ML20249B333
| ML20249B333 | |
| Person / Time | |
|---|---|
| Site: | Duane Arnold  |
| Issue date: | 12/31/1997 |
| From: | Davis E, Leslie Liu, Stoppelmoor W IES UTILITIES INC., (FORMERLY IOWA ELECTRIC LIGHT |
| To: | |
| Shared Package | |
| ML20249B329 | List: |
| References | |
| NUDOCS 9806220330 | |
| Download: ML20249B333 (80) | |
Text
.
'5 da 1997 Annual Report
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A L L I A N T,_
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What can we dofor you?
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l Analyst inquiries Shareowner Information f[
Inquiries from the financial community may The company keeps its shareowners be directed to: Robert Rusa, Investor Relations, informed regularly through the AnnualReport, P.O. Box 192, Madison, Wisconsin 53701-0192, the Quarterly Report and other communications.
l Telephone: 608.252.3470.
We encourage shareowners with questions or l
concerns to contact Shareowner Services.
l Duplicate mai8ings i
AnnualReporta are mailed to all shareowners.
Stock transfer agent and registrar f
You will receive duplicate mailings if your shares for Alliant Corporation (Interstate Energy are registered in different names, but using the Corporation) common stock and all preferred same address. To eliminate duplicate annual stock of Wisconsin Power and Light Company, reports, call or send your request to Shareowner IES Utilities Inc. and Interstate Power Company, s
Services.
contact:
If you receive duplicate mailings of proxies Alliant Corporation (Interstate Energy Corporation) and dividend checks because of slight differences Attn: Shareowner Services in the registration of your accounts, please call P.O. Box 2568 Shareowner Services for instructions on combining Madison, Wisconsin 53701-2568 your accounts.
Shareowner Services Shareowner Direct Plan The company's Shareowner Services p
i The Plan is available to all shareowners of representatives are available to assist you from
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record, first time investors, customen:, vendors 8:30 a.m. to 4:30 p.m. (Central Standard Time) 9 and employees. The Plan enables shareowners to each business day.
I buy common stock directly through the company Madison, Wisconsin Area 608.252.3110 without paying any brokerage commissions, fees Toll-free 800.356.5343 or service charges. You may obtain a copy of the Plan Prospectus by contacting Shareowner Senices.
Please direct written inquiries to Shareowner Senices at the address above.
liighlights of the plan include:
a Optional cash investments by check or Internet Address: www.alliant-energy.com electronic transfer a Dividends can be reinvested or received in cash a Stock certificate safekeeping a Sale of shares 8 re u M arid dividend a Electronic deposit of dividends payment dates Direct Deposit Anticipated record and dividend payment dates Shareowners w ho are not reinvesting their are as follows:
dividends through the Plan may choose to have their quarterly dividend checks electronically Common Stock depo ited in their checking or savings accounts through this service.
Record Dates Payment Dates Jan.26 Feb.14 Apr. 30 May 15 July 31 Aug.15 Oct. 30 Nov.14
Welcome to the world of Alliant
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What can we dofor you?
A L L i A N T,.
What can vue do for you?
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More than you might tlunk Alliant offers customers p
an ever-expanding array of products and services I
designed to enhance the comfort and security of their homes and the productivity of their businesses.
More than one million residential and business customers throughout Iowa, Wisconsin, Minnesota and Illinois count on us for:
s Reliable, competitively priced electric and natural-gas energy that allows for easier living at home and a more productive environment at work.
And business customers, both within and outside of our utility service territory, turn to us for total energy solutions such as:
a Comprehensive business-process improvements designed to drive down production costs while driving up product quality; and a Backup energy supplies to ensure uninterrupted production for their businesses or their 2
manufacturing plants.
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Key Facts About Alliant:
a Electric customers: 897,000 s Natural-gas customers: 382,000 s Water customers: 32,000 Total assets (year-end 1997): $5.0 billion s Operating revenues (1997): $2.3 billion s Employees: Approximately 6,000 We're Alliant, a new company born from the proud traditions of three outstanding energy-services providers - IES Industries Inc., Interstate Power Company and WPL Holdings, Inc.
For more than a century, we've kept homes
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warm, lights burning and factories mnning in more 4
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than 1,000 communities across Iowa, Wisconsin, Minnesota and Illinois.
We know that customers want reliable service, personal attention and an energy partner that will anticipate their needs. With strong Midwestern values and a reputation for service excellence, we have m,
promised our customers that they can rely on us -
.j and we've kept that promise.
Now, under the banner of Alliant, we will work to create partnerships and solutions that increase the comfort, security and productivity of customers around the world.
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The Alliant Family: Focused on customers in a world of choice i
The Allirnt family of companies is poised to compete in the rapidly changing energy-l see ices marketplace. Ilacked by $5 billion in l
assets, an energized workforce, a commitment y
to the future, and a promise to solve customer problems, Alliant is positioned to meet the ever-changing needs of customers here in g
America's heartland and around the world.
In a world where all customers soon wih have a choice of energy suppliers, we are finding better, more responsive ways to deliver. I
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services traditionally provided by electric and l
l natural-gas utilities. And, we are finding new 1
ways to meet customer needs by developing an array of products and services that 3
no other provider can match.
To become the partner of choice for a variety of energy-services customers with Alliant vastly different needs, Alliant is organized Worldwide Headquarters: Madison, Wisconsin into strategic business units - Alliant Utilities, A parent-company staff provides overall strategic i
Alliant Power and Alliant Industries. Internal guidance and also ensures proper coordination support comes from a separate centralized among Alliant's business units.
Alliant Corporate Services mait. Together, p
A L L i A N T.
these four business units help us keep our promise to all customers today, tomorrow and well into the future.
Alliant Corporate Services Headquarters: Dubuque, Iowa Alliant Corporate Services provides value-added services to our intemalcustomers to help us better meet the needs of our extemalcustomers.
!i'l A L L I A N T..
4 M CORPORATE SERVICES
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A L L I A N T.
l y UTluTIESA L L I A N T.
r' A L L I A N T.
g INDUSTRIESA L L I A N T.
- A L L I A N T.
POWER CORPORATE SERVICES Alliant Utilities Alliant Power Headquarters: Cedar Rap'ds, Iowa Headquarters: Madison, Wisconsin The tradition of operational excellence is being Alliant Power manufactures and markets electric carried on at Alliant under three familiar names:
energy from 18 generating facilities with a total IES Utilities, Interstate Power Company, and output of nearly 5,000 megawatts - enough to light Wisconsin Power and Light. Under one banner, 1.5 million homes. One of the loweet-cost electricity these three utility companies help our customers manufacturers in the nation, Alliant Power provides live more comfortably and work more productively affordable and reliable electric energy to customers by offering them a reliable, competitively priced within Alliant's service territory. As the electric-utility supply of electricity, natural gas, water or steam.
industry opens up to competition, Alliant Power is More than one million customers count on Alliant well-positioned to serve customers throughout the not only for their energy supply, but also for responsive, nation who have a choice of supplier.
round-the-clock service.
7" A L L I A N T.
g ' POWERA L L I A N T.
UTILITIES 5
Alliant Industries a Alliant At Home markets new products and Headquarters: Cedar Rapids,lowa services to enhance the security and comfort Alliant industries is the umbrella under which we:
of residential and small-commercial customers.
(1) market competitively priced energy and other a Alliant International seeks opportunities to products and services to industrial, commercial increase the efficiency of energy operations and residential customers; and (2) pursue energy-m markets throughout the world. Current related partnerships in attractive marketplaces operations are in China and New Zealand.
around the globe.
Alliant industries will serve customers through a Cargill/Alliant is a joint venture combining the the following subsidiaries:
w rld-class commodity and risk-management experience of Cargillwith Alliant's energy-trading expertise. Cargil!/Alliant buys, sells and trades a Alliant Industrial Services offers large energy electricity for those customers who already users an array of services to maximize productivity have access to the increasingly robust and energy efficiency. Also available are electric-power marketplace.
solutions for waste remediation and other environmental needs.
!y A L L I A N T.
INDUSTRIES Our new name, Alliant, conveys a commitment to our customers. We are an ally for our customers, communities, investors and employees.We are reliable. And we will be all we can be for those who work with us and for us.
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Promising solutions to people around the wworld Only by striving to e Become a partner with our customers, uphold our values anticipating their reeds and seeking creative solutions to their home and can we deliver all business problems.
that we promise:
Alliant will...
e strive for excellence in service, responsiveness and operational performance.
s Protect the safety of our employees and the public at large.
a Communicate openly and honestly, and uphold the highest standards of ethical behavior throughout the organization.
ex s Increase the value ofinvestments made in the company by our shareowners.
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commumties where we do business, and encouraging diversity in our employee and supplier ranks.
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Alliant a Worldwide Headquarters 222 West Washington Avenue P.O. Box 192 Madison, Wisconsin 53701-0192 U.S.A.
Corporate Office: 608.252.3311 Internet: www.allia nt-energy.com Alliant Business Unit Operating Headquarters s Alliant Utilities f
200 First Street SE
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Cedar Rapids, Iowa 52401 We are your partners, bringing a range of a Alliant Power resources and technical skills to help you be 222 West Washington Avenue more productive and profitable.
P.O. Box 192 Madison, Wisconsin 53701-0192 s Alliant Industries 4
200 First Street SE Cedar Rapids, Iowa 52401 m Alliant Corporate Services 1000 Main Street Dubuque, Iowa 52001 Interstate Energy Corporation, doing business as A!liant Corporation,is a major energy-services provider with growing national and international dis ersified operations. Ileadquartered in Madison, Wisconsin. Alliant and its subsidiaries provide electric, natural gas, water or steam energy to more than one million customers in four Midwestern states, Alliant also has diversified interests through-out the United States and in China A L L I A N T.
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71 0612 250M 3'98
To our f ello w shareowners:
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March 30,1998 Welcome to the world of Alliant". Built on the rich traditions and proud heritage of three companies - IES Industries Inc., Interstate Power Company and WPL Holdings, Inc. - Alliant is the name of a new company with a new face, heart and soul. (Although we are doing business as Alliant Corporation, the legal name of the corporation remains Interstate Energy Corporation. The proxy materials for the 1998 annual meeting include a proposal asking you to approve a change in the legal name of the corporation from Interstate Energy Corporation to Alliant Coq > oration.)
When we ofIicially completed our three-way merger in early 1998, it, in one sense, marked the end of a journey spanning 27 months and 11 approvals. In truth, however, we have only just begun.
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Unlike many of our competitors who have resisted the inevitability of a competitive energy-services marketplace, Alliant has aggressively built itself for the day when customers will decide for themselves which provider offers the greatest value. By Lee Liu completing this historic three-way merger, we are far better positioned to offer our customers around the world an array of comfort, security and productivity solutions that can enhace their lives.
Only by wooing, wowing and winning over our customers each and every day can Alliant deliver for you, our shareowners, a return on your investment that g
stacks up favorably against the competition. Cjearly, our merger will contribute to the bottom line by allowing us to operate more cost-effectively. Over the long term, however, Alliant cannot cost-cut its way to success in a competitive marketplace; a must grow and do so profitably. Under the banner of Alliant, our growth prospects clearly exceed those of our three predecessor companies.
Wayne H. Stoppelmoor As you will see in the new Alliant corporate brochure, which is included in this AnnualReport, we are not focused solely on energy anymore. This is because our customers - whether here in the heartland or halfway around the world - don't really wantjust electricity or natural gas. They want the comfort and security in d)
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their home and the productivity of their business provided by our energy services.
On behalf of more than 6,000 employees who are working every day to
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enhance the value of your investment, thank you very much for your confidence and support. We look forward to rewarding the trust you have placed in us.
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ErrollB.DavisJr.
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Lee Liu Wayne II. Stoppelmoor Erroll B. DavisJr.
Chairman ofthe Board lice Chairman ofthe Board itesident and ChiefExecutive Oficer
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Interstate Energy Corporation (doing business as Alliant Corporation) has an estimated 87,000 shareowners, following completion of the merger.
Shareowner records are maintained in the corporate general office in Madison, Wisconsiri. (As of December 31,1997, there were 35,789, 15,886 and 35,fi77 shareowners of IES Industries Inc., Interstate Power Company and WPL lloidings, Inc., respectively.)
Market information Exchange Listings l
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Stock
. Trading Newspaper Exchange Sysnbol Abbreviation Alliant Corporation gg (Interstate Energy Corporation)
I.NT IntstEngy Stod Edange Common Wisconsin Power & Light Co.
American Wis Pr WI P&Ig 4.50% Preferred Stock Exchange All other Wisconsin Power and Light Company preferred series and all preferred issues from IES Utilities Inc. and Interstate Power Company are traded on the ovcr-the-counter market.
Common Stock quarterly price ranges Street-name accounts and dividends (WPl. Holdings,Inc.only)
Shareowners whose stock is held by banks or brokerage firms 1997 l1996 and who wish to receive quarterly Davidend High Lew Dividend reports directly from the company Quarter -
High Lew a
should contact Shareowner Services First
$28 7/8
$27 3/8
$0.50
$32
$29 7/8
$0.4925 "P
- " "E 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 Form J-K informat. ion Fourth 34 7/16 28 3/8 0.50 295/8 27 1/2 0.4925 Upon request, the company Year l $34 7/16 l $26 3/4 l $2.00
( $32 7/8 l $271/2 l $1.97 will o de, without charge,
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WPL 11oldings, Inc. year-end 1997 common stock price: $331/8
"."P I orm 10-K for the year ended December 31,1997, as filed with the Secutities and Exchange Commission. Requests should be directed to Shareowner Services.
All reportsfiled with the SEC are also available on the internet at www.alliant-energy.com.
Corporate Board of Directors Lee Liu,64 [1981] Y*
Rockne G. Flowers,66 [1979] +* Y Chairman of the Board President and CEO Retired President and Chief Executive Officer Nelson Industries, Inc.
IES Industries Inc.
Stoughton, Wisconsin Wayne H. Stoppelmoor,63 [1986] yt Joyce L Hanes,65 [1982] 9' A Vice Chairman of the Board Chairman of the Boarr' Retired President and Chief Executise Officer Midwest Wholesale, Inc.
I Interstate Power Company Mason City, Iowa Erroil B. Davis Jr.,51[1982]
Katharine C. Lyall,56 [1986] e A l
President ar.d Chief Executive OrYicer President Alliant Corporation University of Wisconsin System Madison, Wisconsin Madison, Wisconsin Alan B. Arends,64 [1993] a +
Arnold M. Nemirow,54 [1991] E' Y President Chairman, President and CEO Allied Benefit Group Financial Senices, Corp.
Bowater, Inc.
Albert Lea, Minnesota Greenville, South Carolina Executive Group of the Alliant Family of Companies ALLIANT CORPORATE OFFICERS IES UTILITIES CORPORATE OFFICERS Erroll B. Davis Jr.,53 [1978]
Erroil B. Davis Jr.,53 [1978]
President and Chief Executive Officer Chief Executive Officer Michael R. Chase,59 [1962]
Eliot G. Protsch,44 [1978]
Executive Vice President-Corporate Services President William D. Harvey,48 [1986]
John E. Ebright,54 [1996]
Executive Vice President-Geneuion Vice President-Controller James E. Hoffman,44 [1995]
Dean E. Ekstrom,50 (1985]
Executive Vice President-Business Development Vice President-Sales and Service Eliot G. Protsch,44 [1978]
John F, Franz Jr.,58 [1992]
Executive Vice President-Energy Delivery Vice President Nuclear O Thomas M. Walker,50 [1996]
Edward M. Gleason,57 [1977]perations Executive Vice President and Chief Hnancial Oflicer Vice President, Treasurer and Corporate Secretary John E. Ebright,54 [1996]
Dundeana K. Langer,39 [1984]
Vice President-Controller Vice President-Customer Operations Edward M. Gleason,57 [1977]
David L Wilson,51 [1966]
Vice President, Treasurer and Corporate Secretary Assistant Vice President-Nuclear Operations Donald D.Jannette,55 [1966]
Donald D.Jannette,55 [1966]
Assistant Cor Susan J. Kosmo,porate Secretary Assistant Corporate Secretary 51 [1986]
Steven F. Price,45 [1984]
Assistant Controller Assistant Treasurer John E. Kratchmer,35 [1985]
Robert A. Rusch,35[1989]
Assistant Controller Assistant Treasurer Daniel Siegfried,38 [1992]
Richard R. Ewers,' 53 [1967]
Assistant Secretary Vice President-Sourcing and Support Services Borbara J. Swan,' 46 [1987]
INTERSTATE POWER COMPANY Vice President and General Counsel CORPORATE OFFICERS Pemsla J.Wegner,* 50 [1993]
Erroil B. Davis Jr.,53 [1978]
Vice President External Affairs and Administration Chief Executive Officer Joseph E. Shefchek,* 41 [1984]
Michael R. Chase,59 [1962]
Assistant Vice President-Environmental Affairs President John E. Ebright,54 [1996]
- Those with an asterisk are not corporate ollicers; they are Vice President-Controller oflicers of Alliant Senices, Inc., the company that provides Dean E. Ekstrom,50 [1985]
intemal senices to the business units.
Vice President Sales and Senice
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71 M
A L L I A N T.
- man, Worldwide lleadquaners 222 Wem Washington Avenue P.O. Box 192 Madison, WI Sr010192 www.alhant-energy.com News Release INTERSTATE ENERGY CORPORATION BOARD OF DIRECTORS EIICTS OFFICERS MADISON, Wis. - April 21,1998 -The floard of Directors ofInterstate Energy Corporation (NYSE: LNT) announced the election of omcers. The company - which is doing business as Alliant Corporation - will be led by Lee Liu, who was elected chairman of the board; Wayne H.
Stoppelmoor, who was elected vice chairman of the board; and Erroll B. Davis Jr., who was elected president and chief executive omccr.
Liu,65, was formerly chairman of the board and chief executive omcer ofIES Industries Inc. and its utility subsidiary, IES Utilities Inc. He has held various management positions with IES and one ofits predecessor companies, Iowa Electric Lig,ht and Power Co., since joining the company in 1957.
He was first elected to the board of directors in 1981. Liu is a graduate ofIowa State University.
Stoppelmoor,64, was formerly chairman of the board ofInterstate Power Co. He retired as president and chief executive omcer of the company in 1997. He joined IPC in 1960 and was elected president and chief executive officer in 1987. He was first elected to the board of directors in 1986. Stoppelmoor is a graduate of the University ofIowa.
Davis, 53, was formerly president and chief executive officer of WPL Holdings, Inc. and its principal subsidiary, Wisconsin Power and Light Co. He joined WP&L in 1978 and was first elected to the WP&L board of directors in 1982. Davis is a graduate of Carnegie-Mellon University and has a M.B.A. degree from the University of Chicago.
The list of the corporate board of directors in the company's 1997 annual report inaccurately indicates that Liu had retired as president and chief executive omcer ofIES Industries Inc.
