-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UCw4xZxy0qbTSoUDTNRkw3z6FiA3zATVvasAt7c3fsgtZPWxyaJIOwBSzWGXfUre 4oimpHpkSIBIMIPjhmbpOw== 0000897069-97-000126.txt : 19970320 0000897069-97-000126.hdr.sgml : 19970320 ACCESSION NUMBER: 0000897069-97-000126 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 SROS: AMEX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WPL HOLDINGS INC CENTRAL INDEX KEY: 0000352541 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 391380265 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09894 FILM NUMBER: 97559154 BUSINESS ADDRESS: STREET 1: 222 W WASHINGTON AVE CITY: MADISON STATE: WI ZIP: 53703 BUSINESS PHONE: 6082523311 MAIL ADDRESS: STREET 1: P O BOX 2568 CITY: MADISON STATE: WI ZIP: 53701-2568 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WISCONSIN POWER & LIGHT CO CENTRAL INDEX KEY: 0000107832 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 390714890 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-00337 FILM NUMBER: 97559155 BUSINESS ADDRESS: STREET 1: 222 W WASHINGTON AVE CITY: MADISON STATE: WI ZIP: 53703 BUSINESS PHONE: 6082523311 10-K405 1 FORM 10-K WPL HOLDINGS, INC. AND WISCONSIN POWER AND LIGHT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Name of Registrant, State of IRS Employer Commission Incorporation, Address of Principal Identification File Number Executive Offices and Telephone Number Number 1-9894 WPL HOLDINGS, INC. 39-1380265 (a Wisconsin corporation) 222 West Washington Avenue Madison, Wisconsin 53703 Telephone (608)252-3311 0-337 WISCONSIN POWER AND LIGHT COMPANY 39-0714890 (a Wisconsin corporation) 222 West Washington Avenue Madison, Wisconsin 53703 Telephone (608)252-3311 Securities registered pursuant to Section 12 (b) of the Act: Name of Each Exchange on Which Registrant Title of Class Registered WPL Holdings, Inc. Common Stock, $.01 Par Value New York Stock Exchange WPL Holdings, Inc. Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: Registrant Title of Class Wisconsin Power and Light Company Preferred Stock (Accumulation without Par Value) Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that each registrant was required to file such reports) and (2) has been subject to such filing requirements for the past (90) days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ X] The aggregate market value of the voting stock held by nonaffiliates as of January 31, 1997 is as follows: WPL Holdings, Inc. $861.7 million Wisconsin Power and Light Company $46.5 million Number of shares outstanding for each class of common stock as of January 31, 1997: WPL Holdings, Inc. Common Stock, $.01 par value, 30,773,735 shares Wisconsin Power and Light Company Common Stock, $5 par value, 13,326,601 shares (all of which are owned beneficially and of record by WPL Holdings, Inc.) DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statements relating to each registrant's 1997 Annual Meeting of Shareowners are incorporated by reference into Part III hereof. TABLE OF CONTENTS Page Part I Number Item 1. Business 1 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders Executive Officers of 16 the Registrants 17 Part II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters 19 Item 6. Selected Financial Data 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of 19 Operations Item 8. Financial Statements and Supplementary 20 Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 89 Disclosures Part III Item 10. Directors and Executive Officers of the Registrants 89 Item 11. Executive Compensation 89 Item 12. Security Ownership of Certain Beneficial Owners and Management 89 Item 13. Certain Relationships and Related 89 Transactions Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 90 Signatures 103 Financial Statement Schedules 109 PART I ITEM 1. BUSINESS WPL Holdings, Inc. WPL Holdings, Inc. (WPLH) was incorporated under the laws of the State of Wisconsin on April 22, 1981, and operates as a holding company with both utility and nonutility businesses. It is the parent company of a public utility, Wisconsin Power and Light Company (WP&L) and its related subsidiaries and of Heartland Development Corporation (HDC), the parent corporation for the nonutility businesses. WPLH has no employees who are not also employees of WP&L and/or HDC. Refer to Item 8 "Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements," Note 13 for financial information related to WPLH's business segments. Proposed Merger WPLH, IES Industries Inc. (IES) and Interstate Power Company (IPC) have entered into an Agreement and Plan of Merger, as amended (Merger Agreement), dated November 10, 1995, which provides for the combination of all three companies. The new company will be named Interstate Energy Corporation (IEC). IES is a holding company headquartered in Cedar Rapids, Iowa, and is the parent company of IES Utilities Inc. (IES Utilities) and IES Diversified Inc. (IES Diversified). IES Utilities supplies electric and gas service to approximately 336,000 and 176,000 customers, respectively, in Iowa. IES Diversified and its principal subsidiaries are primarily engaged in the energy-related, transportation and real estate development businesses. IPC, a public utility headquartered in Dubuque, Iowa, supplies electric and gas service to approximately 165,000 and 49,000 customers, respectively, in northeast Iowa, northwest Illinois and southern Minnesota. The proposed merger, which will be accounted for as a pooling of interests, was approved by the respective shareowners on September 5, 1996. The merger is conditioned on the receipt of approvals of several federal and state regulatory agencies. The status of these approvals is as follows: On January 15, 1997, the Federal Energy Regulatory Commission (FERC) issued an order in which it accepted several provisions of the IEC merger application without the need for public hearings. The FERC has set limited issues for hearing, including generation market power in the transmission-constrained Wisconsin Upper Michigan System (WUMS) subregion in Wisconsin. The FERC has also ordered the merger partners to attempt to negotiate a wholesale customer protection mechanism with those intervenors who are not satisfied with the four year rate freeze proposed in the application. If an agreement between the merger partners and the intervenors is not reached, the FERC will decide the issue. A final decision on the merger is expected to be issued by the FERC by the end of the third quarter of 1997. IES and IPC announced in 1996 their intentions to hold retail electric prices to their current levels until at least January 1, 2000. The companies made the proposal as part of their testimony in the IEC merger application filed with the Iowa Utilities Board (IUB). The application was later withdrawn and resubmitted on January 2, 1997 and the same rate freeze proposal was included in the resubmittal. The proposal excludes price changes due to government-mandated programs, such as energy efficiency cost recovery, or unforeseen dramatic changes in operations. Hearings before the IUB are expected to commence in the summer of 1997 with approval expected by the end of the third quarter of 1997. In March of 1996, an application requesting approval of the merger was filed with the Public Service Commission of Wisconsin (PSCW). On February 13, 1997, the PSCW voted to delay hearings on the proposed merger. The hearings are currently scheduled for June 4, 1997, with a decision anticipated in the third quarter of 1997. Legislation was introduced in the Wisconsin State Senate in February 1997 which could delay the PSCW approval of the merger. WPLH cannot predict the outcome of such legislation. In March of 1996, an application requesting approval of the merger was also submitted to the Illinois Commerce Commission (ICC). The ICC conducted hearings on November 12, 1996 and final briefs were filed on December 23, 1996. A decision is pending. On January 15, 1997, the Minnesota Public Utilities Commission (MPUC) announced that it had approved the IEC merger without hearings, subject to a number of technical conditions, which WPLH anticipates will not be opposed by the merger partners. Included in these conditions is a four year rate freeze for IEC's electric and gas customers in the state of Minnesota. An application to establish IEC as a registered holding company under the Public Utility Holding Company Act of 1935 (1935 Act) was submitted to the Securities and Exchange Commission (SEC). The period for comments by interested parties closed on November 5, 1996. A decision on the application is expected at the end of the third