of the Merged Company include:
Wisconsin Power & Light Company (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 Notes 2 and 15 of the "Notes to Consolidated Financial
Statements" of WPLH included elsewhere in this Annual Report.
The Merged Company currently anticipates 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 Merged
Company estimates it 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, the Merged Company
has agreed to various rate freezes and rate caps to be implemented in
certain jurisdictions for periods 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 the Merged
Company, the Merged Company 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 (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, the Merged Company 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 the Merged Company. 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 the Merged Company'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 the Merged Company 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 the Merged Company's service
territory, federal and state regulatory or government actions, the
operations of the Merged Company's nuclear facilities, 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
The Merged Company 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.
The Merged Company realized 54%, 41%, 3% and 2% of its electric
utility revenues in 1997 in Iowa, Wisconsin, Minnesota and Illinois,
respectively. Approximately 87% of the electric revenues were regulated by
the respective state commissions while the other 13% were regulated by the
Federal Energy Regulatory Commission (FERC). The Merged Company realized
56%, 38%, 3% and 3% of its gas utility revenues in Iowa, Wisconsin,
Minnesota and Illinois, respectively.
Federal Regulation
IESU, IPC and WP&L are all 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, the 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, IESU, WP&L and IPC have on file with the FERC
pro forma open access transmission tariffs. In response to FERC Orders 889
and 889-A, each of the three utility subsidiaries is participating in a
regional Open Access Same-Time Information System. The utility
subsidiaries cannot predict the long-term consequences of these rules on
their 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.
State Regulation
Iowa
IESU and IPC are subject to regulation by the Iowa Utilities Board
(IUB). The IUB initiated a Notice of Inquiry (Docket No. NOI-95-1) in
early 1995 on the subject of "Emerging Competition in the Electric Utility
Industry" to address all forms of competition in the electric utility
industry and to gather information and perspectives on electric
competition from all persons or entities with an interest or stake in the
issues. The IUB staff's report in this docket was accepted by the IUB,
finding, in part, that there is no compelling reason to move quickly into
restructuring the electric utility industry in Iowa, based upon the
existing level of relative prices. However, the IUB is continuing the
analysis and debate on restructuring and retail competition in Iowa.
On August 18, 1997, the IUB issued an order that promulgated draft
principles for an Independent System Operator (ISO) and invited public
comment. On September 10, 1997, the IUB issued an order adopting an
"Action Plan to Develop a Competitive Model for the Electric Industry in
Iowa." The IUB states in this action plan that while "the IUB has not
determined retail competition in the electric industry is in the best
interests of Iowa's consumers...", the State of Iowa is likely to be
affected by federal or neighboring states' actions so there is a need for
the IUB to design a model that suits Iowa's needs. The priority concerns
in the plan are public interest issues (an Iowa-specific pilot project,
customer information and assessment, environmental impacts, public
benefits and transition costs/benefits) and transmission-related issues
(transmission and distribution system reliability and transmission system
operations). There is no timetable in the action plan. On October 2, 1997,
the IUB staff sent to the advisory group (of which IESU and IPC are
members) for written comment a set of proposed guidelines for an Iowa-
specific electric pilot project that would allow retail access to a
"subset of all customer classes." IESU has indicated to the IUB its
interest in pursuing such a pilot program. The IUB has also issued an
order covering unbundling of natural gas rates for all Iowa customers to
be effective in 1999.
Wisconsin
WP&L is subject to regulation by the Public Service Commission of
Wisconsin (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 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 Merged Company, 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.
Minnesota
IPC is subject to regulation by the Minnesota Public Utilities
Commission (MPUC). The MPUC established an Electric Competition Working
Group in April 1995. On October 28, 1997, the Working Group issued a
report and recommendations on retail competition. The MPUC reviewed the
report and directed its staff to develop an electric utility restructuring
plan and timeline. The Minnesota legislature had established a joint
legislative task force on electric utility restructuring in 1995. This
joint task force has generally been inactive the past year. It appears the
earliest restructuring legislation could be introduced is in 1999.
Illinois
IPC and WP&L are 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
Each of the utilities 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 the utility subsidiaries' 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, each utility subsidiary would be
required to determine any impairment of other assets and write-down any
impaired assets to their fair value. The utility subsidiaries believe they
meet the requirements of SFAS 71.
IESU, IPC and WP&L cannot currently predict the long-term
consequences of the competitive and restructuring issues described above
on their results of operations or financial condition. The major objective
is to allow the utilities 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.
WPLH RESULTS OF OPERATIONS - 1997 COMPARED WITH 1996
Pursuant to the rules of the Securities and Exchange Commission, the
"Results of Operations" discussion set forth below covers only the results
of WPLH since the Merger was consummated after December 31, 1997, and WPLH
(renamed Interstate Energy Corporation) was the surviving holding company
resulting from the Merger. Certain information regarding the operations of
IES and IPC are set forth below under the heading "Pro Forma Earnings Per
Share Information and Historical IES and IPC Data." For additional
information regarding the pro forma results of the combined companies, see
"Interstate Energy Corporation Unaudited Pro Forma Combined Financial
Statements." All references to earnings per share throughout MD&A refer to
both basic and diluted earnings per share.
Overview
WPLH reported consolidated net income from continuing operations of
$61.3 million or $1.99 per share for 1997, as compared to $73.2 million or
$2.38 per share for 1996. Earnings per share for 1997 and 1996 were $1.99
and $2.34, respectively, reflecting the impact of discontinued operations.
The decrease in 1997 earnings versus 1996 was primarily the result of
lower operating income at WP&L and the impact of non-recurring gains which
contributed 5 cents per share to earnings in 1997 compared to 19 cents 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 the Kewaunee Nuclear
Power Plant (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 also lower than 1996
due to increased expenses for plant maintenance, depreciation and
interest.
HDC, parent company of WPLH's nonregulated operations, reported a
loss from continuing operations of $2.8 million for 1997 compared with a
loss from continuing operations of $3.5 million for 1996. HDC's 1997
results reflect improved performance of the energy marketing business. In
1997, HDC recognized an after-tax loss of $1.1 million as a result of a
write-off of nonproductive assets in its environmental and engineering
services business. In 1996, HDC recognized an after-tax gain of $2.5
million related to the sale of HDC's investment in assisted living
properties.
WPLH also recognized a 1996 after-tax loss of $1.3 million resulting
from additional fees and expenses related to discontinued operations which
is discussed in Note 12 of "Notes to Consolidated Financial Statements."
<TABLE>
WPLH Electric Operations
<CAPTION>
Revenues and Costs kWhs Sold Customers at
(In Thousands) (In Thousands) Year End
1997 1996 Change 1997 1996 Change 1997 1996 Change
<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>
WPLH Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) (In Thousands) Year End
1997 1996 Change 1997 1996 Change 1997 1996 Change
<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.
Fees, Rents, Non-Utility Energy Sales and Other Revenues
Fees, rents, non-utility energy sales and other revenues primarily
reflect sales and revenues of WPLH's nonregulated subsidiaries,
consolidated under HDC. Revenues of the principal businesses of HDC were
as follows:
1997 1996
(in millions)
Environmental and engineering
services . . . . . . . . . . . . $ 78.1 $ 84.8
Energy marketing . . . . . . . . . 30.8 73.8
Other . . . . . . . . . . . . . . . 15.6 14.9
----- -----
$124.5 $173.5
===== =====
Contributing to the decrease in these revenues for 1997 was the
formation of a joint venture, effective January 1, 1997, between the gas
marketing business of the energy marketing subsidiary and Industrial
Energy Applications, Inc. (IEA), the energy marketing subsidiary of IES.
HDC owns 50% of this joint venture and for the year ended December 31,
1997, accounted for the investment under the equity method. Therefore,
HDC's share of revenues and expenses related to this joint venture have
been included with "Interest Expense and Other." Revenues for 1996
included $26.4 million related to gas marketing sales now associated with
the joint venture. In addition, the softening market for the environmental
and engineering services business and the transfer of the power marketing
business to a joint venture formed with Cargill Incorporated contributed
to the decline in revenues for 1997. See Note 14 of "Notes to Consolidated
Financial Statements" for a further discussion of this joint venture.
In addition to the revenues of the nonregulated businesses, other
revenues also include the water operations of WP&L. These revenues were
$4.7 million in 1997 and $4.2 million in 1996.
Other Operation and Cost of Non-Utility Energy
Other operation and cost of non-utility energy expense includes
expenses related to WP&L, WPLH and the nonregulated businesses of HDC. The
distribution of other operations expense was as follows:
1997 1996
(in millions)
WP&L . . . . . . . . . . . . . . . . . . . . . . $131.4 $140.3
Nonregulated businesses and parent company
operations . . . . . . . . . . . . . . . . . . 123.4 177.3
----- -----
$254.8 $317.6
===== =====
Contributing to the decrease in other operation and cost of non-
utility energy was the recording of HDC's share of the expenses associated
with the gas marketing joint venture under "Interest Expense and Other,"
as discussed above. Operating expenses at the nonregulated businesses for
the year ended December 31, 1996, included $30.8 million related to gas
marketing sales now associated with the joint venture. In 1997, these
expenses were included with "Interest Expense and Other", as previously
discussed under "Fees, Rents, Non-Utility Energy Sales and Other
Revenues." In addition, the softening market for the environmental and
engineering services business and the reduced activity in the electric
power area of the energy marketing subsidiary also contributed to the
decline in other operations expense for 1997.
Conservation expense at WP&L was reduced significantly under the
retail rate order, effective April 29, 1997. This reduction decreased
WP&L's operating expenses by $8.8 million in 1997 compared with the same
period in 1996. 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 as a result of higher plant maintenance
expenses at Kewaunee and several of WP&L's coal-fired plants, as discussed
above under "WPLH Electric Operations."
Depreciation and Amortization
Depreciation expense increased due to higher depreciation rates at
WP&L 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). In 1997, HDC recognized an
after-tax loss of $1.1 million as a result of a write-off of nonproductive
assets in its environmental and engineering services business.
Interest Expense and Other
The increase in interest expense and other is primarily the result of
non-recurring gains which contributed 5 cents per share in 1997 and 19
cents per share in 1996.
Income Taxes
The decrease in income taxes between periods reflects lower taxable
income, an adjustment of prior period taxes and increased affordable
housing and historical tax credits.
WPLH RESULTS OF OPERATIONS - 1996 COMPARED WITH 1995
Overview
WPLH reported consolidated net income from continuing operations of
$73.2 million or $2.38 per share for 1996, as compared to $71.6 million or
$2.33 per share for 1995. Earnings per share for 1996 and 1995 were $2.34
and $1.90, respectively, reflecting the impact of the discontinued
operations.
The increase in earnings in 1996 primarily reflects the operations of
WPLH's utility subsidiary, WP&L. Continued customer growth in the service
territory and increased power marketing activity contributed to a $9
million increase in electric margin in 1996 as compared with 1995. The
1996 gas margin also increased due primarily to higher weather-driven
sales. (See "WPLH Electric Operations" and "WPLH 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.