Interstate Energy Corporation, doing business as Alliant, is headquartered in Madison, Wis.
Formed as a result of the merger ofIES Industries Inc., Interstate Power Co. and WPL Holdings, Inc.,
Alliant is a major energy-services corporation with growing national and international diversified operations. Through its regulated utility businesses, Alliant provides electric, natural-gas, water and steam energy to more than one million customers in four Midwestern states. Alliant also has diversified interests throughout the United States and in China and New 7mland.
WPL HOLDINGS, INC.
IES INDUSTRIES INC.
INTERSTATE POWER COMPANY (Merged as Interstate Energy Corporation, doing business as Alliant Corporation) 1997 FINANCIAL INFORMATION g.
The following items are included in this financial insert:
- 1. Management *> Discussion and Analysis of Financial Condition and Results of Operations (MD&A)- the discussion of historicel results of operations focuses primarily on WPL lloidings. Inc. (WP) H). This I
presentation is in accordance with the rules of the Securities and Exchange Commission (SEC) since WPLil (now Interstate Eners) Corporation) was the surviving holding company in the merger involving WPLH, IES Industries Inc. (IF.S) and Interstate Power Company (IPC). The portions of MDkA which are prospective in nature gen: rally reflect a discussion of Interstate Energy Corporation's operations on a post.
merger basis.
- 2. Selected Consolidated Quarterly Financial Data (Unaudited)-in acccrdance with SEC rules, reflects WPLH results on a' stand.alone basis.
- 3. Consolidated Financial Statements and Related Notes-in accordance with SEC rules, reflects WPLH results on a stand.alone basis.
- 4. WPL Holdings, Inc. Selected Financial and Operating Statistics -includes statistics for the last five years
' for WPLH on a stand-alone basis.
- 5. IES Industries Inc. Selected Financial and Operating Statistics-includes statistics for the last five years for IES Industries Inc. on a stand-alone basis.
- 6. Interstate Power Company Selected Financial and Operating Statistics - includes statistics for the last five years for Interstate Power Company on a stand-alonc basis.
TABLE OF CONTENTS Psee No.
. M D&A
+ MERGER................................................
3
. FORWARD.LOOKING STATEMENTS....
3 UTILITY INDUSTRY OUTLOOK........
4 WPLH RESULTS OF OPERATIONS.
6
- PRO FORMA INFORMATION 12'
+ LIQUIDITY AND CAPITAL RESOURCES..
'13
. OTH E R M ATTE R S ~............................................................
21
. WPLH SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
' (Unsedited)...
26
- L WPLH REPORT ON THE FINANCIAL INFORMATION 28
. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....,,
29
. WPLH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
+ CONSOLIDATED STATEMENTS OF INCOME 30 l
. CONSOLIDATED BALANCE SHEETS....
31
. CONSOLIDATED STATEMENTS OF CASH FLOWS............
32 CONSOLIDATED STATEMENTS OF CAPITALIZATION.
33
+ CONSOLIDATED STATEMENTS OF COMMON SHAREOWNERS' INVESTMENT 34 NOTES TO CONSOLIDATED FINANCI AL STATEMENTS..
35
- WPL HOLDINGS. INC. SELECTED FINANCI AL AND OPERATING STATISTICS......
50
- IES INDUSTRIES INC, SELECTED FINANCI AL AND OPERATING STATISTICS.
53
- INTERSTATE POWER COMPANY SELECTED FINANCIAL AND OPERATING STATISTICS.........
56 2
l
M ANAGl: MINI'5 DISCUSSION AND ANAlJSIS Ol' FIN ANCIAL CONDillON AND Hl: SUI.T5 01:
OPI: RATIONS (MD&A)
MERGER in April 1998, WPL lloldings,Inc. (WPLH ), IES Industries Inc. (lES) and Interstate Power Company (IPC) completed the three-way merger (Merger) forming Interstate Lnergy Corporation (Merged Company). In connec-tion with the Merger, ILS was merged with and into WPLH forming the Merged Company and IPC became a subsidiary of the Merged Company. In addition, following the Merger, the holdmg companics for the nonregulated businesses of the former WPLil and IES (lleartland Development Corporation (llDC) and IES Diversified inc.
(Diversified), respectively) were merged. The resulting company from this merger is referred to as New Diversified.
As a result of the Merger, the first tier subsidiaries of the Merged Company include: Wisconsin Power & Light Company (WP&L),IES Utilities Inc. (lESU), IPC, New Diversified and Alliant Services Company (the subsidiary formed to provide administrative services as required under the Public Utility lloiding 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 lloiding Company Act of 1935. For additional information regarding the terms of the Merger. see Notes 2 and 15 of the " Notes to Consolidated Financial Statements" of WPLli included elsewhere in this Anne Report.
The Merged Company currently anticipates cost savings resulting from the Merger of approximately $749 million over a ten-year period, net of transaction costs and costs to achieve the savings of approximately $78 million.
Approximately $22 million of these costs had been incurred through December 31,1997. Upon consummation of the Merger, the Merged Company estimates it will expense approximately $40 million of additional merger-related costs (e.g., required payments to or for financial advisors. employee retirements and separations, attorneys, accountants, etc.). The estimate of potential cost savings constitutes a forward-looking statement and actual results may difTer materially fmm this estimate. The estimate is necessarily based upon various assumptions that involve judgments with respect to, amonF other things, future national and regional economic and competitive conditions, technoloF cal i
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 cctually be realized. In addition, the allocation between WPLil, IES and IPC and their customers of the estimated cost savings of approximately $749 million over ten years resuhing from the Merger, net of costs incurred to achieve i
such savings, will be subject to regulatory review and approval.
l As part of the approval process for the Merger, the Merged Company has agreed to various rate frecres and rate caps to be implemented in certain jurisdictions for periods not to exceed four years commencing on the ellective 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 afTecting the Merged Company, the Merged Company does not expect the merger-related electric and natural gas price freezes to have a material adverse efTect on its financial position or results of operations.
FORWARD-LOOKING STATEMENTS Statements contained in this Annual Report (including MD&A) that are not of historical fact are forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securitics Litigation Reform Act of 1995, Irom time to time, the Merged Company may make other forward-looking statements within the meaning of the federal securities laws that involve judgments. assumptions and other uncertainties beyond the control of the MerFed Company. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction atrategies and anticipated outcomes, pricing strategies, changes in the utihty industry, planned capital expenditures, financing needs and availability, statements of the Merped Company's expectations, beliefs. future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance of the 3
l
Merged Company and that such forward looking statements are subject to risks and uncertainties that could cause actual results to di!Ter materially from those espressed in, or implied by, such statements. Some, but not all. of the
- risks and uncertainties include weather efTects on sales and revenues, competitive factors. general economic conditions in the Merged Company's service territory, federal and state regulatory or government actions. the operations of the Merged Company's nuclear facilitics, the abilit3 of the Merged Company to successfully integrate the operations of WPLH, IES and IPC and changes in the rate of inflation.
UTILITY INDUSTRY OUTLOOK -
The Merged Company competes in an ever-changing utility industry. Set forth below is an overview of this evolving marketplace.
Electric energy generation, transmission, and distribution are in a period of fundamental chanpc in the manner in which customers obtain, and energy suppliers provide, energy services. As legislative, regulatory, economic and technological changes occur. electric utilities are faced with increasing pressure to become more competitive. Such competitive pressures could result in loss of customers and an incurrence of stranded costs (i.e., assets and other costs rendered unrecoverable as the result of competitive pricing). To the extent stranded costs cannot be recovered from customers, they would be borne by security holders.
The Merged Company realized 54% 41%. 3% and 2% of its electric utility revenues in 1997 in Iowa, Wisconsin, Minnesota and lilinois, respectively. Approximately 87% of the electric revenues were regulated by the respective state commissions while the other 13% were regulated by the Federal Energy Regulatory Commission (FERC).The
' Merged Company realized 56%,38%, 3% and 3% of its pas 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 pencration market. in 1996. the FERC issued final rules (FERC Orders 888 and 889) requirin; electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. In March 1997, FERC issued orders on rehearing for Ordsr> 888 and 889 (Orders 888-A and 889-A). In response to FERC Orders 88h and 888-A, IESU. WP&L and IPC have on file with the FERC pro forma open access transmission tarifTs. 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 operatior.s or financial condition.
FERC Order 888 permits utilities to seek recovery of legitimate, prudent and verifiable stranded costs associated with providin; 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 strandell costs resulting from retail competition.
' The various states retain jurisdiction over the question of w hether 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.
Stric Regulation im IESU and IPC are subject to regulation by the Iowa thilities 11oard (IUB). The IUli initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of " Emerging Competition in the Elcetric 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 state in the issues. The IUli staffs report in this
' docket was accepted by the IUB. finding. in part, that there is no compelling reason to move quick!) into restructuring 4
the cicetrie utihti industry in Iowa, based upon the existing level of ecl.mvc prices. Ilowever, the IUH is continuing the an.dpis and debate on restructuring and retail competition in Iowa.
On August IK.199. the IUH issued an order that promulgated draft principles for an Independent System Operator (ISO) and insited public comment. On September 10.1997, the IUH issued an order adopting an " Action Plan to Develop a Competitive Model for the Electric Industry in lowa." The IUB states in this action plan that w hile "the IUH Ihas not determined retail competition in the electric industry is in the best interests of Iowai 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 towa'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." lESU has indicated to the IUB its interest in pursuing such a pilot program. The IUH has also issued an order covering unbundling of natural gas rates for all lowa customers to be effective in 1999.
H 1. amin WP&L is subject to regulation by the Public Service Commission of Wisconsin (PSCW). The PSC%">
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 pas 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 mam.cr. 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.
i The short-term goals of the electric restructuring process are to ensure reliability of the state's electric system and development of a robust w holesale 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 u 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 PSC%"> ISO Fuidelines. 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 MerFed Company, have been proposed by other entities.
In addition to the ISO proceedings. the PSCW has issued an order outlining its policies and principles for Public Benefits (low-income assistnce, energy elliciency. renewable generation and environmental research and develop-ments 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 550 to $75 million statewide. Legislation to implement this proposal is being developed and likely will be introduced in 1998.
5
1 1
i
'The PSCW has also initiated a Service Qualit3 administrative rulemakmp proces. to estabhsh measurement and reporting requirements for reliability of service. call center anacring times. safety. tree trimming generation.
transmission and distribution inspection and maintenance plans. etc. A hearing was held on these issues in March
)
1998.
Minusura IPC is subject to regulation by the Minnesota l'ublic Utilities Commission (MPUC). The MPUC established an Electric Competition Working Group in April 1495. On October 28,1997, the Working Group issued a relmrt and recommendations on retail competition. The MPUC reviewed the report and directed its stalT to develop an electric utility restructuring plan and timeline. The Minnesota legislature had established a j eint 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.
fili:ois 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.
Simmary Each of the utilities complies with the provisions of Statement of Financial Accounting Standards No. 71 i
(SFAS ?!) " Accounting for the EfTects of Certain Types of iteputation." SFAS 71 provid:s that rate-regulated l
puolic 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 restructuring or otherwise, a write-down of relat:d 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 restructur-ing issues described above on their results of operations or hnancial condition. The major objective is to a' low the utilitics to better prepare for a competitive, deregulated utilii) industry. The strategy for dealing with these emerging issues includes seeking Frowth opportunities. continuing to otter quality customer r.rvice. ongoing cost reductions and productivity enhancements.
WPLil RFSULTS OF OPFit ATIONS - 1947 COMPAlli:D WITil 19%
Pursuant to the rules of the Securities and lachanpc Commission. the "Itesults of Operations" discussion set forth below covers only the results of WPLil.since the Merger was consummated after December 31,1997, and WPLH (renamed Interstate Energy Corporation s was the surviving holding company resulting from the Merger.
Certain information regarding the operations of IES and IPC are set forth below under the heading " Pro Forma Etrnings Per Share information and Historical IES and IPC Data.' I or additional information regarding the pro forma results of the combined companies, see " Interstate Energy Corporation Unaudited Pro Forma Lombined l
FinIncial Statements." All' references to carnings per share throughout MD& A refer to both hasic and diluted carnings per share.
6 L
Oieniew WPLH reported consolidated net income from continuing operations of 561.3 million or 51.99 per share for 1997, as compared to $73.2 million or 52.3S per share for 1996. Earnings per share for 1997 and 1996 w cre S1.99 and
$2.34. respectively, reflecting the impact of discontinued operations.
The decrease in 1997 carnings versus 1996 was primarily the result of lower operating income at WP&L and the impact of non-recurring gains u hich contributed 5 cents per share to carnings in 1997 compared to 19 cents in 1996.
Gas and electric margins were down 54.2 and $2.0 million, respectively, in 1997 as compared to 1996. The decrease in Fas margin was primarily due to lower weather-driven sales to residential customers as well as a 2.2%
average retail gas rate decrease w hich went into efTect 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 al.so 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 resuh 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 51.3 million resulting from additional fees and expenses related to discontinued operations which is discussed in Note 12 of" Notes to Consolidated Financial Statements."
WPLH Electric Operations Reienues and Cous LWhs Sold Cuomers as (in Thousand0 (in nossands)
Year 1:nd 1997 l#9m Change 1997 1996 Change 1997 194h Chance Residential............
. $199.633 $201.690 (1%) 2.973.932 2.979.F26
- 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%
M55 815 5%
Seles for resale 160.917 131.836 22%
5.823.521 5.245.812 11%
122 90 36%
Other.........
14.3Mk 6.903 108%
61.330 57.757 6%
1.753 1730 1%
i
. Total.......
634.143 589.482 8% 14.992.060 14.083.391 6% 393.190 385.237 2%
==
Electric Production Fuels.......
II6.N12 l 14.470 2%
Purchased Power 125.438
> 1.108
$5%
M argin........
53*l.ku3 5393.904 (1%I Electric revenues increased 544.7 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 l
and warmer weather during the winter months of 1997. Revenues were also affected by en 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.
l Despite higher electric revenues, electric margin decreased 52.0 million. or 1%. as compared with 1996. The l
decline in margin reflects the impact of the shutdown at Kewaunce throughout most of the first half of 1997 for steam j
generator tube repairs as well as several temporary, routine outages at WP&L's coal-fired plants through the first five j
months of 1997. These outages caused a Freater reliance on more costly purchased power to meet customer i
7 1
i
I requirements.The PSCW ordered a temporary customer surcharpe effective April 29.1997 through.luly I.1997, to allou WP&L to recover a portion of the higher purchased power costs associated with the Neuaunce outape. Refer to the " Liquidity and Capital Resourec> - Capital Requirements'" section below for further discussion of the Keuaunce plaat outape. The Kewaunce outage and increased sales to other utilities resulted in a $5% inercase in the cost of
. purchased power.
! For a dinussion of electrie capacity and reliability refer to "Other Matters - Power Supply" section below.
Willi Gas Operations krienues and Coss*
Therm. Said
( ustomers at (in 'I housands)
(in Thousand=1
) car 1:nd IW7 IWh Chance IW7 IWh Chance IW7 IWh Change 4..
. $ N4.513 5 90.382 (6%4 127.704 142.974 (11 % ) 137.x27 133.5k0 3%
- Residential.....
Commercial.,,
45.456 46.703. (3%1 N5.917 91.665 (6%)
16,653 16.083 4%
Industrial.
N.37H 11.410 (27%4 17.144 19,974 (14% )
4NM 529 (8%)
7 transportation and other.
17.536 17.132 2% ~ 175.943 I k5.671 (5%)
35M 252 42%
4 155.KM3 165.627 (6% ) 44h 7HN 440.284 (H% )
155.326 150.444 ]
Total.
purchased (ias.
99.2c7 104.H 30 (5% )
... 5 56.61#,. 5 60.797 y Margin..
Gas revenues decreased 59.7 million, or 6% in 1997 as compared with 1996. The de'eline in revenues and margin reflected an average retail rate decrease of 2.2% elrective April 29.1997. and lower sales. Therm sales declined by 8%
due to warmer ucather in the winter months of 1997. This deercase was' dircelly renected in the decline in revenues
- and corresponding $4.2 million. or 7% decrease in margin. WPAL reali/ed favorable contributions to pas margin of
' $0.6 million and $1.1 million for 1997 and 1996 respectively). through its pas incentive program. Refer to the
" Liquidity and Capital Resources-Rates and Regulatory Matters" scetion below for further discussion of this adjustment mechanism.
Fees Rents Non-Utility Energy Sales and Other Reienues Fees. rents. non-utility energy sales and other revenues primarily rencet sales and retenues of WPLil's nonrepulated subsidiaries. consolidated under llDC. Revenues of the principal businesses of IIDC uere as follows:
tW7 iWe Environmental and engineering services.
S 78.I 5 84.8 30.8 73.8 Lnergy marketing Other.
15.6 14.9 5124.5 5173.5
-- Contributing to the decrease in these revenues for 1997 was the formation of a joint venture. elTeethe.lanuary 1.
'1997, between the pas marketing business of the energ3 marketing subsidiary and Industrial Energy Applications. Inc.
(IEA). the energy marketing subsidiary of IES.11DC owns 50% of this joint venture and for the year ended December 31.1997, accounted for the investment under the equit) method. Therefore. IIDC's share of revenues and expenses related to this joint venture have been included with " Interest lapense and Other,' Revenues for 1990 included $26.4 million related to pas marketing sales now associated with the joint venture, in addition. the sof tening 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 L
to Consolidated Financial Statements" for a further discussion of this joint venture.
In' addition to thq 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.
8
Other Oper:lio) cud Cost of Non-Ulility 1:ncrgy
- Other operation and cost of non-utility energ.i expense include, expenses related to w PAL, WPLil and the l
nonreFulated businesses of IIDC. The distribution of other operations expense was as follows:
1 Iw?
- iwe, l
- W P& L.........
SI31.4 5140.3 Nonregulated businesses and parent company operations..
123.4 177.3
$254.N $317.6 Contributing to the decrease in other operation and cost of non-utility energy was the recording of IIDC's share of the expenses associated with the gas marketing joint venture under " Interest lixpense 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 cnd 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.
i 1
Conservation expense at WP&L was reduced significantly under the retail rate order, clTective 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 ofTsetting this decrease was an additional S3.0 million of operating expense in the fourth quarter of 1997, associated with an early retirement program for eligible bargaining unit employees.
-M:illensnee Expense l.
Maintenance expense increased as a result of higher plant maintenance expenses at Kewaunec 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. cfTeetive
.lanuary 1,1997, and property additions. The increases approved by the PSCW included higher depreciation expense
' for Kewaunce, 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 51.1 million as~ a result of a write-olT of
. nonproductive assets in its environmental and engineering services business 1 terest 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.
i ine:me Taxes The decrease in income taxes between periods reflects lower taxable income. an adjustment of prior period taxes
'and increased afTordable housing and historical tax credits.
l 9
t
[
l o
1 C___=:________--_-__:____
WPLil RFSUllI'S OF OPER ATIONS-1996 COMPARI:D WITil 1995
?OOrsicw Wptil reporte'd consolidated net income from continuing operatmns of 573.2 million or 52.38 per share for 1996. as compared to $71.6 million or 52.33 per share for 1995. liarninp per share for 1996 and IW5 were 52.34 and -
l
^ $1.90. respectively, reflecting the impact of the discontinued operations.