quarter of 1997. The SEC historically has interpreted the 1935 Act to preclude registered holding companies, with limited exceptions, from owning both electric and gas utility systems. As part of the application, IEC has requested a ruling on whether it would be allowed to continue its ownership in gas operations. An impact review of the merger on market power, which is required by the Hart-Scott-Rodino Antitrust Improvements Act, was completed by the U.S. Department of Justice (DOJ). All requirements of this review have been satisfied. If the merger is not consummated before July 7, 1997, the merger partners will be required to submit new information to the DOJ. An application was filed with the Nuclear Regulatory Commission (NRC) to approve the transfer of the licenses of IES for the Duane Arnold Energy Center nuclear facility and of WP&L for the Kewaunee Nuclear Power Plant to IEC. Both plants are jointly owned with other companies. The application, which was filed on October 1, 1996, is pending. Refer to Note 2 "Notes to Consolidated Financial Statements" for additional information. For detailed unaudited pro forma financial statements for IEC refer to Item 14. WP&L WP&L, incorporated in Wisconsin on February 21, 1917, as the Eastern Wisconsin Electric Company, is a public utility predominately engaged in the transmission and distribution of electric energy and the generation and bulk purchase of electric energy for sale. WP&L also transports, distributes and sells natural gas purchased from gas suppliers. Nearly all of WP&L's customers are located in south and central Wisconsin. WP&L operates in municipalities pursuant to permits of indefinite duration which are regulated by Wisconsin law. WP&L does not derive a material portion of its revenues from any one customer. WP&L owns all of the outstanding capital stock of South Beloit Water, Gas and Electric Company (South Beloit), a public utility supplying electric, gas and water service, principally in Winnebago County, Illinois, which was incorporated on July 23, 1908. WP&L also owns varying interests in several other subsidiaries and investments which are not material to WP&L's operations. Regulation WP&L is subject to regulation by the PSCW as to retail utility rates and service, accounts, issuance and use of proceeds of securities, certain additions and extensions to facilities and in other respects. The PSCW is comprised of three Commissioners appointed by the Governor and ratified by the Wisconsin State Senate. WP&L is required to file a rate case with the PSCW every two years with requests for rate relief based on a forward- looking test year period. South Beloit is subject to regulation by the ICC for retail utility rates and service, accounts, issuance and use of proceeds of securities, certain additions and extensions to facilities and in other respects. The PSCW's inquiries into the future structure of the natural gas and electric utility industries are ongoing. The stated goal of the PSCW in the natural gas docket is to move all gas supply activities out of the existing regulated distribution utilities and allow affiliated units to compete for the supply business. The goal of the electric utility restructuring process is to create open access transmission and distribution services for all customers with competitive generation and customer service markets. Additional proceedings as well as consultation with the legislature are planned prior to a target implementation date after the year 2000. The FERC has jurisdiction under the Federal Power Act over certain of the electric utility facilities and operations, wholesale rates and accounting practices of WP&L and in certain other respects. Certain of WP&L's natural gas facilities and operations are subject to the jurisdiction of the FERC under the Natural Gas Act. WP&L is presently exempt from all provisions of the Public Utility Holding Company Act of 1935, except provisions relating to the acquisition of securities of other public utility companies. The FERC is currently developing regulation which will begin to provide open access to electric utility transmission facilities for wholesale customers subject to certain approved FERC tariffs. WP&L believes its existing open access tariffs position it well to compete under such market conditions. With respect to environmental matters impacting WP&L and its subsidiaries, the United States Environmental Protection Agency administers certain federal statutes and has delegated the administration of other environmental initiatives to the Wisconsin Department of Natural Resources (DNR). In addition, the DNR has jurisdiction over air and water quality standards associated with fossil fuel fired electric generation and the level and flow of water, safety and other matters pertaining to hydroelectric generation. WP&L is subject to the jurisdiction of the NRC with respect to the Kewaunee Nuclear Power Plant (Kewaunee) and to the jurisdiction of the United States Department of Energy (DOE) with respect to the disposal of nuclear fuel and other radioactive wastes from Kewaunee. Employees At December 31, 1996, WP&L employed 2,339 persons, of whom 1,827 were considered electric utility employees, 308 were considered gas utility employees and 204 were considered other utility employees. WP&L has a 3- year contract with members of the International Brotherhood of Electrical Workers, Local 965, that is in effect until May 31, 1999 which covers 1,617 of WP&L's employees. Electric Operations General WP&L provides electricity in a service territory of approximately 16,000 square miles in 35 counties in southern and central Wisconsin and 4 counties in northern Illinois. As of December 31, 1996, WP&L provided retail electric service to approximately 385,000 customers in 615 cities, villages and towns, and wholesale service to 24 municipal utilities, one privately owned utility, 3 rural electric cooperatives, one Native American nation and to the Wisconsin Public Power, Inc. system for the provision of retail service to 9 communities. Electric operations represented 77.6 percent of WP&L's total operating revenues and 87.2 percent of WP&L's total operating income for the year ended December 31, 1996. Electric sales are seasonal to some extent with the yearly peak normally occurring in the summer months. WP&L also experiences a smaller winter peak in December or January. The maximum net hourly peak load on the electric system was 2,124 megawatts and occurred on August 6, 1996. The winter system peak of 1,901 megawatts occurred on December 18, 1996. During the year ended December 31, 1996, about 69.6 percent of total kilowatthour requirements were generated by company-owned and jointly-owned facilities and the remaining 30.4 percent was purchased. WP&L's electric generating facilities include: four coal-fired generating stations (including nine units; four jointly owned), seven natural-gas- fired peaking units, eight hydro-electric plants (two jointly owned), one gas-fired steam generating plant and one nuclear power plant (jointly owned). Refer to Item 2 "Properties" for additional information regarding electric generating facilities. WP&L owns 21,753 miles of electric transmission and distribution lines and 363 substations located adjacent to the communities served. WP&L is interconnected with other utilities in Wisconsin and neighboring states and is a member of the Mid-Continent Area Power Pool Resource Transmission Group (MAPP RTG) and Power and Energy Market. Although currently a member of the Mid-America Interconnected Network, Inc. (MAIN), WP&L officially notified the MAIN board of directors of its intentions to withdraw from MAIN, effective December 31, 1997. Fuel In 1996, approximately 84.0 percent of WP&L's net kilowatthour generation of electricity was fueled by coal and 12.7 percent by nuclear fuel (provided by WP&L's 41 percent ownership interest in Kewaunee). The remaining electricity generated was produced by hydroelectric, oil-fired and natural gas generation. Coal WP&L's primary fuel source is coal. To ensure an adequate supply of coal, WP&L has entered into certain long-term coal contracts. These contracts include a demand or take-or-pay clause under which payments are required if contracted quantities are not purchased. Refer to Note 11a in "Notes to Consolidated Financial Statements" for details relating to these long- term coal purchase commitments. WP&L anticipates that its average fuel costs will likely increase in the future, due to cost escalation provisions in existing coal and transportation contracts. WP&L's management believes that any