HDC, parent company of WPLH's nonregulated operations, reported a
loss from continuing operations of $3.5 million for 1996 compared with a
loss from continuing operations of $1.5 million for 1995. HDC's 1996
results were adversely impacted by contract losses early in 1996
associated with the start-up of the energy marketing business as well as a
softening market for the environmental and engineering services business.
Partially offsetting these losses was an after-tax gain of $2.5 million in
1996, related to the sale of HDC's investment in assisted living
properties.
WPLH also recognized a 1996 after-tax loss of $1.3 million resulting
from additional fees and expenses related to the discontinued operations
which is discussed in Note 12 of "Notes to Consolidated Financial
Statements."
<TABLE>
WPLH Electric Operations
<CAPTION>
Revenues and Costs kWhs Sold Customers at
(In Thousands) (In Thousands) Year End
1996 1995 Change 1996 1995 Change 1996 1995 Change
<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 114,470 116,488 (2%)
Fuels . . . . . .
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 the purchase 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>
WPLH Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) (In Thousands) Year End
1996 1995 Change 1996 1995 Change 1996 1995 Change
<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
and other . . 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.
Fees, Rents, Non-Utility Energy Sales and Other Revenues
Fees, rents, non-utility energy sales and other revenues primarily
reflect sales and revenues of WPLH's nonregulated subsidiaries,
consolidated under HDC, as adjusted for discontinued operations. Revenues
of the principal businesses of HDC were as follows:
1996 1995
(in millions)
Environmental and engineering services $84.8 $88.6
Energy marketing . . . . . . . . . . . 73.8 12.6
Other . . . . . . . . . . . . . . . . . 14.9 16.4
----- -----
$173.5 $117.6
===== =====
Energy marketing revenues were higher due to an increase in the
volume of electric power and natural gas sales by the energy marketing
subsidiary. The subsidiary meets these sales commitments through spot
market purchases and short-term purchase contracts. (See "Other Operation
and Cost of Non-Utility Energy"). Revenues at the environmental and
engineering services business were lower in 1996 due to a softening market
for environmental services.
In addition to the revenues of the nonregulated businesses, other
revenues also include the water operations of WP&L. These revenues were
$4.2 million in both 1996 and 1995.
Other Operation and Cost of Non-Utility Energy
Other operation and cost of non-utility energy expense includes
expenses related to WP&L, the parent company and the nonregulated
businesses of HDC. The distribution of other operations expense was as
follows:
1996 1995
(in millions)
WP&L . . . . . . . . . . . . . . . . . . . . $140.3 $139.3
Nonregulated businesses and parent
company operations . . . . . . . . . . . . . 177.3 113.4
------ -----
$317.6 $252.7
====== =====
The increase in operations expense associated with the nonregulated
businesses is primarily a result of increased volume at the energy
marketing subsidiary. Several commitments made in early 1996 resulted in
substantial losses. On a comparative basis, the non-utility energy
marketing business incurred net losses of 17 cents per share in 1996 and 3
cents per share in 1995.
The environmental and engineering services business also incurred
higher contract related costs which were partially offset by labor and
benefit savings. The environmental and engineering services business lost
4 cents per share in 1996 as compared to a 7 cent per share contribution
in 1995.
Operating expenses in the affordable housing business were
significantly reduced in 1996 as operations support was outsourced and
development activity was curtailed. After adjusting for the tax benefits
and credits associated with this business, the affordable housing business
contributed approximately 8 cents per share in 1996 including 2 cents per
share related to the sale of two properties. In 1995, the affordable
housing business contributed 4 cents per share.
Maintenance
Maintenance expense increased due to higher plant maintenance and the
extended 1996 refueling outage at Kewaunee (See "Liquidity and Capital
Resources - Capital Requirements" below).
Depreciation and Amortization
Depreciation and amortization expense increased $4.4 million as a
result of property additions and greater amortization of contributions in
aid of construction (a reduction of expense) in 1995.
Interest Expense and Other
The $9.1 million increase in other income is the result of two
significant gains recognized in 1996. The sale of a combustion turbine by
WP&L resulted in other income of $5.7 million. In addition, HDC recognized
a gain of $4.2 million on the sale of its investment in assisted living
properties. Interest expense was lower in 1996 as compared to 1995 as a
result of less short-term debt outstanding and a slight decrease in
interest rates.
Income Taxes
Income taxes increased for 1996 as a result of higher taxable income.
The effective tax rate on continuing operations was 35.4% and 32.5% 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.
PRO FORMA EARNINGS PER SHARE INFORMATION AND HISTORICAL
IES AND IPC DATA
Set forth below is information regarding pro forma earnings per share
(basic and diluted) of the Merged Company and certain historical financial
information regarding IES and IPC for the years ended December 31, 1997,
1996 and 1995.
1997 versus 1996
The earnings per average common share for the Merged Company on a pro
forma basis and for each of WPLH, IES and IPC for the years ended December
31, 1997 and 1996 were as follows:
1997 1996
Merged Company pro forma combined* . $2.02 $2.10
WPLH . . . . . . . . . . . . . . . . 1.99 2.34
IES . . . . . . . . . . . . . . . . . 2.18 2.04
IPC . . . . . . . . . . . . . . . . . 2.74 2.69
The growth in IES's earnings per share in 1997 as compared with 1996
was primarily the result of: a 3.8% increase in electric sales (excluding
off-system sales), a lower effective income tax rate, and increased
operating income from IES's non-utility operations. The increased earnings
were partially offset by higher interest expense, higher utility operating
expenses, and start-up expenses in international and domestic growth
areas. Expenses incurred defending an unsuccessful hostile takeover bid
for IES reduced 1996 earnings per share by 15 cents.
The growth in IPC's earnings per share in 1997 as compared with 1996
was primarily the result of: electric and gas rate increases, a favorable
court ruling regarding the recovery of manufactured gas plant costs (see
"Liquidity and Capital Resources - Rates and Regulatory Matters"), and the
continued control of operation and maintenance costs. Partially offsetting
the increase in earnings were slightly depressed sales due to milder
weather and the loss of eight municipal customers to other energy
suppliers.
1996 versus 1995
The earnings per average common share for the Merged Company on a pro
forma basis and for each of WPLH, IES and IPC for the years ended December
31, 1996 and 1995 were as follows:
1996 1995
Merged Company pro forma combined* . . . $2.10 $1.98
WPLH . . . . . . . . . . . . . . . . . . 2.34 1.90
IES . . . . . . . . . . . . . . . . . . . 2.04 2.20
IPC . . . . . . . . . . . . . . . . . . . 2.69 2.63
The decrease in IES's earnings was primarily due to costs incurred in
1996 defending an unsuccessful takeover bid for IES which decreased
earnings per share by 15 cents. Increased sales, electric and gas rate
increases, and continuing efforts to control costs contributed to the
increased earnings for IPC.
* The pro forma earnings per share reflect the impact of the
discontinued operations recorded by WPLH in 1996 and 1995. For additional
information regarding the derivation of the pro forma earnings per share
data, see "Interstate Energy Corporation Unaudited Pro Forma Combined
Financial Statements" included elsewhere in this Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Historical WPLH Analysis
Cash flows from operating activities at WPLH decreased to $151
million in 1997 compared with $191 million in 1996 primarily due to a
reduction in net income and working capital. Cash flows used for financing
were $2.2 million in 1997 as compared to $72.4 million in 1996 resulting
from a net increase in the amount of debt outstanding. Cash flows used for
financing activities increased to $72.4 million in 1996 from $31.0 million
in 1995 due to the net change in short-term debt. 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 both the sale of
other property and equipment and the sale of a subsidiary and investments.
Times interest earned before income taxes for WPLH for 1997, 1996 and 1995
was 3.19, 3.82 and 3.55, respectively.
Prospective Considerations
The capital requirements of the Merged Company will be primarily
attributable to its utility subsidiaries' construction and acquisition
programs, its debt maturities and business opportunities of New
Diversified. The Merged Company 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. The Merged
Company'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 the Merged Company's liquidity
and capital resources, as discussed previously in the "Utility Industry
Outlook" section.
The Merged Company has interests in the international arena. At
December 31, 1997, IES had approximately $57 million of investments in
foreign entities. At December 31, 1997, WPLH and IPC did not have material
foreign investments. The Merged Company continues to explore additional
international investment opportunities. Such investments may carry a
higher level of risk than the Merged Company's traditional domestic
utility investments or New Diversified's domestic investments. Such risks
could include foreign government actions, foreign economic and currency
risks and others.
The Merged Company is engaged in pursuing various potential business
development opportunities, including international as well as domestic
investments, and is devoting resources to such efforts. The Merged Company
is striving to select investments where the international and other risks
are both understood and manageable.
At December 31, 1997, IES and IPC had investments in the stock of
McLeodUSA Inc. (McLeod), a telecommunications company, valued at $327
million and $1.4 million (as compared to a cost basis of $29 million and
$0.1 million), respectively. Pursuant to the applicable accounting rules,
the carrying value of the investments are adjusted to the estimated fair
value each quarter based on the closing price at the end of the quarter.
The adjustments do not impact earnings as the unrealized gains or losses,
net of taxes, are recorded directly to the common equity section of the
balance sheet. In addition, any such gains or losses are reflected in
current earnings only at the time they are realized through a sale. IES
and IPC have entered into agreements with McLeod which restricts the sale
or disposal of its shares without the consent of the McLeod Board of
Directors until September and June 1998, respectively.
The Merged Company had certain financial guarantees and commitments
outstanding at December 31, 1997 which are not reflected in the pro forma
consolidated financial statements. They generally consist of third-party
borrowing arrangements and lending commitments as well as guarantees of
financial performance of syndicated affordable housing properties.
Management believes the possibility of the Merged Company having to make
any material cash payments under these agreements is remote.
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 the Merged Company and certain subsidiaries are as
follows:
Standard &
Moody's Poor's
(As of (As of
3/26/98) 3/2/98)
IESU . . . . . . - Secured long-term debt A2 A+
- Corporate credit rating
(a) N/A A+
- Unsecured long-term debt A3 A
WP&L . . . . . . - Secured long-term debt Aa2 AA
- Corporate credit rating
(a) N/A AA-
- Unsecured long-term debt Aa3 A+
IPC . . . . . . . - Secured long-term debt A1 A+
- Corporate credit rating N/A A+
- Unsecured long-term debt A2 A
New Diversified . - Commercial paper P2 A1
Merged Company. . - Corporate credit rating
(a) N/A A+
- Commercial paper (b) P1 A1
__________
(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.
(b) Upon consummation of the Merger, IESU, WP&L and IPC will 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 replaces the commercial paper programs previously held at
IESU, WP&L and IPC.
The following material long-term debt financing activities involving
subsidiaries of the Merged Company took place 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%.