3 The increase in carnings in 1996 primarily reflects the operations of WPLil's utility subsidiary. WP&L.
-l Continued customer growth in the service territory and increased pow er marketing actisity contributed to a 59 million increase in electric margin'in 1996 as compared with 1995; The 1996 gas margin also increased due primarily to j
higher we6ther-driven sales. (See "WPLil Electric Operations" and "WPLil Gas Operations" below). In addition, a '
l
'$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.-
liDC, parent company of WPLil's nonregulated operations. reported a loss from continuing operations of 53.5 million for 1996 compared with a loss from continuing operations of $1.5 million for 1995, llDC's 1996 results were i
adversely impacted by contract losses early in 1996 associated with the start-up of the energy marketing busir+ss as wcil as a softening market for the environmental and engineering services business. Partially oITsetting these losses was an after-tax Fain of 52.5 million in 1996. related to the sale of liDC's investment in assisted living properties.
l l
'WPLil also recognized a 1996 after tax loss of 51.3 million resulting from additiv.:al fees and expenses related to th' discontinued operations which is discussed in Note 12 of " Notch to Consolidated Financial Statements.'
e WPLH 1:lcetric Operations Reicaues and Costi LWhs Said Custoniers at (in Thoussedd (in 'Ihousand0 Year End i
IN 1995 Change 1990 l#95 Chaner l*9h
.IMS Change
< Residential.,,.
.,.$201,690 5199.850 1%
2,979,826 2,937.825 1%
330.933 329.643-2%
Commercial,,,,..
105,319 102,124 3%
1,814,324 1.773,406 - 2%
45,669 44.730 2%
l Industnal.
.... 143,734 140.562 2%
3.985,672 3.E72.520 3%
HIC 795 3%
~
. Sales for resalc L,.......... 131,830 -
- 97.350 35 %
5.245.NI2 3.109.385 69%
90 4h 88%
6.903
' 6.433 7%
57.757 54.042
.7%
1.730 1.294 34 %
Ot her.......
Total...,
589,482 - 546.324
.8%
14.0M3.391 11.741.178 2ta 3H5.237 376.510 2%
l
- == -
==
l Electne Production Fuels.....
114.470 116.488 (2%)
l l
. Purchased Power 81.10M 44.440 80%
.4
. Margin....
. $393.904 53x4.896 2%
Electric margin increased 59.0 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 electrie production' fuels and' purchased power. Although fuel and purchased power costs declined on a per LWh basis.
purchased power expense increased by 80%. This increase was due to WP&L's higher level of sales to other utilitics as uell as a 55.0 million increase in purchased power related to the purchase of replacement power during the extended 1996 refueling outage at Kewaunee. Partially ofTsetting increased purchased power costs were slightly lower delivered coal and nuclear fuel costs per kWh.
l 10 0
i i Gas Operations krernau. and Costs lluenes 5 3d (in Thousandst
( uunnerrs as fin 'llenusands:
)varInd tw.
( b ner im IW5
( burr I We.
lW4
( h ugt a
l
! 11 41
$ 90.382 5 70.382 289 142.474 126.903 13% 133.5K0 129.576 3%
- rcial 46,703 35.4I i 32%
41.665 82,448 11%
16.083 15.724 2%
ial.
11.410 17.984 (37% ) 19.474 21.435 (7%)
529 566 (7% )
artation and other.
17.132 15.3hs i1% 185.671 _l68.702 10%
252 227 11 %
165,627 139.165 19% 440.284 399.488, 3 150.444 146.093 3%
.cd Gas.
_104.830 84.002 25%
in.
5 60.797 $ $5.163 10%
s margins increased $5.6 million or 10%. during 1996 compared with 1995 primarily as a result of hi h herm sales increased 10% due to a combination of colder weather during the first hve months of 1996 g er
- d to 1995, and customer growth or 3%. The 19% increase in gas revenues reflects not onl the high as
- also the pass through of higher natural gas costs to WP&L's customers. WP&L realized favorable 3
tions to gas margins of Si.I million and $0.8 million for 1996 and 1995 respectively due t uent activities. Refer to the " Liquidity and Capital Resources - Rates and Regulatory Matters" sectiono er further discussion of this adjustment mechanism.
rnts, Non-Utilit3 Energ.s Sales and Other Reienues lated subsidiaries, consolidated under llDC, as adjusted for discontinued o s
1 businesses ofIIDC were as follows:
erations. Revenues of the Im IMS Environmental and engineering services.
Energy marketing s x4.x $ 88.6 Other.
73.M 12.6 14.4 16.4
$173.5 $ 117.6 nergy marketing subsidiary. The subsidiary meets these sales comm s
1-term purchase contracts. (See "Other Operatmn and Cost of Non-Utility lin ases rental and engineering services business wer l ergy"L Revenues at the e ouer in 1996 due to a softening market ior environmental Jdition to the revenues of the nonregulated businesses, other revenues also include the water
'hese revenues were 54.2 million in both 1996 and 1995.
operations of il
Other Operation and Cost of Non-Utility Energ)
Other operation and cost of non utility energy expense includes expenses related to WP&L, the parent compan>
I and the nonregulated businesses of IIDC. The distribution of other operations expense was as lollow s:
tm im WP&L
$140.3 $ 139.3 Nonregulated businesses and parent compas.y operations.
177.3 113.4
$317.6 5252.7
- The increase in operations expense associated with the nonregulated businesses is pnmarily a result of increased volume at the energy marketing subsidiary. Feveral commitments made in early 149b 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 alTordable 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 hou. sing 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.
M:irtenance Maintenance expense increased due to higher plant maintenance and the extended 1996 refueling outage at Kewaunce ISee " 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.
lxterest Expense and Other The 59.1 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 54.2 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.
I cme Taxes income taxes increased for 1996 as a result of higher taxable mcome. The efTective tax rate on continuing operations was 35.4c4 and 32.5ci for 1996 and 1995, respectively. The lower rate in 1995 was the result of prior years' tax contingencies resolved favorabl in 1495 and increased non-deductible MerFer expenses in 1996.
3 PRO l'ORMA EARNINGS PER SHARE INFORMATION AND HISTORICAL.
IES AND IPC DATA Set forth belou.is information regarding pro forma earnings per share tbasic vad diluted) of the Merged Company and certain historical financial information regarding IES and IPC for the year.s ended December 31. lu97 1996 and 1995.
12
1997iersn 1996
{
The carnings per average common share for the Merged Company on a pro forma basis and for each of WPl.II.
lES and IPC for the 3 cars ended December 31.1997 and 1996 were as follows:
iw Merged Compan3 pro forma combined
- 52.02 52.10 WPLil 1.94 2.34 IES..
2.18 2 04 IPC..
2.74 2.69 The growth in IES's carnings per share in 1997 as compared with 1996 was primarily the result on a 3M increase in electric sales (escluding oft-sysicm sales), a lower clTective income tax rate. and increased operating income from IES's non-utility operations. The increased earnings were partially olTset b3 higher interesi expense, higher utility operating expenses, and start-up expenses in international and domestic growth areas. Ihpenses 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 compan d with 1996 was primarily the result of: eleetne and pas 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 j
costs. Partially offsetting the increase in carnings were slightly depressed sales due to milder weather and the loss of cipht municipal customers to other energy suppliers.
1996 sersus 1995 i
The carnings per average comman share for the Merged Company on a pro forma basis and for each of WPLil, IES and IPC for the years ended December 31,1996 and 1995 were as follows:
_1 %
_IMS Merged Company pro forma combincd*
52.10 51.98 WPLil 2.34 1.90 IES.
2.04 2.20 IPC.
2.69 2.63 The decrease in IES's carnings was primarily due to co.sts incurred in 1996 defending an unsuccessful talemer bid for IES which decreased earnings per share by 15 cents. Increased sales, electric and gas rate increases and continuing efTorts to control costs contributed to the increased earnings for IPC.
- The pro forma carnings per share reflect the impact of the discontinued operations recorded by WPLil in 1996 and 1995. For additional information regarding the derivation of the pro forma carnings per share data. see " Interstate Energy Corporation Unaudited Pro Forma Combined Financial Statements" included elsewhere in this Annual Report.
LIQUIDITY AND CAPITAL RESOURCES 11ist:rical WPLil Analysis Cash flows f rom operating activitic> at WPLil decreased to S151 million in 1997 compared with S191 million in 1990 primarily due to a reduction in net income and working capital. Cash flow s used for financing were 52.2 million in 1997 as compared to 572.4 million in 1996 resulting from a net increase in the amount of debt outstanding. Cash flows used for hnancing activities increased to 572.4 million in 1996 from S31.0 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 rnd1995 due to the proceeds received in 1996 from both the sale of other property and equipment and the sale of a 13 I~
h l
\\
I
subudiary and inte>tments. Times intercat earned before income taxes for WPLil for 1997,1996 and 1995 was 3.19, 3.82 and 3J5. respectively.
Prospectiir Considerations The capital requirements of the Merged Company will be primarily attributable to its utilit3 subsidiaries construction and acquisition programs,its debt maturities and business opportunities of New Diversified. The Merged Compan3 anticipates that future capital requirements will be met by cash generated fmm 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 alTected by costs associated with environmental and regulatory issues. Emerging competition in the utility industry could also impact the Merged Company's liquidity and capital resources, as discussed previously in the " Utility industry Outlook" section.
The Merged Company has interests in the international arena. At December 31.1997. IES had approximately 537 million ofinvestments in foreign entities. At December,31,1997, WPLH and IPC did not have material foreign investments. The Merged Company continues to explore additional international investment opportunities. Such investments may carry a higher level of risk than the Merged Company's traditional domestic utility investments or New Diversified's domestic investments. Such risks could include foreign governmen actions, foreign economic and currency risks and others.
The Merged Company is engaged in pursuing various potential business devek pment opportunities. including international as well as domestic investments, and is devoting resources to such ef. orts. The Merged Company is striving to select investments where the international and other risks are both understood and manageable.
At December 31, 1997 IES and IPC had investments in the stock of McLeodUSA Inc. (McLeod), a telecommunications company, valued at $327 million and $1.4 million (as compared to a cost basis of $29 million and 50.1 rhillion), respectively. Pursuant to the applicable accounting rules, the carrying value of the investments are adjusted to the estimated fair value cach 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 pains or losses are reficcted in current earnings only at the time they are realized through a sale. IES and IPC have entered into agreements with McLeod which restricts the sale or disposal of its shares without the consent of the McLeod Board of Directors until September and June 1998, respectively.
The Merged Company had certain financial guarantees and commitments outstanding at December 31,1997 which are not reflected in the pro forma consolidated financial statements. They generally consist of third-party borrowing arrangements and lending commitments as well as guarantees of financial performance of syndicated afTordable housing properties. Management believes the possibility of the Merged Company having to make any material cash pa3 ment > under these agreements is remote.
14
l l
l l
l'inneirg end Capitti Structure l
Access to the long-term and short-term capital and credit markets. and costs of external financing are dependent l
on creditworthiness. The debt ratings of the Merged Comp.my and certain subsidiaries are as follows:
l Moodn Nandard & l'oor's t As of 3/26/W 1 As of 3/2/w)
I ESU..
. 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+
l IPC.
. Secured long-term debt Al A+
+ Corporate credit rating N/A A+
+ Unsecured long-term debt A2 A
New Diversified.,
. Commercial paper P2 Al Merped Company..
. Corporate credit rating (a)
N/A A+
. Commercial paper (b)
Pi 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 o the Merger. IESU. WP&L and IPC will participate in a utility money pool which will be r
funded. as needed, by ae Merged Company through the issuance of commercial paper. This utility money pool replaces the commercial paper programs previously held at IESU, WP&L and IPC.
The following material long-term debt financing activities involving subsidiaries of the Merged Company took place in 1997 -
- On April 28,1997. WP&L entered into an interest rate forward contract to hedge interest rate risk related to the anticipated issuance of 5105 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 wisich resulted in a cash payment of 53.8 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 5105 million of debt securities described above to repay maturing short-term debt. finance utility construction expenditures and to repay at maturity 555 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 agreemen extends through October 2000, with one-year extensions available upon aFreement by the parties. Unused borrowing availability under this agreement is also used to support Diversified's commercial paper program. A combined maximum of 5450 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 matunties 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 S15l. million 364-Day Credit Agreement as discussed later.
- In August 1997. IESU issued 5135 million of 6.625% Senior Debentures, due 2009. The proceeds from these debentures were used to reduce IESU's short-term borrowings.
15 l
l t
. ILSU repaid at maturity SX million of 6.12% l'irst Mortgage lionds during the second quarter of 1997.
. Also in the second quarter of 1997. IESU i.ssued 555 million of Collateral Trust lionds. 6.87%. duc 2(K)7 Iloiders thereof may elect to have their Collateral Trust llonds redeemed,in whole but not in part, on May 1 2002. at 100% of the principal amount thereof, plus accrued interest. The proceeds f rom the Collateral 'T rust llonds were used to refinance $15 million of Series L. 7.87% First Mortgage llonds. 530 million of Series M.
7.625% First Mortgage llonds and $10 million of 7.375% First Mortgage llonds.
. IPC repaid at maturity $17 million of 6.125% First Mortgage llonds in May 1997.
Other than the Merged Company's periodic sinking fund requirements. which uill not require additional cash expenditures, the following long-term debt (in millions) uill mature prior to December 31.2002; IESU 5185.1 IPC.
8.1 WP&L 10.8 New Diversified..
207 6 Merged Company 5411.6 l
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 companic.s are evaluating their future financing needs and will make the necessary regulatory filings as needed.
Under the most restrictive terms of their respective indentures. WP&L. IESU and IPC could have issued at least $276 million, $234 million and $200 million of long-term debt at December 31.1997 respectively.
The various charter provisions of the subsidiaries of the Merged Company authori/c and limit the appregate 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 share.s of Cumulative Preferred or Preference Stock:
ICSti IPC Misi HN Cumulative Preferred.
- 1.238.614 2.700.775 5.00().000 Cumulative Preference.
700.000 2.000.000 The capitalization ratios of WPLil. IES and IPC at year-end were as follov s:
Pro Iorma Combined "PW U*
III 1997 1007 19 %
1007 10 %
1997 30 %
Common equity.
SIG 54 % 59%
19%
47% 52%
500 Preferred stock.
3 5
6 1
1 8
b Long-term debt.
46 41 35 50 52 40 42 100%
100% 10(& 100% 10(& 100% 100%
For interim financing. WP&L. lESU and 1PC are authorized by the applicable federal or state regulators agency to issue short-term debt as follows (in millions) at December 31. 1997-u P&t.
nsti ig Regulatory authorization 5138 5200 575 Short-term debt outstanding S 81
- 534 16
Wl'Lil alw had $42 milhon of short term debt outstandmg at December 31.1997. In addition to providing for ongoing workmp capital needs, this availabihty of short-term financing provides the companies flexibility in the jouance of long-term securitics. The lesel of short-term turrowing 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 abantage of fmorable short-term rates. WP&L and ILSU also use proceeds from the sale of accounts receivable and unbilled revenues to finance a portion of their >ng-term cash needs. The Merged Company anticipates that short-term dehi will continue to be available at reasonable costs due to current ratings by independent utility analysts and rating services.
WPLll. IES and IPC had the following tank lines of credit (in millions) at December 31.1997 available to support its borrowings:
WI'l.Il II:S II'C Hank lines of credit 5170
$ 45 $53 Amount utilized
$ 11
$34 Commitment fees are paid to maintain these lines and there are no conditions which restrict the unuv.d lines of credit. From time to time, the Merged Company may borrow from banks and other financial institutions in lieu of commercial paper, and has agreements with several financial institutions for such borrowings. There are no commitment fees associated with these agreements and there were no borrowings outstanding under these agreements at December 31,1997.
In October 1997. Diversified entered into a 364-Day Credit Agreement with various bankinF institutions. The i
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 5150 million of horrowings 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 financinF flexibility available to the Merged Company, management believes it has the necessary financing capabilities in place to adequately finance its capital requirements for the foreseeable fu:ure.
Capital Requirements Gcneral 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. viriations in actual sales and load growth compared to forecasts, requirements of environmental, nuclear and othei gulatory authorities, acquisition and business combination opportimi N. the availability of alternate energy and purchased power sources, the ability to obtain adequate and timely rate relief, escalations in construction costs and conservation and energy efficiency programs.
The Merged Company's ar.ticipated construction and acquisition expenditures for 1998 are estimated to be approximately 5630 million, consisting of approximately $277 million in its utility operations. $190 million for energ)-
related international investments and 5163 million for new business development initiatives at New Diversified. The level of 1998 domestic and internationalinvestments could vary significantly from the estimates noted here dependent on actual investment opportunities as well as the timing of the opportunities. The Merged Company estimates it will spend approximately $1.2 billion on utihty construction and acquisition expenditures during 1999-2002. The strategy related to the construction and acquisition program for New Diversified during 1999-2002 is currently being finalized.
New Diversified expects to invest in energy products and ser ices in domestic and international markets, industrial services initiatives and other strategic initiatives.
17
One of the Merged Company's objectives is to finance utility construction expenditures through internally generated f unds supplemented, when required. by outside financing. The Merped Company anticipates funding the large majority of its utilit) construction expenditures during 1998-2002 through internally generated funds.
Supplemented by external financings as needed. Fundmg of a maiorit) of the New Disersihed construction and acquisition expenditures is expected to be completed with external linancings.
Nuclear Tacilities The Merged Company owns interests in two nuclear facilities. Kewaunce and the Duane Arnold Energ) Center (DAEC). Set forth below is a discussion of certain matters impacting these facilities.
Kewaunce, a 535-megawatt (nameplate capacity) pressurized water reactor plant, is operated by Wisconsin Public Service Corporation (WPSC) and isjointly 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 ser ice 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 Kewaunce steam pencrator 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 Fenerator 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. Kewaunce 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 scal.
Kewaunec is operating at 97% of rated capacity because certain steam pencrator tubes have been removed from service rather than repaired.
In accoriace with the PSCW authorization. WP&L had deferred $3.1 million at December 31. 1997.
associated with Kewaunce steam Fenerator repair costs. In March 1998, the PSCW approved recovery of these costs through a customer surcharge efTective 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 Kewaunce have F aing views on the desirability of procediep with the steam generator replacement project. Although the new resleeving repair technology may allow the pat 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 generato: rep' irs. WP&L and MG&E have been unwilling to support replacement. In a
March 1996. WPSC filed an application with the PSCW for permission to replace the Kewaunee steam pencrators.