increases in costs associated with these contracts will be incorporated in future rates and as such will not have a material effect on operating results. The estimated coal requirements of WP&L's generating units (including jointly-owned facilities) for the years 1997 through 2001 total about 40 million tons. Present coal supply contracts and transportation contracts (excluding extension options) cover approximately 46 percent and 63 percent, respectively, of these estimated requirements. WP&L will seek renewals of existing contracts or additional sources of supply and negotiate new or additional transportation contracts to satisfy these requirements and to comply with environmental regulations. Purchased Power During the year ended December 31, 1996, about 30.4 percent of WP&L's total kilowatthour requirements were met through purchased power. Refer to Note 11b in "Notes to Consolidated Financial Statements" for details relating to long-term purchase power commitments. Nuclear Kewaunee is jointly-owned by WP&L (41 percent), Wisconsin Public Service Corporation (41.2 percent) and Madison Gas & Electric Company (17.8 percent). Wisconsin Public Service Corporation (WPSC) is the operator. The plant began commercial operation in 1974. Kewaunee operates with a NRC license which expires in 2013. The supply of nuclear fuel for the Kewaunee plant is dependent upon the mining and milling of uranium ore to uranium concentrates, the conversion of uranium concentrates to uranium hexafluoride, the enrichment of the uranium hexafluoride and the fabrication of the enriched uranium into usable fuel assemblies. After a region (approximately one-third of the nuclear fuel assemblies in the reactor) of spent fuel is removed from the reactor, it is placed in temporary storage for cooling in a spent fuel pool at the plant site. Permanent storage is addressed below. Presently, there are no operating facilities in the United States reprocessing commercial nuclear fuel. A discussion of the nuclear fuel supply for Kewaunee, which requires approximately 300,000 pounds of uranium concentrates per year follows: (a) Requirements for uranium are met through spot market or contract purchases of uranium. An inventory policy, which takes advantage of economical spot market purchases of uranium, results in maintaining inventories sufficient for up to two reactor reloads of fuel, excluding in-process uranium. (b) Uranium hexafluoride, from inventory and from spot market purchases, was used to satisfy converted material requirements in 1996. Conversion services relating to uranium hexafluoride are purchased on the spot market. Contracts exist with primary suppliers for services in 1997, 1998 and 1999. (c) In 1996, enrichment services were procured from COGEMA, Inc. pursuant to a contract executed in 1983 and last amended in 1995. Enrichment services are also purchased from the United States Enrichment Corporation under the terms of the utility services contract. This contract is in effect for the life of Kewaunee. The Kewaunee owners over the next ten years are committed to take 70 percent of their annual enrichment services requirements in alternate years 1997, 1999, 2001, 2003, and 2005 from the United States Enrichment Corporation. (d) Fuel fabrication requirements through March 15, 2001 are covered by contract with Siemens Power Corporation. (e) Beyond the stated periods for Kewaunee, additional contracts for uranium concentrates, conversion to uranium hexafluoride, fabrication and spent fuel storage will have to be procured. The prices for the foregoing are currently expected to increase slightly. The National Energy Policy Act of 1992 provides that both the Federal government and the nuclear utilities fund the decontamination and decommissioning of the three federal gaseous diffusion plants in the United States. This will require the owners of Kewaunee to pay an additional $19.2 million in current dollars over the next 15 years plus an adjustment for inflation. At December 31, 1996 the remaining liability was $ 13.1 million of which WP&L's share was $5.4 million. WP&L's share including interest amounted to an annual payment of approximately $554,000 in 1996. If for any reason Kewaunee was forced to permanently suspend operations, fuel related obligations are as follows: (1) there are no financial penalties associated with present uranium supply, conversion service and enrichment agreements and (2) the fuel fabrication contract contains force majeure and termination for convenience provisions. The maximum exposure could be as much as $550,000 as of the end of 1996. Uranium inventories could be sold on the spot market. In September 1996, Kewaunee was taken out of service for a scheduled refueling and maintenance outage which was originally projected to be of five weeks duration. Additional information relating to the Kewaunee outage can be found elsewhere in this report in Item 7 "Management's Discussion and Analysis of Financial Conditions and Results of Operations." Physical decommissioning is expected to occur during the period 2014 to 2021 with additional expenditures being incurred during the period 2022 to 2039 related to the storage of spent nuclear fuel at the site. The undiscounted amount of decommissioning costs estimated to be expended between the years 2003 and 2039 is $611 million. Wisconsin utilities operating nuclear generating plants are required by the PSCW to establish external trust funds to provide for the decommissioning of such plants. WP&L's share of the decommissioning costs is estimated to be $176 million (in 1996 dollars) based on a 1992 site-specific study, using the immediate dismantlement method of decommissioning. WP&L's annual contribution to the external trust fund for decommissioning was $10.7 million in 1996. Retail rate order UR-110, expected to be issued by the PSCW in April 1997, will likely increase the annual contribution to approximately $16 million. The market value of the investments in the funds established by WP&L at December 31, 1996, totaled $90.7 million. Additionally, in July 1994, the PSCW issued a generic order covering utilities that have nuclear generation. This order standardizes the escalation assumptions to be used in determining nuclear decommissioning liabilities. The inflation assumptions applied in UR-110 were as follows: labor, 4.12 percent; burial costs, 10.42 percent; energy, 3.66 percent; and other, 8.00 percent. After-tax earnings on the tax-qualified and non-qualified decommissioning funds are assumed to be 5.6 percent and 7.0 percent, respectively. Pursuant to the Nuclear Waste Policy Act of 1982, the DOE has entered into a contract with WP&L to accept, transport and dispose of spent nuclear fuel beginning no later than January 31, 1998. The DOE has announced that it will delay the acceptance of spent nuclear fuel beyond 1998. A fee to offset the costs of the DOE's disposal for all spent fuel used since April 7, 1983 has been assessed by the DOE at one mill per net kilowatthour of electricity generated and sold by Kewaunee. An additional one-time fee was paid for the disposal of spent nuclear fuel used to generate electricity prior to April 7, 1983. Spent fuel is currently stored at Kewaunee. The existing capacity of the spent fuel storage facility will enable storage of the projected quantities of spent fuel through April 2001. Kewaunee is currently evaluating options for the storage of additional quantities beyond 2001. Several options are available. An investment of approximately $2.5 million could provide additional storage sufficient to meet on-site spent fuel storage needs until 2013, the expiration of the current operating license. The Low-Level Radioactive Waste Policy Act of 1980, as amended, provides that states may enter into compacts to provide for regional low-level waste disposal facilities. Wisconsin is a member of the Midwest Interstate Low-Level Radioactive Waste Compact. Ohio has been selected as the host state for the Midwest Compact and is proceeding with the preliminary phases of site selection. In July 1995, the Barnwell, South Carolina disposal facility again began accepting waste materials from outside its region. The Kewaunee owners expect to have sufficient storage space either on site or through shipments to Barnwell to satisfy low level radioactive waste disposal needs until the Ohio facility accepts low level radioactive waste materials. The Kewaunee capability factor was 71.3 percent in 1996, compared to a projected industry average of 79.8 percent. The comparable amounts for 1995 were 83.1 percent and 84.5 percent, respectively. The lower