UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Name of Registrant, State of IRS Employer
Commission Incorporation, Address of Principal Identification
File Number Executive Offices and Telephone Number Number
1-9894 WPL HOLDINGS, INC. 39-1380265
(a Wisconsin corporation)
222 West Washington Avenue
Madison, Wisconsin 53703
Telephone (608)252-3311
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange on
Title of Class Which Registered
Common Stock, $.01 Par Value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past (90) days. Yes X
No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-K or any amendment to this Form 10-K. [ X]
The aggregate market value of the voting stock held by nonaffiliates as of
February 28, 1998: $976.1 million
Number of shares outstanding of each class of common stock as of February
28, 1998:
Common Stock, $.01 par value, 30,788,593 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the registrant's 1998 Annual
Meeting of Shareowners will, upon filing with the Securities and Exchange
Commission, be incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
Part I Number
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of 24
Security Holders
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 27
Item 7A. Quantitative and Qualitative Disclosures 52
About Market Risk
Item 8. Financial Statements and Supplementary
Data 52
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosures 74
Part III
Item 10. Directors and Executive Officers of the
Registrant 74
Item 11. Executive Compensation 74
Item 12. Security Ownership of Certain Beneficial
Owners and Management 74
Item 13. Certain Relationships and Related
Transactions 74
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 75
Signatures 89
Report of Independent Public Accountants
on Schedules 90
FORWARD-LOOKING STATEMENTS
Refer to the "Forward-Looking Statements" section in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(MD&A) for information and disclaimers regarding forward-looking
statements contained in this Annual Report on Form 10-K.
PART I
As described below, WPL Holdings, Inc. (WPLH) is a party to a proposed
three-way merger (Merger) involving IES Industries Inc. (IES) and
Interstate Power Company (IPC). Management of WPLH currently expects the
Merger to be consummated in the second quarter of 1998. As a result, and
to enhance the reader's understanding of the combined company following
the Merger, certain information relating to IES and IPC and their
respective operations, as well as to the combined company, has been
included in this Annual Report on Form 10-K. Information relating to IES
and IPC was supplied by the respective companies for inclusion herein.
This information has been provided for reference only and is not intended
to imply that the operations of WPLH included the operations of IES or IPC
prior to the effective time of the Merger. The portions of Items 1
through 3 of Part I which are prospective in nature, generally reflect a
discussion of operations on a post-merger basis. The portions of Items 1
through 3 of Part I that are historical in nature focus primarily on WPLH.
ITEM 1. BUSINESS
A. MERGER
WPLH, IES and IPC are in the process of completing a Merger forming
Interstate Energy Corporation (Merged Company). In connection with the
Merger, IES will be merged with and into WPLH forming the Merged Company
and IPC will become a subsidiary of the Merged Company. In addition,
following the Merger, the holding companies for the nonregulated
businesses of the former WPLH and IES (Heartland Development Corporation
(HDC) and IES Diversified Inc. (Diversified), respectively) will be merged
into each other. The resulting company from this merger is referred to as
New Diversified. As a result of the Merger, the first tier subsidiaries
of the Merged Company will include: Wisconsin Power and Light Company
(WP&L), IES Utilities Inc. (IESU), IPC, New Diversified and Alliant
Services Company. Among various other regulatory constraints, the Merged
Company will operate as a registered public utility holding company
subject to the limitations imposed by the Public Utility Holding Company
Act of 1935. For additional information regarding the terms of the
Merger, see Note 2 of the "Notes to Consolidated Financial Statements."
The merger partners currently anticipate cost savings resulting from the
Merger of approximately $749 million over a ten-year period, net of
transaction costs and costs to achieve the savings of approximately $78
million. Approximately $22 million of these costs had been incurred
through December 31, 1997. Upon consummation of the Merger, the merger
partners estimate the Merged Company will expense approximately $40
million of additional merger-related costs (e.g., required payments to or
for financial advisors, employee retirements and separations, attorneys,
accountants, etc.). The estimate of potential cost savings constitutes a
forward-looking statement and actual results may differ materially from
this estimate. The estimate is necessarily based upon various assumptions
that involve judgments with respect to, among other things, future
national and regional economic and competitive conditions, technological
developments, inflation rates, regulatory treatments, weather conditions,
financial market conditions, future business decisions and other
uncertainties. No assurance can be given that the entire amount of
estimated costs savings will actually be realized. In addition, the
allocation between WPLH, IES and IPC and their customers of the estimated
cost savings of approximately $749 million over ten years resulting from
the Merger, net of costs incurred to achieve such savings, will be subject
to regulatory review and approval.
As part of the approval process for the Merger, 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" in Item 7. MD&A for a further discussion).
Assuming capture of the anticipated merger-related synergies and no
significant legislative or regulatory changes affecting 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.
A brief description of the three merger partners is as follows:
WPLH
WPLH was incorporated under the laws of the State of Wisconsin in 1981,
and operates as a holding company with both utility and nonutility
businesses. It is the parent company of a public utility, WP&L and its
related subsidiaries and of HDC, the parent corporation for the nonutility
businesses. Refer to Note 13 of the "Notes to Consolidated Financial
Statements" for financial information related to WPLH's business segments.
IES
IES is a holding company which was incorporated as IE Industries in 1986
under the laws of the State of Iowa. IES's wholly-owned subsidiaries are
IESU and Diversified. IESU is primarily an electric and natural gas
utility company operating in the State of Iowa. Diversified is a holding
company for nonutility subsidiaries which are primarily engaged in the
energy-related, transportation and real estate development businesses.
Diversified also has an investment in an Iowa-based telecommunications
company, among other miscellaneous investments.
IPC
IPC is a public utility incorporated in 1925 under the laws of the State
of Delaware. IPC is primarily an electric and natural gas utility company
operating in the States of Iowa, Minnesota and Illinois. At December 31,
1997, IPC provided electric and gas service to approximately 166,000 and
50,000 customers, respectively. In 1997, 1996 and 1995, IPC had no
single customer for which electric and/or gas sales accounted for 10% or
more of IPC's consolidated revenues. IPC's largest gas transportation
customer, which represents 36% of IPC's total gas throughput, is committed
by contract for the next four years. The revenue associated with this
customer is immaterial.
WP&L and HDC are currently the primary first-tier subsidiaries of WPLH.
Assuming that the Merger is consummated, the first-tier subsidiaries of
the Merged Company would be as follows:
1) WP&L
WP&L, incorporated in Wisconsin in 1917 as the Eastern Wisconsin Electric
Company, is a public utility predominately engaged in the transmission and
distribution of electric energy and the generation and bulk purchase of
electric energy for sale. WP&L also transports, distributes and sells
natural gas purchased from gas suppliers. Nearly all of WP&L's customers
are located in south and central Wisconsin. WP&L operates in municipal-
ities pursuant to permits of indefinite duration which are regulated by
Wisconsin law. At December 31, 1997, WP&L supplied electric and gas
service to approximately 393,000 and 155,000 customers, respectively.
WP&L also has approximately 32,000 water customers. The water operations
are immaterial to WP&L overall. In 1997, 1996 and 1995, WP&L had no
single customer for which electric and/or gas sales accounted for 10% or
more of WP&L's consolidated revenues.
WP&L owns all of the outstanding capital stock of South Beloit Water, Gas
and Electric Company (South Beloit), a public utility supplying electric,
gas and water service, principally in Winnebago County, Illinois, which
was incorporated in 1908.
WP&L also owns varying interests in several other subsidiaries and
investments which are not material to WP&L's operations.
2) IESU
IESU was incorporated in Iowa in 1925 as Iowa Railway and Light
Corporation and is currently a first-tier subsidiary of IES. IESU is
primarily a public utility operating company engaged in providing electric
energy, natural gas and, to a limited extent, steam used for industrial
and heating purposes, in the State of Iowa. At December 31, 1997, IESU
supplied electric and gas service to approximately 339,000 and 178,000
customers, respectively. In 1997, 1996 and 1995, IESU had no single
customer for which electric and/or gas sales accounted for 10% or more of
IESU's consolidated revenues.
IESU also owns varying interests in several other subsidiaries and
investments which are not material to IESU's operations.
3) IPC
See above.
4) HDC
Incorporated in 1988, HDC is the parent company of all nonutility
businesses for WPLH. HDC and its principal subsidiaries are engaged in
business development in three major areas: (1) environmental and
engineering services; (2) affordable housing; and (3) energy services.
Following the consummation of the Merger, it is anticipated that HDC
and Diversified will be merged to form New Diversified.
5) DIVERSIFIED
Other than IESU's nonregulated investments, the non-utility operations of
IES are organized under Diversified. Diversified is a holding company
whose wholly-owned subsidiaries include IES Transportation Inc. (IES
Transportation), IES Energy Inc. (IES Energy), IES Investments Inc. (IES
Investments) and IES International Inc. (IES International).
6) ALLIANT SERVICES COMPANY
Upon consummation of the Merger, Alliant Services Company will be the
subsidiary formed to provide administrative services as required under
the Public Utility Holding Company Act of 1935.
B. INFORMATION RELATING TO THE MERGED COMPANY AS A WHOLE
EMPLOYEES
As of December 31, 1997, the parties to the Merger and their affiliates
had the following full-time employees:
Number of Number of
Number of Bargaining Bargaining
Employees Employees Agreements
WP&L 2,175 1,490 1
IESU 2,045 1,089 6
IPC 872 559 3
HDC 642 - -
Diversified 255 84 5
IES 148 - -
----- ----- -----
Total 6,137 3,222 15
===== ===== =====
There are several bargaining agreements at IESU expiring in 1998 but the
number of employees covered under these agreements is relatively small.
CAPITAL EXPENDITURE AND INVESTMENT AND FINANCING PLANS
Refer to the "Liquidity and Capital Resources" section in Item 7. MD&A for
a discussion of anticipated construction and acquisition expenditures for
1998-2002 and the assumptions in financing future capital requirements.
REGULATION
Assuming the Merger is consummated, 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.
WP&L is subject to regulation by the Public Service Commission of
Wisconsin (PSCW) as to retail utility rates and service, accounts,
issuance and use of proceeds of securities, certain additions and
extensions to facilities and in other respects. The PSCW is comprised of
three commissioners appointed by the Governor of Wisconsin and ratified by
the State Senate. WP&L is generally required to file a rate case with the
PSCW every two years with requests for rate relief based on a forward-
looking test year period. However, as one of the conditions of the
Merger, the PSCW has required WP&L to freeze on a post-merger basis retail
electric, natural gas, and water rates for a period of four years. The
PSCW also regulates the type and amount of investments in non-utility
businesses.
IESU and IPC operate pursuant to the laws of the State of Iowa and are
thereby subject to the jurisdiction of the Iowa Utilities Board (IUB).
The IUB has authority to regulate rates and standards of service, to
prescribe accounting requirements and to approve the location and
construction of electric generating facilities having a capacity in excess
of 25,000 Kw. The IUB is comprised of three commissioners appointed by
the Governor of Iowa and ratified by the State Senate. Requests for price
relief are based on historical test periods, adjusted for certain known
and measurable changes. The IUB must decide on requests for price relief
within 10 months of the date of the application for which relief is filed
or the interim prices granted become permanent. Interim prices, if
allowed, are permitted to become effective, subject to refund, no later
than 90 days after the price increase application is filed. IESU and IPC
have agreed to a four-year price cap effective with the Merger as part of
the Merger approval process.
In Iowa, non-exclusive franchises, which cover the use of streets and
alleys for public utility facilities in incorporated communities, are
granted for a maximum of twenty-five years by a majority vote of local
qualified residents. In addition, the IUB defines the boundaries of
mutually exclusive service territories for all electric utilities. The
IUB has jurisdiction and grants franchises for the use of public highway
rights-of-way for electric and gas facilities outside corporate limits.
IPC is also subject to regulation by the Minnesota Public Utilities
Commission (MPUC). The MPUC is comprised of five commissioners appointed
by the Governor of Minnesota and confirmed by the Senate. Requests for
price relief can be based on either historical or projected data. The
MPUC must reach a final decision within 10 months. Interim rates are
permitted. The MPUC also has jurisdiction to approve IPC's capital
structure on an annual basis.
South Beloit and IPC are subject to regulation by the Illinois Commerce
Commission (ICC) for retail utility rates and service, accounts, issuance
and use of proceeds of securities, certain additions and extensions to
facilities and in other respects. The ICC is comprised of five
commissioners appointed by the Governor of Illinois. Requests for rate
relief must be decided within 11 months.
The Federal Energy Regulatory Commission (FERC) has jurisdiction under the
Federal Power Act over certain of the electric utility facilities and
operations, wholesale rates and accounting practices of WP&L, IESU and
IPC, and in certain other respects. In addition, certain natural gas
facilities and operations of the companies are subject to the jurisdiction
of the FERC under the Natural Gas Act.
With respect to environmental matters, the United States Environmental
Protection Agency administers certain federal statutes and has delegated
the administration of other environmental initiatives to the applicable
state environmental agencies. In addition, the state agencies have
jurisdiction over air and water quality standards associated with fossil
fuel fired electric generation and the level and flow of water, safety and
other matters pertaining to hydroelectric generation.
WP&L and IESU are subject to the jurisdiction of the Nuclear Regulatory
Commission (NRC), with respect to the Kewaunee Nuclear Power Plant
(Kewaunee) in the case of WP&L and the Duane Arnold Energy Center (DAEC)
in the case of IESU, and to the jurisdiction of the United States
Department of Energy (DOE) with respect to the disposal of nuclear fuel
and other radioactive wastes from Kewaunee and the DAEC.
Effective with the consummation of the Merger, the Merged Company will be
subject to regulation by the PSCW, as WP&L is currently. The PSCW
regulates, among other things, the type and amount of investments in non-
utility businesses.
Refer to Item 7. MD&A for additional information regarding regulation.
YEAR 2000
Refer to the "Other Matters - Year 2000" section in Item 7. MD&A for a
discussion of Year 2000 system conversion initiatives.
C. INFORMATION RELATING TO UTILITY OPERATIONS
On a combined basis, the merger partners realized 54%, 41%, 3% and 2% of
their 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 FERC. On a combined basis, the parties realized 56%,
38%, 3% and 3% of their gas utility revenues in Iowa, Wisconsin, Minnesota
and Illinois, respectively.
UTILITY INDUSTRY OUTLOOK
Refer to the "Utility Industry Outlook" section in Item 7. MD&A for a
discussion of various competitive issues impacting utility operations.
ELECTRIC OPERATIONS
WP&L
WP&L provides electricity in a service territory of approximately 16,000
square miles in 35 counties in southern and central Wisconsin and four
counties in northern Illinois. As of December 31, 1997, WP&L provided
retail electric service to approximately 393,000 customers in 615 cities,
villages and towns, and wholesale service to 25 municipal utilities, one
privately owned utility, three rural electric cooperatives, one Native
American nation and to the Wisconsin Public Power, Inc. system for the
provision of retail service to 14 communities.
Electric operations represented 79.8% of WP&L's total operating revenues
and 90.5% of WP&L's total operating income for the year ended December 31,
1997.
Electric sales are seasonal to some extent with the yearly peak normally
occurring in the summer months. WP&L also experiences a smaller winter
peak in December or January. The maximum net hourly peak load on the
electric system was 2,253 megawatts and occurred on July 16, 1997.