This application was approved in April 1998. The issues related to the continued operation and f uture 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 ahernatives. If it should become necessary to retire Kewaunee permanently. WP&L would replace the Kewaunce Feneration through a combination of purchased power. increased generatior. at existing WP&L pencrating 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 tac uncertaint) regarding the expected useful life of the plant without steam generator replacement. At December 31.1997. the nei carrying amount of WP&L's investment in Kewaunce was approximately 545.7 million. The current cost of WP&Li share of the estimated costs to decommission Kewaunee is $181.3 million and exceeds the trust assets at December 31.1997 by 568.9 million. The costs of decommksioning are assumed to escalate at an annual rate of 5.83E WP&L's retail customers in the Wisconsin jurisdiction are responsible for approximately 80% of WP&Li share of Kewaunee costs.
Ib
1 As a result of accelerating the recovery of WP&Li share of Kewaunee related costs depreciation expense and i
decommissioning funding will increase approximately $3.0 million (from $4.b million to $7.8 million) and $5.4 l
million (from $10.7 million to $16.1 million). respectively. on an annualiecd basis. During 1997.$0.5 million of depreciation expense related to unrecovered plam investment was recogniecd compared to $4.h milhon which was recognited in 1996. During 1997, decommissioning expense associated with f undmg mereased to $11.3 milhon from l
$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 efTective 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 IESUi 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.
ilefer to the "Other Matters - Environmental" section for a discussion of various issues impacting the Merged Company's future capital requirements.
R:tes and Regulatory Matten
- In November 1997, as part ofits merger approval, FERC accepted a proposal by IESU, WP&L, and IPC, w hich provides for a four-year freeze on wholesale electric prices beginning with the cITective date of the Merger.
WNL in connection with its approval of the Merger, the PSCW accepted a WP&L proposal to frecre rates for four
- years following the date of the Merger. A re-opening of an investigation into WP&L's rates during the rate frecre period, for both cost increasas 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 efTective April 29. 1997 through 1o98. 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 pas performance based ratemaking incentive mechanism; and a modified SO2 incentive. In addition. the PSCW ordered that it must 1
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 52.00G of total capitalization, Based or a 13-month average for 1997. WP&Li common equit) ratio was 52.56%.
The retail electric rates are based in part on forecasted fuel and purchase power costs. Under PSCW rules.
j 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&Li 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 recogni7ed by WP&L.
Previously, this incentive was limited to $1.1 million to WP&L. The incentive includes a sharing mechanism.
19
I whereby 4(f;, ol all pains and losses relative to curren' comnmdity prices as ucl: 1s other benchmarks are recogni/ed -
by WPAl. rather than refunded to or reemered from customers.
l IESU l^
in September 1997. IESU agreed m... :he IUB to provide Iowa customers a four-year retail electric and gas prise free /c commencing on the efTective date of the Merger. The egreement excluded price changes due to government-mandated programs. such as energy elliciency cost recovery or unforeseen dramatic changes in operations. In addition. the priec freeze does not preclude a review by either the IUH or Office of Consumer Advocate (OCA) into whether IESU is exceeding a reasonable return on common equity.
Under provisions of the IUH rules, IESU is currently recovering the costs it has incurred for its energ3 elliciency programs. There have been several cost recovery filings made and approved by the IUH over the course of the last few
-years. Generally the costs incurred through July 1997 are being recovered over various lour-year periods. The IUH commenced a rulemaking in January 1997 to implement statutory changes alloning concurrent recovery and a fmal 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 reFulatory asset that was created under the prior rate making mechanism as these costs are recovered.
IESU has'the following amounts of energy efliciency costs included in regulatory assets on its Consolidated Balance Sheets (in thousands):
l'ourd ear Recovery iterianing December 31,1997 l>ccember 31. l#%
6/95
$ 7,779
$12.834 Costs incurred through 1993,.......
Costs incurred in 1994-1995.....
8/97 30.924 33.16!
8/97-19,1147-15.087
- Costs incurred from 1/96-7/97..
Under collection of concurrent recovery..,
N/A H50 SS9.4(Mi
$61.082 il*C in September 1997. IPC agreed with the IUB to provide towa customers a four-year retail electric and pas price freeze commencing on the efTective date of the Merger. The agreement excluded price changes due to government-mandated programs, such as energy ciliciency 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 execeding 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 elTective 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 S3.2 million annually. The reduction applied to all bills rendered on and alter October 7.1997.
i In' May 1995. IPC filed an application with the MPUC for an increase in gas rates in an annual amount of 52.4 million. Increased interim rates in an annual amount of $1.5 million were placed in efTect in June 1995. On February 29.1996. MPUC issued an order allowing an increase in pas ratch of $2.1 million. Rates reflecting the increase were implemented in September 1996. The Department of Public Service and the Oflice 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 land the MPUC) to the Minnesota Supreme Coun. On January 8.1998, the 20
Minne ota Supreme Court upheld the MPUC's initial decision allowing IPC to reemer 54.9 million of manuf actured pas plant clean-up expenses over a 10 year period.
IPs is aim recovering its energy efliciency costs in Iowa in a similar manner as IESU and began its concurrent cost recovery in October 1997. IPC has the following amounts of encrp) efliciency costs to be recovered in Iowa included in regulatory assets on its Balance Sheets (in thousands):
tout 4 rer Reco. cry preinning Derend.cr 31. lW7 l>ccomher 31. Iw%
Costs incurred through 1992.
10/94 5 912 5 2.128 Costs incurred in 1993-1995.
5/97 16.576 19,193 Costs incurred irom 1/96-9/97 10/97 9.796 6Jt42 527.2M4
$27.363 in addition. IPC had $2.7 million and $2.5 million at December 31.1997 and December 31.1996. respectively, included in regulatory assets for energy efficiency recoveries in Minnesota.
Assuming capture of the MerFer-related synergies described under the caption " Merger" above and no significant legislative or regulatory changes aflecting its utility subsidiaries, the Merged Company does not expect the Merger-related electric and gas price freezes to have a material adverse efTect on its financial position or results of operations.
OTHER MATTERS Yccr 2(MHi The Merged Company utilizes software, embedded systems and related technologies throughout its businesses that will be afTected by the date change in the Year 2000. An internal task force has been assembled to review and develop the full scope, work plan and cost estimates to ensure that the Merged Company's systems continue to meet its internal and customer needs.
Phase I of the project, which encompassed a review of the necessary software modifications that will need to be made to the Merged Company's financial and customer systems, has been completed. The Merped Company currently estimates that thc remaining costs to be incurred on this phase of the pm.icci will be approximately 54 million to $8 million in the aggregate.
The task force has also begun Phase 11 of the project which is an extensive review of the Merged Company's embedded systems for Year 2000 conversion issues. The task force has inventoried critical embedded operating systems and is uorking 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 afTect employee safety or business operations).
As part of an awareness effort, the Merged Company has also notified its utility customers of its Year 2000 project etTorts. Key suppliers are also being contacted to confirm their Year 2000 readiness plans. Efforts are also
- underway to develop contingency plans for critical embedded operating systems. The Merged Company is currently unable to estimate the costs to M.mrred on this phase of the project but does believe that the costs will be significant. An estimate of H mnses to be incurred on this phase of the project is expected to be available by the third quarter cf iW8.
The goal of the MerFed Company' is to have all the material Year 2000 conversions made sufficiently in advance of December 31.1999 to allow for unanticipated issues. At this time. management is unable to determme if the Year 2000 issue will have a material adverse effect on the Merged Company's hnancial position or results of operations.
i l
21
l in April 1998. WP&L filed a request with the l'5CW requesting deferral treatment ol Year 2(KK) costs in excess of $4.5 million. Currently, management cannot prediet the action the PSCW may take regarding this reyucst.
1.aborissues The status of the collective bargaining agreements at each of the utilitics is as follows:
ti:sti wni.
.i.re_
Number of collective bargaining agreements....
6 1
3 Percentage of workforec 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.
. Finncial Instruments WPLil has historically had only limited involvement with derivative financialinstruments 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 receivahic. The total notional amount of
. interest rate swaps outstanding was $40 million at December 31; 1997. WPLH has used swaps futures and options to E
. hedge the price risks associated with the purchase and sale of stored pas at WP&L and with the purchases and sales of as and electric power at the energy marketing subsidiary. On April 28.1997, WP&L cntered into an interest rate F
forward contract.to hedge interest rate risis 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 u hich includes: (a) unreafired holding
= Fains/ losses on securities classified as available-for sale under SFAS 115. (b) foreign currency translation adjust-ments accounted for under SFAS 52, and f 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 (SI'AS 131 L Disclosures About Segments of an Enterprise and Related Information, was issued by the FASit in the second quarter of 1997. SFAS 131 requires disclosures for cach business segment in a manner consi. stent with how management disaggregates and evaluates the c:mpany, with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosure.s.
- SFAS 131 is efTective for periods beginning after December 15.1997.
EAccounting for Obligations Associated with the Hetirement of Long-l.ited Assets The staff of the Securities and Exchange Commission has questioned certain of the current accountinF practices of the electric utility; industry, including IESU and WP&L, regarding the recognition, measurement and classification 22 t
- .estions, the 1 ASH is reviewing the accounting for closure and wer piants. If current electric utility industry accounting practices for nuclear power plant de commissioning of sped. the annual prosision for decommissioning could increase relative to 1997 and the
- iwioning could be recorded as a liability (rather than as accumulated depreciation), with rec estimated cost for in the cost of the related nuclear power plant. Assuming no significant regulatory shift 1ESU a
,s ability to recover decommissioning costs through rates.se that such change o
i erations MerFed Company does not expect the efTects of inflation at current levels to have a significant position or results of operations.
lentil pollution abatement programs ofIESU IPC WP&L and New Diversified are subject to continuing evised from time to time due to changes in environmental regulations, changes in construction p i of construction costs. While the Merged Company cannot precisely' forecast the effect of future
- nts of current envirom.:ntal regulations. ental regulations' on its operations, it has ta J. IPC and WP&L all have current or previous ownership interests in properties previously asso loring costs relating to the sites. A summary of information relating F
. lESU '
tN' WPa t.
-, umber of k'nown sites for which liability may exist...............
lability recorded at December 31.1997 (millions)..............
533.2 - $5.F 59.2 34 9
1A egulatory asset recorded at December 31,1997 (millions) 533.2 $6.2 516.3 ompanies are working pursuant to the requirements of various federal and state agencies to i revent and remediate, w here necessary, the environmental impacts to property, including natural resou 2nd the sites in order to protect public health and the environment. The companies each b li letId the remediation at various sites, although they are stillin the process of obtaining e eve that they
- ble environmental agencies for some of these sites.
- ompany has recorded environmental liabilities related to the MGP sites: such amounts are based on the
- t estim:te of the amount to be incurred for investigation. remediation and monitoring costs for those s tes where the investigation is in its earlier stages. The Merged Com incurred for the investigation. remediation and monitoring of the sites to be approximately $36 m e range of
. It is possible that future cost estimates will be greater than the current estimates as the inves reeds and as additional facts become known.
- completed a comprehensive review ofits MGP liability in the third quarter of 1997. This review resulted lion reduction in the retorded MGP liability. largely due to the approval by the Wisconsin Depart i
Tources iWDNR) of in costly containment and control strategies as an alternative to various sites. See Note !! c. of the " Notes to Consolidated Financial Statements" excavation i
The current rate makin; tre; sent approved by the PSCW. th' MGP expenditures. net of any insurance c
- deferred and collected from gas customers over a five-year period after new rates are implemented allows the deferral of MGP-related costs applicable to the Minnesota sites and IPC has been succe 23 I
l L__.___________..___.__.__._
in obtaining approval to reemer such costs in rate > in Minnesota. While the IUH does not allow for the delerral of MGP-related costs. it has permitted utilities to recover its prudently incurred costs. As a resuh. regulatory assets have been recorded by each company which reflect the probable future rate recovery, where applicahic. Considering the current rate treatment. and assuming no material change therein, each of ILSU. IPC and WPAL belieses that the clean.up costs incurred for these MGP sites will not have a material adverse effect on their respective unancial 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 ap.tinst certain ofits insurance carriers to recover its MGP-related costs. Settlements have been reached with cipht 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 1 of the Act and are in the process of meeting the requirements of Phase 11 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 sulTicient allowances to olTset 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 federallaws 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 (N A AQS) 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.
f 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 f'
its NOx emissions at all of its plants to.15 lbs/mmbtu. WP&L cannot presently predict the final outcome of this-proposal but believes that, under the terms of the proposed rule, it would be required to install controls at its plants and that the cost related thereto would be significant.
In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids. Iowa, which, based Jon the' EPA's assumptions and worst-case modeling method suggested that the Cedar Rapids area could be classified as "nonattainment" for the N AAQS 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 pencrating 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 cntered into a consent order with the Iowa Department of Natural Resourecs (IDNR; in the third quarter of 1997 on this issue. IESU agreed to limit the SO2 emissions from the two noted pencrating facilities and to install a new stack (potential aggregate capital cost of up to $2.5 million i
I over the nest two yearsi 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. lESU determined that certain changes undertaken during previous 3 cars at one of its generating facilities may have required a federal Prevention of Significant Deterioration t PSD) permit. lESU 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 bc l
24 l
l subject to a penah) for not having obtained the permit previously; however. ILSU beheses that any likely actions resuhing 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 ol plant operations. ILSU determined that certain permit limits l
~ were exceeded infl997 at one of its generating facilities in Cedar Rapid >. 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 efTect on IESU's financial position or results of operations.
A global treaty has been negotiated that could require reductions of greenhouse gas emissions from utility plants.
Negotiators left significant implementation and compliance questions open to resolution at meetings to be held starting in November 1998. At this time, the Merged Company is unable to predict whether Congress will ratify the treaty. Given the uncertainty of the treaty ratification and the ultimate terms of the final regulations, the Merged Company cannot currently estimate the impact the implementation of the treaty uould 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 l
DOE to enter into contracts with parties for the disposal of such material beginning in.lanuary 1908. 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 efTorts 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.
1 L
The NWPA assigns responsibility for interim storage of spent nuclear (uel to generators of such spent nuclear fuel, such as IESU and WP&L. In accordance with this responsibility, IE3U and WP&L have been storing spent nuclear fuel on site at DAEC and Kewaunee, respectively, since plant ognrations began. DAEC has current on-site capability to store spent fuel until 2001. lESU is currently reviewire,its options to expand on-site storage capability.
To provide assurance that both the operating and post-shutdown stcrape 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 sullicient 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 o' 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-L: vel 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 comparabit 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 contim.es to accept the low-level waste and IESU and l
WP&L currently ship the waste each produces to such site. thereby minimizing the amount of low-level waste stored
' on-cite. In addition, given technological advanco. was;: mnpaction and tne reduction in the amount of waste peacrated. DAEC and Kewaunee cach have ra-site storage capability suflicient to store low-level waste expected to
- be generated over m least the next ten yea:s. with continuing access to the Barnwell disposal facility extending that on-site storage capability indefinitely.
The National Energy Polic) 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 25
_,__,.____-___-.m_
fuel purchases. IESU is recovering the costs associated with this assessment through its electric fuct adjustment clauses over the period the costs are assessed. IESU's 70% share of the future assessment at December 31.1997 was Sh.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 55.9 million and $5.1 million recorded, respectively.
Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary of New Diversified, is responsible for certain dismantlement and abandonment costs related to various oft-shore oil and pas platforms (and related on-shore pbnts 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.
P:wer 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 ll-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 resuh, WP&L and other Wisconsin-based utilities are advocating faster PSCW approval of needed transmission projects.
On September.'4.1997, the PSCW ordered WP&L and two other Wisconsin utilities to arrange for additional electric capacity to hdp 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 oflicials noted that it will take time to get new transmission and power plant projects approved and built.
While utility oflicials 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.
l WPLH SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
The following unaudited consolidated quarterly data of WPLil. in the opinion of management, include adjustments which are normal and recurring in nature necessary for the fair presentation of the results of operations.
l and financial position. WP&L's results of operations are a significant portion of the consolidated results. The quarterly amounts were afTected b), among other items. WP&L's rate activities, seasonal weather conditions and changes in sales and operating expenses. Refer to " Management':. 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 as margins. The lower margins resulted from F
l l
b I-
l' warmer ceather and several temporar,s plant outapes dunnp the hrst twe months of 1997. In addition. a $3.4 million after-tax pain was recogni/ed on the sale of a combustion turbine in the second quaner of 1996.
l.stnings Operating Operating Nrs pre Share l{cicanes Inneme income (husic and dilvied)
(in Ihnusands ewcpt per sharc data)
Quarter Ended i
1997:
March 31..
S261.688 $40.637 521.827
$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 i
December 31 251.4I i 30.260 11.093 0.36 i
l l
}
27 l
1.-
L
WPLil REPORT ON TIII: FINANCIAL. INFORM ATION WPL lloidings, Inc. management is responsible for the information and representations contained in the financial statements and in certain other scetions 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.
~
Err:Il B. Daiis Jr.
President and Chief Executive Oflicer WPL Holdings, Inc.
hN
!& W -
Edwtrd M. Gleason Vice President. Treasurer and Corporate Secretary Principal Financial Officer WPL Holdings, Inc.
January 30.1998 28
l l
RI: PORT Ol' INDI:Fl:NDi'NT ITill.lO ACCOl'N1 ANTS To the Sharcouners of WPL lloidings, Inc.:
We have audited the accompanying consolidated balance sheets and statements of capitalization.. of WPL l
.lloldings, Inc. (a Wisconsin corporation) and subsidiaries as of December 31,1997 and 1996, and the telated
. consolidated statements of income. cash flows and common sharcou ners' investment for each of the three year 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 enerally accepted auditing standards. Those standards require that F
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mat: rial misstatement. An audit includes examining, on i test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes asses. sing the accounting principles used and significant estimates made by management, as well as evaluating the overch 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 lloldinp. Inc. and subsidiaries as of December 31,1997 and 1996, and the results ofits operations and its cash flow > for each of the three years in the period ended December 31,1997,in conformity with generally accepted accounting principles.
ARTilUR ANDERSEN LLP Milwaukee. Wisconsin, January 30.'1998 j
i 29 i
_________-.L.
l WPl. IlOI. DINGS. INC.
CONSOI.lDATI:D STATI:N11:NTS 01' INCON11:
Trur I.nded liccender.11.
lW7 Iwo IW5 on thousands esreps for twr hharc data)
Operating reienues:
Electric.
5634.143 5589.482 5546.324 Gas.
155.883 165.627 139.165 Fees, rents, non-utility encipy sales and other.
129.229 177.735 121.766 919.255 932.844 807.255 Operating espenses:
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 Int: rest espense and other:
42.535 42.027 43.559 Interest expense.
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 disidend requirement of e;;hsidiary.