Kewaunee percent for 1996 reflects the extended shutdown of Kewaunee for the repair of the steam generator tubes. Recovery of Electric Fuel Costs and Purchased Power In WP&L's current rate order, UR-109, the PSCW approved elimination of the retail electric fuel adjustment clause for a two year trial period, 1995- 1996. For that period, retail rates remained unchanged even when fuel costs and purchased power varied from forecasted levels established in the rate proceeding. At the PSCW hearings on March 4, 1997, it was determined that with rate case UR-110, WP&L will reinstate the retail electric fuel adjustment clause. Under the fuel adjustment clause, rates are based on estimated per unit fuel costs and purchased power established during rate proceedings and are not subject to change by fuel cost and purchased power fluctuations unless actual costs are outside specified limits. If actual costs vary from the estimated costs by more than +/- 10 percent in a month or by more than +/- 3 percent for the test year to date, projected annual variances are then estimated. If the projected annual variance is more than +/- 3 percent, rates are subject to hearings and a increase or decrease by the PSCW. WP&L's wholesale rates and South Beloit's retail rates contain fuel adjustment clauses pursuant to which rates are adjusted monthly to reflect changes in the costs of fuel. Environmental Matters WP&L cannot precisely forecast the effect of future environmental regulations by federal, state and local authorities upon its generating, transmission and other facilities, or its operations, but has taken steps to anticipate the future while meeting the requirements of current environmental regulations. The Clean Air Act Amendments of 1977 and subsequent amendments to the Clean Air Act, as well as the new laws affecting the handling and disposal of solid and hazardous wastes, could affect the siting, construction and operating costs of both present and future generating units. Under the Federal Clean Water Act, National Pollutant Discharge Elimination System permits for generating station discharge into water ways are required to be obtained from the DNR to which the permit program has been delegated. These permits must be periodically renewed. WP&L has obtained such permits for all of its generating stations or has filed timely applications for renewals of such permits. Air quality regulations promulgated by the DNR in accordance with federal standards impose statewide restrictions on the emission of particulates, sulfur dioxide, nitrogen oxides and other air pollutants and require permits from the DNR for the operation of emission sources. WP&L currently has the necessary permits to operate its generating facilities. While periodic exceedances in air emissions may occur, management promptly responds to these events and works with the DNR to resolve any permit compliance issues. With the passage of the new federal Clean Air Act Amendments, the state is required to include these provisions into their permit requirements. WP&L has submitted timely Title V permit applications in compliance with schedules set forth by the regulators. WP&L has also completed application for Phase II permits under the Clean Air Act in compliance with the time lines identified. The state Title V operating permits, when issued, will consolidate all existing air permit conditions and regulatory requirements into one permit for each facility. Permits have been or are expected to be issued in 1997. Until such time, the facilities will continue to operate under their existing permit conditions. Pursuant to Section 144.386(2) of the Wisconsin Statutes, WP&L has submitted data and plans for 1997 sulfur dioxide emissions compliance. Actual 1996 emissions are being reported to the DNR. WP&L is currently in compliance with the state requirement. WP&L will continue to make any necessary operational changes in fuel types and power plant dispatch to comply with the system emissions limit of 1.2 pounds SO per million BTU. 2 WP&L's compliance strategy for Wisconsin's sulfur dioxide law (discussed above) and the Federal Clean Air Act Amendments required plant upgrades at its generating facilities. The majority of these projects were completed in 1993. WP&L has installed continuous emission monitoring systems at all of its coal-fired boilers in compliance with federal requirements. Monitoring for sulfur dioxide was also required by Title IV of the Federal Clean Air Act at WP&L's South Fond du Lac combustion turbine site. These requirements were also met. Additional monitoring systems for nitrogen oxides were required in 1996 at the combustion turbine site. WP&L has installed these monitors, and completed certification tests for the equipment. No significant investments are anticipated at this time to meet the requirements of the Federal Clean Air Act Amendments. Pursuant to Section 311(j)(5) of the Clean Water Act, WP&L has submitted a facility response plan for the South Fond du Lac combustion turbine site. The plan addresses pollution prevention and spill response activities for those facilities with capacity to store in excess of one million gallons of oil. WP&L maintains licenses for all of its ash disposal facilities and regularly reports to the DNR groundwater data and quantities of ash landfilled or reused. The landfills are operated according to a Plan of Operation approved by the DNR. WP&L monitors hazardous materials use and hazardous waste generation at its facilities. Annual reports are filed with the DNR on quantities stored and generated as required by the Superfund Amendments and Reauthorizaton Act and the Resource Conservation Recovery Act. WP&L's accumulated pollution abatement expenditures adjusted for accumulated retirements totaled $135 million as of December 31, 1996. The major expenditures consist of about $60 million for the installation of electrostatic precipitators for the purpose of reducing particulate emissions from WP&L's coal-fired generating stations and approximately $75 million for other pollution abatement equipment at the Columbia, Edge- water, Kewaunee, Nelson Dewey, Rock River and Blackhawk plants. Expenditures during 1996 totaled approximately $2.6 million. Estimated future pollution abatement expenditures total $0.6 million through 1997. WP&L's estimated pollution abatement expenditures are subject to continuing review and are revised from time to time due to escalation of construction costs, changes in construction plans and changes in environmental regulations. See "Electric Operations - Nuclear" for information concerning the disposal of spent nuclear fuel and high level nuclear waste. WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED ELECTRIC STATISTICS
Year Ended December 31, 1996 1995 1994 1993 1992 Area served (end of period): Cities, villages and towns served--retail 615 610 607 609 611 Customers served (end of period): Residential and Farm 336,933 329,643 322,924 316,870 310,702 Industrial 815 795 776 714 727 Commercial 45,669 44,730 43,793 42,884 42,287 Sales to Other Utilities 90 48 42 39 39 Other 1,730 1,294 1,256 1,236 950 ------- ------- ------- ------- ------- Total 385,237 376,510 368,791 361,743 354,705 ======= ======= ======= ======= ======= Sales--kilowatt-hours (in thousands): Residential and Farm 2,979,826 2,937,825 2,776,895 2,751,363 2,614,439 Industrial 3,985,672 3,872,520 3,764,953 3,540,082 3,377,132 Commercial 1,814,324 1,773,406 1,688,349 1,629,911 1,551,823 Sales to Other Utilities 5,245,812 3,109,385 2,574,121 2,388,131 2,208,419 Other 57,757 54,042 54,518 51,073 55,230 ---------- ---------- ---------- ---------- --------- Total 14,083,391 11,747,178 10,858,836 10,360,560 9,807,043 ========== ========== ========== ========== ========= Electric operating revenues (in thousands): Residential and Farm $201,690 $199,850 $194,242 $184,176 $171,887 Industrial 143,734 140,562 140,487 132,903 128,467 Commercial 105,319 102,129 101,382 95,977 91,707 Sales to Other Utilities 131,836 97,350 86,400 78,955 77,485 Other 6,903 6,433 9,236 11,176 8,189 ------- ------- ------- ------- ------- Total 589,482 546,324 531,747 503,187 477,735 ======= ======= ======= ======= ======= Percent of generation by fuel type: Coal 84.00% 81.10% 80.40% 80.30% 79.80% Nuclear 12.70% 15.30% 16.80% 16.50% 17.40% Hydroelectric 2.40% 2.20% 2.40% 2.90% 2.60% Natural gas 0.80% 1.30% 0.30% 0.20% 0.10% Oil 0.10% 0.10% 0.10% 0.10% 0.10% ------- ------- ------- ------- ------- Total 100.00% 100.00% 100.00% 100.00% 100.00% ======= ======= ======= ======= ======= System capacity---at time of system peak: (kWh's) Company plants (including jointly owned) 2,300,000 2,176,000 2,193,000 2,019,000 1,934,000 Firm purchased (sold) power 68,000 57,000 40,000 83,000 110,000 --------- --------- --------- --------- --------- Total 2,368,000 2,233,000 2,233,000 2,102,000 2,044,000 System peak demand 2,124,000 2,197,000 2,002,000 1,971,000 1,782,000 --------- --------- --------- --------- --------- Reserve margin at time of peak 244,000 36,000 231,000 131,000 262,000 ======== ======== ========= ========= ========= Average annual electric bill per residential and farm customer $599 $606 $602 $581 $553 Average annual kilowatt-hour use per residential and farm customer 8,844 8,912 8,599 8,683 8,415