Refer to Item 2. "Properties" for additional information regarding
electric facilities.
Fuel
In 1997, approximately 86% of WP&L's net kilowatthour generation of
electricity by company-owned and jointly-owned facilities was fueled by
coal and 10% by nuclear fuel (provided by WP&L's 41% ownership interest in
Kewaunee). The remaining electricity generated was produced by hydro-
electric, oil-fired and natural gas generation. The 1997 WP&L coal
percentage was higher than anticipated due to the outage at the Kewaunee
plant as discussed in Item 7. MD&A. As a result, the coal portion of
generation is expected to be slightly lower in future years.
In 1997, approximately 64% of IESU's net kilowatthour generation of
electricity by company-owned and jointly-owned facilities was fueled by
fossil fuel (primarily coal) and 34% by nuclear fuel through ownership in
the DAEC. The 1997 IESU fossil percentage was lower than anticipated
because of several maintenance outages at various fossil-fueled generating
facilities and attempts to conserve coal due to rail transportation
problems. As a result, the fossil fuel portion of generation is expected
to be slightly higher in future years.
In 1997, approximately 94% of IPC's electricity was fueled by coal and the
remainder was primarily from natural gas. Future sources of generation
are expected to be in similar proportions.
Coal
WP&L's primary fuel source is coal. To ensure an adequate supply of coal,
WP&L has entered into certain long-term coal contracts. These contracts
include a demand or take-or-pay clause under which payments are required
if contracted quantities are not purchased. Refer to Note 11a in "Notes
to Consolidated Financial Statements" for details relating to these long-
term coal purchase commitments. WP&L anticipates that its average fuel
costs will likely increase in the future, due to cost escalation
provisions in existing coal and transportation contracts.
Present coal supply contracts and transportation contracts (excluding
extension options) cover approximately 34% and 42%, respectively, of
WP&L's estimated coal requirements for the years 1998 through 2002. WP&L
will seek renewals of existing contracts or additional sources of supply
and negotiate new or additional transportation contracts to satisfy these
requirements and to comply with environmental regulations.
IESU estimates that it has the capability to purchase approximately half
of its 1998 through 2002 coal requirements under its current coal
contracts and will meet the remainder of its requirements from either
future contracts or purchases in the spot market. Many of the current
contracts have provisions allowing IESU to purchase additional tons of
coal. IESU believes that an ample supply of coal is available in the spot
market to meet its needs.
Approximately 75% to 80% of IPC's 1998 coal requirements will be met from
long-term contracts. These contracts have expiration dates ranging
through August 31, 1999. Future coal requirements will be met from either
future contracts or purchases in the spot market.
Purchased Power
During the year ended December 31, 1997, about 36.7% of WP&L's total
kilowatthour requirements were met through purchased power. Refer to Note
11b in "Notes to Consolidated Financial Statements" for details relating
to long-term purchase power commitments.
Approximately 24.6% and 38.6% of IESU's and IPC's total kilowatthour
requirements, respectively, were met through purchased power during the
year ended December 31, 1997.
General
Assuming consummation of the Merger, WP&L, IESU and IPC expect to realize
reduced electric production costs through the joint dispatch of systems
and increased marketing opportunities in the wholesale and interchange
markets through electric interconnections with other utilities.
The facilities of the merger partners are interconnected with certain
neighboring utilities and WP&L, IESU and IPC participate as members of the
Mid-Continent Area Power Pool (MAPP). This pool is comprised of 20
utilities which are Transmission Owning Members (TOMs) and 51 energy-
related companies providing services in the upper midwest region of the
United States, and operates pursuant to an agreement which provides for
the interchange of electric energy, the sharing of responsibilities for
production capacity and reserve and the supply of electric energy.
Nuclear
General
Assuming the Merger is consummated, the Merged Company will own interests
in two nuclear facilities, Kewaunee and the DAEC. 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. 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.
As co-owners of nuclear generating units, IESU and WP&L are subject to the
jurisdiction of the NRC. The NRC has broad supervisory and regulatory
jurisdiction over the construction and operation of nuclear reactors,
particularly with regard to public health, safety and environmental
considerations.
The operation and design of nuclear power plants is under constant review
by the NRC. IESU and WP&L have complied with and are currently complying
with all NRC requests for data relating to these reviews. As a result of
such reviews, further changes in operations or modifications of equipment
may be required, the cost of which cannot currently be estimated. IESU's
and WP&L's anticipated nuclear-related construction expenditures for 1998-
2002 are approximately $46 million and $43 million, respectively. Refer
to "Liquidity and Capital Resources - Capital Requirements" in Item 7.
MD&A for a further discussion.
The DAEC received the highest score possible (1 on a 3-point scale) in the
areas of plant operations, engineering and plant support and a "good"
rating (2) in the area of maintenance during the NRC's last Systematic
Assessment of Licensee Performance (SALP) report in 1997. Kewaunee
received the highest score possible (1) in the area of maintenance and a
"good" rating (2) in the areas of plant operations, engineering and plant
support during the NRC's last SALP report which was also received in 1997.
Under the Price-Anderson Amendments Act of 1988 (1988 Act), IESU and WP&L
currently have the benefit of public liability coverage which would
compensate the public in the event of an accident at a commercial nuclear
power plant. The 1988 Act permits such coverage to rise with increased
availability of nuclear insurance and the changing number of operating
nuclear plants subject to retroactive premium assessments. The 1988 Act
provides for inflation indexing (Consumer Price Index every fifth year) of
the retroactive premium assessments.
As an outgrowth of the Three Mile Island Nuclear Power Plant (TMI)
experience, nuclear plant owners have initiated a cooperative insurance
program designed to help cover business interruption expenses for
participating utilities arising from a possible nuclear plant event. IESU
and WP&L are participants in this program. This type of insurance is an
industry response intended to lessen the cost burden on customers in the
event of a lengthy plant shutdown.
In the unlikely event of a catastrophic loss at Kewaunee or the DAEC, the
amount of insurance available may not be adequate to cover property
damage, decontamination and premature decommissioning. Uninsured losses,
to the extent not recovered through rates, would be borne by WP&L or IESU
and could have a material adverse effect on their financial position and
results of operations. Refer to Note 11f of the "Notes to Consolidated
Financial Statements" for a further discussion of insurance matters
relating to Kewaunee.
Kewaunee
WPSC purchases uranium concentrates, conversion services, enrichment
services, and fabrication services for nuclear fuel assemblies at
Kewaunee. New fuel assemblies replace used assemblies that are removed
from the reactor every 18 months and placed in storage at the plant site
pending removal by the DOE. Uranium concentrates, conversion services,
and enrichment services are purchased at spot market prices, through a bid
process, or using existing contracts.
A uranium inventory policy requires that sufficient inventory exist for up
to two reactor reloads of fuel. As of December 31, 1997, 960,000 pounds
of yellowcake or its equivalent were held in inventory for Kewaunee.
Two contracts are in place to provide conversion services for Kewaunee
nuclear fuel for reloads in 1998 and 2000. A contract with Cogema, Inc.
provides a fixed quantity of enrichment services through the year 2001.
Additional enrichment services will be acquired under a contract with the
United States Enrichment Corporation which is in effect for the life of
Kewaunee or by purchases on the spot market. A contract with Siemens
Power Corporation provides fuel fabrication services through March 15,
2001, for Kewaunee. This contract contains force majeure and termination
provisions.
If, for any reason, Kewaunee was forced to suspend operations permanently,
fuel-related obligations are as follows: (1) there are no financial
penalties associated with the present uranium supply, conversion service,
and enrichment agreements, and (2) the fuel fabrication contract contains
force majeure and termination provisions. As of the end of 1997, the
maximum exposure would not be expected to exceed $550,000. Uranium
inventories could be sold on the spot market.
DAEC
A contract for enrichment services and enriched uranium product was signed
with the United States Enrichment Corporation (USEC) in 1995, which has
reduced IESU's enrichment and uranium costs. This contract will be
effective through 2001 and may extend beyond 2001 if certain conditions
occur. Fabrication of the nuclear fuel is being performed by General
Electric Company for fuel through the 2008 refueling of the DAEC. IESU
believes that an ample supply of uranium and enrichment services will be
available in the future and intends to purchase such uranium and
enrichment services as necessary on the spot market and/or via medium
length (less than five years) contracts to supplement its current
contracts and meet its generation requirements.
Refer to "Other Matters - Environmental" and "Liquidity and Capital
Resources - Capital Requirements" in Item 7. MD&A for a discussion of
various other nuclear issues relating to Kewaunee and the DAEC.
Power Supply
Refer to "Other Matters - Power Supply" in Item 7. MD&A for a discussion
of power supply concerns in the State of Wisconsin.
Electric Environmental Matters
WPLH is regulated in environmental protection matters by a number of
federal, state and local agencies. Such regulations are the result of a
number of environmental protection laws passed by the U.S. Congress, state
legislatures and local governments and enforced by federal, state and
county agencies. The laws impacting WPLH's operations include the Clean
Water Act; Clean Air Act, as amended by the Clean Air Act Amendments of
1990; National Environmental Policy Act; Resource Conservation and
Recovery Act; Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and
Reauthorization Act of 1986; Occupational Safety and Health Act; National
Energy Policy Act of 1992 and a number of others. WPLH regularly secures
and renews federal, state and local permits to comply with the
environmental protection laws and regulations. Costs associated with such
compliance have increased in recent years and are expected to increase
moderately in the future.
Refer to "Other Matters - Environmental" in Item 7. MD&A for a further
discussion of electric environmental matters.
<TABLE>
<CAPTION>
WPL Holdings, Inc.
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Electric Operating Information
(Utility Only)
Operating Revenues ('000s):
Residential $199,633 $201,690 $199,850 $194,242 $184,176
Commercial 107,132 105,319 102,129 101,382 95,977
Industrial 152,073 143,734 140,562 140,487 132,903
------- ------- ------- ------- -------
Total from ultimate customers 458,838 450,743 442,541 436,111 413,056
Sales for resale 160,917 131,836 97,350 86,400 78,955
Other 14,388 6,903 6,433 9,236 11,176
------- ------- ------- ------- -------
Total $634,143 $589,482 $546,324 $531,747 $503,187
======= ======= ======= ======= =======
Electric Sales ('000s MWH) :
Residential 2,974 2,980 2,938 2,777 2,751
Commercial 1,878 1,814 1,773 1,688 1,630
Industrial 4,256 3,986 3,873 3,765 3,540
-------- ------- -------- ------- -------
Total from ultimate customers 9,108 8,780 8,584 8,230 7,921
Sales for resale 5,824 5,246 3,109 2,574 2,388
Other 60 57 54 55 52
------- ------- ------- ------- -------
Total 14,992 14,083 11,747 10,859 10,361
======= ======= ======= ======= =======
Customers (End of Period):
Residential 343,637 336,933 329,643 322,924 316,870
Commercial 46,823 45,669 44,730 43,793 42,884
Industrial 855 815 795 776 714
Other 1,875 1,820 1,342 1,298 1,275
------- ------- ------- ------- -------
Total 393,190 385,237 376,510 368,791 361,743
======= ======= ======= ======= =======
Other Selected Electric Data:
System capacity at time of peak
demand (MW):
Company-owned 2,337 2,300 2,176 2,193 2,019
Firm purchases and sales
(net) 145 68 57 40 83
------- ------- ------- ------- -------
Total 2,482 2,368 2,233 2,233 2,102
======= ======= ======= ======= =======
Maximum peak hour demand (MW) 2,253 2,124 2,197 2,002 1,971
Sources of electric energy ('000s
MWH):
Steam 8,587 8,687 8,323 7,821 7,616
Nuclear 970 1,301 1,555 1,625 1,565
Hydroelectric 234 244 222 228 276
Purchases 5,744 4,494 2,227 1,786 1,488
Other 121 59 86 24 6
------- ------- ------- ------- -------
Total 15,656 14,785 12,413 11,484 10,951
Cooling degree days 369 408 982 637 630
Revenue per KWH from
ultimate customers (in cents) 5.04 5.13 5.16 5.30 5.21
</TABLE>
GAS OPERATIONS
With the advent of Order 636 as promulgated by FERC, the nature of WP&L,
IESU and IPC's gas supply portfolios have changed. Order 636, among other
things, eliminated the interstate pipelines' obligation to serve and now
requires WP&L, IESU and IPC to purchase virtually 100% of their gas supply
requirements from non-pipeline suppliers. In addition, Order 636 has
enhanced access to competitively-priced gas supply and more flexible
transportation services.
WP&L General
As of December 31, 1997, WP&L provided retail natural gas service to
approximately 155,000 customers in 243 cities, villages and towns in 22
counties in southern and central Wisconsin and one county in northern
Illinois. Gas operations represented 19.6% of WP&L's total operating
revenues and 9.8% of WP&L's total operating income for the year ended
December 31, 1997.
WP&L's gas sales follow a seasonal pattern. There is an annual base load
of gas used for heating, cooking, water heating and other purposes, with a
large peak occurring during the heating season.
WP&L Gas Supplies
Prior to 1995, WP&L passed on its costs incurred from natural gas
suppliers and pipeline companies on a dollar-for-dollar basis to its
customers. In 1995, the PSCW approved implementation of a performance-
based rate mechanism for Wisconsin gas customers. Under this mechanism,
fluctuations in the commodity cost of gas above or below a prescribed
commodity price index will increase or decrease WP&L's margin on gas
sales. Both benefits and exposures are subject to customer sharing
provisions. Effective with the UR-110 rate order on April 29, 1997, to
the extent WP&L purchases its gas supply below the index price, WP&L will
retain 40% of the savings. The balance of the savings is returned to
customers. The same sharing mechanism exists for gas that is purchased at
a cost above the index price.
In providing gas commodity service to retail gas customers, WP&L
administers a diversified portfolio of transportation contracts with ANR
Pipeline (ANR) and Northern Natural Gas Company (NNG) allowing access to
gas supplies from the states of Oklahoma, Louisiana, Texas, and the
province of Alberta, Canada. WP&L's transportation contracts provide a
maximum daily delivery capability of 242,580 dekatherms (Dth) per day of
natural gas as follows:
ANR NNG Non-Traditional
122,124 Dth 75,056 Dth 45,400 Dth
Two non-traditional arrangements provide WP&L with gas delivered directly
to its "city gate" using the vendors' transportation contract with ANR
Pipeline.
WP&L's contracts also allow access to gas stored in underground storage
fields in the states of Michigan, New Mexico and Oklahoma. Gas purchased
in the summer and delivered in the winter comprise approximately 24% of
WP&L's annual gas requirements.
WP&L maintains purchase agreements with over 50 suppliers of natural gas
from all gas producing regions of the U.S. and Canada. These include six
contracts providing for long-term gas deliveries (i.e., with terms ranging
from six months to ten years). These contracts provided 54% of WP&L's
annual gas purchases in 1997. In addition to its direct purchase and
sales of natural gas, WP&L provided transportation service to 178
customers who purchased their own gas, pursuant to WP&L's transportation
tariffs. These customers represent approximately 40% of total gas moved
through WP&L's natural gas distribution pipe.
Refer to Note 11b of the "Notes to Consolidated Financial Statements" for
a discussion of WP&L's long-term purchase gas commitments.
IESU Gas Supplies
Contracts with the pipelines subsequent to Order 636 are comprised
primarily of firm transportation, firm storage and no-notice service.