93.279 I I 8.329 111.036 Ice:me tases.
28.715 41.814 36.108 Preferred disidend requirement of subsidiary 3.310 3.310 3.310 1 c:me from continuing operations,
61.254 73.205 71.618 Discontinued operations:
Loss from operation of discontinued subsidiary, net of appheable tas benefits of 51.451 2.212 Loss on disposal of subsidiary. net of applicable tax benefit of 5575 and tax expense of 53.271 1.297 10.974 1.247 13.186 Nxt income 5 61.254 5 71.908 5 58.432 E raings per common share (hasic and diluted):
Income from continuing operations.
5 1.99 5
2.38 5
2.33 Discontinued operations.
( 0.04 )
10.43) 5 1.99 5
2.34 5
1.90 Net income.
Weighted nierage number of shares of common stock outstanding 30.782 30.790 30.774 Ccsh disidends paid per common share.
5 2.00 5
1.97 5
1.94 The accompanying notes are an integral part of the consolidated financial statements.
30 l
l 1
WPL HOLDINGS. INC.
CONSOLIDATED BALANCE SHEETS 1
Ikccmhcr 31.
l 1997 199h ASSETS (in thousands)
Utility plant:
i Plant m service -
Electric
$1.790.641
$1.729.311 Gas.
237 M56 227.h09 l
Water...
24J6he 23.905 Common.
Iv5.N15 152M 2.249.176 2.I33.118 Less - accumulaicd provision for depreciation.
1M5.726 967.436 1.1N3.4%
l.165.682 Construcuan morL in progress.
42.312 55.519 Nuclear fuel, net..
19.tM6 19.36k I.244.NUM l.240.569 Other property and equipment:
Rtntal net.
j 101.R35 112,913 Other, net.
9.424 16.350 111.259 129.263 investments:
Nuclear decommissioning trust funds 112.356 90.671 Other investmenu..
2n.2M9 15.40k
)
)
l
.Carrent assets:
j 140.645 100.079
- Cesh and equivalents.. m.........
13.9N7 11.070
- Net accounts receivable and unhilled revenue. less allomance for doubtful accounts of $1.104 and $1.524 respectively 7N.HN2 88.798 i
Coal at averarc cost.
18,857 15.k41 t
Matenals and supphes. at average cost.
19.274
_19.915 Gas in storare. at averare cost..
12.564 9.992 Prepaid rou reccipts tax..
22.153 19.389 F
i-Prepayments and other.
N.151 7.397 173.imN 172.402 l
R:stricted cash..
s.146 6.848 l
Deferred charycs; j
Rifulatory assets.
98.314 160.877 i
Other..
92.627 84.493 183.941 245.370 l
TOTAL ASSETS.
51.NelJt07 $ 1.900.531 l
CAPITAUZATION AND LIABluTIES
' Capitalization (See Consolidated Staicmenn of Capitahzationi:
Common sharcowncrs'invrstment...
$ 607.5N3 $ 607.355
' Subsidiary preferred stock not mandatorily redeemahic.
59.963 54.963 Long-term debt, net..
457.520 362.564 1.125.une 1.029.hh2 Current liabilities:
Current matuntics of long-term debt..
11.528 67.626
. Variable rate demand bonds.
5A975 56.975 Short-term debt.....
123.095 102.779 Accounts payable and accruals....
91.175 100.4k6 Accrued payroll and vacanon.
16.030 14.500 Accrued encome taxes,
412 4.669
. Acerued interest.
8.229 9.085 Other.
J1.72H 45.218
_ 339.172 407.338
. Other credits:
Accumulated deferred income tases.....
253.519 245.6b6 i
l'
' Accumulated deferred mvestment tax credits.
35.0."
36.931 i
Accrued environmental remediauon costs.
9.23N 74.075 Delerred credits and other.
99.773 106.619 397.5e9 463.311 Commitments and conungencies (Note 11)
J
' TOTAL CAPITALIZATION AND LI ABILITIES.
$1AIJt07
$1.900.531 l
The accompanying notes are an interral part of the consolidat-d knancia) statements.
31
]
______.u.
WPL HOLDINGS, INC, CONSOLII)ATED STAT 131ENTS OF CASil FLOWS Tear Ended ikccmher 31.
tw7 1%
1**5 (in thousandn)
Ccsh flows generated from (used for) operating actisities:
Net income....
$ 61,254 5 71,908 5 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 af 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)
I nventories..............
(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 Ccsh Rows generated from (used for) financing actisities:
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 t1.367) 941 Net cash from (used for) financing activities..
(2,107)
(72.399)
(30.980)
Ccsh flows generated from (used for) insesting actiiities:
Proceeds from sale of other property and equipment.
9,700 36.264 (116.457)
(120,732)
(99,746)
Additions to utility plant. excluding AFUDC.
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)
N1t increase (decrease) in cash and equivalents.
2,917 (316) 4.113 Cash and equitaients at beginning of year..
11.070 11.386 7.273
$ 13.987 5 11.070
$ 11.386 Ccsh and equivalents at end of year.
S:pplemental disclosures of cash flow information:
Ccsh paid during the 3 ear:
S 42,706 5 35.855 5 39.984 Interest on debt.
$ 3.310
- 5. 3.310 5 3.310 Preferred stock dividends of subsidiary
. $ 23.662
$ 39,795 5 29,499 Inecme taxes..
The accompanying notes are an integral part of the consolidated fmancial statements.
32
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION j
December 31.
t 1#47
- 199t, 1
(in thousands rscept for share data)
.bareeweers' latestment:
100.000.000 shares. issued and outstanding -
5 30M 5 308 n stock 5.01 par value, authorized 344.392 303.M56 4.593 cnd 30.773.735 shares, respectively...
302.Mx3 303.191 ni paid-in capital.
Ml7.5M3 607.355 t;d cirnings,,..
stock:
d value sin Power and Light Company -
3.750.000 shares. maximum aggregate state ul;tive, r.cithout par value. authorized
50,000.000:eferred stock without mandatory redemption. $100 stated value -
9.997 9.997 7,491 7,491 4.50% series 99.970 shares outstanding.
6.44N 6.49E 4.80% series.74.912 shares outstanding.
2.9 %
2.996 4.96% series. 64,979 shares outstanding...
4.40% series. 29.957 shares outstanding....
2,995 2.995
- 15. INN) 15.(XK) 4.76% series. 29.947 shares outstanding.
6.20% series. 150.000 shares outstandmg.....
14.986 14.986 emulative, without par value. 525 stated value -
59.463 59.963 6.50% series. 599,460 shares outstanding.....
rm debt:
msin Power and Light Company -
K.N99 8399
)
it mortgage bonds:
8.51H6 E.5(Kr Senes L, 6.25%, due 1998...................................
2014 (3.80% at 12/ 31/97).......
14.MHi 14.600 j
' 1984 Serie= A. variable rate, duc 1988 Series A. variable rate, duc 2015 (3.80% at 12/31/97).....
27.tNMI 27.(NKi i
16.tNNI 16.00l>
' 1990 Series V, 9.3% due 2025..........................2015 (5.05% at 12/31/97).......
16.tMMI 16 (KK) 1991 Series A variable rate, duc 2005 (5.05% at 12/31/97)...
1.tMND 1(KXI 1991 Series B, variable rate due N75 875 1991 Series C, variable rate, due 2000 (5.05% at 12/31/97).....
1991 Series D, variable rate. due 2000 (5.05% at 12/31197).
90.tNNI 90.000 1992 Series X.7.75%. due 2004..
62.tNNI 62 (XX) 1992 Series W,8.6%. due 2027..
72,lHM) 72.1XXI 55,ixx) 1992 Series Y, 7.6%. duc 2005..........
IDS.DIMt 1992 Series Z. 6.125%. repaid 1997..
. cbentures. 7%, due 2007.................
421.N74 371.874 multifamily Housing Revenue Bonds issued by various housing and community development ftiend Development Corporation -
36.503 37.445 authorities. duc 2004-2024, 2.00% 7.55%...............
45.10o 45.0h6 ither mongage notes payable, due 1998-2042. 0% - 10.75%..
Hl.Mpu.
E2.531 10.(KNi
't Holdings. Inc. -
24.tNHi 24.(xxt
.%% Senior notes, repaid 1997...,
24.fMN) 34.(KKI
,59% Senior notes, due 2004..
(11.528)
(67.626)
(56.975)
(56.475) ss -
Current maturities........
11.460)
(l.2401 Vtriable rate demand bonds..
457.520 362.564
.'Jn:monized discount und premium. net.
51.125.066 [1.029.hK2 LAL CAPITALIZATION,...
il t
- The accompanying notes are an integral part of the consolidated financ a statemen s.
33
WPL llOLDINGS. INC.
CONSOLIDATED STATEMENTS OF COMMON SilAREOWNERS' INVESTMENT Year Ended I)ecessber 31.
IM7 19 %
1995 _
Ccmmon stock:
(in thousands except for Bilance at t,: pinning of year.
per shast data)
B:lince at end of year...............
308 $
308 308 Additional paid in capital:
308 308 308 B: lance at beginning of year.......................
Other.....................................
303,856 305.223 304,442 Balance at end of year....
hinvested earnings:
536 _ (1.367) _
781 304.392 _303.856 _305.223 B21ance at beginning of year.....
Net income......
303.191 291.939 293.048 Cash dividends ($2.00 per share, $1.97 per share and $194 per shar 61,254 71,908 58.432 respectively)...............
e, Expense of issuing stock and other.......
(61,562)
(60,656)
(59,701)
Balance at end of year.,....
3TAL COMMON S11AREOWNERS' INVESTMENT...................................
160 302.883 _303.191
................. 5607.583 $607.355. _291.939
$597.470
. The accompanying notes are an integral part of the consolidated fin 34 I
WPl. IlOI. DINGS, INC.
SOTES TO CONSOI.lDATI:D FIN ANCI Al. STATEMI:NTS (dollars in millions except as otherwise indicated)
NOTE 1. SUMM ARY 012 SIGNIFICANT ACCOUNTING POI.lCll:N
- a. General The consolidated financial statements include the accounts of WPL 11oldings, Inc. (WPLH) and its consoli-dated subsidiaries (collectively, the Company). WPLil 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 Fas primarily in the state of Wisconsin. WP&L's principal consolidated subsidiary is South lieloit Water. Gas and Electric Co. The Cornpany also has various non-utility subsidiaries uhich are primarily engaged in the environmental and enf ncering service, allordable housing and energy marketing businesses.
i 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 climinated from the consolidated financial statements.
Unconsolidated investments for w hich the Company has at least a 20% interest are pencrally accounted for under the equity method of accounting. These investments are stated at acquisition cost, increased or decreased for the Company's equit) in net income or loss w hich 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 estimatch 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 difTer from those estimates.
- d. Cash and Equivalents The Company considers all short-term liquid investments with a matunty of three months or less to be cash equivalents.
- c. 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 35
Normal repairs maintenance and m nor items of utility plant and other property and equipment are expensed.-
Ordinary utility plant retirements,includi ig remmal costs less salvage value, are charged to accumulated deprecia-tion 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 f rom the accounts and any gain or loss is included in other income and deductions.
' f. Depreciation
-The Compan3 uses'the straight-line method of depreciation. For utility plant, straight-line depicciation is
. computed on the ave. ape bdance of depreciable property at individual straight-line regulatory-approved rates that
- consider the estimated useful life and removal cost or salvage value as follows:
1"I
.L*
1"!
Electric...
3.6%
3.3%
3.3%
- Gas.................
3.H9 3.M 3.7% '
Wa t e r.....................,......
2.7%
2.6% -
2..W Common..
11.99 8.1 %
7.9%
Depreciation expense related to WP&L's share of the decommissioning of the Keuaunce Nuclear Power Plant (Kewaunee) is discussed in Note Ii " Commitments and Contingencies." WP&l. implemented higher depreciation rates efTective January 1.1997.
~
Estimated usefullives related to other property and equipment are from 4 to 12 years for equipment and 31.5 to
- 40jears for buildings.
- g. Nielear' 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 EITects of Certain Types of Regulation." provides that rate-reFulated public utilities. such as WP&L. record certain costs and credits allowed in the ratemaking process in difTerent 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-dow n 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 Fenerally 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 31.149' and 1996. regulatory. created assets included the following:
1 t
IM7 1%
Environmental remediation costs (Note Ill.
$16.3 5 81.4 iTax related....
52.2 57.2 i
-Jurisdictional plant dilTerences 7.9 7.6 Decontamination and decommissioning costs of federal enrichment facilities 5.9 6.1
~Other....
' 9.0 h.6
$91.3 $160.9 36 I
l tof December 31.1997 and 19%. WPAl. had recorded regulatorprelated habihties of $39.6 and 533.9
!cly.'These liabilities are pnmarily tas related.
l.
cno l Company. accrues resenues for senices provided but not yet billed at month-end.
O Teses :
- Company follows the liability method of accounting for deferred income taxes, which requires the tirent of deferred tax assets and liabilities, as' appropriate. for all temporary dilTerences between the tax basis
!and liabilities and.the amounts reported in~ the financial statements using currently enacted tax rates as l Note 6.
letment tax credits are accounted for on a deferred basis and reflected in income ratably over the life of the pility plant.- As part of the alTordable housing business. the Company is eligible to claim alTordable housing iric rehabilitation credits. These tax credits reduce current federal taxes to the extent the Company has ked taxes payable.
- son Sh:res Outstanding 1 iwei hted averaFe common shares outsta' nding used in the calculation of basic carnings per share were -
F
$; 30.789,813 and 30.773.588 for 1997.1996 and 1995. respectively. The common stock shares used for 6 diluted earnings per sharc 'were 30.784,136: 30.793.555 and 30.775.965 for.1997.1996 and 1995, lly; 3
l PROPOSED MERGER OF THE COMPANY hovemberlo.1995. WPLH,' JES Industries Inc. (lES), and Interstate Power Company (IPC) entered in nent and Plan of Merger, as amended (Merger Agreement), providing for: a) IPC becoming a subsidiary of pnd b) the merFer of IES with and into WPLH, which merger will result in the combination of IES and '
ps. single holding company (collectively, the Proposed Merger). The new holding company will be named i Energy Corporation (Merged Company). The Proposed Merger. which will be accounted for as a pooling Mrnd is intended to be tax-free for federal income tax purposes, has been approved by the respective lloards Ers, shneowners, state regulatory agencies and most of the federal agenciei 11 is still subject to appmval by stics and Exchange Commission (SEC). The companies cipect to receive SEC approval in the second L1998.
!ummny below contains selected unaudited pro forma financial data for the year ended Deecrhber 31.1997, sid data should be read in conjunction with'the historical' consolidated financial statements and related hiscf WPLH and in conjunction with the unaudited pro forma combined financial statements and 'related
~
tG Merged Company included elsewhere in this Annual Report. The pro forma combined earning.s per share issu:nce of shares associated with the exchange ratios discussed below.
t t
L 1*ru l'ornia j
% l't31 II:N ll'C
. l*ru I urnia Conibined i As keparted)
( As kepersedi
( As keported Adjust airnis il naudited)
! revenues., s..
pny continuing operations... o.
S: 919.3' S 930.7 5331.8 5118.8 S2,300A S 61.3 5
66.3 5 26.7
^S
-S 154.3.
lG share hom continuing operations lnd. dilutedf.
_ S l.99 5
2.18' S 2.74 S
n.
S 2.02' hecember 31,1997.........
SI.861.8 -
S2.457.2.
5638.7-S tb.01 - 54.951.7 obligations. net at December 31.
t
...g.
' S 526.0 S N82.4
$195.9 5 -
StJ04.3
~
37;
'c
-E' i
]
s
(
Under the terms of the Merger Agreement. the outstandmg shares a f WPLil'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 comerted to 1.14 shares of the Merged Company's common stock and each share of IPC common stock will be comerted to 1.1I shares of the Merged Company's common stock. It is anticipated that the Merged Company will retain WPLil's common share dividend payment level as of the efTectise time of the Proposed Merger. On January 16.1998, the lloard of Directors of WPL11 declared a quarterly dividend of 50.50 per share. This represents an annual rate of 52.00 per share.
IES is a holding company headquartered in Cedar Rapids. Iowa. anc is the parent company of IES Utilities Inc.
(lESU) and IES Diversified inc. (Diversified). lESU supplies electric and gas service to approximately 339,000 and 178,000 customers, respectively, in Iowa. Diversified and its principal subsidiaries are primaril) 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 50.0(KI customers. respectively, in northeast lowa 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 llolding Compan) 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 efTective date of the Proposed Merger. In addition, the non-utility operations of WPLil and IES will be combined shortly after the efTective 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 eperation 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 wit!.
each owner refleeting 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 consolid.aed halance sheets at December 31.1997 and I996.
IM7 IWee Plani Accumulated Accumulated Ownership lascrdce Mw l%nt in Prw+idon Int l%nt in Prn idon for inacres ',
Daec Caparies Mrsicr Deprecensson Cu IP Neder Depreciation Cu IP Coah Columbia Energy 1975 &
Center.
40.2 1978 1.023 5101.4 5 89.2 5 0.8 5161.8 5 86.4 51.6 Ed e*ater Unit 4 63.2 1964 330
$ 1.5 29.5 1.0 50.8 28.0 0.7 F
Edgewater Unit 5 75.0 1985 380 229.4 79.b 0.1 228.8 73.7
0.0 Nuclear
Kewaunee Nuclear power plant 41.0 1974 535 132.0 h6 6 0.3 131.2 80.6 Of Total.
5543 5285.1 5 2.2 5572.6 526s.7 53.1
==
NOTE 4. l'TILITY ACCOl' nth RECEIVAllLE 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 S150.0 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.E3% annual rate during 1997. These costs are recovered in retail utility rates 38
as an operatmp expense. All billmr and colicction f unctions 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 collec 591.0 and 586.5 res;)cctively. During 1997, the monthly proceeds from the sale of accounts receivable averaped
$92.1, compared with Sh6.6 in 1996. As of December 31.1997. the amount of sold receivables subject to recourse was
$8.2.
l l
The Company does not have any significant concentrations of credit risk in the December l
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 Senicing oT Financial Assets and Extinguishment of Liabilities." w hich establishes standards for asset and liability recognitbn when transfers occur. 7his statement, effective January 1,1997, specifies conditions when control has been surrendered which determines if sale treatment of the receivables would be allowed. This s has not had any impact on the Company's financial position or results of operations.
NOTE 5. EMPLOYEE BENEFIT IUNS
- a. Pension Plans WP&L has nonumtributory. defined benefit retirement plans covering substantially all employees. The benefits are based upon years of senice 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 Employe Retirement income Security Act of 1974, as amended (ERISA), and that does not exceed the maximum tax de 7.stible amaunt 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 l#%
Accumulated benefit obligation Vested benefits.
$(173.4) 5(161.0)
Non-vested benefits.
(6.1 )
( 3.3 )
Total...
(179.5)
(l64.3)
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 senice cost.
7.8 3.7 Unrecognized net loss.
0.8 15.0 Prepaid pension costs.