- In October 1997, Diversified entered into a 3-Year Credit Agreement
with various banking institutions which replaced its variable rate
credit facility. The agreement extends through October 2000, with
one-year extensions available upon agreement by the parties. Unused
borrowing availability under this agreement is also used to support
Diversified's commercial paper program. A combined maximum of $450
million of borrowings under this agreement and the commercial paper
program may be outstanding at any one time. Interest rates and
maturities are set at the time of borrowing. The rates are based upon
quoted market prices and the maturities are less than one year. At
December 31, 1997, Diversified had $182 million of borrowings
outstanding under this facility with interest rates ranging from
6.05%-7.30%. New Diversified intends to continue borrowing under the
renewal options of this facility and no conditions exist at December
31, 1997 that would prevent such borrowings. Accordingly, this debt
is classified as long-term. In addition, Diversified also entered
into a $150 million 364-Day Credit Agreement as discussed later.
- In August 1997, IESU issued $135 million of 6.625% Senior Debentures,
due 2009. The proceeds from these debentures were used to reduce
IESU's short-term borrowings.
- IESU repaid at maturity $8 million of 6.125% First Mortgage Bonds
during the second quarter of 1997.
- Also in the second quarter of 1997, IESU issued $55 million of
Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect
to have their Collateral Trust Bonds redeemed, in whole but not in
part, on May 1, 2002, at 100% of the principal amount thereof, plus
accrued interest. The proceeds from the Collateral Trust Bonds were
used to refinance $15 million of Series L, 7.875% First Mortgage
Bonds, $30 million of Series M, 7.625% First Mortgage Bonds and $10
million of 7.375% First Mortgage Bonds.
- IPC repaid at maturity $17 million of 6.125% First Mortgage Bonds in
May 1997.
Other than the Merged Company's periodic sinking fund requirements,
which will not require additional cash expenditures, the following long-
term debt (in millions) will mature prior to December 31, 2002:
IESU . . . . . . . . . . $185.1
IPC . . . . . . . . . . . 8.1
WP&L . . . . . . . . . . 10.8
New Diversified . . . . . 207.6
-----
Merged Company . . . . . $411.6
=====
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.
IESU, IPC and WP&L currently have no authority from their applicable
federal/state regulatory commissions or the Securities and Exchange
Commission (SEC) to issue additional long-term debt. The companies are
evaluating their future financing needs and will make the necessary
regulatory filings as needed.
Under the most restrictive terms of their respective indentures,
WP&L, IESU and IPC could have issued at least $276 million, $234 million
and $200 million of long-term debt at December 31, 1997, respectively.
The various charter provisions of the subsidiaries of the Merged
Company authorize and limit the aggregate amount of additional shares of
Cumulative Preferred Stock and Cumulative Preference Stock that may be
issued. At December 31, 1997, the companies could have issued the
following additional shares of Cumulative Preferred or Preference Stock:
IESU IPC WP&L IES
Cumulative Preferred . . - 1,238,619 2,700,775 5,000,000
Cumulative Preference . . 700,000 2,000,000 - -
The capitalization ratios of WPLH, IES and IPC at year-end were as
follows:
<TABLE>
<CAPTION>
Pro Forma WPLH IES IPC
Combined
1997 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Common equity . . . . 51% 54% 59% 49% 47% 52% 50%
Preferred stock . . . 3 5 6 1 1 8 8
Long-term debt . . . 46 41 35 50 52 40 42
---- ---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100% 100%
</TABLE>
For interim financing, WP&L, IESU and IPC are authorized by the
applicable federal or state regulatory agency to issue short-term debt as
follows (in millions) at December 31, 1997:
WP&L IESU IPC
Regulatory authorization . . . $138 $200 $75
Short-term debt outstanding . . $ 81 - $34
WPLH also had $42 million of short-term debt outstanding at December
31, 1997. In addition to providing for ongoing working capital needs, this
availability of short-term financing provides the companies 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 and IESU also use proceeds from the sale of accounts receivable and
unbilled revenues to finance a portion of their long-term cash needs. The
Merged Company anticipates that short-term debt will continue to be
available at reasonable costs due to current ratings by independent
utility analysts and rating services.
WPLH, IES and IPC had the following bank lines of credit (in
millions) at December 31, 1997 available to support its borrowings:
WPLH IES IPC
Bank lines of credit . . . . . . $170 $45 $53
Amount utilized . . . . . . . . . - $11 $34
Commitment fees are paid to maintain these lines and there are no
conditions which restrict the unused lines of credit. From time to time,
the Merged Company 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.
In October 1997, Diversified entered into a 364-Day Credit Agreement
with various banking institutions. The agreement extends through October
20, 1998, with 364 day extensions available upon agreement by the parties.
The unborrowed portion of this agreement is also used to support
Diversified's commercial paper program. A combined maximum of $150 million
of borrowings under this agreement and the commercial paper program may be
outstanding at any one time. Interest rates and maturities are set at the
time of borrowing. The rates are based upon quoted market prices and the
maturities are less than one year. There were no borrowings under this
facility at December 31, 1997.
Given the above financing flexibility available to the Merged
Company, 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 and business combination
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.
The Merged Company's anticipated construction and acquisition
expenditures for 1998 are estimated to be approximately $630 million,
consisting of approximately $277 million in its utility operations, $190
million for energy-related international investments and $163 million for
new business development initiatives at New Diversified. The level of 1998
domestic and international investments could vary significantly from the
estimates noted here dependent on actual investment opportunities as well
as the timing of the opportunities. The Merged Company estimates it will
spend approximately $1.2 billion on utility construction and acquisition
expenditures during 1999-2002. The strategy related to the construction
and acquisition program for New Diversified during 1999-2002 is currently
being finalized. New Diversified expects to invest in energy products and
services in domestic and international markets, industrial services
initiatives and other strategic initiatives.
One of the Merged Company's objectives is to finance utility
construction expenditures through internally generated funds supplemented,
when required, by outside financing. The Merged Company anticipates
funding the large majority of its utility construction expenditures during
1998-2002 through internally generated funds, supplemented by external
financings as needed. Funding of a majority of the New Diversified
construction and acquisition expenditures is expected to be completed with
external financings.
Nuclear Facilities
The Merged Company owns interests in two nuclear facilities, Kewaunee
and the Duane Arnold Energy Center (DAEC). Set forth below is a discussion
of certain matters impacting these 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 the 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.
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. In March 1996, WPSC filed an application with the PSCW for
permission to replace the Kewaunee steam generators. This application was
approved in April 1998. The issues related to the continued operation and
future ownership still need to be resolved before steam generator
replacement can 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.
DAEC, a 520-megawatt boiling water reactor plant, is operated by IESU
and IESU has a 70% ownership interest in the plant. The DAEC operating
license expires in 2014. Pursuant to the most recent electric rate case
order, the IUB allows IESU to recover $6.0 million annually for the cost
to decommission the DAEC. The current recovery figures are based on an
assumed cost to decommission the DAEC of $252.8 million, which is IESU's
70% portion in 1993 dollars, based on the Nuclear Regulatory Commission
(NRC) minimum formula (which exceeds the amount in the current site-
specific study completed in 1994). At December 31, 1997, IESU had $77.9
million invested in external decommissioning trust funds and also had an
internal decommissioning reserve of $21.7 million recorded as accumulated
depreciation.
Refer to the "Other Matters - Environmental" section for a discussion
of various issues impacting the Merged Company's future capital
requirements.
Rates and Regulatory Matters
In November 1997, as part of its merger approval, FERC accepted a
proposal by IESU, WP&L, and IPC, which provides for a four-year freeze on
wholesale electric prices beginning with the effective date of the Merger.
WP&L
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.
IESU
In September 1997, IESU agreed with the IUB to provide Iowa customers
a four-year retail electric and gas price freeze commencing on the
effective date of the Merger. The agreement excluded price changes due to
government-mandated programs, such as energy efficiency cost recovery or
unforeseen dramatic changes in operations. In addition, the price freeze
does not preclude a review by either the IUB or Office of Consumer
Advocate (OCA) into whether IESU is exceeding a reasonable return on
common equity.
Under provisions of the IUB rules, IESU is currently recovering the
costs it has incurred for its energy efficiency programs. There have been
several cost recovery filings made and approved by the IUB over the course
of the last few years. Generally, the costs incurred through July 1997 are
being recovered over various four-year periods. The IUB commenced a
rulemaking in January 1997 to implement statutory changes allowing
concurrent recovery and a final order in this proceeding was issued in
April 1997. The new rules allowed IESU to begin concurrent recovery of its
prospective expenditures on August 1, 1997. The implementation of these
changes will gradually eliminate the regulatory asset that was created
under the prior rate making mechanism as these costs are recovered.
IESU has the following amounts of energy efficiency costs included in
regulatory assets on its Consolidated Balance Sheets (in thousands):
Four-Year
Recovery December 31, December 31,
Beginning 1997 1996
Costs incurred through
1993 . . . . . . . . . 6/95 $ 7,779 $12,834
Costs incurred in
1994-1995 . . . . . . . 8/97 30,924 33,161
Costs incurred from
1/96-7/97 . . . . . . . 8/97 19,847 15,087
Under collection of
concurrent recovery . . N/A 850 -
------- -------
$59,400 $61,082
======= =======
IPC
In September 1997, IPC agreed with the IUB to provide Iowa customers
a four-year retail electric and gas price freeze commencing on the
effective date of the Merger. The agreement excluded price changes due to
government-mandated programs, such as energy efficiency cost recovery, or
unforeseen dramatic changes in operations. In addition, the price freeze
does not preclude a review by either the IUB or OCA into whether IPC is
exceeding a reasonable return on common equity. IPC also agreed with the
MPUC and Illinois Commerce Commission to four-year and three-year rate
freezes, respectively, commencing on the effective date of the Merger.
On September 30, 1997, the IUB approved a settlement between IPC and
the OCA which provided for an electric rate reduction of approximately
$3.2 million annually. The reduction applied to all bills rendered on and
after October 7, 1997.
In May 1995, IPC filed an application with the MPUC for an increase
in gas rates in an annual amount of $2.4 million. Increased interim rates
in an annual amount of $1.5 million were placed in effect in June 1995. On
February 29, 1996, MPUC issued an order allowing an increase in gas rates
of $2.1 million. Rates reflecting the increase were implemented in
September 1996. The Department of Public Service and the Office of
Attorney General appealed the MPUC's decision. The appeal was denied by
the Minnesota Court of Appeals on February 18, 1997. On March 21, 1997,
the Department of Public Service and the Office of Attorney General
appealed the decision of the Court of Appeals (and the MPUC) to the
Minnesota Supreme Court. On January 8, 1998, the Minnesota Supreme Court
upheld the MPUC's initial decision allowing IPC to recover $4.9 million of
manufactured gas plant clean-up expenses over a 10 year period.