Firm transportation contracts grant IESU access to firm pipeline capacity
which is used to transport gas supplies from non-pipeline suppliers on
peak day. Firm storage service allows IESU to purchase gas during off-
peak periods and place this gas in an account with the pipelines. When
the gas is needed for peak day deliveries, IESU requests and the pipelines
deliver the gas back on a firm basis. No-notice service grants IESU the
right to take more or less gas than is actually scheduled up to the level
of no-notice service. No-notice service takes the form of transportation
balancing or storage service depending on the pipeline.
IESU's portfolio of firm transportation, firm storage and no-notice
service from pipelines is as follows:
Firm Firm
Transportation Storage No-Notice
NNG:
Volume (Dth/day) 143,996 60,706 10,000
Expiration date 10/31/99 10/31/99 10/31/99
Natural Gas Pipeline
Co. of America (NGPL):
Volume (Dth/day) 28,605 34,014 996
Expiration date 11/30/2000 11/30/98 11/30/98
ANR:
Volume (Dth/day) 60,737 19,180 5,000
Expiration date 10/31/2003 10/31/2003 10/31/2003
Gas supply is purchased from a variety of non-pipeline suppliers located
in the United States and Canada having access to virtually all major
natural gas producing regions.
IESU has firm gas supply agreements with various non-pipeline suppliers.
These gas supply agreements have maximum and minimum obligations and will
be delivered through gas transmission pipelines as follows:
Maximum Minimum
Daily Quantity Daily Quantity
(Dth/day) (Dth/day)
NNG 96,486 73,545
NGPL 38,575 25,575
ANR 25,000 20,000
These gas supply contracts have expiration dates ranging from a few months
to almost four years. Rates charged by IESU's suppliers are subject to
regulation by the FERC. IESU's tariffs provide for subsequent adjustments
to its natural gas rates for changes in the cost of natural gas purchased
for resale.
IPC Gas Supplies
IPC purchases pipeline transportation capacity from NNG, NGPL and Northern
Border Pipeline Company (NBPL). During 1997, IPC purchased gas from non-
traditional suppliers, i.e. producers, brokers and marketers, at market
responsive rates. Order 636 unbundled pipeline supply from its capacity.
Subsequent to Order 636, FERC continues to approve the tariffs of NNG and
NGPL, but only with regard to capacity and storage rates, subject to
change as rate cases are filed.
Gas for IPC's Mason City, Albert Lea and Savanna service areas is
transported by NNG under capacity contracts for 36,338 Dth per day, and
for an additional 15,657 Dth in the November to March time frame. The
majority, 26,999 Dth, of the above capacities is from the producing areas
of Oklahoma and Texas, etc. These contracts expire in October 1999. Gas
is supplied by producers, marketers and brokers, as well as from storage
services, to meet the peak heating season requirements.
Gas for IPC's Clinton service area is transported by NGPL under capacity
contracts for 17,750 Dth annually, with expiration dates of November 30,
1998, February 28, 1999, and two as of November 30, 2001. This gas is
supplied by producers, marketers and brokers. IPC supplements this
capacity with storage gas, which has the pipeline capacity embedded in its
FERC approved rate.
IPC owns propane-air mix gas plants in Albert Lea, Minnesota and Clinton
and Mason City, Iowa. The daily output capacities are: 5,000 Dth, 4,000
Dth and 9,600 Dth, respectively.
IPC's tariffs provide for subsequent adjustments to its natural gas rates
for changes in the cost of natural gas purchased for resale.
Gas Environmental Matters
Refer to "Other Matters - Environmental" in Item 7. MD&A for a discussion
of gas environmental matters as well as Item 3. "Legal Proceedings" for
additional information related to manufactured gas plant (MGP) sites.
<TABLE>
<CAPTION>
WPL Holdings, Inc.
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Gas Operating Information
(Utility Only)
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>
D. INFORMATION RELATING TO NONREGULATED OPERATIONS
A description of HDC's businesses at December 31, 1997 is as follows:
Environmental and Engineering Consulting
Heartland Environmental Holding Company (HEHC), a wholly-owned subsidiary
of HDC, is the holding company for HDC's environmental and engineering
services activities. HEHC's primary subsidiary is RMT, Inc. (RMT). RMT
is a Madison, Wisconsin based environmental and engineering consulting
company that serves clients nationwide in a variety of industrial market
segments. The most significant of these markets are chemical companies,
pulp and paper processors, oil and gas providers, foundries and other
manufacturers. RMT specializes in solid and hazardous waste management,
ground water quality protection, industrial design and hygiene
engineering, and air and water pollution control.
Affordable Housing
Formed by HDC in 1988, Heartland Properties, Inc. (HPI) is responsible for
performing asset management, facilitating the development of and financing
high quality, affordable housing in Wisconsin and the Midwest. HPI has a
majority ownership interest in 60 such properties. As of December 31,
1997, HPI's investment in affordable housing properties was $100 million,
net of depreciation.
To facilitate HPI's development and financing efforts in the affordable
housing market, HDC incorporated Capital Square Financial Corporation in
1992 to provide mortgage banking services. Heartland Capital Company LLC,
which was formed in 1994 to provide construction financing services, was
liquidated during 1997.
Energy Services
Heartland Energy Group, Inc (HEG) was formed in 1995 as the parent company
for HDC's energy services businesses. The two most significant components
of HEG prior to 1997 were Heartland Energy Services, Inc. (HES) and
ENSERV, Inc.
HES, formed in 1993, provided energy supplies to industrial and wholesale
customers. Beginning in 1994, HES actively bought and sold natural gas.
In January 1997, HES's natural gas business was combined in a joint
venture with Industrial Energy Applications, Inc. (IEA), the energy
marketing subsidiary of IES.
HES received federal marketing authority for electricity in September
1994. HES continued to buy and sell electricity through 1997. In July
1997, WPLH announced a joint venture with Cargill Incorporated to market
electricity and risk management services to wholesale buyers. This joint
venture, in which the Merged Company has a 50% ownership interest, is
named Cargill-Alliant. HES's electricity business was part of WPLH's
initial capital contribution to the joint venture.
ENSERV offered turnkey project development and implementation for customer
energy supply initiatives. In January 1997, ENSERV was part of HDC's
contribution to the joint venture with IEA.
In the event the Merger is consummated, the nonregulated businesses of
IES, for which Diversified is the parent corporation, will become part of
the Merged Company. A description of Diversified's businesses at December
31, 1997 is as follows:
IES Transportation is a holding company whose wholly-owned subsidiaries at
December 31, 1997, included the Cedar Rapids and Iowa City Railway Company
(CRANDIC) and IES Transfer Services Inc. (Transfer). CRANDIC is a
short-line railway which renders freight service between Cedar Rapids and
Iowa City. Transfer's operations include transloading and storage
services. IES Transportation also has a 75% equity investment in IEI
Barge Services, Inc. (Barge) which provides barge terminal and hauling
service on the Mississippi River. In addition, IES Transportation has
investments in two Iowa railroad companies.
IES Energy is a holding company whose wholly-owned subsidiaries at
December 31, 1997, included IEA and Whiting Petroleum Corporation
(Whiting). IEA offers commodities-based and facilities-based energy
services for customers, including supplying natural gas and electricity,
standby generation, cogeneration, steam production and propane air
systems. Whiting is organized to purchase, develop and produce crude oil
and natural gas.
IES Investments is a holding company whose primary wholly-owned
subsidiaries at December 31, 1997, included Iowa Land and Building Company
(Iowa Land), IES Investco Inc. (Investco) and Village Lakeshares, Inc.
(Lakeshares). Iowa Land is organized to pursue real estate and economic
development activities in Utilities' service territory. Investco is a
holding company for certain equity investments. Lakeshares is a holding
company for resort properties in Iowa. IES Investments also has direct
and indirect equity interests in various real estate ventures, primarily
concentrated in Cedar Rapids, and holds other passive investments.
At December 31, 1997, IES Investments held an investment in the stock of
McLeodUSA Inc. (McLeod), a telecommunications company, valued at $327
million (as compared to a cost basis of $29 million). Pursuant to the
applicable accounting rules, the carrying value of the investment is
adjusted to the estimated fair value each quarter based on the closing
price at the end of the quarter. The adjustment does not impact earnings
as the unrealized gain or loss, net of taxes, is recorded directly to the
common equity section of the balance sheet. In addition, any such gain or
loss is reflected in current earnings only at the time it is realized
through a sale. IES Investments has entered into an agreement with
McLeod which restricts the sale or disposal of its shares without the
consent of the McLeod Board of Directors until September 1998.
IES International is a holding company whose wholly-owned subsidiaries are
IES New Zealand Limited (IES New Zealand), Interstate Energy Corporation
Pte Ltd. (IECP) and IES Brazil Inc. IES New Zealand has equity
investments in two New Zealand electric distribution entities. IECP has a
50% equity investment in two individual cogeneration facilities in China:
JIES Heat and Power Ltd. and TIES Heat and Power Ltd. None of the
investments under IES International are consolidated, therefore IES
International has no operating revenues. IES Brazil Inc. has been formed
for the purposes of potential future investments in Brazil. IES
Investments also has several investments in foreign entities, including a
loan to a New Zealand company and an investment in an international
venture capital fund. These investments are considered international
investments for management purposes.
Refer to "Other Matters - Environmental" in Item 7. MD&A for a discussion
of an environmental matter at Whiting.
ITEM 2. PROPERTIES
WP&L
WP&L's principal electric generating stations at December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
Name and Location Major Fuel 1997 Summer Capability
of Station Type in Kilowatts
<S> <C> <C> <C>
Kewaunee Nuclear Power Plant, Kewaunee, WI Nuclear 211,200 (1)
Rock River Generating Station, Janesville, WI Coal 161,000
Nelson Dewey Generating Station, Cassville, WI Coal 226,000
Edgewater Generating Station #3, Sheboygan, WI Coal 74,000
Edgewater Generating Station #4, Sheboygan, WI Coal 233,200 (2)
Edgewater Generating Station #5, Sheboygan, WI Coal 301,500 (3)
Columbia Energy Center, Portage, WI Coal 485,100 (4)
--------
Total Coal 1,480,800
Blackhawk Generating Station, Beloit, WI Gas 60,000
Rock River Combustion Turbine, Janesville, WI Gas and Oil 151,400
South Fond du Lac Combustion Turbine
Units 2 and 3, Fond du Lac, WI Gas and Oil 169,700
Sheepskin Combustion Turbine, Edgerton, WI Gas and Oil 36,700
-------
Total Gas and Oil 417,800
Kilbourn Hydro Plant, Wisconsin Dells, WI Hydro 9,500
Prairie du Sac Hydro Plant, Prairie du Sac, WI Hydro 30,000
Petenwell/Castle Rock Hydro Plants,
Wisconsin Rapids, WI Hydro 13,300 (5)
4 small units at various locations Hydro 2,070
--------
Total Hydro 54,870
---------
Total generating capability 2,164,670
=========
(1) Represents WP&L's 41% ownership interest in this 515,000 Kw
generating station. The plant is operated by WPSC.
(2) Represents WP&L's 68.2% ownership interest in this 342,000 Kw
generating station. The plant is operated by WP&L.
(3) Represents WP&L's 75% ownership interest in this 402,000 Kw
generating station. The plant is operated by WP&L.
(4) Represents WP&L's 46.2% ownership interest in this 1,050,000 Kw
generating station. The plant is operated by WP&L.
(5) Represents WP&L's 33.3% ownership interest in this 40,000 Kw
hydro plant. The plant is operated by Wisconsin River Power
Company.
</TABLE>
WP&L owns 2,701 miles of electric transmission lines and 362 substations
located adjacent to the communities served. Substantially all of WP&L's
facilities are subject to the lien of its first mortgage bond indenture.
IESU
IESU's principal electric generating stations at December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
Name and Location Major Fuel 1997 Summer Capability
of Station Type in Kilowatts
<S> <C> <C> <C>
Duane Arnold Energy Center, Palo, Iowa Nuclear 364,000 (1)
Ottumwa Generating Station, Ottumwa, Iowa Coal 343,440 (2)
Prairie Creek Station, Cedar Rapids, Iowa Coal 207,750
Sutherland Station, Marshalltown, Iowa Coal 143,000
Sixth Street Station, Cedar Rapids, Iowa Coal 65,000
Burlington Generating Station, Burlington, Iowa Coal 211,800
George Neal Unit 3, Sioux City, Iowa Coal 144,200 (3)
-------
Total Coal 1,115,190
Peaking Turbines, Marshalltown, Iowa Oil 159,600
Centerville Combustion Turbines, Centerville, Iowa Oil 49,400
Diesel Stations, all in Iowa Oil 8,300
-------
Total Oil 217,300
Grinnell Station, Grinnell, Iowa Gas 46,400
Agency Street Combustion Turbines,
West Burlington, Iowa Gas 58,400
Burlington Combustion Turbines, Burlington, Iowa Gas 57,000
Red Cedar Combustion Turbine, Cedar Rapids, IA Gas 18,800
-------
Total Gas 180,600
---------
Total generating capability 1,877,090
=========
(1) Represents IESU's 70% ownership interest in this 520,000 Kw
generating station. The plant is operated by IESU.
(2) Represents IESU's 48% ownership interest in this 715,500 Kw
generating station. The plant is operated by IESU.
(3) Represents IESU's 28% ownership interest in this 515,000 Kw
generating station which is operated by an unaffiliated utility.
</TABLE>
At December 31, 1997, the transmission lines of IESU, operating from
34,000 to 345,000 volts, approximated 4,440 circuit miles (substantially
all located in Iowa). IESU owned 579 substations (substantially all
located in Iowa).
IESU's principal properties are suitable for their intended use and are
held subject to liens of indentures relating to its bonds.
IPC
IPC's principal electric generating stations at December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
Name and Location Major Fuel 1997 Summer Capability
of Station Type in Kilowatts
<S> <C> <C> <C>
Dubuque Units 2, 3 and 4, Dubuque, IA Coal 78,000
M. L. Kapp Plant Units 1 and 2, Clinton, IA Coal 235,000
Lansing Units 1, 2, 3 and 4, Lansing, IA Coal 320,000
Fox Lake Plant Units 1, 2 and 3, Sherburn, MN Coal 108,000
George Neal Unit 4, Sioux City, IA Coal 134,300 (1)
Louisa Unit 1, Louisa, IA Coal 28,000 (2)
-------
Total Coal 903,300
Montgomery Unit 1, Montgomery, MN Gas 22,200
Fox Lake Plant Unit 4, Sherburn, MN Gas 21,300
Lime Creek Plant Units 1 and 2, Mason City, IA Gas 70,000
-------
Total Gas 113,500
Dubuque Units 1 and 2, Dubuque, IA Oil 4,600
Hills Units 1 and 2, Hills, MN Oil 4,000
Lansing Units 1 and 2, Lansing, IA Oil 2,000
New Albin Unit 1, New Albin, IA Oil 700
-------
Total Oil 11,300
---------
Total generating capability 1,028,100
=========
(1) Represents IPC's 21.5% ownership interest in this 640,000 Kw
generating station. The plant is operated by MidAmerican Energy
Company.
(2) Represents IPC's 4% ownership interest in this 738,000 Kw
generating station. The plant is operated by MidAmerican Energy
Company.