5 35.4 5 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%
39
1he net pen.sion ' cost Ibeneht i recogni/cd in the consolidated statements of income for 1497.1996 and 1995 meluded the following components:
les?
lean t **.A Sen ice cost..
S 4.8 5 5.I
$ 3.9 Interest cost on pro.tected benelit obligation.
13.M 13.6 12.9 Actual return on assets (36.2)
( 25.0)
( 3 !.6)
Amorti/ation and deferrals 15.1 5.5 15.1 Net pension cost (beneht) 5 (2.5)
$ ( 0.8 )
5 0.3 During 1997 %'P&L expensed 51.3 tor an early retirement program for cligible bargaining unit employees.
- h. Other Postretirement lienefits
%'P&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.
%'P&L clected 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 %'P&L. the cost of providing postretirement benehts, including the transition obligation,is being recovered in retail rates under current regulatory practices. %'P&L's policy is to fund the postretiremen: 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:
IW7 1*pn
' Accumulated benefit obligation Retirees.
. 5(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.k Accum91:ited benefit obligation in er.. :ss of plan assets.
(31.0)
(32.8 )
Unrecognized transition obligation 21.0 23.5 Unrecognized prior senice cost.
(0.3)
( 0.3 )
Unrecognized net gain
( H.3)
( 5.0 )
Accrued postretirement benefits liability 5(18.6) S(14.6)
Assumed rate of return on plan assets 4.00%
9.009 l
Discount rate of projected bencht obligation.
7.25%
7.509 Medical cost trend on paid charges:
Initial trend rate N.00%
9.005 Ultimate trend rate.
5.00%
5.004 9*
I I
40 l
l
tet postretirement benefits cost recogni/ed in the consohdaicd statements of income for luv7 dcd the following components:
, pm, and IW7
_I M
_tws gnice cost..
$ 1.M
$ l.8 51.5 Cerest cost on projected benefit obligation 3.3 3.4 3.t.
glua) return on assets
( 1.9)
(1.3)
( 2.1 )
nortization of transition obligation.........
1.5 1.5 1.5 amortization and deferrais 4 0.5 0.3 1.3 Net postrctirement benefits cost,,
$ 5.2 $ 5.7 $ 5.8 cing the assumed health-care cost trend rate by one percentage point in each year would increase t 6 postretirement benefit obligation as of December 31.1997 by $2.7 and the aggregate of the service a
{
6 components of the net periodic postretirement benefit cost for the year by 50.4.
- 1997. WP&L expensed $1.7 for an early retirement program for cligible bargaininF unit employees.
rm Egrity incentite Plan
) has a long-term equity incentive plan which permits the grant of non-qualified stock options inc as, restricted stock, performance shares and performance units to key employees. As of December 31 Ion-qualified stock options and equivalent performanec units had been granted to key employees T ember of shares of common stock that may be issued under the plan may not exceed one mill ete become exercisable after three years. Options outstanding will expire no later than 10 years after t The first options were granted in 1995 and will become exercisable in January 1998. No options 3xercised to date. The options granted and the value of those options using the Black.Scholes model i sw7 im sws ions granted.......................
77.650 72.250 41.900 ighted average Black-Scholes value of o tiility..........................ptions.
52.15
$2.23
$2.71 0.15 0.16 0.16
) free interest ra te....................,......
6.13%
5.26% -
7.h4%
=cted life...................................
3 years 3 years 3 years Dud dividend rate..........................
7.0%
7.0%
70%
follows APB Opinion 25, Accounting for Stock issued to Employees." to account for stock options G cost is secognized because the option exercise price is equal to the market price of the underl M rant. Had compensation cost for the plan been determined based on the Black.Scholes value at the F
7er awards as prescribed by SFAS No.123 Accounting for Stock-Based Compensation." p eJnings per share would have been:
2 O
O forma net income.......
forma etrnings per share (basic and diluted)
$61.1 571.7 558.3 51.98 52.33 S t.90
' rmance units granted under the plan to date are expensed o o
ver the three-year vesting period based on widend r:te. In 1997.1996 and 1995 WPLH recognized expense of 50.4. 50.2 and 501 respectively.
m 41
_. _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - ^
cNOTE 6. INCOMI:TANI:S -
' The following table reconciles the statutors federalincome tax rate to the efTective income tax rate on continuiny operations:
sw?
1%.
im Statutory federal income tax rate 35.0%
35.0%
35.0%
State income taxes, net of federal benefit 7.0 6.8 6.0 lavestment tax credits restored..
(2.0)
( 1.6)
(1.7)
Amortization of excess deferred taxes.
(I.6)
( 1.4)
( 1.5)
AfTordable 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 )
Efrective 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:
_l#97
_I M.
_I M
. Cu rre n t fede ral........................................... $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)
' Afrordable 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:
l*97 1%.
- Property related.....
S295.4 5282.0 Investment tax credit related.....
(23.5) (19.9)
Decommissioning related.........
(16.0)
( 14.5)
Other..........
J.y (1.9)
. S253.5. S245.7 NOTE 7. SHORT TERM DEllT AND LINES OF CREDIT
'WPLH and its subsidiaries maintain committed bank lines of credit, most of u hich are at the bank prime rates, to obtain short term borrowing ficxibility, including pledging lines of credit as security for an) commercial paper '
l
- outstandmp. Amounts available under these lines of credit totaled 51"'0.0 as of December 31. 1997. Information regarding short-term debt and lmes of credit is as followx se tw pm As of year end -
Lines of credit borrowings..
- Commercial paper outstanding 5 81.0 5 59.5 5 56.5 Notes payable outstanding.............
5 42.1 5 43.3 5 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 5117.0 Average amount of 6hort term debt (based on daily outstanding balances) 5 94.5
.5 60.8 5 6H.7
....~..-.......
- AveraFe interest rate on short term debt 5.65%
5.72 %
5.95%
. NOTE M.. DERIVATIVE FINANCIAL INSTRUMENTS.
l The Company has only limited involvement with derivative financial instruments and does not i se them for
- trading purposes. They are used to manage well-delined interest rate and commodity price risks.
laterest rate swaps and forward contracts: WP&L enters into interest rate swap agreements to reduce the impact of changes in intercht rate > on its floating-rate debt and fees associated with the sale ofits accounts reecivable.
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 reportinF ate.The average pay and receive d
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 contraetc however, the total cost to WP&L if it had terminated all of the agreements existing at December 31,1997 would have been 50.2.
In 1995, WP&L entered into an interest rate forward contract related to the amicipated issuance of $60.0 of l
1:ng-term debt securities. The securities were not issued in 1996 and the forward contract was closed ut.ich resulted in a Fain of $0.8 to WP&L. The pain was deferred and was recognited 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 hedpc interest rate risk related to the anticipated issuance of $105.0 oflong-term debt securities. The securities were issued in. lune 1997 and the forward contract was settled which resulted in a cash payment of 53.K 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.
l Gas Swaps: WP&L uses pas commodity swaps to reduce the impact of price fluctuations on pas parchased 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.h million
-dekatherms. Variances between underlyinF commodity prices and financial contracts on these apreements are
. deferred and recognized as increases or decreases in the cost of as at the time the storage pas is. sold. It is no:
F WP&L's intent to terminate these contracts: however, the total cost to WP&L il it had terminated all of the
' aFtrements existing at December 31.1997 would have been a pain of 51.0.
. Other: The Comp.my's non-utility energy marketing business periodically uses commodit) futures contracts.
l options and swaps to hedpc the impact of natural pas and electric power price fluctu:r ons on its purchase and sale commitments. Gains and losses on these instruments are deferred and recognized in neome as adjustments to the costs of energy when the related transaction being hedged is finali/ed. At December 31.1997 and 1996, the
' instruments outstanding were immaterial.
I 43 l-.
i o
l
. NOTI: 9. l' AIR VAI.I'l: Ol' l'IN ANCI Al. INSTRIIMENTS
' The folhming methods and' assumptions sere ~ used to estimate the fair value of each class of linancial instruments:
Current Assets and Current I.iabilitics - The carrying amount approximates fair value due to the short maturities of these financial mstruments.
l 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 j
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 WPal.- liased on quoted market prices for the same or similar issues.
I;mg-Term Debt - liased uptm the market yield of similar securitic> and quoted market prices on the current rates for debt of the same remaining maturities.
The estimated fair values of linancial instruments at L)ecember 31.1997 and 199&
Iw7 l#%
Carrying I air Carryine l' air j
Value Value Valoc Value i
I Nuclear decommissioning trust funds..
$112.4 $112.4 $ 90.7 $ 90.7 I
Preferred stock.
60.0
$1.7 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 pains or losses related to the difference between the carrying amount and the fair value of WP&L's nuclear decommissioning trust lunds and long-term debt may not be realized by the Company's sharcowners.
NOTE 10. CAPITAIJZATION
- c. Ocmmon Sharconners' Imestment During 1997. l996 and IW5. the Compan,s did not issue any new shares of common stock through either its Sharcowner Direct Plan or 401(kl Savings Plan.
in February 1989, the llvard of Directors of the Company declared a dividend distribution of one common stock
. purchase right (r ght) on each outstanding share of the Company's common stock. Each right would initiall,s entitle
. shareowners to buy one-half of one share of the Company's common stock at an exercise price of 560.00 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 efTeetive April 29.19-)7 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 Compan) that are in escess 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'T, of total capitahzation, llased on a 13-month average for 1997. WP&L's common equity ratio was 52.56%
- b. lang-Term Debt Substantially all of WP&L's utihty plant is secured by iti. first mortgage bonds. In addition, the Company's long-term debt includes unsecured debentures, notes payable ar.d revenue bonds related to its afTordable housing 44 L
l.
properties. Current matunties of long. term debt of the Company are as follows: SI1.5 m IWh. 54.5 in lW9. 54.1 in
~2(XX). 52.6 in 2001 and $2.7 in 2002.
In June 1497 WP&L issued $105.0 of 7% Debentures due. lune 15.2007 Approximately 550.0 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 llonds. Series Z. 6.125%. due July 15. 1997.
NOTE 11. COMMITMENTS AND CONTINGENCIES
- c. 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 payment > 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 2(XXI, 59.0 in 2001 and $4.0 in 2002.
- h. Purchased Power and Gas Under firm purchased power and gas contracts, the Company is obligated as follows:
Po=n Gas 1998.................
$72.0 $37.0 1999.........
76.3 32.7 L
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 1
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 thesc 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 ofits liability at each cf the 14 sites. This i
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 59.2. 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 ahernative to excavation pmcesses at two sites. The decline in the liability of approximately 565.0 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 clor out letter from the DNR. bringing the total number of sites with close out letterr. to four.
]
The cleanup estimate discussed above includes the costs of feasibility studies. data collection, soil and groundwater remediation activities, and ongoing monitorinF 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 msking treatment approved by the PSCW. the costs expended in the environmental remediation of these sites, net of any I
i l
45 i
l l
l L-__-_.__-_-_---___________-______
insurance proceeds, are deferred and collected from gas customers mer a five year period after aew rates are implemented. Although no assurance can be phen. management currently believes future costs will also be recovered in rates. The associated regulatory asset is $16.3 a* of Decemt.,: 31.1997.
- d. Spent Nuclear Fuel and Decommissioning Costs
-The current cost of WP&L's share of the estimated costs to decommi.ssion Kewaunce ($181.3). assuming early retirement, exceeds the trust assets at December 31.1997 (Sil2.4) by 568.9. 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 amoants 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 contnbution 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 5112.4 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 suflicient 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:
1"2 1"t Original cost of nuclear fuel.......
5169.6 5166.4 Less - Accumulated amortization 150.5 147.0 Nuclear fuel, net.
S 19.1 5 19.4
- e. Nrelear Performance WP&L has 'a 41% ownership interest in Kewaunee. Kewaunee resumed operations on June 12.1997 after being.
. out of service since September 21.1906 for refueling and repair.s to the steam pencrator tubes. The ioint owners continue to analyze and discuss other options related to the future of Kewaunce, including various ownership transfer alternatives.
- f. N: clear Insurance The Price Ander. son 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 Kewaunce,is subject to an overall assessment of approximately $32.5 per incident, not to exceed 54.1 payable in any given year.
Through its membership in Nuclear Mutual Limited and Nuclear Llectric Insurance Limited. WP&L has obtained property damage and decontamination insurance totaling St.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.
46 1
- g. Planned Capitel l.'spenditures Plans for the construction and financing of future additions to utihty plant can be found elsew here in this report under " Management's Discussion and Analysis of 1 inancial Condition and licsults of Operations."
- h. lean Commitments As of December 31. 1997, ilDC had extended commitments to proside 515.7 in nonrecourse, fixed rate, permanent financing to developers which are secured by allordable housing properties The Company anticipates other lenders will ultimately finance these properties.
NOTE 12. DISCONTINUE:D OPEltATIONS The Company's financial statements refleet 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 57.7. 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 1990, 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 taxc> for the discontinued operations for the time period.s 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.
47
NOTE 13. SEGMENT INFORM ATION The following table sets forth certain information relating to the Company's consolidated cominuing operations:
sw?
- =..
iws
. Operation information:
Customer revenues --
Electric - utility S 634.1 5 589.5 $ 546.3 Gas - utility....
155.9 165.6 139.2 78.1 84.8 88.6 Environmental and engineering servicca
. Ot her...................
51.1 92.9 33.2 Operating income (loss) -
Electric - utility.
$ 125.9 $ 136.3 5 134.2 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 t.ssets, including allocated common plant at December 31 -
Electric - utility S t.245.2 51.225.3 51.226.8 Gas - utility.....
193.ie 262.1 250.6
' Environmental and engineering services....................
26.6 33.5 38.1 Ot her '............
3%.4 379.6
-356.9 Other inforrnation:
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 5 71.4 Gas - utility......
12.3 9.8 9.6 Other.......
7.8 6.4 5.3
- (a) ExcludeIthe effects of afTordabic housing and historical tax credits of 56.2,55.9 and 55.0 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 wholer. ale buyers. This joint venturc, in which the Company has a 50% interest, is named t
Cargill-Alliant The joint venture is accounted for using the equit) method. As of December 31.1997, the carrying amount of the investment was 54.7.
NOTE 15. SUBSEQUENT EVENT (Unaudited) ln April 1998, the Proposed Merger involving WPLH, IES and IPC was consummated and the Company was
. renamed Interstate Energy Corraration. For information regarding the terms of the Proposed Merger and selected unaudned pro forma financial data of Intextate Energy Corporation, see Note 2. The authorized common stock of
' Interstate Energy Corporation was increased from 100 million to 200 million shares at the effective date of the merger.
l 48 1
jo I
WPL HOLDINGS, INC.
IES INDUSTRIES INC.
INTERSTATE POWER COMPANY (Merged as Interstate Energy Corporation, doing business as Alliant Corporation)
/
\\
1997 SELECTED FINA CIAL AND '
i
~ OPERATING STAT \\, TICS Note: Certain reclassifications have been made to the 1993-1996 figures to conform with the 1997 presentation. In addition, other reclassifications have been made for consistency purposes across the three companics.
49
Wl'l. IlOI. DINGS. INC.
SI:1.1:(TI:D l'IN ANCI Al. AND Ol*l: RATING STATISTICS l'inancial information l
Iw7 two IMS IwJ tw3 l
IDollars in simusands escept int per sharc data) 3 Income Statement Data:
.. S 919,255 $ 932.844 5 807.255 $ 795.717 $ 738.604 Operating revenues Operating expenses 79tu 48 789.794 660.702 666,537 610.660 Operating income.
128.s>07 143.050 146.553 129.180 127.944 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 ('(XXh) 30.782 30.790 30.774 30,671 29.681 Return on overage coramon equity 10.1%
i 1.9%
9.8%
11.1%
11.7 %
Per Share Data:
income from continuing operations...
S 1.99 2.38 5 2.33 $
.2.17 2.15 Discontinued operations
- S (0.04 ) 5 (0.43). $
(0.04 ) 5' (0.04 )
Earnings per average common. share (hasic and diluted)
S 1.99 $
2.34 $
1.90 5 2.13 S 2.11 Dividends declared per common share..
S 2.00 5 1.97 5 1.94 5 1.92 5 1.90 Book 'value at year-end........
S 19.73 5 19.73 5 19.41 19.43 $
19.15-
- Market value at year-end S
33.13 $
28.13 $
30.03. 5 27.38 5 32.88 Other Selected Financial Data:
Construction and acquisition expenditures.
S 129,833 5 144 205 5 129.698 $ 144.072 $ 171.134 Total assets at year-end................. $1.861.807 S1.900,531 51,872,414 51.805,901 S1,761,899 Long-term obligations. net...
S 526.023 $ 487.165 $ 490.734 5 507,917 5 482.862 Times interest earned before income taxes..
3.19X 3.82X 3.55X 3.81X 3.45X Capitalization Ratios:
Common stock.
54%
$9%
55 %
54 %
54 %
Preferred and preference stock...
5%
6%
5%
5%
6%
' Long-term debt.
41%
35%
40%
41%
40%
"lotal 100%
1005 100%
100%
100%
50
WPl. IlOI. DINGS. INC.
. SI:1.lTTI:D l'INANCl41. AND OPI:R ATING STATISTICS 1:lectric Operating Information (l'tility Onl )
3 I
IW7 Iwo IWS lWJ IW.1 Operating Hetenues (*lHNh):
l
' Residential....................
... 5199.n33 $201.690 $ 199.850 $194.242 $ 184.176 L
Commercial......
107.132 105.319 102.129 101.382 95.977 I ndust rial................
152.073 143.734 140.562 140.487 132.903 l
l Total from ultimate customers......
45X.838 450.743 442.541 436.111 413.056 l-
- Sales for resale...
160,917 131.836 97.350 86,400 78.955 l
Other...
14.3MM 6.903 6.433
-9.236 11.176 Total....
S634.143 $589.482 $546.324 $531.747 $503.187 t
t Els. ric Sales ('lWHN MWil):
[
Residential 2.974 2.980 2.938 2.777 2.751 i
Commercial.........
I.N78 1.814 1.773 1,688 1.630
- I nd u st rial..............
4.256 3.986 3.873 3.765 3.540
' Total from ultimate customers.
9.10N 8.780 8.584 8.230 7.921 Sales for resale...
5.h4 5.246 3.109 2.574 2.388 Other.........
60 57 54 55 52 l
. Total..
.........,, 14.992 14.083 11.747 10.859 10.361
' Cut:mers (End of Period):
l Residential.......
343.637 336.933 329,643 322.924 316.870 Cc m me rcial................
46.823 45.669 44.730 43.793 42.884 Industrial.....
M55 815 795 776 714 Other 1.N75 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
".019
- Firm purchases and sale' (net) 145 68 57 40 83 s
L Total.......
2.4N2 2.368 2.233 2.233 2.102 Maimum peak hour demand (MW)
53 2.124 0.107 2.002 1.971
. Sources of electric energy ('000s MWH):
j Steam -
8.587 8.687 8.C3 7.821 7.616 Nuclear...