IPC is also recovering its energy efficiency costs in Iowa in a
similar manner as IESU and began its concurrent cost recovery in October
1997. IPC has the following amounts of energy efficiency costs to be
recovered in Iowa included in regulatory assets on its Balance Sheets (in
thousands):
Four-Year
Recovery December 31, December 31,
Beginning 1997 1996
Costs incurred through 1992 . . 10/94 $ 912 $ 2,128
Costs incurred in 1993-1995 . . 5/97 16,576 19,193
Costs incurred from 1/96-9/97 . 10/97 9,796 6,042
------- -------
$27,284 $27,363
======= =======
In addition, IPC had $2.7 million and $2.5 million at December 31,
1997 and December 31, 1996, respectively, included in regulatory assets
for energy efficiency recoveries in Minnesota.
Assuming capture of the Merger-related synergies described under the
caption "Merger" above and no significant legislative or regulatory
changes affecting its utility subsidiaries, the Merged Company does not
expect the Merger-related electric and gas price freezes to have a
material adverse effect on its financial position or results of
operations.
OTHER MATTERS
Year 2000
The Merged Company utilizes software, embedded systems and related
technologies throughout its businesses 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 the Merged Company'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 the Merged Company's
financial and customer systems, has been completed. The Merged Company
currently estimates that the remaining costs to be incurred on this phase
of the project will be approximately $4 million to $8 million in the
aggregate.
The task force has also begun Phase II of the project which is an
extensive review of the Merged Company'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, the Merged Company 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. The Merged Company 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 the Merged Company 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 the Merged
Company's financial position or results of operations.
In April 1998, WP&L filed a request with the PSCW requesting deferral
treatment of Year 2000 costs in excess of $4.5 million. Currently,
management cannot predict the action the PSCW may take regarding this
request.
Labor Issues
The status of the collective bargaining agreements at each of the
utilities is as follows:
IESU WP&L IPC
Number of collective bargaining
agreements . . . . . . . . . . . . . 6 1 3
Percentage of workforce covered by
agreements . . . . . . . . . . . . . 53 69 64
There are two agreements at IESU expiring in 1998 and the number of
employees covered under these agreements is relatively small.
Financial Instruments
WPLH 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. WPLH has used swaps, futures and options to hedge
the price risks associated with the purchase and sale of stored gas at
WP&L and with the purchases and sales of gas and electric power at the
energy marketing subsidiary. 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.
IES historically had a policy that derivative financial instruments
were to be used only to mitigate business risks and not for speculative
purposes. Derivatives were used on a very limited basis. At December 31,
1997, IES did not have any material derivatives outstanding. IPC had no
derivatives outstanding at December 31, 1997. The Merged Company is in the
process of developing its policy for the use of derivative financial
instruments.
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 IESU and 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,
IESU and WP&L do 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
The Merged Company 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 IESU, IPC, WP&L and New
Diversified 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 the Merged Company
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.
IESU, IPC and WP&L all have current or previous ownership interests
in properties previously associated with the production of gas at
manufactured gas plants (MGP) for which they may be liable for
investigation, remediation and monitoring costs relating to the sites. A
summary of information relating to the sites is as follows:
IESU IPC WP&L
Number of known sites for which
liability may exist . . . . . . . . 34 9 14
Liability recorded at December 31,
1997 (millions) . . . . . . . . . . $33.2 $5.8 $ 9.2
Regulatory asset recorded at December
31, 1997 (millions) . . . . . . . . $33.2 $6.2 $16.3
The companies are 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. The companies each believe that they
have completed the remediation at various sites, although they are still
in the process of obtaining final approval from the applicable
environmental agencies for some of these sites.
Each company has recorded environmental liabilities related to the
MGP sites; such amounts are 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. The Merged
Company currently estimates the range of costs to be incurred for the
investigation, remediation and monitoring of the sites to be approximately
$36 million to $83 million. 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. The MPUC also allows the deferral of MGP-related costs
applicable to the Minnesota sites and IPC has been successful in obtaining
approval to recover such costs in rates in Minnesota. While the IUB does
not allow for the deferral of MGP-related costs, it has permitted
utilities to recover its prudently incurred costs. As a result, regulatory
assets have been recorded by each company which reflect the probable
future rate recovery, where applicable. Considering the current rate
treatment, and assuming no material change therein, each of IESU, IPC and
WP&L believes that the clean-up costs incurred for these MGP sites will
not have a material adverse effect on their respective financial positions
or results of operations.
In April 1996, IESU filed a lawsuit against certain of its insurance
carriers seeking reimbursement for its MGP-related costs. Settlement
discussions are proceeding with its insurance carriers regarding the
recovery of these costs. Settlement has been reached with sixteen
carriers. In 1994, IPC filed a lawsuit against certain of its insurance
carriers to recover its MGP-related costs. Settlements have been reached
with eight carriers. Both companies are continuing their pursuit of
additional recoveries. Amounts received from insurance carriers are being
deferred by IESU and IPC pending a determination of the regulatory
treatment of such recoveries. WP&L has settled with twelve carriers and is
also continuing to pursue additional recoveries from other carriers. The
three companies are unable to predict the amount of any additional
insurance recoveries they may realize.
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. IESU, IPC and WP&L have met the provisions of Phase I of
the Act and are 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. The companies are reviewing their options to ensure
they will have sufficient allowances to offset their emissions in the
future. The companies believe that the potential costs of complying with
these provisions of Title IV of the Act will not have a material adverse
impact on their 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. IESU, IPC and WP&L are currently reviewing the rules to
determine what impact they may have on their 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 cost related thereto would be
significant.
In 1995, the EPA published the Sulfur Dioxide Network Design Review
for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-
case modeling method suggested that the Cedar Rapids area could be
classified as "nonattainment" for the NAAQS standards established for SO2.
The worst-case modeling suggested that two of IESU's generating facilities
contributed to the modeled exceedences. As a result of exceedences at a
monitor near one of IESU's generating facilities, the EPA issued a letter
to the Iowa Governor's office directing the state to develop a plan of
action. In this regard, IESU entered into a consent order with the Iowa
Department of Natural Resources (IDNR) in the third quarter of 1997 on
this issue. IESU agreed to limit the SO2 emissions from the two noted
generating facilities and to install a new stack (potential aggregate
capital cost of up to $2.5 million over the next two years) at one of the
facilities. The IDNR approved the consent order in the fourth quarter of
1997 and it is expected to be approved by the EPA in the second quarter of
1998.
Pursuant to a routine internal review of documents, IESU determined
that certain changes undertaken during previous years at one of its
generating facilities may have required a federal Prevention of
Significant Deterioration (PSD) permit. IESU initiated discussions with
its regulators on the matter, resulting in the submittal of a PSD permit
application in February 1997. IESU expects to receive the permit in the
second quarter of 1998. IESU may be subject to a penalty for not having
obtained the permit previously; however, IESU believes that any likely
actions resulting from this matter will not have a material adverse effect
on its financial position or results of operation.
Pursuant to a separate routine internal review of plant operations,
IESU determined that certain permit limits were exceeded in 1997 at one of
its generating facilities in Cedar Rapids. IESU has initiated discussions
with its regulators on the matter and has proposed a compliance plan which
contemplates operational changes. In addition, IESU will be submitting a
PSD permit application in the second quarter of 1998. IESU may be subject
to a penalty for exceeding permit limits established for this facility;
however, management believes that any likely actions resulting from this
matter will not have a material adverse effect on IESU's financial
position or results of operations.
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, the Merged Company 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, the Merged Company 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. IESU and WP&L entered into
such contracts and have made the agreed payments to the Nuclear Waste Fund
(NWF) held by the U.S. Treasury. The companies were 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. IESU and
WP&L are 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 IESU and WP&L. In
accordance with this responsibility, IESU and WP&L have been storing spent
nuclear fuel on site at DAEC and Kewaunee, respectively, since plant
operations began. DAEC has current on-site capability to store spent fuel
until 2001. IESU is currently reviewing its options to expand on-site
storage capability. To provide assurance that both the operating and post-
shutdown storage needs are satisfied, a combination of expanding the
capacity of the existing fuel pool and construction of a dry cask modular
facility are being contemplated. 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. The States of Iowa
and Wisconsin are members 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 IESU and WP&L currently ship the waste each produces
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, DAEC and Kewaunee each have
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. IESU is recovering the costs associated with
this assessment through its electric fuel adjustment clauses over the
period the costs are assessed. IESU's 70% share of the future assessment
at December 31, 1997 was $8.9 million and has been recorded as a liability
with a related regulatory asset for the unrecovered amount. WP&L is also
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.
Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary of
New Diversified, is responsible for certain dismantlement and abandonment
costs related to various off-shore oil and gas platforms (and related on-
shore plants and equipment), the most significant of which is located off
the coast of California. Whiting estimates the total costs for these
properties to be approximately $14 million and the expenditures are not
expected to be incurred for approximately five years. Whiting accrues
these costs as reserves are extracted, resulting in a recorded liability
of $8.6 million at December 31, 1997.
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.
WPLH SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
The following unaudited consolidated quarterly data of WPLH, 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. WP&L's results of operations are a significant
portion of the consolidated results. The quarterly amounts were affected
by, among other items, WP&L's 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.
Earnings
per Share
Operating Operating (basic and
Revenues Income Net Income diluted)
(in thousands except per share data)
Quarter Ended
1997:
March 31 . . . . . . $261,688 $40,637 $21,827 $0.71
June 30 . . . . . . . 206,681 19,900 9,007 0.29
September 30 . . . . 214,412 31,877 13,953 0.45
December 31 . . . . . 236,474 36,193 16,467 0.54
1996:
March 31 . . . . . . $260,877 $54,012 $31,680 $1.03
June 30 . . . . . . . 208,293 30,361 16,539 0.54
September 30 . . . . 212,263 28,417 12,596 0.41
December 31 . . . . . 251,411 30,260 11,093 0.36
<PAGE>
WPLH REPORT ON THE FINANCIAL INFORMATION
WPL Holdings, Inc. management is responsible for the information and
representations contained in the financial statements and in certain other
sections of this Annual Report. The consolidated financial statements that
follow have been prepared in accordance with generally accepted accounting
principles. In addition to selecting appropriate accounting principles,
management is responsible for the manner of presentation and for the
reliability of the financial information. In fulfilling that
responsibility, it is necessary for management to make estimates based on
currently available information and judgments of current conditions and
circumstances.
Through a well-developed system of internal controls, management
seeks to ensure the integrity and objectivity of the financial information
presented in this report. This system of internal control is designed to
provide reasonable assurance that the assets of the company are
safeguarded and that the transactions are executed according to
management's authorizations and are recorded in accordance with the
appropriate accounting principles.
The Board of Directors participates in the financial information
reporting process through its Audit Committee.
LOGO
Erroll B. Davis Jr.
President and Chief Executive Officer
WPL Holdings, Inc.
LOGO
Edward M. Gleason
Vice President, Treasurer and Corporate Secretary
Principal Financial Officer
WPL Holdings, Inc.