</TABLE>
IPC owns 2,545 miles of electric transmission lines and 224 substations
located in Iowa, Illinois and Minnesota. Substantially all of IPC's
facilities are subject to the lien of its bond indenture securing IPC's
outstanding first mortgage bonds.
HDC
The following table gives information as of December 31, 1997 with respect
to rental properties associated with HDC's affordable housing project
developments, through its HPI subsidiary.
Location Housing Development Resident Type
Property:
Antigo, WI The Depot Families
Appleton, WI Lincoln Mills Families/Elderly
Appelton, WI Ravine Mills Families/Elderly
Appelton, WI The Mills II Families/Elderly
Beloit, WI Beloit Water Tower Place Families
Chisholm, MN Lincoln Square Families
DePere, WI Lawton Foundry Families
Madison, WI The Avenue Disabled/Families
Marinett, WI Dunlap Square Families/Elderly
Marshfield, WI The Woodlands Families/Elderly
Mc Farland, WI The Cottages Families/Elderly
Sheboygan Falls,WI Brickner Woolen Mills Families/Elderly
Sheboygan, WI Jung Apartments Families
Sheboygan, WI Sunnyside Townhouses Families
Sun Prairie, WI Vandenburg Heights Families
Verona, WI Sugar Creek Senior
Housing Elderly
Madison, WI YWCA Women & Homeless
Various Other Families, Elderly,
Singles, Disabled &
Homeless
Occupancy rates in the 60 properties/investments owned by HPI averaged 91%
during 1997.
HPI also maintains a minor equity ownership in development properties
where the majority interest was subsequently sold to outside investors.
This equity ownership is not considered material in relation to WPLH's
consolidated financial statements. HPI remains contingently liable for
minimum property financial performance guarantees for a period of time on
many of the properties sold. Those contingent obligations have been
accrued for or are otherwise not considered likely to have a material
effect on WPLH's consolidated financial statements.
Diversified
Diversified also owns property which primarily represents investments in
transportation, energy-related, telecommunications and real estate
properties.
ITEM 3. LEGAL PROCEEDINGS
WP&L
On July 20, 1995, the City of Beloit (Beloit) filed a suit against WP&L in
the Circuit Court of Rock County, Wisconsin alleging that, based on
negligence, nuisance and trespass, WP&L caused damage to Beloit through
the contamination of property owned by Beloit as a result of the
historical operation of manufactured gas plants on the property prior to
Beloit's acquisition of the property. The suit seeks damages equal to the
cost of cleaning up the property, for decrease in the value of the
property, and to compensate Beloit for lost development opportunities for
the property as well as consequential damages and costs of the action.
Beloit and WP&L entered into a settlement agreement whereby WP&L will pay
$3.3 million of the expected $3.8 million cost of remediating the
property. Costs in excess of $3.8 million will be split between WP&L and
Beloit on a 90%/10% basis with WP&L paying the 90%. WP&L currently
believes that these costs will be recoverable in rates. In addition, WP&L
intends to seek to recover the payment from insurers.
In management's judgment, the probability is remote that this action will
have a material adverse impact on WPLH's financial condition.
IES
On April 30, 1996, IESU filed suit, IES Utilities Inc. v. Home Ins. Co.,
et al., No. 4-96-CV-10343 (S.D. Iowa filed Apr. 30, 1996), against various
insurers who had sold comprehensive general liability policies to Iowa
Southern Utilities Company (ISU) and Iowa Electric Light and Power Company
(IE) (IESU was formed as the result of a merger of ISU and IE). The suit
seeks judicial determination of the respective rights of the parties, a
judgment that each defendant is obligated under its respective insurance
policies to pay in full all sums that IESU has become or may become
obligated to pay in connection with its defense against allegations of
liability for property damage at and around MGP sites, and indemnification
for all sums that it has or may become obligated to pay for the
investigation, mitigation, prevention, remediation and monitoring of
environmental impacts to property, including natural resources like
groundwater, at and around the MGP sites. Settlement discussions are
proceeding between IESU and its insurance carriers regarding the recovery
of these MGP-related costs. Settlement has been reached with sixteen
carriers thus far. Any amounts received from insurance carriers are being
deferred pending a determination of the regulatory treatment of such
recoveries.
IES, Diversified, IES Energy, MicroFuel Corporation (the Corporation) now
known as Ely, Inc. in which IES Energy has a 69.40% equity ownership, and
other parties have been sued in Linn County District Court in Cedar
Rapids, Iowa, by Allen C. Wiley. Mr. Wiley claims money damages on
various tort and contract theories arising out of the 1992 sale of the
assets of the Corporation, of which Mr. Wiley was a director and
shareholder. All of the defendants in Mr. Wiley's suit answered the
complaint and denied liability. IES and Diversified were dismissed from
the suit in a motion for summary judgment. In addition, a grant of
summary judgment has reduced Mr. Wiley's claims against the remaining
parties to breach of fiduciary duty. A separate motion for summary
judgment, which was filed seeking dismissal of the remaining claims
against the remaining parties, was overruled on September 20, 1996, and
the trial has been set for May 1998. All of the defendants are vigorously
contesting the claims.
The Corporation commenced a separate suit to determine the fair value of
Mr. Wiley's shares under Iowa Code section 490. A decision was issued on
August 31, 1994, by the Linn County District Court ruling that the value
of Mr. Wiley's shares was $377,600 based on a 40 cents per share
valuation. The Corporation contended that the value of Mr. Wiley's shares
was 2.5 cents per share. The Decision was appealed to the Iowa Supreme
Court by the Corporation on a number of issues, including the
Corporation's position that the trial court erred as a matter of law in
discounting the testimony of the Corporation's expert witness. The Iowa
Supreme Court assigned the case to the Iowa Court of Appeals. On February
2, 1996, the Iowa Court of Appeals reversed the District Court ruling
after determining the District Court erred in discounting the expert
testimony. The case was remanded back to the District Court for
consideration of the expert testimony, but with no additional evidence
taken. The District Court re-affirmed its original decision on August 28,
1996, and the Corporation has again appealed to the Iowa Supreme Court.
The case has been reassigned to the Iowa Court of Appeals without oral
argument.
On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda) filed
a request with the IUB that the IUB initiate formal complaint proceedings
against IESU. Lambda alleged that IESU was discriminating against it by
refusing to enter into contracts with it for remote displacement service
and by favoring IEA, a subsidiary of IES, in such matters. On October 17,
1996, IESU filed a Response which denied the allegations, and alleged,
inter alia, that Lambda was unlawfully attempting to provide retail
electrical services in IESU's exclusive service territory. On August 25,
1997, the IUB issued its Final Decision and Order rejecting Lambda's
complaint. On October 10, 1997, the IUB issued its rehearing order which
again rejected Lambda's complaint.
On October 9, 1996, the IES filed a civil suit in the Iowa District Court
in and for Linn County against Lambda, Robert Latham, Louie Ervin, and
David Charles (three former employees of IES and/or its subsidiaries),
collectively the "Defendants", alleging, inter alia, violations of Iowa's
trade secret act and interference with existing and prospective business
advantage. On November 1, 1996, the Defendants filed their Answer and
Counterclaims alleging, inter alia, violation of Iowa competition law,
tortious interference and commercial disparagement. The Defendants
therewith also filed a Third-Party Petition against IESU, IEA and Lee Liu,
Chairman of the Board & Chief Executive Officer of IES and IESU, alleging,
inter alia, tortious interference and commercial disparagement.
IPC
There are no material pending legal proceedings, or proceedings known to
be contemplated by governmental authorities, other than ordinary routine
litigation incidental to the business, to which IPC is a party or of which
any of IPC's property is the subject.
Environmental Matters
The information required by Item 3 is included in this Annual Report on
Form 10-K under Item 8. "Notes to Consolidated Financial Statements,"
Note 11c and "Other Matters - Environmental" in Item 7. MD&A.
Rate Matters
The information required by Item 3 is included in "Liquidity and Capital
Resources - Rates and Regulatory Matters" in Item 7. MD&A.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
WPLH's Common Stock trades on the New York Stock Exchange. Quarterly
Price Ranges and Dividends with respect to the Common Stock were as
follows:
<TABLE>
<CAPTION>
1997 1996
Quarter High Low Dividend High Low Dividend
<S> <C> <C> <C> <C> <C> <C>
First $28 7/8 $27 3/8 $0.50 $32 $29 7/8 $0.4925
Second 28 1/4 26 3/4 0.50 32 7/8 28 5/8 0.4925
Third 29 27 0.50 32 7/8 28 7/8 0.4925
Fourth 34 7/16 28 3/8 0.50 29 5/8 27 1/2 0.4925
Year $34 7/16 $26 3/4 $2.00 $32 7/8 $27 1/2 $1.97
</TABLE>
Stock price at December 31, 1997: $33 1/8
At December 31, 1997, there were approximately 35,677 holders of record of
WPLH's stock including underlying holders in WPLH's Shareowner Direct
Plan.
WPLH is the sole common shareowner of all 13,236,601 shares of WP&L Common
Stock currently outstanding. Cash dividends paid per share of WP&L's
Common Stock during 1997 and 1996 to WPLH were $4.41 and $4.99,
respectively.
In the retail rate order effective April 29, 1997, the PSCW ordered that
it must approve the payment of dividends by WP&L to its parent company
that are in excess of the level forecasted in the rate order ($58.3
million), if such dividends would reduce WP&L's average common equity
ratio below 52.00% of total capitalization. Based on a 13-month average
for 1997, WP&L's common equity ratio was 52.56%.
In accordance with the terms of the Merger (refer to Item 1. "Business -
Merger" above), WPLH is not permitted to declare or pay any dividends on
any of its capital stock other than the obligations that exist with
respect to WP&L's Cumulative Preferred Stock, and regular quarterly
dividends on WPLH's Common Stock may not exceed 105% of the common stock
dividends from the prior year.
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
WPL Holdings, Inc.
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Financial Information
(Dollars in thousands except
for per share data)
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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MD&A)
MERGER
WPL Holdings, Inc. (WPLH), IES Industries Inc. (IES) and Interstate Power
Company (IPC) are in the process of completing a three-way merger (Merger)
forming Interstate Energy Corporation (Merged Company). In connection
with the Merger, IES will be merged with and into WPLH forming the Merged
Company and IPC will become a subsidiary of the Merged Company. In
addition, following the Merger, the holding companies for the nonregulated
businesses of the former WPLH and IES (Heartland Development Corporation
(HDC) and IES Diversified Inc. (Diversified), respectively) will be merged
into each other. The resulting company from this merger is referred to as
New Diversified. As a result of the Merger, the first tier subsidiaries
of the Merged Company will 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 Note 2 of the "Notes to
Consolidated Financial Statements" of WPLH included elsewhere in this
Annual Report on Form 10-K.
The merger partners currently anticipate cost savings resulting from the
Merger of approximately $749 million over a ten-year period, net of
transaction costs and costs to achieve the savings of approximately $78
million. Approximately $22 million of these costs had been incurred
through December 31, 1997. Upon consummation of the Merger, the merger
partners estimate the Merged Company will expense approximately $40
million of additional merger-related costs (e.g., required payments to or
for financial advisors, employee retirements and separations, attorneys,
accountants, etc.). The estimate of potential cost savings constitutes a
forward-looking statement and actual results may differ materially from
this estimate. The estimate is necessarily based upon various assumptions
that involve judgments with respect to, among other things, future
national and regional economic and competitive conditions, technological
developments, inflation rates, regulatory treatments, weather conditions,
financial market conditions, future business decisions and other
uncertainties. No assurance can be given that the entire amount of
estimated cost savings will actually be realized. In addition, the
allocation between WPLH, IES and IPC and their customers of the estimated
cost savings of approximately $749 million over ten years resulting from
the Merger, net of costs incurred to achieve such savings, will be subject
to regulatory review and approval.
As part of the approval process for the Merger, 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.
Given that management believes the Merger will be consummated in the
second quarter of 1998, additional information has been included below
regarding WPLH's merger partners, IES and IPC. The information regarding
IES and IPC as well as the Merged Company is generally prospective in
nature and has been included to enhance the reader's understanding of the
Merged Company.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K (including MD&A)
that are not of historical fact are forward-looking statements intended to
qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. From time to time, WPLH 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 WPLH. 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
WPLH'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 WPLH 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
WPLH's service territory, federal and state regulatory or government
actions, the operations of WPLH's nuclear facilities, the potential that
the Merger will not be consummated, the ability of the parties to
successfully integrate the operations of WPLH, IES and IPC assuming the
Merger is consummated and changes in the rate of inflation.
UTILITY INDUSTRY OUTLOOK
The merger partners compete 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.
On a combined basis, the merger partners realized 54%, 41%, 3% and 2% of
their 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). On a
combined basis, the merger partners realized 56%, 38%, 3% and 3% of their
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 merger partners, have been proposed by other
entities.
In addition to the ISO proceedings, the PSCW has issued an order outlining
its policies and principles for Public Benefits (low-income assistance,
energy efficiency, renewable generation and environmental research and
development) including funding levels, administration of the funds and how
funds should be collected from customers. The PSCW has proposed
increasing funding levels through utility rates by $50 to $75 million
statewide. Legislation to implement this proposal is being developed and
likely will be introduced in 1998.
The PSCW has also initiated a Service Quality administrative rulemaking
process to establish measurement and reporting requirements for
reliability of service, call center answering times, safety, tree
trimming, generation, transmission and distribution inspection and
maintenance plans, etc. A hearing was held on these issues in March 1998.
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
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.
All references to earnings per share throughout MD&A refer to both basic
and diluted earnings per share.
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) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $199,633 $201,690 (1%) 2,973,932 2,979,826 - 343,637 336,933 2%
Commercial 107,132 105,319 2% 1,877,640 1,814,324 3% 46,823 45,669 3%
Industrial 152,073 143,734 6% 4,255,637 3,985,672 7% 855 815 5%
Sales for resale 160,917 131,836 22% 5,823,521 5,245,812 11% 122 90 36%
Other 14,388 6,903 108% 61,330 57,757 6% 1,753 1,730 1%
-------- -------- ---------- ---------- -------- --------
Total 634,143 589,482 8% 14,992,060 14,083,391 6% 393,190 385,237 2%
========== ========== ==== ======== ======== ====
Electric
Production Fuels 116,812 114,470 2%
Purchased Power 125,438 81,108 55%
-------- --------
Margin $391,893 $393,904 (1%)
======== ======== ====
</TABLE>
Electric revenues increased $44.7 million, or 8%, in 1997 as compared with
1996. Continued customer growth, economic strength in the service area
and increased sales to other utilities offset the impact of cooler summer
weather and warmer weather during the winter months of 1997. Revenues
were also affected by an average retail rate decrease of 2.4% effective
April 29, 1997. Other revenues increased in 1997 compared with 1996 due
to increases in conservation services. Refer to the "Liquidity and Capital
Resources - Rates and Regulatory Matters" section below for further
discussion of these rate modifications.
Despite higher electric revenues, electric margin decreased $2.0 million,
or 1%, as compared with 1996. The decline in margin reflects the impact
of the shutdown at Kewaunee throughout most of the first half of 1997 for
steam generator tube repairs as well as several temporary, routine outages
at WP&L's coal-fired plants through the first five months of 1997. These
outages caused a greater reliance on more costly purchased power to meet
customer requirements. The PSCW ordered a temporary customer surcharge
effective April 29, 1997 through July 1, 1997, to allow WP&L to recover a
portion of the higher purchased power costs associated with the Kewaunee
outage. Refer to the "Liquidity and Capital Resources - Capital
Requirements" section below for further discussion of the Kewaunee plant
outage. The Kewaunee outage and increased sales to other utilities
resulted in a 55% increase in the cost of purchased power.