970 1.301 1.55 5 1.625 1.565 Hydroelectric 234 244 222' 228 276 Purchases..
5.744 4.494 2.227 1.786 1.488 L-Other...
121 59 86 24 6
l l
- Total.
15.656 14.785 12.413 11.484 10.951 4
Cooling degree dap.
369 408 982 637 630 l'
Resenue per I;Wil from ultimate customer: (in cents)..
5.04 5.13 5.16 5.30 5.21 51' 1
i g
i L___.__.
M l'I. IlOI. DINGS. INC.
SI'.I.lXTED l'INANCI Al. AND OPI:R ATING STATISTICS G:s Operating Information (titility Onl )
3 i
D D
D 5
D 1
Operating Retenues ('(MNis):
Residential.......
S 84,513 $ 90,382 $ 70,382 5 71,555 $ 7i,632 i
45,456 46,703 35,411 38,516 31 993 Commercial.,,
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......
5155.883 $165.627 $139.165 $139,646 5137.270 Gn Sales ('INNis Dekatherms):
12.770 14.297 12,690 11,956 12.001 Residential.,.
Commercial.
8.592 9.167 8,245 8.128 7,994 Industrial 1.714 1.997 2,144 3,113 3,497 l
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 (Escluding Transportation and Other):
Residential..
137,827 133.580 129,576 124,938 120,829 16,653 16,083 15,724 15.270 14,826
. Commercial..........
Industrial 488 529 566 561 549 Total....
154.968 150.192 145,866 140.769 136.204 Other Selceted Gas Data:
lleating degree days............,
7.350 8.124 7,431 7,170 7.351 Revenue per dekatherm sold (excluding transportation and other).,
S 6.00 5.83 5 5.36 5 5.72 5 5.65 Purchased gas costs per dekatherm sold (excluding transportation and other)
S 4.30 5 4.12 5 3.64 5 3.82 5 3.85 52
ll;S INDl ?STRil:S INC.
SI:1.l:CII:D l'INANCI Al. AND OPI:R ATING STATISTICS l'irancial Information sw im sws swa in.1 (lauHars in thousands nrept for prr sharr datal Income Statement Data:
Operating revenues....
.. $ 930.699 5 973.912 5 851.010 5 785.864 5 801.266 Operating cApenses.............
763.562 807.346 697.676 637.931 649.997 Operating income................
167.137 166.566 153.334 147.933 151.260 Net income..........
66.337 -
60.907 64.176 66.818 67.438-Ccmmon Stock Data:
Weighted average common shares outstanding
( '000s )...........
.M.3NG 29.861 29.202 28.560 27.764 Retum on average common equity (l)..
9.2%
9.8%
10.7 %
i 1.5%
12.9%
Per Sharc Data:
Earnings per average common sharc (hasic and diluted)......
$2.I8 52.04
$2.20
$2.34 S2.45-Dividends declared per common share...
$2.10
$2.10
$2.10
$2.10
$2.10 Hook value at year-end(I)..
$26.76
$20.84 520.75
$20.56
$20.21 Market value at year-end....
$36.MI -
$29.88
$26.50
$25.25 531.25 Other Selected l'inancial Data:
. Construction and acquisition expenditures.... $ 171.125 5 238.378 $ 218.099 5 206.548 5 169.017 Total assets at year-end(I )........
$2.457.219. 52.125 562 51.985.591 $1.849.093 $ 1.699.819
~
- Long-term obligations. net
- c.,
$ M82.421 5 744.298 5 654.090 5 623.359 5 574.488 Times interest earned before income taxes..
2.66X 2.99X 3.12X 3.38X 3.38X Capitali/ation Ratios:
' Common stock (l).
49%
47%
49%
50%
51%
Preferred and preference stock...........
1%
1%
2%
2%
2%
Long term debt.....
50%
52%
49%
48%
47%
Total...
IIMi%
1(N)%
1(Kl%
100%
100%
==
(1) in the third quarter of 1997. IES Industries Inc. began adjusting the carr. sing value of its investment in McLeodUSA inc. 'to its estimated fair value, pursuant to the applicable accounting rules. At December 31
.1997. the adjustment reflected an unrealized Fain of approximately 5298 million with a net of tax increase to other common equity of 5174 million.
Jr 53 I
p
IES INDUSTRIES INC.
SELECTED FINANCI AL AND OPERATING STATISTICS Electric Operating Information (Ulilit) Only) lw?
- ivw, tws swa t w.4 Operating Reienues (*(HHis):
Residential...
$227.446 $213.838 $217.351 $200,686 $206.562 Commercial.
162,626 153.163 150,722 146.119 145,898 Industrial 177.890 160.477 148.529 143.965 137.595 Total from ultimate customers 568,012 527.478 516.602 490.770 490.0$$
Sales for resale 25,719 37,384 35.356 37.271 49.654 Other 10.539 9.411 8.513 9.286 10.812 Total..
5604.270 $574.273 $560.471 $537.327 $550.521 Electric Sales ('0(Hh MWil):
Residential.
2,682 2.642 2.690 2.494 2,528 Commercial..
2,378 2.315 2.296 2,148 2,079 Industrial 4.743 4.436 4.248 4.015 3.674 Total from ultimate customers 9,803 9.393 9.234 8.657 8.281 Sale > for resale...
794 1,746 1.586 1,705 2,629 Other 43 46 50 67 64 Total..
10.640 11.185 10.870 10.429 10.974 Customers (End of Period):
Residential.
288,387 286.315 284.154 281,653 279,187 Commercial.
48,962 48.593 48.196 47,595 46.957 Industrial 711 703 695 706 677 Other 442 437 444 451 444 Total.
338.502 336.048 333.489 330.405 327.265 Other Selected Electric Data:
System capacity at time of peak demand (MW):
Compan3-owned.
1.892 1.864 1,873 1.741 1.734 Firm purchases and sales (net).
232 232 207 280 24b Total.
2.124 2.096 2.080 2.t)21 1.982 Maximum peak hour demand (MW) 1.854 1.E33 1.82.!
1.780 1.716 Sources of electric energy ('00% MWH ;:
Steam..
5.499 4.936 5.759 5.509 5.349 Nuclear
'9N 2.753 2.611 2.876 2.265 Hydroelectric.
H 7
h 8
7 Purchases.
2.789 4.177 3.013 2.647 3.949 Other 156 37 16 14 h
Total.
I1.356 11.910 11.407 _ 11.054 11.57h Cooling degree days 858 766 1.093 846 765 Revenue per KWH from ultimate customers (in cents).
5.74 5.62 5.59 5.67 5.92 54
II'S INI)l'STRll:S INC.
SI:1.l:CTI:D l'IN ANCI Al. AND Ol'l:R ATING STATISTICS G:s Operating Information (Utility Onl )
3 IW7 19 %
IWS IW4 IW3 Operating Retenues (1Nh):
Residential.....
$110.663 $ 97.708 5 84,562 5 82.795 S 90.462 Commercial...
54.383 46.966 40.390 40.912 45.528 I nd u st rial...............
13.961 12.256 8.790 12.515 15.593 Transportation and other.
4.510 3.934 3.550 2.811 2.735 Tot al...............
S183.517 $ 160.864 5137.292 $ l 39.033 $154.318 G:s Snics (1MNis DeLutherms):
Residential....
16.317 17.680 16.302 15.766 16.971 Com mercial.............
9.602 10.323 9.534 9.298 10,133 L 1ndustrial.........
3,318 3.796 3.098 4.010 4.618
' Transportation and other 10,321 10.341 10.871 H.901 7.284
.m Total ;......
39.558 42.140 39.805 37.975 39.006
.Cotoniers at End of Period (Escluding Transportation and Other):
Residential............
155.859 154.457 152.873 151,367 152,472 Commercial..
21,431 21.364 21.193 21.053 17.757 Industrial...
399 417 404 409 490 Total....
177.689 176.238 174.470 172.829 170.719 Other Selected Gas Data:
Heating degree days....
6,685 7.204 6.686 6.380 6.816-Revenue per dekatherm sold texcluding J
transportation and other)..
S 6.12 $
4.94 5
4.62 5 4.69 5 4.78 Purchased gas cost per dekatherm sold (excluding 3.44 l
Transportation and other) 4.33 5 3.27 5 3.15 5 3.28 5 l
l 55 I
4 1
I r
1-J L.
__-___________________a
INTI:RSTATI' l' owl:R COMI'ANY SI:1.lXTI:D l'INANCI AI. AND OPI: RATING STATISTICS f.
l'inzncial Information.
IW7 Im, tw5 iw.I lw.4 e
(llollars in thousands encope for per share dala) income Stancment Data:
Operating revenuca.
5331.847 5326.084 5318,542 S307,650 S309.468 i
Operating expenses 276.347 265.755 250.630 264.215 265.677 i
Operating income......
55.54HI 60.329
- 67.912 43,435 43.791 Net income.,....
26.649 25.860 25,198 18.213 16.126
- Ccmmon Stock Data:
Weighted average common shares outstanding f(KNh) 9.725 9.594 9.564 9.479 9.316 Return on average common equity 12.7%
12.8%
12.9%
9.5%
8.5%
l Per Share Data:
Earning, per average common share (hasic and
. diluted)..
52.74 S2.69 52.63 51.92 S1.73
' Dividends declared per common share S2.08 S2.08 52.08 52.08
$2.08
- Book value at year-end.
$22.09 521.31 520.68
$20.13 S20.21 Market value at year-end.
S37.44
$29.00 533.13 S23.75' S30.13 Other Scicesed I'inancial Data:
Construction and acquisition expenditures S 28.8HN S 30.997 5 28.579 5 41.098 5 34.117 Total assets at year-end.,..
S63N.749 5639.200 5634.316 5628.845 5604.361 l
Long term obligations, net.......
5195.863 5212.892 5212.931 5226.982 5227.024 i
Times interest carned before income taxes.
4.00X 3.82X 3.75X 2.74X 2.70X l
Capitalization Ratios:
Common stock.......
52%
50%
47 %
46%
44 %
i Preferred and preference stock...
N%
8%
8%
8%
8%
l Long-term debt 40%
42%
45%
46%
48%
l Total 100%
100%
100%
100%
100%
5<,
l i
INTERSTATI' TOWl'.R CONil'AM SEl.ECTED FINANCIAL, AND Ol'ER ATING STATISTICS Electric Operating Information 1
Iw?
t w.,
tws swa sw3 Opeuting Resenues ('tMMh):
Residential.,..........
S 82.078 $ 79.121 5 80.870 $ 74.289 $ 72.432 Ccmmercia!........
50.550 49.998 50.038 48.828 51.101 Industrial..............
125.949 124.515 123.620 116.645 111.540 Total from ultimate customers.
258.577 253.634 254.528 239,762 235.073 Sales for resale..
5,710 12.145-11.020 13.168 10.381 Other.........
13.053 10.841 9.325 8.800 10.305 Tot al.............................
$277.340 $276.620 $274.873 $261.730 $255.759 j
i Electric Sales (*(NNb MWH):
Residential.....
s 1.043 1.046 1,077 1.005 1.000 l
- Commercial..............
740 749 747 742 782 Industrial.........
3.321, 3.244 3.239 3.090 2.927 Total from uhimate customer (.....
5.104 5.039 5.063 4.F37 4.709 Sales for resale............
150 467 306 478
~
{
\\'
311 Ot her..,,.................
58 58 59 60 62 Total.
5.312 5.564 5.428 5.375 5.082 Customers (End of Period):
Residen tial.....................
132.580 131.837 130.643 129.289 128.388 Ccmmercial...
31.174 31.164 30.860 30.829 30.650 lodustrial 989 954 928 880 795 Other.................
964 950
%3 985 937-Total.,..,............
165.707 164.905 163.394 461.983 160.770 Other Selected Electric Data:
System capacity at time of peak demand (MW):
Company-owned........
al.028 1.028 1.028 1.026 1.023 Firm purchases and sales (net).
283 283 283 283 273 Total.............
1.311 1.311 __ l.311 l.309 1.296 Maximum peak hour demand (MW).... :.
- 938 996 1.011 932 927
- S:urces of electric energy COO (h MWH):
i
)
Steam.........
3.337 3.391 3.524 3.409 3.28 r Purchases....
2.127 2.224 2.176 2.021 1.944 i K Other;.......
46 45 17 15 16
)
i.
Total..,..
5.510 5.660 5.717 5.445 5.242 Cooling degree days.
426 757 1.065 826 701 Revenue per KWH from ultimate customers
- (in cents),........
5.07 5.03 5.03 4.96 4.99 l
I i
57 l
l i
w___-_-_.-_-___.---..___
i j
INTI:RSTATI: l' owl:R CON 11*ANY SI:1.l:CTI:D l'INANCIAl, AND Ol'ERATING STATISTICS Grs Operating information twi
- iwe, sus swa tw3 Oper.-ting Retenuch (*tHHht:
Residential.
530.366 $28.178 524.817 525.344 528,791 Commercial.
16.019 14.518 12.150 12.654 14.429 Industrial..
5.054 3.903 3.688 5.283 6.235 Transportation and other 3.nhN 2.865 1014 2.639 4.254 l
Total........
$54,507 540.464 543.669 545.920 $$3.709
- Gas Sales ('IMMis Dekatherms):
Residential..
4.807 5.188 4.835 4.725 4.957 i
m Commercial.......
2.948 3.123 2.820 2.793 2.911 Industrial...........
1.1M5 1.063 1.139 1.586 1.557
. Transportation and other 28 Mu3 26.332.
26.526 24.550 24.584 l
Total..
37.743 35.706 35.320 33.654 34.009 Cast:mers at End of Period (Escluding Transportation and Other):
l Residential.
44,270 43.882 43.556 43.323 42.915 I
Commercial.
5.232 5.211 5.178 5.173 5.088 I nd ust rial..........
76 76 89 88 92 Tot al.......
49.57H 49.169 48.823 48.584-48.095 Other Selected Gas ihts:
Heating degree days..
En97 8.083 7,452 7.i l 5 7.466 Revenue per dekatherm sold (escluding transportation and other).
55.75 54.97 54.62 54.75 55.25 Purchased gas costs per dekatherm sold (escluding transportation and other).
S3.73 53.37 52.94
$3.39 54.06 j
SF 1
1 i
)
4
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 (Merped Company) combine the historical consolidated balance sheets and statemer.ts ofincome of IES Industries Inc. (IES). Interstate Power Company (IPC) and WPL Holdings, Inc. (WPLll) as adjusted b) various pro forma adjustments identified in Note 1. All material adjustments known at this time w hich impact the reporting permds show n have been included.
The combination of WPtil. IES and IPC is referred to herein as the " Merger."
These pro forma combined financial statements set forah 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 indicati,e of the financial position or operating results that would haie occurred had the Merger been consummated on the date, or at the beginning of the periods, for which the Merger is being giien effect nor is it necessaril indicatiie of future operating results or financial position.
3 9
i INTERSTATE ENERGY CORPORATION
(*NAl'DITED PRO FORN1A CON 1HINED HAI.ANCI: Sill:l:T Decemi er 31,1997 (in thousands)
PrnIarma Wl*l.Il llA IPC Adjuumenn l're I ntma i Am keparsed) ( As Neported) ( As Reponedl (M Note il remiliined 3Sgg.y.g UTILITY PLANT l
Liectrie.
51,790.641 52.072.k66 Sh69.715 5
54.733.222 i
Ga.
237.k 56 I E7.09h 7(1.201 495.155 Other..
220.679 145.716 306.395
)
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
{
Constructioti mork in progree.
42.312 38.923 5,276 h6.5 l l i
Nuclear fuel 7 net.,
19.046 36.731 55.777 Net utility ' lant...............
l.244. Huh 1.366.073 494.597 3.105.478 l
p OTHER PROPERTY, PLANT ANI) 1.QUIPMENT - NET AND OTHI:R j
IWVLSTMENTS.
139.54K 319.657 4.746 (1251 463.x26 CURRENT ASSETS i
Cash and cash equivalents.
13.987 10.143 2.N97 302 27.329 l
Accounts receivable - net,.,
78.082 52.295 27.061 12.489 169.927 l
fossil fuel inventories, at averape cost.
lx.857 10.579 11.220 40.656 l
c Materials and supplics, at average cost 19.274 24.274 6.297 49.k45 Prepa3 ments and other....
42.808 69.920 15.035
( 3.27x !
I 24.4N5 ~
l Total current assets..................
173.008 167.211 62.510 9.513'
.112.242
. EXTERNAL DECOMMISSIONING FUND.
112.356 77.8K2 190.238 INVESTMENT IN MCLEODUSA INC.
326.582 1.440 32N.022 l
DEFERRED Cil ARGES AND OTHER 192.087 199.k l4 75.456 (15.4421 451.915
. TOTAL ASSETS.
51.861.807 52.457.214 563h.749 5 (6.0541 $4.951.721 j
CAPITALIZATION AND LIABILITIES j
CAPITALIZATION I
Common Stock Equits
' Common stock.
5 30x 5
5 34.163 5 (33.70f0 5 765-Other stockholders' equity..,
607.275 H I h.133 1 k I.457 3x.404 -
1.64.*.269 Total common stock equit3....
607.5h3 k1h.133 215.620 4.698 1.64o.034 j
Preferred stock no: mandatorily redeemable.
59.963 18.320 10.819 89.102 Preferred stock mandatory sinking fund..
24.267 24.267 l
Long-term debt - net.
J.
457.520 k45.189 165.194
- I.167.903 Total capitalization..
1.125.006 1.6H1.642 415.900 4.69x 3.227.306 CURRENT Li ABILITIES -
Current maturities, sinking funds. and capital lease 3
obligations.
11.528 13.6h4 6.314 31.526 l
Commercial paper, notes payable and other.
123.095 33.500 156.595 Vanable rate demand bonds..
56.975 56.975 i
- Accounts payable and accruals.
91.175 7h702 13.208 9.549
- 92.634 l
Taxes accrued......
412 62.432 16.014 65 78.923 l
Other accrued liabilities..
55.987 67.174 12.445 d.468) 133.138 l
Total current liabilities.
339.8/3 221.992 bl.481 7.14o 649,791 OTHER LIABILITIES Deferred income taxes....
253.519 372.h37 104.670 73).026 Deferred investment tax credits.
35.039 31.83h 15.985 82.x62 Accrued environmental remediation costs.
9.23b 46.989 5.794 62.021 Capitallease obligations........
23.548 86 -
23.634 Otner liabilities and deferred credith 99.773 7h.373 14.v 33 t 17.F9x i 175.0xl l
1 Total othe'r liabihties 397.569 553.5h5 141.36h tli. w.I 1.074.624
)
TOTAL CAPITALIZATION AND LIABILITIES 51.k61.807 52.457.219 563b.749 i o.0541 54.951.721 See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
2 l
t l
1 1
i l
INTI:RSTATI: 1:NERG) CORPORATION l'NAl'DITl:D PRO FORMA CONIHINI:D STATEMENTS OF INCOME FOR Tile YEAR ENDED DECEMBER 31.1997 (in thousands, except per share amounts)
Pro Forma
% Pl.il ILS lPC Adjustments Pro Forms a b Hepartedi ( As keported) ( As Reporird t (See Nose il Combined Operating Revenues
- Electric utility
$634.143
$604.270
$277.340
$1.515.753 G as u tility.....................