January 30, 1998
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowners of WPL Holdings, Inc.:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of WPL Holdings, Inc. (a Wisconsin
corporation) and subsidiaries as of December 31, 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 WPL Holdings,
Inc. 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>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1997 1996 1995
(in thousands except for per share
data)
Operating revenues:
Electric . . . . . . . . . . . $634,143 $589,482 $546,324
Gas . . . . . . . . . . . . . . 155,883 165,627 139,165
Fees, rents, non-utility energy
sales and other . . . . . . . 129,229 177,735 121,766
-------- -------- --------
919,255 932,844 807,255
-------- -------- --------
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 and cost of
non-utility energy . . . . . . 254,796 317,608 252,722
Maintenance . . . . . . . . . . 48,058 46,492 42,043
Depreciation and amortization . 111,289 90,683 86,319
Taxes other than income . . . . 34,988 34,603 34,188
-------- -------- --------
790,648 789,794 660,702
-------- -------- --------
Operating income 128,607 143,050 146,553
-------- -------- --------
Interest expense and other:
Interest expense . . . . . . . 42,535 42,027 43,559
Allowance for funds used during
construction . . . . . . . . . (2,775) (3,208) (2,088)
Miscellaneous, net . . . . . . (4,432) (14,098) (5,954)
------- -------- -------
35,328 24,721 35,517
------- -------- -------
Income before income taxes and
preferred dividend requirement
of subsidiary . . . . . . . . . 93,279 118,329 111,036
Income taxes . . . . . . . . . . 28,715 41,814 36,108
Preferred dividend requirement of
subsidiary . . . . . . . . . . 3,310 3,310 3,310
-------- -------- --------
Income from continuing operations
61,254 73,205 71,618
-------- -------- --------
Discontinued operations:
Loss from operation of
discontinued subsidiary, net
of applicable tax benefits of
$1,451 . . . . . . . . . . . - - 2,212
Loss on disposal of subsidiary,
net of applicable tax benefit
of $575 and tax expense of
$3,271 . . . . . . . . . . . - 1,297 10,974
-------- -------- --------
- 1,297 13,186
-------- -------- --------
Net income . . . . . . . . . . . $ 61,254 $ 71,908 $ 58,432
======== ======== ========
Earnings per common share (basic
and diluted):
Income from continuing
operations . . . . . . . . . . $ 1.99 $ 2.38 $ 2.33
Discontinued operations . . . . - (0.04) (0.43)
------ ------ ------
Net income . . . . . . . . . . $ 1.99 $ 2.34 $ 1.90
====== ====== ======
Weighted average number of shares
of common stock
outstanding . . . . . . . . . . 30,782 30,790 30,774
====== ====== ======
Cash dividends paid per common
share . . . . . . . . . . . . . $ 2.00 $ 1.97 $ 1.94
====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
(in thousands)
ASSETS
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:
Rental, net . . . . . . . . . . . . . . . 101,835 112,913
Other, net . . . . . . . . . . . . . . . 9,424 16,350
--------- ---------
111,259 129,263
--------- ---------
Investments:
Nuclear decommissioning trust funds . . . 112,356 90,671
Other investments . . . . . . . . . . . . 28,289 15,408
--------- ---------
140,645 106,079
--------- ---------
Current assets:
Cash and equivalents . . . . . . . . . . 13,987 11,070
Net accounts receivable and unbilled
revenue, less allowance
for doubtful accounts of $1,104 and
$1,524, respectively . . . . . . . . . . . 78,082 88,798
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 . . . . . . . . . . 8,151 7,397
--------- ---------
173,008 172,402
--------- ---------
Restricted cash . . . . . . . . . . . . . . 8,146 6,848
--------- ---------
Deferred charges: . . . . . . . . . . . . .
Regulatory assets . . . . . . . . . . . . 91,314 160,877
Other . . . . . . . . . . . . . . . . . . 92,627 84,493
--------- ---------
183,941 245,370
--------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . $1,861,807 $1,900,531
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization (See Consolidated Statements
of Capitalization):
Common shareowners' investment . . . . . $607,583 $607,355
Subsidiary preferred stock not
mandatorily redeemable . . . . . . . . . 59,963 59,963
Long-term debt, net . . . . . . . . . . . 457,520 362,564
--------- ---------
1,125,066 1,029,882
--------- ---------
Current liabilities:
Current maturities of long-term debt . . 11,528 67,626
Variable rate demand bonds . . . . . . . 56,975 56,975
Short-term debt . . . . . . . . . . . . . 123,095 102,779
Accounts payable and accruals . . . . . . 91,175 106,486
Accrued payroll and vacation . . . . . . 16,030 14,500
Accrued income taxes . . . . . . . . . . 412 4,669
Accrued interest . . . . . . . . . . . . 8,229 9,085
Other . . . . . . . . . . . . . . . . . . 31,728 45,218
--------- ---------
339,172 407,338
--------- ---------
Other credits:
Accumulated deferred income taxes . . . . 253,519 245,686
Accumulated deferred investment tax
credits . . . . . . . . . . . . . . . . 35,039 36,931
Accrued environmental remediation costs . 9,238 74,075
Deferred credits and other . . . . . . . 99,773 106,619
--------- ---------
397,569 463,311
--------- ---------
Commitments and contingencies (Note 11)
TOTAL CAPITALIZATION AND LIABILITIES . . . $1,861,807 $1,900,531
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
(in thousands)
Cash flows generated from (used
for) operating activities:
Net income . . . . . . . . . . . $61,254 $71,908 $58,432
Adjustments to reconcile net
income to net cash generated
from operating activities:
Depreciation and amortization 111,289 90,683 86,319
Deferred income taxes . . . . 4,957 7,078 9,908
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 sale of
subsidiary and investment . . - (4,149) 10,974
(Gain) loss on disposition of
other property and equipment 710 (5,676) -
Changes in assets and
liabilities:
Restricted cash . . . . . . . (1,298) (3,582) (49)
Net accounts receivable and
unbilled revenue . . . . . . 10,716 5,850 (23,183)
Inventories . . . . . . . . . (4,887) (4,081) 3,750
Prepayments and other . . . . (3,518) 1,201 2,292
Accounts payable and accruals (14,637) 11,661 19,966
Accrued taxes . . . . . . . . (4,257) (1,814) 88
Other, net . . . . . . . . . . (9,625) 19,764 12,974
--------- --------- ---------
Net cash from (used for)
operating activities . . . 151,223 190,719 185,917
--------- --------- ---------
Cash flows generated from (used
for) financing activities:
Common stock cash dividends . (61,562) (60,656) (59,701)
Proceeds from issuance of
long-term debt . . . . . . . 105,000 1,370 756
Reduction of long-term debt . (65,921) (5,000) (18,000)
Net change in short-term debt 20,316 (6,746) 45,024
Other, net . . . . . . . . . . - (1,367) 941
--------- --------- ---------
Net cash from (used for)
financing activities . . . (2,167) (72,399) (30,980)
--------- --------- ---------
Cash flows generated from (used
for) investing activities:
Proceeds from sale of other
property and equipment . . . 9,700 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 nuclear
decommissioning trust funds . (21,685) (17,314) (21,566)
Proceeds from sale of
subsidiary and investments . - 24,930 -
Purchase of other property and
equipment . . . . . . . . . . (2,855) (20,824) (26,696)
Contribution to nonutility
joint venture . . . . . . . . (5,000) - -
Other, net . . . . . . . . . . (4,977) (13,464) 5,105
--------- --------- ---------
Net cash from (used for)
investing activities . . . (146,139) (118,636) (150,824)
--------- --------- ---------
Net increase (decrease) in cash and
equivalents . . . . . . . . . . . 2,917 (316) 4,113
Cash and equivalents at beginning
of year . . . . . . . . . . . . . 11,070 11,386 7,273
--------- --------- ---------
Cash and equivalents at end of year $13,987 $11,070 $11,386
========= ========= =========
Supplemental disclosures of cash
flow information:
Cash paid during the year:
Interest on debt . . . . . . . $42,706 $35,855 $39,984
Preferred stock dividends of
subsidiary . . . . . . . . . $ 3,310 $ 3,310 $ 3,310
Income taxes . . . . . . . . . $23,662 $39,795 $29,499
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
(in thousands except for
share data)
Common shareowners' investment:
Common stock $.01 par value, authorized
100,000,000 shares, issued and
outstanding - 30,788,593 and 30,773,735
shares, respectively . . . . . . . . . $ 308 $ 308
Additional paid-in capital . . . . . . . 304,392 303,856
Reinvested earnings . . . . . . . . . . . 302,883 303,191
--------- ---------
607,583 607,355
--------- ---------
Preferred stock:
Wisconsin Power and Light Company -
Cumulative, without par value,
authorized 3,750,000 shares, maximum
aggregate stated value $150,000,000:
Preferred stock without mandatory
redemption, $100 stated value -
4.50% series, 99,970 shares
outstanding . . . . . . . . . . . 9,997 9,997
4.80% series, 74,912 shares
outstanding . . . . . . . . . . . 7,491 7,491
4.96% series, 64,979 shares
outstanding . . . . . . . . . . . 6,498 6,498
4.40% series, 29,957 shares
outstanding . . . . . . . . . . . 2,996 2,996
4.76% series, 29,947 shares
outstanding . . . . . . . . . . . 2,995 2,995
6.20% series, 150,000 shares
outstanding . . . . . . . . . . . 15,000 15,000
Cumulative, without par value, $25
stated value -
6.50% series, 599,460 shares
outstanding . . . . . . . . . . . 14,986 14,986
--------- ---------
59,963 59,963
--------- ---------
Long-term debt:
Wisconsin Power and Light Company -
First mortgage bonds:
Series L, 6.25%, due 1998 . . . . 8,899 8,899
1984 Series A, variable rate, due
2014 (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
--------- ---------
Heartland Development Corporation -
Multifamily Housing Revenue Bonds issued
by various housing and community
development authorities, due 2004-2024,
2.00% - 7.55% . . . . . . . . . . . . 36,503 37,445
Other mortgage notes payable, due
1998-2042, 0% - 10.75% . . . . . . . . 45,106 45,086
--------- ---------
81,609 82,531
--------- ---------
WPL Holdings, Inc. -
8.96% Senior notes, repaid 1997 . . . . - 10,000
8.59% Senior notes, due 2004 . . . . . 24,000 24,000
--------- ---------
24,000 34,000
--------- ---------
Less -
Current maturities . . . . . . . . . . (11,528) (67,626)
Variable rate demand bonds . . . . . . (56,975) (56,975)
Unamortized discount and premium, net . (1,460) (1,240)
--------- ---------
457,520 362,564
--------- ---------
TOTAL CAPITALIZATION . . . . . . . . . . . $1,125,066 $1,029,882
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMMON
SHAREOWNERS' INVESTMENT
Year Ended December 31,
1997 1996 1995
(in thousands except for per share
data)
Common stock:
Balance at beginning of year . . $ 308 $ 308 $ 308
--------- --------- ---------
Balance at end of year . . . . . 308 308 308
--------- --------- ---------
Additional paid-in capital:
Balance at beginning of year . . 303,856 305,223 304,442
Other . . . . . . . . . . . . 536 (1,367) 781
--------- --------- ---------
Balance at end of year . . . . . 304,392 303,856 305,223
--------- --------- ---------
Reinvested earnings:
Balance at beginning of year . . 303,191 291,939 293,048
Net income . . . . . . . . . . 61,254 71,908 58,432
Cash dividends ($2.00 per
share, $1.97 per share
and $1.94 per share,
respectively) . . . . . . . . (61,562) (60,656) (59,701)
Expense of issuing stock and
other . . . . . . . . . . . . - - 160
--------- --------- ---------
Balance at end of year . . . . . 302,883 303,191 291,939
--------- --------- ---------
TOTAL COMMON SHAREOWNERS'
INVESTMENT . . . . . . . . . . . . $607,583 $607,355 $597,470
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions except as otherwise indicated)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General
The consolidated financial statements include the accounts of WPL
Holdings, Inc. (WPLH) and its consolidated subsidiaries (collectively, the
Company). WPLH is an investor-owned holding company whose primary
operating company, Wisconsin Power & Light Company (WP&L), is engaged
principally in the generation, transmission, distribution and sale of
electric energy and the purchase, distribution, transportation and sale of
natural gas primarily in the state of Wisconsin. WP&L's principal
consolidated subsidiary is South Beloit Water, Gas and Electric Co. The
Company also has various non-utility subsidiaries which are primarily
engaged in the environmental and engineering service, affordable housing
and energy marketing businesses.