Gas Operations General As of December 31, 1996, WP&L provided retail natural gas service to approximately 151,000 customers in 243 cities, villages and towns in 22 counties in southern and central Wisconsin and one county in northern Illinois. Gas operations represented 21.8 percent of WP&L's total operating revenues and 12.1 percent of WP&L's total operating income for the year ended December 31, 1996. WP&L's gas sales follow a seasonal pattern. There is an annual base load of gas used for heating, cooking, water heating and other purposes, with a large peak occurring during the heating season. Near-record cold on January 30, 1996 resulted in sales volumes of 250,390 dekatherms. Gas Supplies Prior to 1995, WP&L passed on its cost incurred from natural gas suppliers and pipeline companies on a dollar-for-dollar basis to its customers. In 1995, the PSCW approved implementation of a performance-based rate mechanism for Wisconsin gas customers. Under this mechanism, fluctuations in the commodity cost of gas above or below a prescribed commodity price index will increase or decrease WP&L's margin on gas sales. Both benefits and exposures are subject to customer sharing provisions. Specifically, to the extent WP&L purchases its gas supply below the index price, it will retain 50 percent of the first $1.151 million in savings; 25 percent of the next $1.151 million; and 10 percent of the next $2.878 million. WP&L's share of the incentive is capped at $1.150 million on a pre-tax basis. The balance of the savings is returned to customers. Under UR- 110, expected to be issued in April 1997, the sharing will be 60 percent customers and 40 percent WP&L. During 1996, WP&L paid the two pipeline companies serving WP&L (ANR Pipeline and Northern Natural Gas Company) $1.3 million in FERC Order 636 transition costs representing costs incurred by these pipelines in transitioning from full service natural gas commodity providers to open access gas transmission companies. In addition, WP&L incurred $0.7 million of take-or-pay costs paid to pipelines to reform its gas contracts from the pre-Order 636 time period. Both categories of costs were fully recovered from WP&L's gas customers. Customers served under South Beloit's gas rate schedules continue to pay for gas on a traditional purchase gas adjustment basis. In providing gas commodity service to retail gas customers, WP&L administers a diversified portfolio of transportation contracts with ANR Pipeline and Northern Natural Gas Company allowing access to gas supplies from the states of Oklahoma, Louisiana, Texas, and the province of Alberta, Canada. WP&L's transportation contracts provide a maximum daily delivery capability of 239,131 dekatherms per day of natural gas as follows: ANR Pipeline Northern Natural Gas Company Non-Traditional 148,075 Dt 75,056 Dt 16,000 Dt Two non-traditional arrangements provide WP&L with gas delivered directly to its "city gate" using the vendors' transportation contract with ANR Pipeline. WP&L's contracts also allow access to gas stored in underground storage fields in the states of Michigan, New Mexico and Oklahoma. Gas purchased in the summer and delivered in the winter comprise 25 percent of WP&L's annual gas requirements. WP&L maintains purchase agreements with over 80 suppliers of natural gas from all gas producing regions of the U.S. and Canada. These include 8 contracts providing for long-term gas deliveries (i.e., with terms ranging from 6 months to 10 years). These contracts provided 50 percent of WP&L's annual gas purchases in 1996. In addition to its direct purchase and sales of natural gas, WP&L provided transportation service to 190 customers who purchased their own gas, pursuant to WP&L's transportation tariffs. These customers represent 31 percent of total gas moved through WP&L's natural gas distribution pipe. Refer to Note 11b in "Notes to Consolidated Financial Statements" relating to long-term purchase gas commitments. Manufactured Gas Plant Sites WP&L has a current or previous ownership interest in 11 properties associated in the past with the production of manufactured gas. Some of these sites do contain coal tar waste products which may present an environmental hazard. WP&L owns five of these sites, three are currently owned by municipalities and the remaining three are currently owned by private companies. Through ongoing investigations and studies, WP&L confirmed that there was no contamination at two of the sites and only a minimal likelihood of contamination at a third site. As WP&L has received close out letters from the DNR for these three sites, WP&L has no further obligation at these sites. WP&L has also implemented DNR- approved remediation plans at two additional sites in the last several years. An air sparging/biosparging remediation system was implemented at one of the sites, while excavation and disposal of the coal tar residue and contaminated soils was implemented at the other. Groundwater monitoring is ongoing at both sites. WP&L currently estimates that the remaining remediation costs associated with the former manufactured gas plant sites is $74 million. The estimate includes the costs of feasibility studies, data collection, soil and groundwater remediation activities and ongoing monitoring activities through 2027. The estimate is based on a number of factors including the estimated extent and volume of contaminated soil and/or groundwater. The estimate is also premised in part on a remediation method that involves treatment or removal of contaminated soil. Based on recent approvals from the DNR, WP&L may be able to implement a less-costly containment and control remediation strategy at two of the remaining sites. WP&L plans to implement this remediation at these two sites in 1997. If remediation is successful, management believes there may be a significant reduction in the estimated liability. Changes in the liability do not immediately impact the earnings of WP&L. Under the current rate making treatment approved by the PSCW, the costs expended in the environmental remediation of these sites are deferred and collected from gas customers over a five year period after new rates are implemented. Management believes future costs will also be recovered in rates. See "Item 3. Legal Proceedings" for information related to the manufactured gas plant sites. WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED GAS STATISTICS
Year Ended December 31, 1996 1995 1994 1993 1992 Area served (end of period): Cities, villages and towns served--retail 243 242 239 217 194 Customers served (end of period): Residential 133,580 129,576 124,938 120,829 116,642 Commercial and Industrial 16,309 15,976 15,531 15,088 14,656 Interruptible 303 257 272 261 262 Transport and other 252 284 240 85 109 -------- -------- -------- -------- -------- Total 150,444 146,093 140,981 136,263 131,669 ======== ======== ======== ======== ======== Sales--Therms (in thousands) (a): Residential 142,974 126,903 119,562 120,005 114,131 Commercial and Industrial 98,095 91,316 87,487 87,038 82,087 Interruptible 13,480 12,148 24,809 27,872 25,497 Transport and other 185,735 169,121 142,252 84,877 71,167 -------- -------- -------- -------- -------- Total 440,284 399,488 374,110 319,792 292,882 ======== ======== ======== ======== ======== Gas operating revenues (in thousands): Residential $90,382 $70,382 $71,555 $71,632 $63,699 Commercial and Industrial 50,270 39,456 41,918 40,748 37,154 Interruptible 5,261 3,708 8,777 11,247 14,589 Transport and other 19,714 25,619 29,681 13,643 3,920 -------- -------- -------- -------- -------- Total 165,627 139,165 151,931 137,270 119,362 ======== ======== ======== ======== ======== Average annual gas bill per residential and farm heating customer $677 $543 $573 $593 $546 Average annual residential and farm heating use -- therms 1,070 979 957 993 978 (a) One therm equals 100,000 British Thermal Units and is a measure of the heat content of natual gas.