For a discussion of electric capacity and reliability refer to "Other
Matters - Power Supply" section below.
<TABLE>
WPLH Gas Operations
<CAPTION>
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $ 84,513 $ 90,382 (6%) 127,704 142,974 (11%) 137,827 133,580 3%
Commercial 45,456 46,703 (3%) 85,917 91,665 (6%) 16,653 16,083 4%
Industrial 8,378 11,410 (27%) 17,144 19,974 (14%) 488 529 (8%)
Transportation
and other 17,536 17,132 2% 175,943 185,671 (5%) 358 252 42%
-------- -------- -------- -------- -------- --------
Total 155,883 165,627 (6%) 406,708 440,284 (8%) 155,326 150,444 3%
======== ======== ===== ======== ======== =====
Purchased Gas 99,267 104,830 (5%)
-------- --------
Margin $ 56,616 $ 60,797 (7%)
======== ======== =====
</TABLE>
Gas revenues decreased $9.7 million, or 6%, in 1997 as compared with 1996.
The decline in revenues and margin reflected an average retail rate
decrease of 2.2%, effective April 29, 1997, and lower sales. Therm sales
declined by 8% due to warmer weather in the winter months of 1997. This
decrease was directly reflected in the decline in revenues and
corresponding $4.2 million, or 7%, decrease in margin. WP&L realized
favorable contributions to gas margin of $0.6 million and $1.1 million for
1997 and 1996, respectively, through its gas incentive program. Refer to
the "Liquidity and Capital Resources - Rates and Regulatory Matters"
section below for further discussion of this adjustment mechanism.
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
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
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) Change (In Thousands) Change Year End Change
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $201,690 $199,850 1% 2,979,826 2,937,825 1% 336,933 329,643 2%
Commercial 105,319 102,129 3% 1,814,324 1,773,406 2% 45,669 44,730 2%
Industrial 143,734 140,562 2% 3,985,672 3,872,520 3% 815 795 3%
Sales for resale 131,836 97,350 35% 5,245,812 3,109,385 69% 90 48 88%
Other 6,903 6,433 7% 57,757 54,042 7% 1,730 1,294 34%
-------- -------- ---------- ---------- -------- --------
Total 589,482 546,324 8% 14,083,391 11,747,178 20% 385,237 376,510 2%
========== ========== ==== ======== ======== ====
Electric
Production Fuels 114,470 116,488 (2%)
Purchased Power 81,108 44,940 80%
-------- --------
Margin $393,904 $384,896 2%
======== ======== ====
</TABLE>
Electric margin increased $9.0 million, or 2%, during 1996 compared with
1995 primarily due to higher sales to commercial and industrial customers
as well as other utilities combined with reduced costs per kWh for
electric production fuels and purchased power. Although fuel and
purchased power costs declined on a per kWh basis, purchased power expense
increased by 80%. This increase was due to WP&L's higher level of sales
to other utilities as well as a $5.0 million increase in purchased power
related to 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) Change (In Thousands) Change Year End Change
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $90,382 $70,382 28% 142,974 126,903 13% 133,580 129,576 3%
Commercial 46,703 35,411 32% 91,665 82,448 11% 16,083 15,724 2%
Industrial 11,410 17,984 (37%) 19,974 21,435 (7%) 529 566 (7%)
Transportation
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
Environmental and engineering $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
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 on Form 10-K.
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
Assuming the Merger is consummated, 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. It is anticipated that future capital
requirements of the Merged Company 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 will have 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. It is expected that the Merged Company
will continue 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 expected to pursue various potential business
development opportunities, including international as well as domestic
investments, and is devoting resources to such efforts. It is anticipated
that the Merged Company will strive 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 merger partners 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 expect to
participate in a utility money pool which will be funded, as needed,
by the Merged Company through the issuance of commercial paper. This
utility money pool is expected to replace the commercial paper
programs previously in place at IESU, WP&L and IPC.
The following material long-term debt financing activities involving
the merger partners and their subsidiaries 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 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 entities identified below 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:
Pro Forma
Combined WPLH IES IPC
1997 1997 1996 1997 1996 1997 1996
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%
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
merger partners anticipate 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, assuming the Merger is consummated, 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, 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.
Assuming the Merger is consummated, 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.
Assuming the Merger is consummated, it is expected that the Merged Company
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. Assuming the Merger is consummated, it is
expected that New Diversified will invest in energy products and services
in domestic and international markets, industrial services initiatives and
other strategic initiatives.
One of the post-merger objectives is to finance utility construction
expenditures through internally generated funds supplemented, when
required, by outside financing. The Merged Company is expected to fund
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
Assuming the Merger is consummated, the Merged Company will own 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 consummation of the Merger and capture of the Merger-related
synergies described under the caption "Merger" above and no significant
legislative or regulatory changes affecting its utility subsidiaries, the
merger partners do not expect the Merger-related electric and gas price
freezes to have a material adverse effect on the financial position or
results of operations of the Merged Company.
OTHER MATTERS
Year 2000
Each of the merger partners utilize 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 systems of the merger partners continue to meet their 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 merger partners'
financial and customer systems, has been completed. The merger partners
currently estimate 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 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 merger partners have also notified
their utility customers of their 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. Management is currently unable to estimate
the costs to be incurred on this phase of the project but believes 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 merger partners 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 financial
position or results of operations of the merger partners.
In April 1998, WP&L filed a request with the PSCW requesting deferral
treatment of Year 2000 costs in excess of $4 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 merger partners do not expect the effects of inflation at current
levels to have a significant effect on their financial position or results
of operations.
Environmental
The pollution abatement programs of IESU, IPC, WP&L, HDC and 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 management 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. Management 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 costs 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, management
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, management 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
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 Net (basic and
Revenues Income Income diluted)
Quarter Ended (in thousands except per share data)
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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Management 53
Report of Independent Public Accountants 54
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 55
Consolidated Balance Sheets, December 31, 1997 and 1996 56
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 57
Consolidated Statements of Capitalization, December 31, 1997
and 1996 58
Consolidated Statements of Common Shareowners' Investment for
the Years Ended December 31, 1997, 1996 and 1995 59
Notes to Consolidated Financial Statements 60
The supplementary data required by this Item are included in Item 7. under
the heading "Selected Consolidated Quarterly Financial Data (Unaudited)."
<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.
Erroll B. Davis Jr.
President and Chief Executive Officer
WPL Holdings, Inc.
Edward M. Gleason
Vice President, Treasurer and Corporate Secretary
Principal Financial Officer
WPL Holdings, Inc.
January 30, 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
ASSETS (in thousands)
Utility plant:
Plant in service--
Electric $1,790,641 $1,729,311
Gas 237,856 227,809
Water 24,864 23,905
Common 195,815 152,093
--------- ---------
2,249,176 2,133,118
Less-accumulated provision for
depreciation 1,065,726 967,436
--------- ---------
1,183,450 1,165,682
Construction work in progress 42,312 55,519
Nuclear fuel, net 19,046 19,368
--------- ---------
1,244,808 1,240,569
--------- ---------
Other property and equipment:
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
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
December 31,
1997 1996
CAPITALIZATION AND LIABILITIES (in thousands)
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
Cash flows generated from (used for)
operating activities: (in thousands)
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 on Form 10-K. The pro
forma combined earnings per share reflect the issuance of shares
associated with the exchange ratios discussed below.
<TABLE>
<CAPTION>
PRO FORMA
WPLH IES IPC PRO FORMA COMBINED
(as reported) (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
Plant Provision Accumulated
Ownership Inservice MW Plant in for Plant in Provision for
Interest % Date Capacity Service Depreciation CWIP Service Depreciation CWIP
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal:
Columbia Energy 1975 &
Center 46.2 1978 1,023 $161.4 $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 benefit obligation 39.3 29.3
Unrecognized net transition asset (12.0) (14.5)
Unrecognized prior service cost 7.8 3.7
Unrecognized net loss 0.8 15.0
----- -----
Prepaid pension costs $35.9 $33.5
===== =====
Assumed rate of return on plan
assets 9.00% 9.00%
===== =====
Discount rate of projected
benefit obligation 7.25% 7.50%
===== =====
Range of assumed rate increases
for future compensation levels 3.50-4.50% 3.50-4.50%
========== ==========
The net pension cost (benefit) recognized in the consolidated statements
of income for 1997, 1996 and 1995 included the following components:
1997 1996 1995
Service cost $4.8 $5.1 $3.9
Interest cost on projected 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 plan assets (31.0) (32.8)
Unrecognized transition obligation 21.0 23.5
Unrecognized prior service cost (0.3) (0.3)
Unrecognized net gain (8.3) (5.0)
----- -----
Accrued postretirement benefits
liability ($18.6) ($14.6)
===== =====
Assumed rate of return on plan assets 9.00% 9.00%
===== =====
Discount rate of projected benefit
obligation 7.25% 7.50%
===== =====
Medical cost trend on paid charges:
Initial trend rate 8.00% 9.00%
===== =====
Ultimate trend rate 5.00% 5.00%
===== =====
The net postretirement benefits cost recognized in the consolidated
statements of income for 1997, 1996 and 1995 included the following
components:
1997 1996 1995
Service cost $1.8 $1.8 $1.5
Interest cost on projected benefit
obligation 3.3 3.4 3.6
Actual return on assets (1.9) (1.3) (2.1)
Amortization of transition
obligation 1.5 1.5 1.5
Amortization and deferrals 0.5 0.3 1.3
---- ---- ----
Net postretirement benefits cost $5.2 $5.7 $5.8
==== ==== ====
Increasing the assumed health-care cost trend rate by one percentage point
in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $2.7 and the aggregate of the
service and interest cost components of the net periodic postretirement
benefit cost for the year by $0.4.
During 1997, WP&L expensed $1.7 for an early retirement program for
eligible bargaining unit employees.
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 options $2.15 $2.23 $2.71
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
35.0% 35.0%
Statutory federal income tax rate 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 relating to directors and nominees for
election of directors at the 1998 Annual Meeting of Shareowners will be
incorporated herein by reference to the relevant information in WPLH's
Proxy Statement for the 1998 Annual Meeting of Shareowners (the 1998 Proxy
Statement) upon the filing of the 1998 Proxy Statement with the Securities
and Exchange Commission. The executive officers of the registrant as of
the date of this filing are as follows (figures following the names
represent the officer's age as of December 31, 1997):
Executive Officers of WPL Holdings, Inc.
Erroll B. Davis, Jr., 53, was elected President effective January 1990 and
Chief Executive Officer effective July 1990 and has been a board member
since March 1988.
Edward M. Gleason, 57, was elected Corporate Secretary effective December
1993 and Vice President-Treasurer effective October 1993. He has also
served as Controller, Treasurer, and Corporate Secretary of WP&L since
1996, Corporate Secretary of WP&L from 1993 to 1996 and Vice President-
Finance and Treasurer of WP&L from 1986 to 1993. Mr. Gleason functions as
principal financial officer of WPL Holdings, Inc. and WP&L.
Steven F. Price, 45, was elected Assistant Corporate Secretary and
Assistant Treasurer effective April 1992.
NOTE: None of the executive officers listed above is related to any
member of the Board of Directors or nominee for director.
Executive officers have no definite terms of office and serve at the
pleasure of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be incorporated herein by
reference to the relevant information in the 1998 Proxy Statement upon the
filing of the 1998 Proxy Statement with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 will be incorporated herein by
reference to the relevant information in the 1998 Proxy Statement upon the
filing of the 1998 Proxy Statement with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be incorporated herein by
reference to the relevant information in the 1998 Proxy Statement upon
filing of the 1998 Proxy Statement with the Securities and Exchange
Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) Consolidated Financial Statements
Refer to Index to Financial Statements at Item 8 "Financial Statements
and Supplementary Data."
(a) (2) Financial Statement Schedules
Report of Independent Public Accountants on Schedules
Schedule I. Parent Company Financial Statements
Schedule II. Valuation and Qualifying Accounts and Reserves
NOTE: All other schedules are omitted because they are not applicable
or not required, or because that required information is shown either
in the consolidated financial statements or in the notes thereto.
(a) (3) Exhibits Required by Securities and Exchange Commission
Regulation S-K
The following Exhibits are filed herewith or incorporated herein by
reference. Documents indicated by an asterisk (*) are incorporated
herein by reference.
2A* Agreement and Plan of Merger, dated as of November 10, 1995, by
and among WPL Holdings, Inc., IES industries Inc., Interstate
Power Company and AMW Acquisition, Inc. (incorporated by
reference to Exhibit 2.1 to WPLH's Current Report on Form 8-K,
dated November 10, 1995)
2B* Amendment No. 1 to Agreement and Plan of Merger and Stock Option
Agreements, dated May 22, 1996, by and among WPL Holdings, Inc.,
IES Industries Inc., Interstate Power Company, a Delaware
Corporation, AMW Acquisition, Inc., WPLH Acquisition Co. and
Interstate Power Company, a Wisconsin Corporation (incorporated
by reference to Exhibit 2.1 to WPLH's Current Report on Form 8-
K, dated May 22, 1996)
2C* Amendment No. 2 to Agreement and Plan of Merger, dated August
16, 1996, by and among WPL Holdings, Inc., IES Industries Inc.,
Interstate Power Company, a Delaware Corporation, WPLH
Acquisition Co. and Interstate Power Company, a Wisconsin
Corporation (incorporated by reference to Exhibit 2.1 to WPLH's
Current Report on Form 8-K, dated August 15, 1996)
2D* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among WPL
Holdings, Inc. and IES Industries Inc. (incorporated by
reference to Annex B to WPL Holdings, Inc.'s Registration
Statement on Form S-4 (No. 333-07931))
2E* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among WPL
Holdings, Inc. and Interstate Power Company. (incorporated by
reference to Annex C to WPL Holdings, Inc.'s Registration
Statement on Form S-4 (No. 333-07931))
2F* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among IES
Industries Inc. and WPL Holdings, Inc. (incorporated by
reference to Annex D to WPL Holdings, Inc.'s Registration
Statement on Form S-4 (No. 333-07931))
2G* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among IES
Industries, Inc. and Interstate Power Company. (incorporated by
reference to Annex E to WPL Holdings, Inc.'s Registration
Statement on Form S-4 (No. 333-07931))
2H* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among
Interstate Power Company and WPL Holdings, Inc. (incorporated
by reference to Annex F to WPL Holdings, Inc.'s Registration
Statement on Form S-4 (No. 333-07931))
2I* Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among
Interstate Power Company and IES Industries Inc. (incorporated
by reference to Annex G to WPL Holdings, Inc.'s Registration
Statement on Form S-4 (No. 333-07931))
3A* Restated Articles of Incorporation of WPL Holdings, Inc.
(incorporated by reference to Exhibit 4.1 to WPL Holdings,
Inc.'s Form S-3 Registration Statement No. 33-59972)
3B* Form of Amendment of the Restated Articles of Incorporation of
WPL Holdings, Inc. (incorporated by reference to Exhibit 4.2 to
WPL Holdings, Inc.'s Registration Statement on Form S-4 (No.