All subsidiaries for which the Company owns directly or indirectly
more than 50% of the voting stock are included as consolidated
subsidiaries. All significant intercompany balances and transactions have
been eliminated from the consolidated financial statements.
Unconsolidated investments for which the Company has at least a 20%
interest are generally accounted for under the equity method of
accounting. These investments are stated at acquisition cost, increased or
decreased for the Company's equity in net income or loss, which is
included in "Miscellaneous, net" in the consolidated statements of income
and decreased for any dividends received. Investments that do not meet the
criteria for consolidation or the equity method of accounting are
accounted for under the cost method.
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
The Company 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
The Company uses the straight-line method of depreciation. For
utility plant, straight-line depreciation is computed on the average
balance of depreciable property at individual straight-line 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 included 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
The Company accrues revenues for services provided but not yet billed
at month-end.
j. Income Taxes
The Company 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. As
part of the affordable housing business, the Company is eligible to claim
affordable housing and historic rehabilitation credits. These tax credits
reduce current federal taxes to the extent the Company has consolidated
taxes payable.
k. Common Shares Outstanding
The weighted average common shares outstanding used in the
calculation of basic earnings per share were 30,781,998; 30,789,813 and
30,773,588 for 1997, 1996 and 1995, respectively. The common stock shares
used for calculating diluted earnings per share were 30,784,136;
30,793,555 and 30,775,965 for 1997, 1996 and 1995, respectively.
NOTE 2. PROPOSED MERGER OF THE COMPANY
On November 10, 1995, WPLH, IES Industries Inc. (IES), and Interstate
Power Company (IPC) entered into an Agreement and Plan of Merger, as
amended (Merger Agreement), providing for: a) IPC becoming a 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 included elsewhere in this Annual Report. 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) (As Reported) (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 Proposed 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 after 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
Ownership Plant Plant Provision Accumulated
Interest Inservice MW in for Plant in Provision for
% Date Capacity Service Depreciation CWIP Service Depreciation CWIP
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal:
Columbia Energy 1975 &
Center . . . . . 46.2 1978 1,023 $161.4 $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.
The Company 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 the Company's financial position
or results of operations.
NOTE 5. EMPLOYEE BENEFIT PLANS
a. Pension Plans
WP&L has noncontributory, defined benefit retirement plans covering
substantially all employees. The benefits are based upon years of service
and levels of compensation. The projected unit credit actuarial cost
method was used to compute net pension costs and the accumulated and
projected benefit obligations. WP&L's policy is to fund the pension cost
in 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 the Company'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 39.3 29.3
benefit obligation . . . . . . .
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 benefit
obligation . . . . . . . . . . . . . 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 in 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 the Company'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 (31.0) (32.8)
plan assets . . . . . . . . . . . . . . . .
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.
c. Long-Term Equity Incentive Plan
WPLH has a long-term equity incentive plan which permits the grant of
non-qualified stock options, incentive stock options, restricted stock,
performance shares and performance units to key employees. As of December
31, 1997, only non-qualified stock options and equivalent performance
units had been granted to key employees. The maximum number of shares of
common stock that may be issued under the plan may not exceed one million.
Options granted to date become exercisable after three years. Options
outstanding will expire no later than 10 years after the grant date. The
first options were granted in 1995 and will become exercisable in January
1998. No options have been canceled or exercised to date. The options
granted and the value of those options using the Black-Scholes model is as
follows:
1997 1996 1995
Options granted . . . . . . . . . . . . 77,650 72,250 41,900
Weighted average Black-Scholes value of $2.15 $2.23 $2.71
options . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . 0.15 0.16 0.16
Risk free interest rate . . . . . . . . 6.13% 5.26% 7.84%
Expected life . . . . . . . . . . . . . 3 years 3 years 3 years
Annual dividend rate . . . . . . . . . 7.0% 7.0% 7.0%
WPLH follows APB Opinion 25, "Accounting for Stock Issued to
Employees," to account for stock options. No compensation cost is
recognized because the option exercise price is equal to the market price
of the underlying stock on the date of grant. Had compensation cost for
the plan been determined based on the Black-Scholes value at the grant
dates for awards as prescribed by SFAS No. 123 "Accounting for Stock-Based
Compensation," pro forma net income and earnings per share would have
been:
1997 1996 1995
Pro forma net income . . . . . . . $61.1 $71.7 $58.3
Pro forma earnings per share (basic
and diluted) . . . . . . . . . . $ 1.98 $ 2.33 $ 1.90
The performance units granted under the plan to date are expensed
over the three-year vesting period based on the current dividend rate. In
1997, 1996 and 1995, WPLH recognized expense of $0.4, $0.2 and $0.1,
respectively.
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 . . . . . . . . . . . . . . . 7.0 6.8 6.0
Investment tax credits restored . . . . (2.0) (1.6) (1.7)
Amortization of excess deferred taxes . (1.6) (1.4) (1.5)
Affordable housing and historical tax
credits . . . . . . . . . . . . . . . (6.7) (5.0) (4.5)
Adjustment of prior period taxes . . . (2.6) - -
Other differences, net . . . . . . . . 1.7 1.6 (0.8)
---- ---- ----
Effective income tax . . . . . . . . 30.8% 35.4% 32.5%
==== ==== ====
The breakdown of income tax expense as reflected in the consolidated
statements of income is as follows:
1997 1996 1995
Current federal . . . . . . . . . . . . $25.2 $32.8 $25.9
Current state . . . . . . . . . . . . . 6.6 9.7 7.2
Deferred . . . . . . . . . . . . . . . 5.0 7.1 9.9
Investment tax credit restored . . . . (1.9) (1.9) (1.9)
Affordable housing and historical tax
credits . . . . . . . . . . . . . . . (6.2) (5.9) (5.0)
---- ---- ----
$28.7 $41.8 $36.1
==== ==== ====
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 . . . . . . . . $295.4 $282.0
Investment tax credit related . . (23.5) (19.9)
Decommissioning related . . . . . (16.0) (14.5)
Other . . . . . . . . . . . . . . (2.4) (1.9)
----- -----
$253.5 $245.7
===== =====
NOTE 7. SHORT-TERM DEBT AND LINES OF CREDIT
WPLH 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 $170.0 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 . . . $ 42.1 $ 43.3 $ 53.0
Discount rates on commercial
paper . . . . . . . . . . . . 5.48-5.90% 5.35-5.65% 5.73-5.77%
Interest rates on notes payable 5.00-5.90% 5.28-6.31% 5.80-6.42%
For the year ended
Maximum month-end amount of
short-term debt . . . . . . . $140.0 $103.5 $117.0
Average amount of short-term
debt (based on daily
outstanding balances) . . . . $ 94.5 $ 60.8 $ 68.7
Average interest rate on short-
term debt . . . . . . . . . . 5.65% 5.72% 5.95%
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate and commodity price risks.
Interest rate swaps 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.
Other: The Company's non-utility energy marketing business
periodically uses commodity futures contracts, options and swaps to hedge
the impact of natural gas and electric power price fluctuations on its
purchase and sale commitments. Gains and losses on these instruments are
deferred and recognized in income as adjustments to the costs of energy
when the related transaction being hedged is finalized. At December 31,
1997 and 1996, the instruments outstanding were immaterial.
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 . . . . . 526.0 555.7 487.2 503.5
Since WP&L is subject to regulation, any gains or losses related to
the difference between the carrying amount and the fair value of WP&L's
nuclear decommissioning trust funds and long-term debt may not be realized
by the Company's shareowners.
NOTE 10. CAPITALIZATION
a. Common Shareowners' Investment
During 1997, 1996 and 1995, the Company did not issue any new shares
of common stock through either its Shareowner Direct Plan or 401(k)
Savings Plan.
In February 1989, the Board of Directors of the Company declared a
dividend distribution of one common stock purchase right (right) on each
outstanding share of the Company's common stock. Each right would
initially entitle shareowners to buy one-half of one share of the
Company's common stock at an exercise price of $60.00 per share, subject
to adjustment. The rights are not currently exercisable, but would become
exercisable if certain events occurred related to a person or group
acquiring or attempting to acquire 20% or more of the outstanding shares
of common stock. The rights expire on February 22, 1999, unless redeemed
or exchanged earlier by the Company.
A retail rate order effective 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 the Company 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. In addition, the Company's long-term debt includes
unsecured debentures, notes payable and revenue bonds related to its
affordable housing properties. Current maturities of long-term debt of the
Company are as follows: $11.5 in 1998, $4.5 in 1999, $4.1 in 2000, $2.6 in
2001 and $2.7 in 2002.
In June 1997, WP&L issued $105.0 of 7% 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, the Company 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 was $14.3
for 1997 and $10.7 for 1996 and 1995. These 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 the Company'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."
h. Loan Commitments
As of December 31, 1997, HDC had extended commitments to provide
$15.7 in nonrecourse, fixed rate, permanent financing to developers which
are secured by affordable housing properties. The Company anticipates
other lenders will ultimately finance these properties.
NOTE 12. DISCONTINUED OPERATIONS
The Company's financial statements reflect the discontinuance of
operations of its utility energy and marketing consulting business in
1995. The discontinuance of this business resulted in a pre-tax loss in
the fourth quarter of 1995 of $7.7. The after tax loss on disposition was
$11.0 reflecting the associated tax expense on disposition due to the non-
deductibility of the carrying value of goodwill at sale. During 1996, the
Company recognized an additional loss of $1.3, net of applicable income
tax benefit, associated with the final disposition of the business.