HDC Incorporated in 1988, HDC is the parent company of all nonutility businesses. HDC and its principal subsidiaries are engaged in business development in three major areas: (1) environmental and engineering services; (2) affordable housing; and (3) energy services. None of the nonutility businesses contributed 10% or more of WPLH's consolidated revenues during 1996. The environmental and engineering service business contributed 11 percent of consolidated revenues in the years ended December 31, 1995 and 1994. The revenues at the environmental and engineering service business were lower in 1996 due to a softening market for environmental services. At year-end 1996, HDC employed 739 persons: 662 in the area of environmental engineering and consulting, 37 in the area of affordable housing, 32 in the area of energy services and 8 at the HDC level. Environmental Engineering and Consulting WP&L acquired RMT, Inc. (RMT) in 1983, and it subsequently became a wholly-owned subsidiary of HDC in 1988. In 1992, HDC transferred its ownership in RMT to Heartland Environmental Holding Company (HEHC), a wholly-owned subsidiary of HDC and the parent company for HDC's environmental and engineering services activities. In 1993, HDC acquired Jones & Neuse, Inc. (J&N) based in Austin, Texas. On December 31, 1996, HDC transferred ownership in J&N to RMT, Inc. RMT is a Madison, Wisconsin based environmental engineering and consulting company that serves clients nationwide in a variety of industrial segment markets. The most significant of these markets are chemical companies, pulp and paper processors, oil and gas providers, foundries and other manufacturers. RMT specializes in solid and hazardous waste management, ground water quality protection, industrial design and hygiene engineering, air and water pollution control, and laboratory services. Affordable Housing Formed by HDC in 1988, Heartland Properties, Inc. (HPI) is responsible for the acquisition, development, financing and syndication of a $231 million portfolio of high-quality affordable housing developments in Wisconsin and the Midwest. HPI has a majority ownership interest in 62 of these properties. As of December 31, 1996, HPI's investment in affordable housing properties was $113 million, net of depreciation. To facilitate HPI's development and financing efforts in the affordable housing market, HDC incorporated Capital Square Financial Corporation in 1992 to provide mortgage banking services, and Heartland Capital Company LLC in 1994 to provide construction financing services. Heartland Retirement Services (HRS), organized in 1993, provides a comprehensive range of housing products for older adults. In January 1996, this business was sold. Energy Services Heartland Energy Group, Inc (HEG) was formed in 1995 as the parent company for HDC's energy services businesses. The two most significant components of HEG as of December 31, 1996, were Heartland Energy Services, Inc. (HES) and ENSERV, Inc. HES, formed in 1993, provides energy supplies to industrial and wholesale customers. Since March 1994, HES has been actively involved in the buying and selling of natural gas, providing gas supply as well as complete fuel management services. HES received federal marketing authority for electricity in September 1994, and operates an energy scheduling and coordination center which buys and sells electricity throughout the United States. The initial electric transaction was made in June 1995. ENSERV offers turnkey project development and implementation for customer energy supply initiatives. Services include project feasibility, engineering, financing, and management. In January 1997, ENSERV, the natural gas marketing business of HES and Industrial Energy Applications (IEA), the energy marketing subsidiary of IES Industries, Inc., formed a joint venture. Discontinued Operations In December 1995, HDC committed to plans for the disposition of the primary operations of A&C Enercom Consultants, Inc. (A&C), which was acquired by HDC in 1993. A&C, a utility services company based in Atlanta, Georgia, provides a variety of energy consulting services including marketing and demand side management. The sale of substantially all the assets of these operations in a cash transaction was completed in January 1996. ITEM 2. PROPERTIES WP&L The following table gives information with respect to electric generating facilities of WP&L (including WP&L's portion of those facilities jointly- owned). 1996 Summer Capability Ownership WP&L Interest Portion in in Type and Location Name Fuel Kilowatts Facility Steam 100% Beloit, WI Blackhawk Natural Gas 60,000 100% Janesville, WI Rock River Coal 161,000 100% Cassville, WI Nelson Dewey Coal 226,000 100% Sheboygan, WI Edgewater #3 Coal 74,000 100% Sheboygan, WI Edgewater #4 Coal 233,200 68.2% Sheboygan, WI Edgewater #5 Coal 301,500 75% Kewaunee, WI Kewaunee Nuclear 211,200 41% Portage, WI Columbia Coal 485,100 46.2% Energy Center Hydro Wisconsin Dells, WI Kilbourn Hydro 9,500 100% Prairie du Sac, WI Prairie du Hydro 30,000 100% Sac Wisconsin River Petenwell/ Hydro 13,300 33% Power Co. Castle Rock 4 small units at Hydro 2,070 100% various locations Combustion Turbine Janesville, WI Rock River Natural Gas 151,400 100% or Oil Fond du Lac, WI South Fond du Natural Gas 169,700 100% Lac Units 2 or Oil and 3 Edgerton, WI Sheepskin Natural Gas 36,700 100% or Oil --------- Total 2,164,670 ========= WP&L owns 21,753 miles of electric transmission and distribution lines and 363 substations located adjacent to the communities served. Substantially all of WP&L's facilities are subject to the lien of its first mortgage bond indenture. HDC The following table gives information as of December 31, 1996 with respect to rental properties associated with HDC's affordable housing project developments, through its HPI subsidiary. Location Housing Development Resident Type Property: Antigo, WI The Depot Families Appleton, WI Lincoln Mills Families/Elderly Appelton, WI Ravine Mills Families/Elderly Appelton, WI The Mills II Families/Elderly Beloit, WI Beloit Water Tower Place Families Chisholm, MN Lincoln Square Families DePere, WI Lawton Foundry Families Madison, WI The Avenue Disabled/Families Marinett, WI Dunlap Square Families/Elderly Marshfield, WI The Woodlands Families/Elderly Mc Farland, WI The Cottages Families/Elderly Sheboygan Falls, WI Brickner Woolen Mills Families/Elderly Sheboygan, WI Jung Apartments Families Sheboygan, WI Sunnyside Townhouses Families Sun Prairie, WI Vandenburg Heights Families Verona, WI Sugar Creek Senior Housing Elderly Madison, WI YWCA Women & Homeless Various Other Families, Elderly, Singles, Disabled & Homeless Occupancy rates in the 62 properties/investments owned by HPI averaged 92 percent during 1996. HPI also maintains a minor equity ownership in development properties where the majority interest was subsequently sold to outside investors. This equity ownership is not considered material in relation to WPLH's consolidated financial statements. HPI remains contingently liable for minimum property financial performance guarantees for a period of time on many of the properties sold. Those contingent obligations have been accrued for or are otherwise not considered likely to have a material effect on WPLH's consolidated financial statements. ITEM 3. LEGAL PROCEEDINGS On July 20, 1995, the City of Beloit (Beloit) filed a suit against WP&L in the Circuit Court of Rock County, Wisconsin alleging that, based on negligence, nuisance and trespass, WP&L caused damage to Beloit through the contamination of property owned by Beloit as a result of the historical operation of manufactured gas plants on the property prior to Beloit's acquisition of the property. The suit seeks damages equal to the cost of cleaning up the property, for the decrease in the value of the property, and to compensate Beloit for lost development opportunities for the property as well as consequential damages and costs of the action. Beloit and WP&L entered into a Stipulation upon which the Court issued an Order staying further proceedings in the action pending further environmental investigation of the property and pending WP&L's determination of the extent of liability insurance coverage for the claims. In management's judgement, the probability is remote that this action will have a material adverse impact on WPLH's financial condition. Environmental Matters The information required by Item 3 is included in Item 8 of this Form 10-K in Note 11c of "Notes to Consolidated Financial Statements." Rate Matters The information required by Item 3 is included in Item 7 of this Form 10-K within the Management's Discussion and Analysis of Financial Condition and Results of Operations narrative under the caption "Liquidity and Capital Resources, Rates and Regulatory Matters." Recent Rate Case Proceedings