333-07931))
3C* By-Laws of WPL Holdings, Inc. as Amended (incorporated by
reference to Exhibit 3B to WPL Holdings, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996)
4A* Indenture of Mortgage or Deed of Trust dated August 1, 1941,
between WP&L and First Wisconsin Trust Company and George B.
Luhman, as Trustees, filed as Exhibit 7(a) in File No. 2-6409,
and the indentures supplemental thereto dated, respectively,
January 1, 1948, September 1, 1948, June 1, 1950, April 1, 1951,
April 1, 1952, September 1, 1953, October 1, 1954, March 1,
1959, May 1, 1962, August 1, 1968, June 1, 1969, October 1,
1970, July 1, 1971, April 1, 1974, December 1, 1975, May 1,
1976, May 15, 1978, August 1, 1980, January 15, 1981, August 1,
1984, January 15, 1986, June 1, 1986, August 1, 1988, December
1, 1990, September 1, 1991, October 1, 1991, March 1, 1992, May
1, 1992, June 1, 1992 and July 1, 1992 (Second Amended
Exhibit 7(b) in File No. 2-7361; Amended Exhibit 7(c) in File
No. 2-7628; Amended Exhibit 7.02 in File No. 2-8462; Amended
Exhibit 7.02 in File No. 2-8882; Second Amendment Exhibit 4.03
in File No. 2-9526; Amended Exhibit 4.03 in File No. 2-10406;
Amended Exhibit 2.02 in File No. 2-11130; Amended Exhibit 2.02
in File No. 2-14816; Amended Exhibit 2.02 in File No. 2-20372;
Amended Exhibit 2.02 in File No. 2-29738; Amended Exhibit 2.02
in File No. 2-32947; Amended Exhibit 2.02 in File No. 2-38304;
Amended Exhibit 2.02 in File No. 2-40802; Amended Exhibit 2.02
in File No. 2-50308; Exhibit 2.01(a) in File No. 2-57775;
Amended Exhibit 2.02 in File No. 2-56036; Amended Exhibit 2.02
in File No. 2-61439; Exhibit 4.02 in File No. 2-70534; Amended
Exhibit 4.03 File No. 2-70534; Exhibit 4.02 in File No. 33-2579;
Amended Exhibit 4.03 in File No. 33-2579; Amended Exhibit 4.02
in File No. 33-4961; Exhibit 4B to WP&L's Form 10-K for the year
ended December 31, 1988, Exhibit 4.1 to WP&L's Form 8-K dated
December 10, 1990, Amended Exhibit 4.26 in File No. 33-45726,
Amended Exhibit 4.27 in File No.33-45726, Exhibit 4.1 to WP&L's
Form 8-K dated March 9, 1992, Exhibit 4.1 to WP&L's Form 8-K
dated May 12, 1992, Exhibit 4.1 to WP&L's Form 8-K dated June
29, 1992 and Exhibit 4.1 to WP&L's Form 8-K dated July 20, 1992)
4B* Rights Agreement, dated February 22, 1989, between WPL Holdings,
Inc. and Morgan Shareholder Services Trust Company (incorporated
by reference to Exhibit 4 to WPL Holdings, Inc.'s Current Report
on Form 8-K dated February 27, 1989)
4C* Indenture, dated as of June 20, 1997, between WP&L and Firstar
Trust Company, as Trustee, relating to debt securities
(incorporated by reference to Exhibit 4.33 to Amendment No. 2 to
WP&L's Registration Statement on Form S-3 (Registration No. 33-
60917))
4D* Officers' Certificate, dated as of June 25, 1997, creating the
7% debentures due June 15, 2007 of WP&L (incorporated by
reference to Exhibit 4 to WP&L's Current Report on Form 8-K,
dated June 25, 1997)
10A*# Executive Tenure Compensation Plan as revised November 1992
(incorporated by reference to Exhibit 10A to WPL Holdings,
Inc.'s Form 10-K for the year ended December 31, 1992)
10B*# Form of Supplemental Retirement Plan, as revised November 1992
(incorporated by reference to Exhibit 10B to WPL Holdings,
Inc.'s Form 10-K for the year ended December 31, 1992)
10C*# Forms of Deferred Compensation Plans, as amended June, 1990
(incorporated by reference to Exhibit 10C to WPL Holdings,
Inc.'s Form 10-K for the year ended December 31, 1990)
10C.1*# Officer's Deferred Compensation Plan II, as adopted September
1992 (incorporated by reference to Exhibit 10C.1 to WPL
Holdings, Inc.'s Form 10-K for the year ended December 31, 1992)
10C.2*# Officer's Deferred Compensation Plan III, as adopted January
1993 (incorporated by reference to Exhibit 10C.2 to WPL
Holdings, Inc.'s Form 10-K for the year ended December 31, 1993)
10F*# Pre-Retirement Survivor's Income Supplemental Plan, as revised
November 1992 (incorporated by reference to Exhibit 10F to WPL
Holdings, Inc.'s Form 10-K for the year ended December 31, 1992)
10H*# Wisconsin Power and Light Company Management Incentive Plan
(incorporated by reference to Exhibit 10H to WPL Holdings,
Inc.'s Form 10-K for the year ended December 31, 1992)
10I*# Deferred Compensation Plan for Directors, as amended January 17,
1995 (incorporated by reference to Exhibit 10I to WPL Holdings,
Inc.'s Form 10-K for the year ended December 31, 1995)
10J*# WPL Holdings, Inc. Long-Term Equity Incentive Plan (incorporated
by reference to Exhibit 4.1 to WPL Holdings, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994)
10K*# Key Executive Employment and Severance Agreement by and between
WPL Holdings, Inc. and E.B. Davis, Jr. (incorporated by
reference to Exhibit 4.2 to WPL Holdings, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994)
10L*# Key Executive Employment and Severance Agreement by and between
WPL Holdings, Inc. and each of L.W. Ahearn, W.D. Harvey, E.G.
Protsch, and A.J. Amato (incorporated by reference to Exhibit
4.3 to WPL Holdings, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994)
10M*# Key Executive Employment and Severance Agreement by and between
WPL Holdings, Inc. and each of E.M. Gleason, B.J. Swan, D.A.
Doyle, N.E. Boys, D.E. Ellestad, P.J. Wegner, and K.K. Zuhlke
(incorporated by reference to Exhibit 4.4 to WPL Holdings,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June
30, 1994)
10N# Severance Agreement by and between WPL Holdings, Inc. and Lance
W. Ahearn
21 Subsidiaries of WPL Holdings, Inc.
23 Consent of Independent Public Accountants
27 Financial Data Schedule
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant agrees
to furnish to the Securities and Exchange Commission, upon request, any
instrument defining the rights of holders of unregistered long-term debt
not filed as an exhibit to this Form 10-K. No such instrument authorizes
securities in excess of 10% of the total assets of the company.
Documents incorporated by reference to filings made by WP&L under the
Securities Exchange Act of 1934, as amended, are under File No. 0-337.
Documents incorporated by reference to filings made by WPL Holdings, Inc.
under the Securities Exchange Act of 1934, as amended, are under File No.
1-9894.
# - A management contract or compensatory plan or arrangement.
(a) (4) Unaudited Pro Forma Combined Financial Information of Interstate
Energy Corporation:
Page Numbers
Unaudited Pro Forma Combined Balance Sheet at
December 31, 1997 80-81
Unaudited Pro Forma Combined Statements of Income for the years
ended December 31, 1997, 1996 and 1995 82-84
Notes to Unaudited Pro Forma Combined Financial Statements 85-88
(b) Reports on Form 8-K
None
<PAGE>
INTERSTATE ENERGY CORPORATION
(doing business as Alliant Corporation)
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements for Interstate
Energy Corporation (Merged Company) combine the historical consolidated
balance sheets and statements of income of IES Industries Inc. (IES),
Interstate Power Company (IPC) and WPL Holdings, Inc. (WPLH) as adjusted
by various pro forma adjustments identified in Note 1. All material
adjustments known at this time which impact the reporting periods shown
have been included. The combination of WPLH, IES and IPC is referred to
herein as the "Merger."
These pro forma combined financial statements set forth the restated
combined financial data that will be presented for future comparative
financial data for the Merged Company. The pro forma balance sheet that
will be filed with the Securities and Exchange Commission following
consummation of the Merger will also include an additional pro forma
adjustment for certain merger-related costs to be recorded upon completion
of the Merger.
These statements are prepared on the basis of accounting for the Merger as
a pooling of interests and are based on the assumptions set forth in the
notes thereto. The historical data for WPLH have been adjusted to reflect
the restatement of such data to account for certain discontinued
operations as discussed in Note 6.
The following information is not necessarily indicative of the financial
position or operating results that would have occurred had the Merger been
consummated on the date, or at the beginning of the periods, for which the
Merger is being given effect nor is it necessarily indicative of future
operating results or financial position.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1997
(In thousands)
<CAPTION>
Pro Forma
ASSETS WPLH IES IPC Adjustments Pro Forma
(As Reported) (As Reported) (As Reported) (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
UTILITY PLANT
Electric $1,790,641 $2,072,866 $869,715 $ - $4,733,222
Gas 237,856 187,098 70,201 - 495,155
Other 220,679 145,716 - - 366,395
--------- --------- --------- ------- ---------
Total 2,249,176 2,405,680 939,916 - 5,594,772
Less: Accumulated
provision for
depreciation 1,065,726 1,115,261 450,595 - 2,631,582
Construction work in
progress 42,312 38,923 5,276 - 86,511
Nuclear fuel--net 19,046 36,731 - - 55,777
--------- --------- --------- --------- ---------
Net utility plant 1,244,808 1,366,073 494,597 - 3,105,478
OTHER PROPERTY, PLANT AND
EQUIPMENT ---NET AND OTHER
INVESTMENTS 139,548 319,657 4,746 (125) 463,826
CURRENT ASSETS
Cash and cash equivalents 13,987 10,143 2,897 302 27,329
Accounts receivable ---net 78,082 52,295 27,061 12,489 169,927
Fossil fuel inventories, at
average cost 18,857 10,579 11,220 - 40,656
Materials and supplies, at
average cost 19,274 24,274 6,297 - 49,845
Prepayments and other 42,808 69,920 15,035 (3,278) 124,485
--------- --------- --------- --------- ---------
Total current assets 173,008 167,211 62,510 9,513 412,242
EXTERNAL DECOMMISSIONING FUND 112,356 77,882 - - 190,238
INVESTMENT IN MCLEODUSA INC. 0 326,582 1,440 - 328,022
DEFERRED CHARGES AND OTHER 192,087 199,814 75,456 (15,442) 451,915
--------- --------- ------- ------- ---------
TOTAL ASSETS $1,861,807 $2,457,219 $638,749 ($6,054) $4,951,721
========= ========= ======= ======= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined
Financial Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued)
December 31, 1997
(In thousands)
CAPITALIZATION AND Pro Forma
LIABILITIES WPLH IES IPC Adjustments Pro Forma
(As Reported) (As Reported) (As Reported) (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
CAPITALIZATION
Common Stock Equity:
Common stock $308 $ - $34,163 ($33,706) $765
Other stockholders'
equity 607,275 818,133 181,457 38,404 1,645,269
--------- --------- --------- -------- ---------
Total common stock
equity 607,583 818,133 215,620 4,698 1,646,034
Preferred stock not
mandatorily redeemable 59,963 18,320 10,819 0 89,102
Preferred stock mandatory
sinking fund 0 0 24,267 0 24,267
Long-term debt---net 457,520 845,189 165,194 0 1,467,903
--------- --------- --------- --------- ---------
Total capitalization 1,125,066 1,681,642 415,900 4,698 3,227,306
CURRENT LIABILITIES
Current maturities,
sinking funds, and
capital lease obligations 11,528 13,684 6,314 0 31,526
Commercial paper, notes
payable and other 123,095 0 33,500 0 156,595
Variable rate demand bonds 56,975 0 0 0 56,975
Accounts payable and
accruals 91,175 78,702 13,208 9,549 192,634
Taxes accrued 412 62,432 16,014 65 78,923
Other accrued liabilities 55,987 67,174 12,445 (2,468) 133,138
--------- --------- --------- --------- ---------
Total current
liabilities 339,172 221,992 81,481 7,146 649,791
OTHER LIABILITIES
Deferred income taxes 253,519 372,837 104,670 0 731,026
Deferred investment tax
credits 35,039 31,838 15,985 0 82,862
Accrued environmental
remediation costs 9,238 46,989 5,794 0 62,021
Capital lease obligations 0 23,548 86 0 23,634
Other liabilities and
deferred credits 99,773 78,373 14,833 (17,898) 175,081
--------- --------- --------- --------- ---------
Total other liabilities 397,569 553,585 141,368 (17,898) 1,074,624
--------- --------- --------- --------- ---------
TOTAL CAPITALIZATION AND
LIABILITIES $1,861,807 $2,457,219 $638,749 ($6,054) $4,951,721
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined
Financial Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH IES IPC Adjustments Pro Forma
(As Reported) (As Reported) (As Reported) (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $634,143 $604,270 $277,340 $ - $1,515,753
Gas utility 155,883 183,517 54,507 - 393,907
Other 129,229 142,912 - 118,826 390,967
--------- --------- --------- --------- ---------
Total operating revenues 919,255 930,699 331,847 118,826 2,300,627
Operating Expenses
Electric and steam production
fuels 116,812 108,344 55,402 - 280,558
Purchased power 125,438 74,098 56,770 - 256,306
Cost of gas sold 99,267 126,631 33,324 - 259,222
Other operation 254,796 231,481 64,685 119,306 670,268
Maintenance 48,058 57,185 17,782 96 123,121
Depreciation and amortization 111,289 114,122 31,676 245 257,332
Taxes other than income taxes 34,988 51,701 16,708 - 103,397
--------- --------- --------- --------- ---------
Total operating expenses 790,648 763,562 276,347 119,647 1,950,204
--------- --------- --------- --------- ---------
Operating Income 128,607 167,137 55,500 (821) 350,423
Other Income (Expense)
Allowance for funds used
during construction 2,775 2,309 190 - 5,274
Other income and deductions,
net 4,432 1,850 6,772 856 13,910
--------- -------- --------- --------- ---------
Total other income
(expense) 7,207 4,159 6,962 856 19,184
Interest Charges 42,535 64,383 15,610 35 122,563
--------- --------- --------- --------- ---------
Income from Continuing
Operations before Income
Taxes and Preferred Dividends 93,279 106,913 46,852 - 247,044
Income Taxes 28,715 39,662 17,684 - 86,061
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,469 - 6,693
--------- --------- --------- --------- ---------
Income from Continuing
Operations $61,254 $66,337 $26,699 $ - $154,290
========= ========= ========= ======== =========
Average Common Shares
Outstanding 30,782 30,380 9,725 5,323 76,210
Earnings per Share of Common
Stock from Continuing
Operations (Basic and
diluted) $1.99 $2.18 $2.74 N/A $2.02
====== ====== ====== ====== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH IES IPC Adjustments Pro Forma
(As Reported) (As Reported) (As Reported) (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $589,482 $574,273 $276,620 $ - $1,440,375
Gas utility 165,627 273,979 49,464 (113,115) 375,955
Other 177,735 125,660 - 113,115 416,510
--------- --------- --------- --------- ---------
Total operating
revenues 932,844 973,912 326,084 - 2,232,840
Operating Expenses
Electric and steam
production fuels 114,470 84,579 57,560 - 256,609
Purchased power 81,108 88,350 61,556 - 231,014
Cost of gas sold 104,830 217,351 31,617 (113,474) 240,324
Other operation 317,608 212,501 51,707 113,474 695,290
Maintenance 46,492 49,001 16,164 - 111,657
Depreciation and
amortization 90,683 107,393 31,087 - 229,163
Taxes other than income