Operating revenues, operating expenses, other income and expense and
income taxes for the discontinued operations for the time periods
presented have been excluded from income from continuing operations.
Interest expense has been adjusted for the amounts associated with direct
obligations of the discontinued operations.
NOTE 13. SEGMENT INFORMATION
The following table sets forth certain information relating to the
Company's consolidated continuing operations:
1997 1996 1995
Operation information:
Customer revenues -
Electric - utility . . . . . . . . $634.1 $589.5 $546.3
Gas - utility . . . . . . . . . . 155.9 165.6 139.2
Environmental and engineering
services . . . . . . . . . . . . 78.1 84.8 88.6
Other . . . . . . . . . . . . . . 51.1 92.9 33.2
Operating income (loss) -
Electric - utility . . . . . . . . $125.9 $136.3 $134.2
Gas - utility . . . . . . . . . . 13.7 18.9 17.0
Environmental and engineering
services . . . . . . . . . . . . (2.0) 0.1 3.7
Other(a) . . . . . . . . . . . . . (9.0) (12.2) (8.3)
Investment information:
Identifiable assets, including
allocated common plant at
December 31 -
Electric - utility . . . . . . . . $1,245.2 $1,225.3 $1,226.8
Gas - utility . . . . . . . . . . 193.6 262.1 250.6
Environmental and engineering
services . . . . . . . . . . . . 26.6 33.5 38.1
Other . . . . . . . . . . . . . . 396.4 379.6 356.9
Other information:
Construction, decommissioning and
nuclear fuel -
Electric - utility . . . . . . . . $123.8 $125.9 $122.3
Gas - utility . . . . . . . . . . 15.3 18.0 16.9
Other . . . . . . . . . . . . . . 14.2 22.5 14.6
Depreciation and amortization
expense -
Electric - utility . . . . . . . . $91.2 $74.5 $71.4
Gas - utility . . . . . . . . . . 12.3 9.8 9.6
Other . . . . . . . . . . . . . . 7.8 6.4 5.3
__________
(a) Excludes the effects of affordable housing and historical tax credits
of $6.2, $5.9 and $5.0 in 1997, 1996 and 1995, respectively.
NOTE 14. CARGILL JOINT VENTURE
In July 1997, the Company announced a joint venture with Cargill
Incorporated to market electricity and risk management services to
wholesale buyers. This joint venture, in which the Company has a 50%
interest, is named Cargill-Alliant. The joint venture is accounted for
using the equity method. As of December 31, 1997, the carrying amount of
the investment was $4.7.
NOTE 15. SUBSEQUENT EVENT (Unaudited)
In April 1998, the Proposed Merger involving WPLH, IES and IPC was
consummated and the Company was renamed Interstate Energy Corporation. For
information regarding the terms of the Proposed Merger and selected
unaudited pro forma financial data of Interstate Energy Corporation, see
Note 2. The authorized common stock of Interstate Energy Corporation was
increased from 100 million to 200 million shares at the effective date of
the merger.
<PAGE>
WPL HOLDINGS, INC.
IES INDUSTRIES INC.
INTERSTATE POWER COMPANY
(Merged as Interstate Energy Corporation,
doing business as Alliant Corporation)
1997 SELECTED FINANCIAL AND
OPERATING STATISTICS
Note: Certain reclassifications have been made to the 1993-1996 figures to
conform with the 1997 presentation. In addition, other reclassifications
have been made for consistency purposes across the three companies.
<TABLE>
WPL HOLDINGS, INC.
SELECTED FINANCIAL AND OPERATING STATISTICS
Financial Information
<CAPTION>
1997 1996 1995 1994 1993
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues . . . $919,255 $932,844 $807,255 $795,717 $738,604
Operating expenses . . . 790,648 789,794 660,702 666,537 610,660
Operating income . . . . 128,607 143,050 146,553 129,180 127,944
Income from continuing
operations . . . . . . 61,254 73,205 71,618 66,424 63,685
Discontinued operations . - (1,297) (13,186) (1,174) (1,162)
Net income . . . . . . . 61,254 71,908 58,432 65,250 62,523
Common Stock Data:
Weighted average common
shares outstanding
('000s) . . . . . . . . 30,782 30,790 30,774 30,671 29,681
Return on average common
equity . . . . . . . . 10.1% 11.9% 9.8% 11.1% 11.7%
Per Share Data:
Income from continuing
operations . . . . . $1.99 $2.38 $2.33 $2.17 $2.15
Discontinued operations - $(0.04) $(0.43) $(0.04) $(0.04)
Earnings per average
common share (basic
and diluted) . . . . $1.99 $2.34 $1.90 $2.13 $2.11
Dividends declared per
common share . . . . $2.00 $1.97 $1.94 $1.92 $1.90
Book value at year-end $19.73 $19.73 $19.41 $19.43 $19.15
Market value at
year-end . . . . . . $33.13 $28.13 $30.63 $27.38 $32.88
Other Selected Financial
Data:
Construction and
acquisition expenditures $129,833 $144,205 $129,698 $144,072 $171,134
Total assets at year-end $1,861,807 $1,900,531 $1,872,414 $1,805,901 $1,761,899
Long-term obligations, net $526,023 $487,165 $490,734 $507,917 $482,862
Times interest earned
before income taxes . . 3.19X 3.82X 3.55X 3.81X 3.45X
Capitalization Ratios:
Common stock . . . . . 54% 59% 55% 54% 54%
Preferred and
preference stock . . 5% 6% 5% 5% 6%
Long-term debt . . . . 41% 35% 40% 41% 40%
Total . . . . . . . 100% 100% 100% 100% 100%
</TABLE>
<PAGE>
<TABLE>
WPL HOLDINGS, INC.
SELECTED FINANCIAL AND OPERATING STATISTICS
Electric Operating Information (Utility Only)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
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>
<PAGE>
<TABLE>
WPL HOLDINGS, INC.
SELECTED FINANCIAL AND OPERATING STATISTICS
Gas Operating Information (Utility Only)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
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>
<PAGE>
<TABLE>
IES INDUSTRIES INC.
SELECTED FINANCIAL AND OPERATING STATISTICS
Financial Information
<CAPTION>
1997 1996 1995 1994 1993
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues . . . $930,699 $973,912 $851,010 $785,864 $801,266
Operating expenses . . . 763,562 807,346 697,676 637,931 649,997
Operating income . . . . 167,137 166,566 153,334 147,933 151,269
Net income . . . . . . . 66,337 60,907 64,176 66,818 67,938
Common Stock Data:
Weighted average common
shares outstanding
('000s) . . . . . . . . 30,380 29,861 29,202 28,560 27,764
Return on average common
equity(1) . . . . . . . 9.2% 9.8% 10.7% 11.5% 12.9%
Per Share Data:
Earnings per average
common share (basic
and diluted) . . . . $ 2.18 $ 2.04 $ 2.20 $ 2.34 $ 2.45
Dividends declared per
common share . . . . $ 2.10 $ 2.10 $ 2.10 $ 2.10 $ 2.10
Book value at
year-end(1) . . . . . $26.76 $20.84 $20.75 $20.56 $20.21
Market value at
year-end . . . . . . $36.81 $29.88 $26.50 $25.25 $31.25
Other Selected Financial
Data:
Construction and
acquisition expenditures $ 171,125 $ 238,378 $ 218,099 $ 206,548 $ 169,017
Total assets at
year-end(1) . . . . . . $2,457,219 $2,125,562 $1,985,591 $1,849,093 $1,699,819
Long-term obligations,
net . . . . . . . . . . $ 882,421 $ 744,298 $ 654,090 $ 623,359 $ 574,488
Times interest earned
before income taxes . . 2.66X 2.99X 3.12X 3.38X 3.38X
Capitalization Ratios:
Common stock(1) . . . 49% 47% 49% 50% 51%
Preferred and
preference stock . . 1% 1% 2% 2% 2%
Long-term debt . . . . 50% 52% 49% 48% 47%
---- ---- ---- ---- ----
Total . . . . . . . 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
__________
(1) In the third quarter of 1997, IES Industries Inc. began adjusting the
carrying value of its investment in McLeodUSA Inc. to its estimated
fair value, pursuant to the applicable accounting rules. At December
31, 1997, the adjustment reflected an unrealized gain of
approximately $298 million with a net of tax increase to other common
equity of $174 million.
</TABLE>
<PAGE>
<TABLE>
IES INDUSTRIES INC.
SELECTED FINANCIAL AND OPERATING STATISTICS
Electric Operating Information (Utility Only)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues ('000s):
Residential . . . . . . . . . $227,496 $213,838 $217,351 $200,686 $206,562
Commercial . . . . . . . . . 162,626 153,163 150,722 146,119 145,898
Industrial . . . . . . . . . 177,890 160,477 148,529 143,965 137,595
--------- --------- --------- --------- ---------
Total from ultimate
customers . . . . . . . . 568,012 527,478 516,602 490,770 490,055
Sales for resale . . . . . . 25,719 37,384 35,356 37,271 49,654
Other . . . . . . . . . . . . 10,539 9,411 8,513 9,286 10,812
--------- --------- --------- --------- ---------
Total . . . . . . . . . $604,270 $574,273 $560,471 $537,327 $550,521
========= ========= ========= ========= =========
Electric Sales ('000s MWH):
Residential . . . . . . . . . 2,682 2,642 2,690 2,494 2,528
Commercial . . . . . . . . . 2,378 2,315 2,296 2,148 2,079
Industrial . . . . . . . . . 4,743 4,436 4,248 4,015 3,674
--------- --------- --------- --------- ---------
Total from ultimate
customers . . . . . . . . 9,803 9,393 9,234 8,657 8,281
Sales for resale . . . . . . 794 1,746 1,586 1,705 2,629
Other . . . . . . . . . . . . 43 46 50 67 64
--------- --------- --------- --------- ---------
Total . . . . . . . . . 10,640 11,185 10,870 10,429 10,974
========= ========= ========= ========= =========
Customers (End of Period):
Residential . . . . . . . . . 288,387 286,315 284,154 281,653 279,187
Commercial . . . . . . . . . 48,962 48,593 48,196 47,595 46,957
Industrial . . . . . . . . . 711 703 695 706 677
Other . . . . . . . . . . . . 442 437 444 451 444
--------- --------- --------- --------- ---------
Total . . . . . . . . . 338,502 336,048 333,489 330,405 327,265
========= ========= ========= ========= =========
Other Selected Electric Data:
System capacity at time of
peak demand (MW):
Company-owned . . . . . . 1,892 1,864 1,873 1,741 1,734
Firm purchases and sales
(net) . . . . . . . . . . 232 232 207 280 248
--------- --------- --------- --------- ---------
Total . . . . . . . . . 2,124 2,096 2,080 2,021 1,982
========= ========= ========= ========= =========
Maximum peak hour demand (MW) 1,854 1,833 1,824 1,780 1,716
Sources of electric energy
('000s MWH):
Steam . . . . . . . . . . 5,499 4,936 5,759 5,509 5,349
Nuclear . . . . . . . . . 2,904 2,753 2,611 2,876 2,265
Hydroelectric . . . . . . 8 7 8 8 7
Purchases . . . . . . . . 2,789 4,177 3,013 2,647 3,949
Other . . . . . . . . . . 156 37 16 14 8
--------- --------- --------- --------- ---------
Total . . . . . . . . . 11,356 11,910 11,407 11,054 11,578
========= ========= ========= ========= =========
Cooling degree days . . . . . 858 766 1,093 846 765
Revenue per KWH from ultimate
customers (in cents) . . . . 5.79 5.62 5.59 5.67 5.92
</TABLE>
<PAGE>
<TABLE>
IES INDUSTRIES INC.