Increase Ordered or Increase (Decrease) Requested Negotiated Date Type of (Decrease) Ordered or % Return on % Return on Increase Rate Case Service Application Test Requested Negotiated Common Common (Decrease) Designation (a) Date Year ($ Millions) ($ Millions) Equity Equity Effective WP&L Retail (PSCW) 6680-UR-103 e,g,w 02-29-88 1988-89 14.7 5.5 13.25 13.10 10-18-88 6680-UR-104 e,g,w 12-30-88 1989-90 17.4 5.3 13.10 13.00 11-12-89 6680-UR-105 e,g,w 12-29-89 1990-91 9.0 (10.8) 13.10 12.90 08-01-90 6680-UR-106 e,g,w 12-28-90 1991-92 18.7 (0.1) 13.25 12.90 08-01-91 6680-UR-107 e,g,w 12-30-91 1992-93 17.8 (0.9) 13.10 12.40 01-01-93 6680-UR-108 e,g,w 01-04-93 1993-94 24.5 17.7 12.60 11.60 10-01-93 6680-UR-109 e,g,w 02-01-94 1995-96 3.8 (11.6) 12.20 11.50 01-01-95 6680-UR-110 e,g,w 04-01-96 1997-98 16.0 N/A 11.90 N/A N/A WP&L Wholesale (FERC) ER87-554 e 07-31-87 1987-88 (1.2) (.9) 13.00 (b) 01-01-88 ER93 e 05-28-93 1993-94 2.0 2.0 11.00 (b) 10-01-93 South Beloit (ICC) 85-0505 e,w 11-08-85 1985-86 1.4(c) .9 15.00 13.80 09-27-86 (a) e-electric, g-gas, w-water. (b) Return on equity was not specified in the negotiated settlement agreement. (c) On May 7, 1986, South Beloit Water, Gas and Electric Co. adjusted the increase requested downward to $1.1 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANTS Executive Officers of WPL Holdings, Inc Erroll B. Davis, Jr., 52, was elected President effective January 1990 and Chief Executive Officer effective July 1990 and has been a board member since March 1988. Lance W. Ahearn, 47, was elected President of HDC effective April 1990, and Chief Executive Officer effective May 1990. Edward M. Gleason, 56, was elected Corporate Secretary effective December 1993 and Vice President, Treasurer effective October 1993. He previously served as Vice President, Finance and Treasurer of WP&L from 1986 to 1993. Mr. Gleason functions as principal financial officer of WPL Holdings, Inc. Steven F. Price, 44, was appointed Assistant Corporate Secretary and Assistant Treasurer effective April 1992. He previously served as Cash Management Supervisor of WP&L from 1987 to 1992. Executive Officers of WP&L Erroll B. Davis, Jr., 52, was elected President and Chief Executive Officer effective August 1988 and has been a board member since April 1984. A.J. (Nino) Amato, 45, was appointed Senior Vice President effective October 1993. He previously served as Vice President, Marketing and Strategic Planning from 1992 to 1993 and Vice President, Marketing and Communications from 1989 to 1992. William D. Harvey, 47, was appointed Senior Vice President effective October 1993. He previously served as Vice President, Natural Gas and General Counsel from 1992 to 1993 and Vice President, General Counsel from 1990 to 1992. Eloit G. Protsch, 43, was appointed Senior Vice President effective October 1993. He previously served as Vice President, Customer Services and Sales from 1992 to 1993 and Vice President and General Manager, Energy Services from 1989 to 1992. Daniel A. Doyle, 38, was appointed Vice President, Power Production effective April 1996. He previously served as Vice President, Finance, Controller and Treasurer from 1994 to 1996, as Controller and Treasurer from 1993 to 1994 and Controller from 1992 to 1993. Prior to joining the Company, he was Controller of Central Vermont Public Service Corporation from 1988 to 1992. Barbara J. Swan, 45, was elected Vice President, General Counsel effective December 1994. She previously served as General Counsel from 1993 to 1994 and Associate General Counsel from 1987 to 1993. Pamela J. Wegner, 49, was elected Vice President, Information Services and Administration effective October 1994. Prior to joining the Company, she was the Administrator of the Division of Finance and Program Management in the Wisconsin Department of Administration from 1987 to 1994. Kim K. Zuhlke, 43, was elected Vice President, Customer Services and Sales effective October 1993. He previously served as Director of Marketing and Sales Services from 1991 to 1993. Joseph E. Shefchek, 40, was elected Assistant Vice President, Environmental Affairs and Research effective December 1994. He previously served as Director of Environmental Affairs and Research from 1991 to 1994. Edward M. Gleason, 56, was elected Controller, Treasurer and Corporate Secretary of WP&L effective May 1996. He served as Corporate Secretary from 1993 to 1996. He previously served as Vice President, Finance and Treasurer from 1986 to 1993. Susan J. Kosmo, 50, was elected Assistant Controller effective September 1995. She previously served as Trust Investments and Investor Relations Supervisor from 1992 to 1995 and Financial Relations Supervisor from 1989 to 1992. David A. Ramos, 40, was elected Assistant Controller effective January 1995. He previously served as Manager of Budgets, Rates and Cost Accounting from 1994 to 1995, Manager of Budgets and Rates from 1992 to 1994 and Manager of Rates and Financial Planning from 1990 to 1992. Steven F. Price, 44, was elected Assistant Corporate Secretary effective April 1992. He previously served as Cash Management Supervisor from 1987 to 1992. Robert A. Rusch, 34, was elected Assistant Treasurer effective September 1995. He previously served as Financial Analyst from 1989 to 1995. NOTE: All ages are as of December 31, 1996. None of the executive officers listed above is related to any member of the Board of Directors or nominee for director of either registrant. Executive officers of have no definite terms of office and serve at the pleasure of the respective Boards of Directors. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS WPLH's Common Stock trades on the New York Stock Exchange. Quarterly Price Ranges and Dividends with respect to the Common Stock are as follows:
1996 1995 Quarter High Low Dividend High Low Dividend First $32 $29 7/8 $0.4925 $31 $27 1/4 $0.485 Second 32 7/8 28 5/8 0.4925 30 27 1/2 0.485 Third 32 7/8 28 7/8 0.4925 29 3/8 27 1/2 0.485 Fourth 29 5/8 27 1/2 0.4925 31 3/4 29 1/4 0.485 ---- --- --- --- ----- --- --- --- --- ----- Year $32 7/8 $27 1/2 $1.97 $31 3/4 $27 1/4 $1.94 === === === === ===== === === === === =====
Stock price at December 31, 1996: 28 1/8 At December 31, 1996, there were approximately 37,108 holders of record of WPLH Common Stock including underlying holders in WPLH's Dividend Reinvestment and Stock Purchase Plan. In accordance with the terms of the Merger Agreement (refer to Item 1 "Business, Proposed Merger" above), WPLH is not permitted to declare or pay any dividends on any of its capital stock other than the obligations that exist with respect to WP&L's Cumulative Preferred Stock, and regular quarterly dividends on WPLH's Common Stock may not exceed 105 percent of the common stock dividends from the prior year. Effective with the formation of the holding company, all $5 par value Common Stock of WP&L was converted into WPLH Common Stock. WPLH is now the sole common shareowner of all 13,326,601 shares of WP&L Common Stock outstanding at December 31, 1996. Cash dividends paid per share of WP&L Common Stock during 1996 and 1995 to WPLH were $1.24 and $1.07, respectively, for each quarter. In the retail rate order effective January 1, 1995, the PSCW ordered that no dividend payment in excess of the level forecasted for 1995 ($58.1 million) may be paid, if such dividend payments would reduce WP&L's average common equity ratio below the test year forecasted level of 51.93 percent. Based on PSCW decisions on March 4, 1997, this percent will increase to 51.98 percent with rate case UR-110. At December 31, 1996, WP&L's common equity ratio was 53.53 percent. ITEM 6. SELECTED