taxes 34,603 48,171 16,064 - 98,838
--------- --------- --------- --------- ---------
Total operating
expenses 789,794 807,346 265,755 - 1,862,895
--------- --------- --------- --------- ---------
Operating Income 143,050 166,566 60,329 - 369,945
Other Income (Expense)
Allowance for funds used
during construction 3,208 2,103 263 - 5,574
Other income and
deductions, net 14,098 (4,591) 2,336 - 11,843
--------- --------- -------- -------- ---------
Total other income
(expense) 17,306 (2,488) 2,599 - 17,417
Interest Charges 42,027 54,822 16,472 - 113,321
--------- --------- -------- -------- ---------
Income from Continuing
Operations before Income
Taxes and Preferred
Dividends 118,329 109,256 46,456 - 274,041
Income Taxes 41,814 47,435 18,133 - 107,382
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,463 - 6,687
--------- --------- --------- --------- ---------
Income from Continuing
Operations (Notes 3 and
6) $73,205 $60,907 $25,860 $ - $159,972
========= ========= ========= ========= =========
Average Common Shares
Outstanding 30,790 29,861 9,594 5,236 75,481
Earnings per Share of Common
Stock from Continuing
Operations (Basic and
diluted) $2.38 $2.04 $2.69 N/A $2.12
===== ===== ===== ======= =====
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH IES IPC Adjustments Pro Forma
(As Reported) (As Reported) (As Reported) (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $546,324 $560,471 $274,873 $ - $1,381,668
Gas utility 139,165 190,339 43,669 (53,047) 320,126
Other 121,766 100,200 - 53,047 275,013
--------- --------- --------- -------- ---------
Total operating revenues 807,255 851,010 318,542 - 1,976,807
Operating Expenses
Electric and steam 116,488 96,256 62,164 - 274,908
production fuels
Purchased power 44,940 66,874 57,566 - 169,380
Cost of gas sold 84,002 141,716 25,888 (50,519) 201,087
Other operation 252,722 199,768 44,581 50,519 547,590
Maintenance 42,043 46,093 14,881 - 103,017
Depreciation and 86,319 97,958 29,560 - 213,837
amortization
Taxes other than income
taxes 34,188 49,011 15,990 - 99,189
--------- --------- --------- -------- ---------
Total operating
expenses 660,702 697,676 250,630 - 1,609,008
--------- --------- --------- -------- ---------
Operating Income 146,553 153,334 67,912 - 367,799
Other Income (Expense)
Allowance for funds used
during construction 2,088 3,424 341 - 5,853
Other income and
deductions, net 5,954 1,548 (4,008) - 3,494
--------- -------- --------- --------- ---------
Total other income
(expense) 8,042 4,972 (3,667) - 9,347
Interest Charges 43,559 50,727 17,136 - 111,422
--------- --------- --------- --------- ---------
Income from Continuing
Operations before Income
Taxes and Preferred
Dividends 111,036 107,579 47,109 - 265,724
Income Taxes 36,108 42,489 19,453 - 98,050
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,458 - 6,682
--------- -------- --------- --------- ---------
Income from Continuing
Operations (Note 6) $71,618 $64,176 $25,198 $ - $160,992
Average Common Shares ========= ========= ========= ========= =========
Outstanding 30,774 29,202 9,564 5,140 74,680
Earnings per Share of Common
Stock from Continuing
Operations (Basic and
diluted) $2.33 $2.20 $2.63 N/A $2.16
===== ===== ===== ===== =====
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
<PAGE>
INTERSTATE ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. Pro Forma Adjustments
<TABLE>
<CAPTION>
December 31, 1997
BALANCE SHEET Merged
Consolidation Eliminations Company IPC IES
of for Common Stock Unbilled Pension Total
IEA-HES LLC IEA-HES LLC Adjustment Revenues Liability Pro Forma
ASSETS (Note 1 (a)) (Note 1 (b)) (Note 1 (c)) (Note 1 (d)) (Note 1 (e)) Adjustments
<S> <C> <C> <C> <C> <C> <C>
OTHER PROPERTY, PLANT AND
EQUIP ---NET AND OTHER
INVESTMENTS $3,458 ($3,583) $ - $ - $ - ($125)
CURRENT ASSETS
Cash and cash equivalents 3,308 (3,006) - - - 302
Accounts receivable ---net 8,932 (1,965) - 5,522 - 12,489
Prepayments and other 2 - - (3,280) - (3,278)
------ ------- ------ ------- -------- -------
Total current assets 12,242 (4,971) - 2,242 - 9,513
DEFERRED CHARGES AND OTHER - - - 2,456 (17,898) (15,442)
------ ------- ------ ------- -------- -------
TOTAL ASSETS $15,700 ($8,554) $ - $4,698 ($17,898) ($6,054)
====== ======= ====== ======= ======== =======
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity:
Common stock $ - $ - ($33,706) $ - $ - ($33,706)
Other stockholders' equity 3,583 (3,583) 33,706 4,698 - 38,404
------ ------- ------ ------- -------- -------
Total common stock
equity 3,583 (3,583) - 4,698 - 4,698
CURRENT LIABILITIES
Accounts payable and
accruals 11,514 (1,965) - - - 9,549
Taxes accrued 65 - - - - 65
Other accrued liabilities 538 (3,006) - - - (2,468)
------ ------- ------ ------- -------- -------
Total current
liabilities 12,117 (4,971) - - - 7,146
OTHER LIABILITIES
Other liabilities and
deferred credits - - - - (17,898) (17,898)
------ ------- ------ ------- -------- -------
Total other liabilities - - - - (17,898) (17,898)
------ ------- ------ ------- -------- -------
TOTAL CAPITALIZATION AND
LIAB. $15,700 ($8,554) $ - $4,698 ($17,898) ($6,054)
====== ======= ====== ======= ======== =======
<CAPTION>
Merged
1997 INCOME STATEMENT Consolidation Eliminations Company
of for Common Stock Total
IEA-HES LLC IEA-HES LLC Adjustment Pro Forma
(Note 1 (a)) (Note 1 (b)) (Note 1 (c)) Adjustments
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas utility $ - $ - $ - $ -
Other 118,826 - - 118,826
Total operating revenues 118,826 - - 118,826
-------- -------- --------- --------
OPERATING EXPENSES:
Cost of gas sold - - - -
Other operation 119,306 - - 119,306
Maintenance 96 - - 96
Depreciation and
amortization 245 - - 245
-------- -------- -------- --------
Total operating
expenses 119,647 - - 119,647
OPERATING INCOME (821) - - (821)
OTHER INCOME (EXPENSE)
Other income and
deductions, net 61 795 - 856
-------- -------- -------- --------
Total other income
(expense) 61 795 - 856
INTEREST CHARGES 35 - - 35
-------- -------- -------- --------
INCOME FROM CONTINUING
OPER. ($795) $795 $ - $ -
======== ======== ======== ========
AVERAGE COMMON SHARES - - 5,323 5,323
<CAPTION>
1996 INCOME STATEMENT Merged
Company
Common Stock IEA Total
Adjustment Gas Activity Pro Forma
(Note 1 (c)) (Note 1 (f)) Adjustments
<S> <C> <C> <C>
OPERATING REVENUES:
Gas utility $ - ($113,115) ($113,115)
Other - 113,115 113,115
------- ------- -------
Total operating revenues - - -
OPERATING EXPENSES:
Cost of gas sold - (113,474) (113,474)
Other operation - 113,474 113,474
------- ------- -------
Total operating expenses - - -
------- ------- -------
INCOME FROM CONTINUING
OPERATIONS $ - $ - $ -
======= ======= =======
AVERAGE COMMON SHARES 5,236 - 5,236
<CAPTION>
1995 INCOME STATEMENT Merged
Company
Common Stock IEA Total
Adjustment Gas Activity Pro Forma
(Note 1 (c)) (Note 1 (f)) Adjustments
<S> <C> <C> <C>
OPERATING REVENUES:
Gas utility $ - ($53,047) ($53,047)
Other - 53,047 53,047
------- ------- -------
Total operating revenues - - -
OPERATING EXPENSES:
Cost of gas sold - (50,519) (50,519)
Other operation - 50,519 50,519
------- ------- -------
Total operating expenses - - -
------- ------- -------
INCOME FROM CONTINUING
OPERATIONS $ - $ - $ -
======= ======= =======
AVERAGE COMMON SHARES 5,140 - 5,140
</TABLE>
(a) Consolidation of IEA-HES L.L.C.
In January 1997, IES and WPLH formed a gas marketing joint venture named
IEA-HES L.L.C. Pursuant to the applicable accounting rules, IES and WPLH
each accounted for this joint venture in 1997 under the equity method of
accounting with their investment recorded on the balance sheet in "Other
Property, Plant and Equipment -- Net and Other Investments" and their
allocated portion of earnings on the income statement in "Other Income and
Deductions, Net". This pro forma adjustment reflects the financial
results of IEA-HES L.L.C. as a consolidated subsidiary.
(b) Eliminations for IEA-HES L.L.C.
This pro forma adjustment reflects the elimination of intercompany
balances of IEA-HES L.L.C. and also eliminates the equity investments of
IES and WPLH and their allocated portion of revenues and expenses.
(c) Merged Company Common Stock Adjustment
The pro forma combined financial statements reflect the conversion of each
share of IES Common Stock (no par value) outstanding into 1.14 shares of
Merged Company Common Stock ($.01 par value) and the conversion of each
share of IPC Common Stock ($3.50 par value) into 1.11 shares of Merged
Company Common Stock ($.01 par value), and the continuation of each share
of WPLH Common Stock ($.01 par value) outstanding as one share of Merged
Company Common Stock, as provided in the Merger Agreement. The pro forma
adjustment to common stock equity restates the common stock account to
equal par value for all shares to be issued ($.01 par value per share of
Merged Company Common Stock) and reclassifies the excess to other
stockholders' equity. The average number of shares of common stock used
for calculating per share amounts is based on the exchange ratios shown
below.
<TABLE>
<CAPTION>
Exchange As reported Pro forma As reported Pro forma As reported Pro forma
Ratio 12/31/97 12/31/97 12/31/96 12/31/96 12/31/95 12/31/95
<S> <C> <C> <C> <C> <C> <C> <C>
WPLH N/A 30,782 30,782 30,790 30,790 30,774 30,774
IES 1.14 30,380 34,633 29,861 34,042 29,202 33,290
IPC 1.11 9,725 10,795 9,594 10,649 9,564 10,616
</TABLE>
The number of shares of common stock at December 31, 1997 used for
calculating the par value of common stock is based on the exchange ratios
shown below.
Exchange As reported Pro forma
Ratio 12/31/97 12/31/97
WPLH N/A 30,789 30,789
IES 1.14 30,577 34,858
IPC 1.11 9,761 10,835
(d) IPC Unbilled Revenues
The financial results of IPC do not include accrued revenues for services
rendered but unbilled at month-end. The pro forma adjustment reflects the
impact of adopting unbilled revenues, including the tax impact of the
adoption. The change is being implemented to conform to the method
currently utilized by WPLH and IES.
(e) IES Pension Liability
The accrued pension liability (and offsetting regulatory asset), included
in the financial results of IES, was calculated using a five-year smoothed
method of recognizing deferred asset gains. The pro forma adjustment
reflects a change to the straight market value method which recognizes
deferred asset gains sooner. The change is being implemented to conform
to the method currently utilized by WPLH and IPC.
(f) IEA Gas Activity
The gas revenues and cost of gas sold of Industrial Energy Applications,
Inc. (IEA), a subsidiary of IES, for 1996 and 1995 have been reclassed
into "Other" operating revenues and "Other operation" expenses,
respectively, consistent with the 1997 presentation.
2. Preferred Stock Dividends of IPC
The Preferred Stock Dividends of IPC have been reclassified in the
unaudited pro forma combined statements as "Preferred Dividends of
Subsidiaries" and deducted in the determination of income from continuing
operations which reflects the holding company structure of the Merged
Company.
3. Nonrecurring Material Items Included in Historical Financial Results
IES's income from continuing operations for the year ended December 31,
1996 included costs incurred relating to its successful defense of a
hostile takeover attempt mounted by MidAmerican Energy Company. The
after-tax impact on income from continuing operations was a decrease of
$4.6 million.
Nonrecurring items affecting WPLH's performance for the year ended
December 31, 1996 included the impact of the sale of a combustion turbine
and the sale of WPLH's assisted-living real estate investments. The
after-tax impact of these items on continuing operations was an increase
of $5.9 million.
4. Estimated Costs and Cost Savings of Proposed Merger
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 the costs incurred to achieve such
savings, will be subject to regulatory review and approval. Costs arising
from the Merger are currently estimated to be approximately $78 million.
Approximately $22 million of these costs had been incurred through
December 31, 1997 and are reflected in results of operations. 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 treatment, weather conditions, financial market conditions,
future business decisions and other uncertainties. No assurance can be
given that the estimated cost savings will actually be realized. None of
the estimated cost savings, or costs to be incurred subsequent to December
31, 1997 to achieve such savings, have been reflected in the unaudited pro
forma combined financial statements.
5. Intercompany Transactions
Intercompany transactions (including purchased and exchange power
transactions) between WPLH, IES and IPC during the periods presented were
included in the determination of regulated rates and/or were not material.
Accordingly, no pro forma adjustments were made to eliminate such
transactions.
6. Discontinued Operations
The financial statements of WPLH reflect the discontinuance of operations
of its utility energy and marketing consulting business in 1995. The
discontinuance of this business resulted in a pre-tax loss in the fourth
quarter of 1995 of $7.7 million. The after-tax loss on disposition was
$11.0 million reflecting the associated tax expense on disposition due to
the non-deductibility of the carrying value of goodwill at sale. During
1996, WPLH recognized an additional loss of $1.3 million, net of
applicable income tax benefit, associated with the final disposition of
the business. Operating revenues, operating expenses, other income and
expense and income taxes for the discontinued operations for the time
periods presented have been excluded from income from continuing
operations. Interest expense has been adjusted for the amounts associated
with direct obligations of the discontinued operations.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on the
14th day of April 1998.
WPL HOLDINGS, INC.
By: /s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 14th day of
April 1998.
/s/ Erroll B. Davis, Jr. President, Chief Executive Officer and
Erroll B. Davis, Jr. Director (Principal Executive Officer)
/s/ Edward M. Gleason Vice President, Treasurer and Corporate
Edward M. Gleason Secretary (Principal Financial and Accounting
Officer)
Director /s/ Milton E. Neshek Director
L. David Carley Milton E. Neshek
/s/ Rockne G. Flowers Director Director
Rockne G. Flowers Henry C. Prange
Director /s/ Judith D. Pyle Director
Donald R. Haldeman Judith D. Pyle
/s/ Katharine C. Lyall Director _____________________ Director
Katharine C. Lyall Carol T. Toussaint
/s/ Arnold M. Nemirow Director
Arnold M. Nemirow
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareowners of WPL Holdings, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements in the 1997 Form 10-K of WPL
Holdings, Inc. and have issued our report thereon dated January 30, 1998.
Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. Supplemental Schedules I and II are the
responsibility of management and are presented for purposes of complying
with the Securities and Exchange Commission's rules and are not part of
the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 30, 1998
<PAGE>
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDINGS, INC.
(Parent Company Only)
Supplemental Notes to Parent Company Only Financial Statements
The following are supplemental notes to the WPL Holdings, Inc. (the
Company) Parent Company Financial Statements and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in WPL Holdings, Inc. 1997 Annual Report, which are hereby
incorporated by reference.
Note A. The parent company files a consolidated federal income tax return
with its subsidiaries.
Note B. Net amounts due to (due from) affiliates result from intercompany
transactions including loans and an administrative allowance.
Note C. Information regarding short term debt is as follows:
1997 1996
(in thousands)
As of end of year:
Notes payable $42,000 $28,500
Interest rates on notes payable 5.00-5.90% 5.28-6.31%
For the year ended:
Maximum month-end amount of
short-term debt $63,000 $34,000
Average amount of short-term
debt $45,266 $26,899
Average interest rate on
short-term debt 5.66% 5.55%
Note D. During 1997, 1996 and 1995, Wisconsin Power and Light Company
allocated and billed certain administrative and general expenses to the
Company using an allocation method approved by the Public Service
Commission of Wisconsin. These expenses totaled $1,830,549; $1,516,585
and $2,005,000 during 1997, 1996 and 1995, respectively.
Note E. Certain reclassifications have been made to prior years financial
statements to conform with the current year presentation.
<PAGE>
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDINGS, INC.
(Parent Company Only)
STATEMENTS OF INCOME AND REINVESTED EARNINGS
For the years ended December 31,
1997 1996 1995
(in thousands)
Income:
Equity in earnings of subsidiaries
after dividends $2,982 $4,952 $994
Cash dividends from subsidiaries 62,164 69,155 59,701
Investment income and other 149 1,081 250
------ ------ ------
65,295 75,188 60,945
------ ------ ------
Expenses:
Operating (Note D) 5,568 2,136 2,443
Interest and other 595 1,437 1,248
------ ------ ------
6,163 3,573 3,691
------ ------ ------
Income before income tax benefit 59,132 71,615 57,254
Income tax benefit (expense):
Current 2,135 627 1,178
Deferred (13) (334) -
------ ------ ------
2,122 293 1,178
------ ------ ------
Net income 61,254 71,908 58,432
------ ------ ------
Reinvested earnings, beginning
of year 303,191 291,939 293,048
Cash dividends (61,562) (60,656) (59,701)
Other - - 160
------- ------- -------
Reinvested earnings,
end of year $302,883 $303,191 $291,939
======= ======= =======
<PAGE>
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDINGS, INC.
(Parent Company Only)
BALANCE SHEETS
December 31,
1997 1996
ASSETS:
(in thousands)
Current Assets
Cash and equivalents $6,632 $3,817
Notes receivable -
affiliates (Note B) 30,471 47,308
------ ------
37,103 51,125
------ ------
Accounts receivable from WPL
Holdings DRIP 150 150
------ ------
Tax benefit receivable 644 507
------ ------
Property and equipment, net 999 999
------ ------
Investments and other 558 1,948
------ ------
Investments in subsidiaries,
at equity:
Wisconsin Power and Light
Company 585,739 576,158
Heartland Development
Corporation 53,903 41,115
------- -------
639,642 617,273
------- -------
Deferred income taxes 39 52
------- -------
Total assets $679,135 $672,054
======= =======
LIABILITIES AND CAPITALIZATION:
Current Liabilities:
Short term debt (Note C) $42,000 $28,500
Current maturities of
long-term debt - 10,000
Accounts payable - affiliates
(Note B) 4,752 1,723
Accrued interest and other 264 107
Dividends payable 252 308
------- -------
47,268 40,638
Long-term debt 24,000 24,000
Deferred credit and other 284 61
------- -------
71,552 64,699
------- -------
Capitalization:
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
------- -------
Total Liabilities and
Capitalization $679,135 $672,054
======= =======
<PAGE>
SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
WPL HOLDINGS, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1997 1996 1995
(in thousands)
Cash flows generated from (used
for) operating activities:
Net income $61,254 $71,908 $58,432
Equity in earnings of
subsidiaries after
dividends (2,982) (4,952) (994)
Equity investments in
subsidiaries (19,387) (106) 119
Depreciation - - 10
Deferred income taxes 13 335 (288)
Changes in assets and
liabilities:
Receivables 16,837 6,190 (24,028)
Investments 1,390 (1,748) 67
Accounts payable 3,029 1,740 129
Accrued taxes - 1,170 (258)
Accrued interest and other 157 (141) 28
Dividends payable (56) 54 26
Other 86 (376) (778)
------- ------- -------
Net cash from (used for)
operating activities 60,341 74,074 32,465
Cash flows generated from (used
for) financing activities:
Long-term debt maturities (10,000) - -
Net change in short term debt 13,500 (8,500) 25,500
Common stock cash dividends (61,562) (60,656) (59,701)
Other 536 (1,367) 941
------- ------- -------
Net cash from (used for)
investing activities (57,526) (70,523) (33,260)
Net increase (decrease) in cash
and equivalents 2,815 3,551 (795)
Cash and equivalents at beginning
of year 3,817 266 1,061
------- ------- -------
Cash and equivalents at end
of year $6,632 $3,817 $266
======= ======= =======
<PAGE>
<TABLE>
SCHEDULE II
WPL HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Deductions period
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts $1,524 $649 $1,069 [1] $1,104
====== ==== ====== ======
Year ended December 31, 1996
Allowance for doubtful accounts $1,735 $928 $1,139 [1] $1,524
====== ==== ====== ======
Year ended December 31, 1995
Allowance for doubtful accounts $1,964 $966 $1,195 [1] $1,735
====== ==== ====== ======
[1] Uncollectible accounts written off, net of recoveries
</TABLE>
EXHIBIT 21
WPL HOLDINGS, INC.
SUBSIDIARIES OF THE REGISTRANT
The following are deemed to be significant subsidiaries of WPL Holdings,
Inc. as of December 31, 1997:
Name of Subsidiary State of Incorporation
Wisconsin Power and Light Company Wisconsin
Heartland Development Corporation Wisconsin
SEVERANCE AGREEMENT AND RELEASE OF CLAIMS
This SEVERANCE AGREEMENT AND RELEASE OF CLAIMS ("Agreement") is made
and entered into by and between Lance Ahearn ("Ahearn") and WPL Holdings,
Inc., a Wisconsin Corporation, ("Company") to extinguish all obligations
and claims between the parties arising out of the employment of Ahearn by
Company and his termination from said employment.
NOW, THEREFORE, for and in consideration of the mutual promises set
forth herein, the adequacy and sufficiency of which is hereby expressly
acknowledged by each of the parties hereto, the parties mutually agree as
follows:
1. Preliminary Statement. Ahearn's employment with Company shall
terminate effective November 21, 1997 (hereinafter the "Termination
Date"). The parties agree that, pursuant to Paragraph 2 of the Key
Executive Employment and Severance Agreement between Ahearn and Company
entered into on June 25, 1994 (hereinafter the "KEESA," attached hereto as
Exhibit A), the termination of Ahearn's employment with Company is a
termination or cancellation prior to a change in control of Company.
Accordingly, the KEESA is of no further force and effect and this
Agreement supersedes and extinguishes all of the parties' rights and
obligations under the KEESA, or any other letter agreement or oral
promise.
2. Communications to Third Parties . Ahearn hereby agrees that
except to the extent necessary required to comply with this Agreement, he
shall not directly or indirectly disclose, publicize, or publish the terms
or conditions of this Agreement to anyone other than his spouse, attorney,
and tax-preparer. The parties mutually agree that any communications to
third parties regarding the termination of Ahearn's employment shall state
only that Ahearn's employment terminated with the mutual agreement of the
parties.
3. Financial Obligations. Company shall pay to Ahearn his salary
and benefits to and including the Termination Date specified in Paragraph
1. Company further shall pay Ahearn's performance bonus for 1997 on a
pro-rated basis to the extent that performance criteria for the Heartland
Development Corporation bonus are met. Within the (10) days after the
Effective Date of this Agreement (see Paragraph 9), Company shall pay
Ahearn, a severance payment of Seven Hundred Sixty Eight Thousand, Nine
Hundred Dollars ($768,900). Additionally, Company shall make three
installment payments in the amount of Two Hundred and Four Thousand, One
Hundred Ninety Dollars ($204,190) according to the following payment
schedule: First Payment of Sixty Eight Thousand, Sixty Three Dollars
($68,063) on January 9, 1998; Second Payment of Sixty Eight Thousand,
Sixty Three Dollars ($68,063) on January 8, 1999; and a Third Payment of
Sixty Eight Thousand, Sixty Four Dollars ($68,064) on January 7, 2000.
The parties agree that all amounts discussed in this Paragraph 3 are gross
amounts which are subject to appropriate tax withholding. The parties
further agree that the payments discussed in this Paragraph 3 constitute
the entire financial obligation of Company to Ahearn.
4. Release and Covenant Not to Sue. In consideration for the
promises made by Company contained in this Agreement, Ahearn hereby
releases and discharges Company, its subsidiaries, affiliates, agents,
employees, officers, directors, shareholders, successors, and assigns from
all claims, liabilities, demands and causes of action whether known or
unknown, fixed or contingent, arising out of or in any way connected with
Ahearn's employment with Company or the termination thereof, and does
hereby covenant not to file a lawsuit to assert such claims. This
Agreement includes, but is not limited to, all matters in law, in equity,
in contract, or in tort, pursuant to statute, including any claim for
discrimination arising under the Age Discrimination in Employment Act,
Title VII of the Civil Rights Act of 1964, the Americans with Disabilities
Act, or any other federal, state, or local law or ordinance. This
agreement does not apply to: (1) any claim or rights that may arise under
the Age Discrimination in Employment Act after the date this Agreement is
executed; (2) to any claim or rights that may arise under the Consolidated
Omnibus Budget Reconciliation Act of 1985 or the Health Insurance
Portability Protection Act; or (3) to any claims resulting from any duty
to indemnify Ahearn assumed by Company during the course of Ahearn's
employment.
It is expressly agreed Ahearn will not institute, or cause to be
instituted, any action, lawsuit, complaint, charge, or proceeding against
Company which relates to, or arises out of Ahearn's employment with
Company or the termination thereof, and will pay Company's costs in the
event that any such action is brought. However, this provision shall not
prohibit either party from taking such steps as are necessary to enforce
the terms and conditions of this Agreement.
5. No Competition. In further consideration for the promises made
by Company contained in this Agreement, Ahearn agrees that he will not,
for a period expiring one year after the Termination Date, without the
prior written approval of Company's Board of Directors, participate in the
management of, be employed by, or own any business enterprise at a
location within the United States that engages in substantial competition
with Company or its subsidiaries, where such enterprise's revenues from
any competitive activities amount to 10% or more of such enterprise's net
revenues and sales for its most recently completed fiscal year; provided,
however, that nothing in this Paragraph 4 shall prohibit Ahearn from
owning stock or other securities of a competitor amounting to less than
five percent of outstanding capital stock of such competitor.
6. Confidentiality. In further consideration for the promises made
by Company contained in this Agreement, Ahearn agrees to hold in strictest
of confidence, and not use to compete with Company or disclose to anyone
except as expressly authorized in writing by the Board of Directors of
Company, any proprietary or confidential information of Company or other
information and data pertaining to the activities and operations of
Company and not made available to the general public by Company or with
Company's consent. Proprietary and confidential information includes, but
is not limited to, trade secrets, information relating to the business,
financial, legal, and personnel matters of Company, information relating
to the internal operations of Company such as operations methods,
equipment, and quality control procedures, information relating to
development projects, information relating to actual or potential
customers or suppliers, marketing plans, price and cost data, and
proprietary information of other companies or individuals which has been
disclosed to Company under a requirement of secrecy. Proprietary and
confidential information may or may not be in documentary form and
includes computer software programs, drawings, plans, letters, and
databases.
This obligation shall remain in effect for so long as Ahearn has
knowledge or possession of information that remains confidential and
secret. Ahearn shall promptly return to Company, and not deliver to
anyone else, all documents and materials containing proprietary and
confidential information, including the original and all copies and
summaries of such documents and materials.
7. Entire Agreement. This Agreement contains the entire agreement
between the parties, and there are no other understandings or terms,
either express or implied, that are not expressly stated herein. This
Agreement shall be amended only by a written agreement signed by both
parties.
8. Voluntary Agreement; Advice of Counsel; 21-Day Period. Ahearn
acknowledges and states that:
a. He has read this Agreement, understands its legal and binding
effect, and is acting voluntarily and freely in executing this
Agreement.
b. He has had an opportunity to seek, and was advised in writing to
seek, legal counsel prior to signing this Agreement.
c. He was given at least 21 days to consider the terms of this
Agreement prior to signing it.
9. Revocation. The eighth day following Ahearn's execution of this
Agreement will be the Effective Date of this Agreement. Ahearn and
Company expressly agree that Ahearn may revoke this Agreement within seven
(7) days after he signs it, and that this Agreement shall not become
effective or enforceable if revoked.
10. Severability. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any term or provision
hereof shall not affect the validity or enforceability of any other term
or provision hereof, and this Agreement shall be treated as though such
invalid or unenforceable provision had never been a part of this
Agreement.
11. Choice of Law. This Agreement shall be construed under the laws
of the State of Wisconsin. The venue of any action necessary under this
Agreement shall be Madison, Wisconsin. In the event of any necessary
action, the prevailing party shall be entitled to reasonable costs and
attorney's fees as the court may adjudge reasonable.
12. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of each of the parties hereto, and their respective
subsidiaries, affiliates, legal and personal representatives, estates,
purchasers, successors, assigns, heirs, executors, and administrators.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date(s) written below.
Date: By:
Lance Ahearn
WPL Holdings, Inc.
Date: By:
Erroll B. Davis, Jr.
President & CEO
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports on the consolidated financial statements of WPL Holdings,
Inc. included in this WPL Holdings, Inc. Form 10-K into WPL Holdings,
Inc.'s previously filed Registration Statements on Form S-8 (Nos. 33-
52215, 333-41485 and 333-46735) and Form S-3 (Nos. 33-21482 and 333-
26627).
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1244808
<OTHER-PROPERTY-AND-INVEST> 251904
<TOTAL-CURRENT-ASSETS> 173008
<TOTAL-DEFERRED-CHARGES> 183941
<OTHER-ASSETS> 8146
<TOTAL-ASSETS> 1861807
<COMMON> 308
<CAPITAL-SURPLUS-PAID-IN> 304392
<RETAINED-EARNINGS> 302883
<TOTAL-COMMON-STOCKHOLDERS-EQ> 607583
0
59963
<LONG-TERM-DEBT-NET> 457520
<SHORT-TERM-NOTES> 42095
<LONG-TERM-NOTES-PAYABLE> 56975
<COMMERCIAL-PAPER-OBLIGATIONS> 81000
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