155.883 183.517 54.507 393.907 Ot her..........
129.229 142.912 118.826 390.967 Total operating revenues.
919.255 930.699 331.847 118.826 2.300.627 Operating Expenses.
t Electric and steam production fuels 116.812 1.08.344 55.402 280.558 I
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 Deprecialson and amortization.........
1I!.289 114.122 31,676 245 257.332 Tuxes 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
~ lncome Taxer 28,715 39.662 17,684 86.06)
Preferred Dividends of Sub.sidiaries (Note 2) 3.310 914 2.469 6.693 income from Continuing Operations.
$ 61.254
. $ 66.337 5 26.699
- $ 154.290 1
1 AveraFe Commor Shares Outstanding...
30.782 30.380 9.725 5.323 76.210 Earnings per Share of Common Stocl. from.
Continuing Operations (Basic and diluted).
1.94 2.18 2.74 N/A 2.02 L
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
l l-i 3
l l
L i
l l
l I
j l
u
INTERSTATE 1:NI:RGY CORPORATION l'NAl'DITEl' i'RO FORM A COMHINI:D STATEMENTS OF INCOME FGR Tile YEAR ENDED DI:CEMBER 31.~ 1996 (In thousands. cxcept per sharc amount %)
1*ru I urma
% I'I,Il lib ll*C Adjustments l'au l arma
( As Reported)
( As Reported)
( As Reported)
(Se Nuse 1)
( umbined Operating Revenues Electrie utility
$589,482 5574.273
$276.620 51.440,375
. 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 b4.579 57.560 256.609 Purchased power.
81.108 88.350 61.556 231.014 l
Cost of gas sold....
104.830 217.351 31,617 (l13.474) 240.324
' Other operation................
317.608 212.501 51.707 l 13.474 695.290 Maintenance..
46.492 49.001 16.164 l 11.657 Depreciation and amortir.ation..
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 l
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 l 13.321 locome from Continuing Operations'liefore income Taxes and Preferred Dividends, 118.329 109.256 46.456 274.041 income Taxes...
41.814 47.435 18.133 l(17.382 Preferred Dividends of Subsidiatics' (Note 2) '
3.310 914 2.463 6.687 Income from Continuing Operations iNotes 3 'and 6)
S 73.205 5 60.907 5 25.860 S 159.972 Average Common Shares Outstanding...
30.790 29.861 9.594 5.236 75.481 Earnings per Share of Comm'on Stock
, from Continuing Operations (Basic and-diluted )
5 2.38 5
2.04 5
2.64 N/A 5
2.12 i
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
4 l
L
INTERSTATI: ENI:RG) CORPORATION l'NAl'DITED PRO FORMA CO%1111NED STATE %1ENTS OF INCON11:
1OR Tile YEAR ENI)ED DECEMilER 31,1995 (in thousands, esecpt per share amounts)
Pro I arma M Pl.11 li'N ll'C Adjuw ment
- l'ru I arma
( As kepersed)
( As Heported)
( An Reported) 1.%cc Nase 1)
Combined Operating Revenues Electric utility
$546.324
$$60.471
$274.873
$1.381.668
)
Gas utility.
139.165 190339 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 production fuels.
116.488 96.256 62.164 274.908 Purchased power.
44,940 66.874 57.566 169.380 Cost of gas sold..
84.002 141.716 25.888 (50.519) 201.087 i
Other operatien.
252.722 199,768 44.581 50.519 547.590 Maintenance.
42.043 46.093 14.881 103.017 Depreciation and amortization.
86.319 97,958 29.560 213.837 Taxes other than income taxes 34.188 49.011 15.990 99.189
)
Total operating expenses.
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 I
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 Cc.ninuing 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 4 hole 61
$ 71.618 5 64.176
$ 25.198 5
5 160.492 Average Common Shares Outstanding.
30.774 29.202 9.564 5.140 74.68C Earnings per Share of Common Stock from Continuing Operations (Basic and diluted) 5 2.33 2.20 2.63 N/A 5
2.16 See accompanying Notes to Unaudited Pro Forma Combined Financial Statements 5
INTI:RSTATF: ENI:RGY CORI' ORATION NOTES TO UN AL DITED l'RO l'OR.\\1A CONiillNI:D flN ANCIAI. STATEN1ENTS 1.1*ro Forma Adjus(ments December.11.1997 IIAI ANCE SilEET Merged
('onsolidanne l'hndnasions i nonpans II*C IIA ni for
('eminum heark IInhilled l'ensism
'I assi 114-ill A 1.1 r ll.4.lil A IJ f Adjusesnces Iersenses liabilis3 1*ru I urnia
( %de 1(all
(%ute libs)
(%dc If tl)
(%dr 1(del ( %eic l a r p p Adresenwnes ASSETS-OTHER PROPERTY. PLANT AND EQUIPMENT - NET AND OTilER INVESTM ENTS......
5 3.45N
$(3.583) $
- 5
- 5
- 5 (125)
CURRENT ASSETS -
Cash and cash equivalents.
3,308 (3.(Xxi) 302 Accounts receivable - net.
' N.932 (l.965) 5.522 12.489 Prepayments and other.
2
( 3.2H0)
(3.278)
'Iotal current assets..............
12.242 (4.971) 2.242 9.513 DEFERRED CHARGES AND OTill:R.,
2.456
( 17.N98 )
(15.442)
. TOTAL ASSETS.'...
515.700 -
5(H.554 ) 5 5 4.698 5117.89x) 5 t 6.054 )
CAPITAIJZATION AND IJABilJTIES
- CAPITALIZATION Common Stock Equity:
'5 5 (33.i(Wi) $
- 5 Common stock..
5
$ (33.7(Ki)
Other stockholders' equity 3.583 (3.5E3 )
13.706 4.69x 38.4(LI Total common stock equity 3.583 (3.5H3) 4.698 4.698 CURRENT LI ABILITIES Accounts payable and accruals.
11.514 (1.965) 9.549 Taxes accrued........
65 tis Other accrued liabilities.
538 -
(3.00 0 42.46x)
Total current liabilities.
12.117 (4.971) 7.146 OTHER LIABILITIES -
Other liabilities and deferred credits..
( 17.N98 )
( 17.H98 )
Total other liabilities.
l 17.898 )
(17.898)
TOTAL. CAPITALIZATION AND LI ABILITIES.
515.700 5 t h.554 )
5 5 4.698 5(17.898) 5 16.054:-
6 l
1997 INCOME-ST ATD1ENT-sicrced c
i.d.im.
I i.... -
e omp...
of far i animw.n %em k l etal l1.4188.% 1.8 A ' il 4-111 $ l.1i Adjoi.sment l'ru i arms
(% esse llall (Nuer Ithip
(%use its si 4djussmenst OPER ATING REVLNULS:
G as utility........
5
.Other.
Ilh.k26 118.826
- Total operating revenues...
118.826 118.826 OPERATING EXPENSES:
. Cost of pas sold 0;her operation.........
I19.306 t 19,306 Maintenanec.....
96 96
- Depreciation und amortization.....
245 245 Total operating expenses.
119.647 119.647 OPERATING INCOME.......
(821)
(E21)
- OTiiER INCOME (EXPENSE)
Other income und deductions, net 61 745 k56 Total other income (expense).
61 795 856 INTEREST Cil ARGES.....
35 35 INCOME FROM CONTINUING OPERATIONS.
$.(795)
$795 I-5
=
AYER AGE COMMON SilARES..
5.323 5.323 1996 INCOME STATEMENT Merged Compem3 Commun Stack 11.4 1mial Adjustmeni
(,as Acti.it3 l're I arma (Note 1(c))
(%nse lifp)
Adjustmenen OPERATING REVENUES:
Gas utility.....
$(113.!!5) $(113.115 )
Other....
113.115 113.115 '
Total opersting revenues...
OPERATING EXPENSES:
- Cost of as sold (113,474) (113.474)
F Other operation............
113.474 113.474 Total operating expensen '..
INCOME FROM CONTINUING OPERATIONS...
5 -
5 5-AVERAGE COMMON SHARES.
5.236 5.236 1945 INCOME STATEMENT
%1erged
( empan3
( emau.a Stock 11.4 letal Adjustmens
( as Acipif 3 l*re f orms (Naselerit
(%nte lif t 6 Adpunaments OPERATING REVENUES:
Gas utility..
5 -
$(53.047 8 $(53.047)
Other.
53.047 53.047 Total operating revenues.
OPER ATING EXPENSES:
j Cost of pas sold....
(50.519) 150.519) j Other operation.
50.519 50.514 i
. Total operating expenses...
i INCOME FROM CONTINUING OPERATIONS,...
5-5 5
.l L
AVERAGE COMMON SilARES 5,140 5.140 l-1 i
I I
I L
(a) Consolidation of II;A lil:S 1 l.C.
In January 1997. ILS and WPLil formed a pas marketing joint venture named IL A-liLS L.L.C. Pursuant to the applicable accounting rules. ILS and WPLil each accounted for this joint venture in 1997 under the equity method of accounting with their investment recorded on the balance sheet in "Other Propert). Plant and Equipment - Net and Other investments" and their allocated portion of carnings on the income statement in "Other income and Deductions. Net". This pro forma adjustment reDects the financial results of IEA-HES L.L.C. as a consolidated subsidiary.
(b) Eliminations for IEA IIES l_I_C.
This pro forma adjustment reflects the elimination of intercompany balances of IEA-IlES L.L.C. and also climinates the equity investments of IES and WPLH and their allocated portion of revenues and expenses.
(c) Merged Company Common Stock Adjustment i
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 (5.01 par value) and the conversion of
- each share of IPC Common Stock (53.50 par value) into 1.11 shares of Merged Company Common Stock (5.0) par value), and the continuation of each share of WPLH Common Stock (5.01 par value) outstanding as one share of MerFed Company Common Stock, as provided in the Merge Agreement. The pro forma adjustment to common stock equity restates the common stock account to equal par value for all shares to be issued (5.01 par value per share of Merged Company Common Stock) and reclassifies the cuess to other stockholders' equity. The average number of shares of common stock used for calculating per shai.. :..vuiits is based en the exchange ratios shown below, behange As reported Pru forma Ah reponed Pro forma As trported l*ro forma Ratio 12/31/97 12/31/97 12/31/ %
12/31/ %
12/31/95 12/31/*5 WPLH..
N/A 30.782 30.782 30,790 30.790 30.774 30.774 l ES..
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 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.
Eschange As reparad Pro forma Ratio 12/31/97 12/31/97 WPLH.
N/A 30.789 30.789 IES.
1.14 30.577 34.858 1 PC -
1.11 9.761 10.835 (d) IPC Unbilled Reienues The financial results of IPC do not include accrued revenues for services rendered but unbilled at month-end.
Tbc 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 Liabilit3 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.
8
l l
(O 113 Gas Actisity The paerevenues and cost of gas sold of Industrial Lnergy Appheations. Inc. (ll A1. a subsidiary of ILS. for 1996 and 1995 have been reclawhed into "Other" operating revenues and "Other operation" expenses. respectively consistent with the 1997 presentation.
- 2. Preferred Stock Disidends of IPC The Preferred Stock Dividends of IPC have been reclassified in the unaudited pro forma combined statements as l
" Preferred Dividend 3 of Subsidiaries.s" and deducted in the determination of income from continuing operations u hich i
reDects the holding company stracture of the Merged Company.
- 3. Nonrecurring Material items included in IIistorical 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 Lnergy Company. The after-tas impact on income from continuing operations was a decrease of f4.6 million.
Nonrecurring items afTecting 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 55.9 mil: ion.
- 4. Estimated Costs and Cost Saiings of Proposed Merger The allocation between WPLH,IES and IPC and their customers of the estimated cost savings of approximately 5749 million over ten years resulting from the merger, net of the costs incurred to achieve such savings, will be subject to regulatory revicu 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 difTer 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, technoloF cal developments. inflation rates, regulatory treatment, weather conditions. financial market conditions, i
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 achiese such savings. have been reflected in the unaudited pro forma combined financial statemer.ts.
S. Intercompany Transactions Intercompany transactions (including purchased and exchange power transactions) between WPLH. lES and IPC during the periods presented were included in the determination of regulated rates and/or were not material.
Accordingly, ao pro forma adjustments were made to climinate such transactions.
- 6. Discontinued Operations The financial statements of WPLH reflect the discontinuance of operations ofits utility energy and marketing consulting business in 1995. The discontinuance of this business resuhed in a pre-tax loss in the fourth quarter of 1995 of 57. million. The after-tax loss on disposition was 511.0 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 *vith the final disposition of the business.
Operating revenues. operating expense:. 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.
9 l
Jack R. Newman,64 [1994] m +*
David Q. Reed,66 [1967] e Partner Independent Practitioner of Law Morgan, Lewis & Bockius Kansas City, Missouri Washington, D.C.
Robert W. Schlutz,62 [1989] e A Milton E. Neshek,67 [1984] e A President General Counsel and Secretary Schlutz Enterprises Kikkoman Foods, Inc.
ColumbusJunction, Iowa Walworth, Wisconsin Anthony R. Weiler,61 [1379] G +
Judith D. Pyle,54 [1992] a +
Senior Vice President, Merchandising Vice Chair Heilig-Meyers Co.
The Pyle Group Richmond, Virginia Madison, Wisconsin Key to committee membership Robert D. Ray,69[1987] + Y e = Audit Committee
+ = Nominating & Gmemance Retired President and Chief Executive Officer n = Compensation and Committee IASD Health Services Inc.
Penonnel Committee Y= Execuuve Comnuttee Des Moines, Iowa A = lsnvironmental/ Safety
= Committee Chair Committee
= Committee Vice Chair Ages are as of December 31,1997. liracketed information represents first year of board affiliation with a company that ultimately became part of the Alliant family.
Edward M. Gleason,57 [1977]
Vice President, Treasurer and Cogiorate Secretary Donald D.Jannette,55 [1966]
Dale R. Sharp,57 [1964]
Assistant Corporate Secretary Vice President-Engineerin Donald D. Jannette,55 [1966] g and Standards Steven F. Price,45 [1984]
Assistant Treasurer Assistant Corporate Secretary Robert A. Rusch,35[1989]
Steven F. Price,45 [1984]
Assistant Treasurer Assistant Treasurer Kent M. Ragsdale,48 [1985]
ALLIANT INDUSTli:lES CORPORATE OFFICERS Assistant Secretary Erroil B. Davis Jr.,53 [1978]
Robert A. Rusch,35 [1989]
Chief Executive Officer Assistant Treasurer James E. Hoffman,44 [1995]
President WISCONSIN POWER AND LIGHT Thomas L Aller,48[1993]
COMPANY CORPORATE OFFICERS Vice President Investments Erroll B. Davis Jr.,53 [1978]
John E. Ebright,54 [1996]
Chief Executive Officer Vice President-Controller William D. Harvey,48 [1986]
Edward M. Gleason,57 [1977]
President Vice President, Treasurer and Corporate Secretary Daniel A.Doyle,39[1992]
Claire K. Fulenwider,55 [1993]
Vice President Fossil Plants Vice President-Business Development John E. Ebright,54 [1996]
Cynthia P, Kellogg,43 [1992]
Vice President-Controller Vice President-Finance Dean E. Ekstrom,50 [1985]
Donald D.Jannette,55 [1966]
Vice President-Sales and Service Assistant Corporate Secretary John F. Franz Jr.,58 [1992]
Steven F. Price,45 [1984]
Vice President-Nuclear O Assistant Treasurer Edward M. Gleason,57 [1977]perations Robert A. Rusch,35 [1989]
Vice President, Treasurer and Corporate Secretary Assistant Treasurer Daniel L Mineck,49 [1970]
Daniel Siegfried,38 [1992]
Vice President-Performance Engineering and Assistant Secretary Environmental Kim K. Zuhlke,44 [1978]
Ages are as of December 31,1997. Dates in brackets represent Vice President-Customer Operations the year each person joined a company that ultimately became David L Wilson,51 [1966]
part of the Alliant family.
Assistant Vice President-Nuclear Operations
i F i n a n c i an i hig hlig h ts tai ins rtRets PRO FORMA PRO FORMA CHANGE (Dollars are in minions except for per-share data)
Operatirig Results:
1 Operating revenues
$2,301
$2,233 3%
l Operating income.
$350
$370 (5%)
income from continuing operations.
$154
$160 (4%)
Net income
$154
$159 (3%)
Return on average common equity 9.98 %
11.14 %
(10%)
Utility electric sales from ultimate customers I
{ thousands of MWH).
24,015 23,212 3%
Total utility electric sales (thousands of MWH) 30,944 30,832 Utility gas sold and transported (thousands of dekatherms).
117,972 121,874 (3%)
Construction and acquisition expenditures
$330
$414 (20%)
Total assets at year-end
$4,952
$4,656 6%
Per Share Data:-
Earnings per average common share from continuing operations (basic and diluted)
$2.02
$2.12 (5%)
Earnings per average common share (basic and diluted)
$2.02
$2.10 (4%)
Book value at year end
$21.52
$19.06 13 %
Due to the closing of the merger following Total Assets (in minions) year-end 1997, this summary information sets
$5,000 ggg forth selected unaudited pro fonna financial dat 4.900 for Interstate Energy Corporation. The information 48 combines the historical consolidated balance sheets, statements of income, and utility sales 4.700 R656 of IES Industries Inc. (IES), Interstate Power 4,gg Company (IPC) and WPL IIoldings, Inc.
48 8 " 86 (WPlJ1), including certain pro forma
'0 adjustments, after giving effect to the merger 4.400 as if it was in place for the entire reporting 1995 1996 1997 periods shown. The adjustments do not include any merger related transaction costs that will be Operating Revenues (inminions) s2.301 recorded upon consummation of the merger.
$2,300 The financial data are prepared on the s2233 basis of accounting for the merger as a pooling 2,200 ofinterests. The data are not necessarily indicative of the financial position or operating 2.100 results that would have occurred had the merger been consummated for the entire 2.000 si,977 reporting period. Accordingly, the data do not give effect to the expected synergies or 1,900 the costs to be incurred to achieve such 1995 1996 1997 synergies. The data also are not necessarily indicatise of future operating results or Income From Continuing financial position. The financial data should Operations (in minions) be read in conjunction with the historical 31" sisi 8'8 financial data of IES, IPC and WPUI, as well as the unaudited pro forma combined 155 -
financial statements and related notes of Interstate Energy Corporation, which are 150 - f' u
all included elsewhere in this annual report 145 to shareowners.
1995 1996 1997 0
t
_