SELECTED FINANCIAL AND OPERATING STATISTICS
Gas Operating Information (Utility Only)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues
('000s):
Residential . . . . . . $110,663 $97,708 $84,562 $82,795 $90,462
Commercial . . . . . . 54,383 46,966 40,390 40,912 45,528
Industrial . . . . . . 13,961 12,256 8,790 12,515 15,593
Transportation and
other . . . . . . . . 4,510 3,934 3,550 2,811 2,735
--------- --------- --------- --------- ---------
Total . . . . . . . $183,517 $160,864 $137,292 $139,033 $154,318
========= ========= ========= ========= =========
Gas Sales ('000s
Dekatherms):
Residential . . . . . . 16,317 17,680 16,302 15,766 16,971
Commercial . . . . . . 9,602 10,323 9,534 9,298 10,133
Industrial . . . . . . 3,318 3,796 3,098 4,010 4,618
Transportation and
other . . . . . . . . 10,321 10,341 10,871 8,901 7,284
--------- --------- --------- --------- ---------
Total . . . . . . . 39,558 42,140 39,805 37,975 39,006
========= ========= ========= ========= =========
Customers at End of
Period (Excluding
Transportation and
Other):
Residential . . . . . . 155,859 154,457 152,873 151,367 152,472
Commercial . . . . . . 21,431 21,364 21,193 21,053 17,757
Industrial . . . . . . 399 417 404 409 490
--------- --------- --------- --------- ---------
Total . . . . . . . 177,689 176,238 174,470 172,829 170,719
========= ========= ========= ========= =========
Other Selected Gas Data:
Heating degree days . . 6,685 7,204 6,686 6,380 6,816
Revenue per dekatherm
sold (excluding
transportation and
other) . . . . . . . . $6.12 $4.94 $4.62 $4.69 $4.78
Purchased gas cost per
dekatherm sold
(excluding
transportation and
other) . . . . . . . . $4.33 $3.27 $3.15 $3.28 $3.44
</TABLE>
<PAGE>
<TABLE>
INTERSTATE POWER COMPANY
SELECTED FINANCIAL AND OPERATING STATISTICS
Financial Information
<CAPTION>
1997 1996 1995 1994 1993
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues . . . . . $331,847 $326,084 $318,542 $307,650 $309,468
Operating expenses . . . . . 276,347 265,755 250,630 264,215 265,677
Operating income . . . . . . 55,500 60,329 67,912 43,435 43,791
Net income . . . . . . . . . 26,699 25,860 25,198 18,213 16,126
Common Stock Data:
Weighted average common
shares outstanding ('000s) . 9,725 9,594 9,564 9,479 9,316
Return on average common
equity . . . . . . . . . . . 12.7% 12.8% 12.9% 9.5% 8.5%
Per Share Data:
Earnings per average
common share (basic and
diluted) . . . . . . . . $2.74 $2.69 $2.63 $1.92 $1.73
Dividends declared per
common share . . . . . . $2.08 $2.08 $2.08 $2.08 $2.08
Book value at year-end . . $22.09 $21.31 $20.68 $20.13 $20.21
Market value at year-end . $37.44 $29.00 $33.13 $23.75 $30.13
Other Selected Financial Data:
Construction and acquisition
expenditures . . . . . . . . $28,888 $30,997 $28,579 $41,098 $34,117
Total assets at year-end . . $638,749 $639,200 $634,316 $628,845 $604,361
Long-term obligations, net . $195,861 $212,892 $212,931 $226,982 $227,024
Times interest earned before
income taxes . . . . . . . . 4.00X 3.82X 3.75X 2.74X 2.70X
Capitalization Ratios:
Common stock . . . . . . . 52% 50% 47% 46% 44%
Preferred and preference
stock . . . . . . . . . . 8% 8% 8% 8% 8%
Long-term debt . . . . . . 40% 42% 45% 46% 48%
----- ----- ----- ----- -----
Total . . . . . . . . . 100% 100% 100% 100% 100%
===== ===== ===== ===== =====
</TABLE>
<PAGE>
<TABLE>
INTERSTATE POWER COMPANY
SELECTED FINANCIAL AND OPERATING STATISTICS
Electric Operating Information
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues ('000s):
Residential . . . . . . . $82,078 $79,121 $80,870 $74,289 $72,432
Commercial . . . . . . . 50,550 49,998 50,038 48,828 51,101
Industrial . . . . . . . 125,949 124,515 123,620 116,645 111,540
--------- --------- --------- --------- ---------
Total from ultimate
customers . . . . . . 258,577 253,634 254,528 239,762 235,073
Sales for resale . . . . 5,710 12,145 11,020 13,168 10,381
Other . . . . . . . . . . 13,053 10,841 9,325 8,800 10,305
--------- --------- --------- --------- ---------
Total . . . . . . . $277,340 $276,620 $274,873 $261,730 $255,759
========= ========= ========= ========= =========
Electric Sales ('000s MWH):
Residential . . . . . . . 1,043 1,046 1,077 1,005 1,000
Commercial . . . . . . . 740 749 747 742 782
Industrial . . . . . . . 3,321 3,244 3,239 3,090 2,927
--------- --------- --------- --------- ---------
Total from ultimate
customers . . . . . . 5,104 5,039 5,063 4,837 4,709
Sales for resale . . . . 150 467 306 478 311
Other . . . . . . . . . . 58 58 59 60 62
--------- --------- --------- --------- ---------
Total . . . . . . . 5,312 5,564 5,428 5,375 5,082
========= ========= ========= ========= =========
Customers (End of Period):
Residential . . . . . . . 132,580 131,837 130,643 129,289 128,388
Commercial . . . . . . . 31,174 31,164 30,860 30,829 30,650
Industrial . . . . . . . 989 954 928 880 795
Other . . . . . . . . . . 964 950 963 985 937
--------- --------- --------- --------- ---------
Total . . . . . . . 165,707 164,905 163,394 161,983 160,770
========= ========= ========= ========= =========
Other Selected Electric
Data:
System capacity at time of
peak demand (MW):
Company-owned . . . . 1,028 1,028 1,028 1,026 1,023
Firm purchases and
sales (net) . . . . . 283 283 283 283 273
--------- --------- --------- --------- ---------
Total . . . . . . . 1,311 1,311 1,311 1,309 1,296
========= ========= ========= ========= =========
Maximum peak hour demand
(MW) . . . . . . . . . . 938 996 1,011 932 927
Sources of electric energy
('000s MWH):
Steam . . . . . . . . 3,337 3,391 3,524 3,409 3,282
Purchases . . . . . . 2,127 2,224 2,176 2,021 1,944
Other . . . . . . . . 46 45 17 15 16
--------- --------- --------- --------- ---------
Total . . . . . . . 5,510 5,660 5,717 5,445 5,242
========= ========= ========= ========= =========
Cooling degree days . . . 926 757 1,065 826 701
Revenue per KWH from
ultimate customers (in
cents) . . . . . . . . . 5.07 5.03 5.03 4.96 4.99
</TABLE>
<PAGE>
<TABLE>
INTERSTATE POWER COMPANY
SELECTED FINANCIAL AND OPERATING STATISTICS
Gas Operating Information
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues ('000s):
Residential . . . . . . . . $30,366 $28,178 $24,817 $25,344 $28,791
Commercial . . . . . . . . 16,019 14,518 12,150 12,654 14,429
Industrial . . . . . . . . 5,054 3,903 3,688 5,283 6,235
Transportation and other . 3,068 2,865 3,014 2,639 4,254
--------- --------- --------- --------- ---------
Total . . . . . . . . . $54,507 $49,464 $43,669 $45,920 $53,709
========= ========= ========= ========= =========
Gas Sales ('000s Dekatherms):
Residential . . . . . . . . 4,807 5,188 4,835 4,725 4,957
Commercial . . . . . . . . 2,948 3,123 2,820 2,793 2,911
Industrial . . . . . . . . 1,185 1,063 1,139 1,586 1,557
Transportation and other . 28,803 26,332 26,526 24,550 24,584
--------- --------- --------- --------- ---------
Total . . . . . . . . . 37,743 35,706 35,320 33,654 34,009
========= ========= ========= ========= =========
Customers at End of Period
(Excluding
Transportation and Other):
Residential . . . . . . . . 44,270 43,882 43,556 43,323 42,915
Commercial . . . . . . . . 5,232 5,211 5,178 5,173 5,088
Industrial . . . . . . . . 76 76 89 88 92
--------- --------- --------- --------- ---------
Total . . . . . . . . . 49,578 49,169 48,823 48,584 48,095
========= ========= ========= ========= =========
Other Selected Gas Data:
Heating degree days . . . . 7,097 8,083 7,452 7,115 7,466
Revenue per dekatherm sold
(excluding transportation
and other) . . . . . . . . $5.75 $4.97 $4.62 $4.75 $5.25
Purchased gas costs per
dekatherm sold (excluding
transportation and other) $3.73 $3.37 $2.94 $3.39 $4.06
</TABLE>
Item 7. Financial Statements and Exhibits.
(a) Not Applicable
(b) Not Applicable
(c) Exhibits.
The exhibit listed in the accompanying Exhibit Index is
filed as part of this Current Report on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
INTERSTATE ENERGY CORPORATION
Date: May 18, 1998 By: /s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
President and Chief Executive
Officer
<PAGE>
INTERSTATE ENERGY CORPORATION
EXHIBIT INDEX TO FORM 8-K
Dated May 18, 1998
Exhibit
23.1 Consent of Arthur Andersen LLP
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports on the consolidated financial statements of Interstate
Energy Corporation (formerly WPL Holdings, Inc.) incorporated by reference
in this Interstate Energy Corporation Form 8-K into Interstate Energy
Corporation's previously filed Registration Statements on Form S-8 (Nos.
33-52215, 333-41485 and 333-46735) and Form S-3 (Nos. 33-21482 and
333-26627).
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
May 18, 1998