FINANCIAL DATA WPL Holdings, Inc. - Refer to Item 8 Financial Statements and Supplemental Data under the heading "WPL Holdings, Inc." Wisconsin Power and Light Company - Refer to Item 8 Financial Statements and Supplemental Data under the heading "Wisconsin Power and Light Company" ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WPL Holdings, Inc. - Refer to Item 8 Financial Statements and Supplementary Data under the heading "WPL Holdings, Inc." Wisconsin Power and Light Company - Refer to Item 8 Financial Statements and Supplementary Data under the heading "Wisconsin Power and Light Company" ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page WPL Holdings, Inc. Number Selected Financial Data 22 Management's Financial Discussion and Analysis of Financial Condition and Results of Operations 22 Report of Management 36 Report of Independent Public Accountants 37 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 38 Consolidated Balance Sheets, December 31, 1996 and 1995 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 40 Consolidated Statements of Capitalization, December 31, 1996 and 1995 41 Consolidated Statements of Common Shareowners' Investment for the Years Ended December 31, 1996, 1995 and 1994 42 Notes to Consolidated Financial Statements 43 Wisconsin Power and Light Company Selected Financial Data 58 Management's Financial Discussion and Analysis of Financial Condition and Results of 58 Operations Report of Management 69 Report of Independent Public Accountants 70 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 71 Consolidated Balance Sheets, December 31, 1996 and 1995 72 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 73 Consolidated Statements of Capitalization, December 31, 1996 and 1995 74 Consolidated Statements of Common Shareowners' Investment for the Years Ended December 31, 1996, 1995 and 1994 75 Notes to Consolidated Financial Statements 76 WPL HOLDINGS, INC. AND SUBSIDIARIES 1996 SELECTED FINANCIAL DATA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL STATEMENTS SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 (in millions, except per share data) Operating revenues $933 $807 $796 $739 $673 Income from continuing operations $73 $72 $66 $64 $58 Per share $2.38 $2.33 $2.17 $2.15 $2.10 Discontinued operations ($1) ($13) ($1) ($1) --- Per share ($0.04) ($0.43) ($0.04) ($0.04) --- Net income available for common shareowners $72 $58 $65 $63 $58 Per share $2.34 $1.90 $2.13 $2.11 $2.10 Cash dividends paid per share $1.97 $1.94 $1.92 $1.90 $1.86 Total assets (at December 31) $1,901 $1,872 $1,806 $1,762 $1,566 Long-term debt, net (at December 31) $363 $430 $448 $425 $418
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) WPLH (the Company), IES Industries, Inc. (IES) and Interstate Power Co. (IPC) have entered into an Agreement and Plan of Merger, as amended (Merger Agreement), dated November 10, 1995, which provides for the combination of all three companies. As a result of the transactions contemplated by the Merger Agreement, the combined company, Interstate Energy Corporation (IEC), anticipates cost savings of approximately $749 million over a ten-year period, net of transaction costs and costs to achieve the savings of approximately $14 million and $64.4 million, respectively. The estimate of potential cost savings constitutes a forward-looking statement and actual results may differ materially from this estimate. The estimate is necessarily based upon various assumptions that involve judgments with respect to, among other things, future national and regional economic and competitive conditions, technological developments, inflation rates, regulatory treatments, weather conditions, financial market conditions, future business decisions and other uncertainties. No assurance can be given that the estimated costs savings will actually be realized. The merger which is conditioned upon, among other things, receipt of certain regulatory and governmental approvals is expected to close by the end of the third quarter of 1997. As part of the approval process, management has proposed rate freezes to be implemented in certain jurisdictions for periods not to exceed four years. See Note 2 of "Notes to Consolidated Financial Statements" for additional information regarding the proposed merger. 1996 COMPARED WITH 1995 OVERVIEW The Company reported consolidated net income from continuing operations of $73.2 million or $2.38 per share for 1996, as compared to $71.6 million or $2.33 per share for 1995. Earnings per share for 1996 and 1995 were $2.34 and $1.90, respectively, reflecting the impact of the discontinued operations of A&C Enercom Consultants, Inc. (A&C) which is discussed in Note 12 of "Notes to Consolidated Financial Statements". The increase in earnings in 1996 primarily reflects the operations of the Company's utility subsidiary, Wisconsin Power and Light Company (WP&L). Continued customer growth in the service territory and increased power marketing activity contributed to a $9 million increase in electric margin in 1996 as compared with 1995. Gas margins also increased due primarily to higher weather-driven sales. (See "Electric Operations" and "Gas Operations" below). In addition, a $3.4 million after-tax gain on the sale of a combustion turbine was recognized during 1996. These events were partially offset by higher plant maintenance and depreciation expenses in 1996. Heartland Development Corporation (HDC), parent company of the Company's nonregulated operations, reported a loss from continuing operations of $3.5 million for 1996 compared with a loss from continuing operations of $1.5 million for 1995. HDC's 1996 results were adversely impacted by contract losses early in 1996 associated with the start-up of the energy service business as well as a softening market for the environmental service business. Partially offsetting these losses was an after-tax gain of $2.5 million in 1996, related to the sale of HDC's investment in assisted living properties. During 1996, the Company incurred $3.2 million in expenses associated with its proposed merger with IES and IPC. See Note 2 of "Notes to Consolidated Financial Statements" for additional information. The Company also recognized a 1996 after-tax loss of $1.3 million resulting from additional fees and expenses related to the discontinued operations of A&C which is discussed in Note 12 of "Notes to Consolidated Financial Statements". Electric Operations
Revenues and Costs kWhs Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1996 1995 1996 1995 1996 1995 Residential and Farm $201,690 $199,850 1% 2,979,826 2,937,825 1% 336,933 329,643 2% Industrial 143,734 140,562 2% 3,985,672 3,872,520 3% 815 795 3% Commercial 105,319 102,129 3% 1,814,324 1,773,406 2% 45,669 44,730 2% Sales to Other Utilities 131,836 97,350 35% 5,245,812 3,109,385 69% 90 48 88% Other 6,903 6,433 7% 57,757 54,042 7% 1,730 1,294 34% ------- ------- ---------- ---------- ------- ------- Total 589,482 546,324 8% 14,083,391 11,747,178 20% 385,237 376,510 2% ======= ======= ==== ========== ========== ==== ======= ======= ==== Electric Production Fuels 114,470 116,488 (2%) Purchased Power 81,108 44,940 80% ------- ------- Margin $393,904 $384,896 2% ======= ======= ====
Electric margin increased $9.0 million, or 2 percent, during 1996 compared with 1995 primarily due to higher sales to commercial and industrial customers as well as other utilities combined with reduced costs per kWh for electric production fuels and purchased power. Although fuel and purchased power costs declined on a per kWh basis, purchased power expense increased by 80 percent. This increase was due to WP&L's higher level of sales to other utilities as well as a $5.0 million increase in purchased power related to the purchase of replacement power during the extended 1996 refueling outage at the Kewaunee Nuclear Power Plant ( Kewaunee) . Partially offsetting increased purchased power costs were slightly lower delivered coal and nuclear fuel costs per kWh. Gas Operations
Revenues and Costs Therms Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1996 1995 1996 1995 1996 1995 Residential $90,382 $70,382 28% 142,974 126,903 13% 133,580 129,576 3% Commercial and Industrial 50,270 39,456 27% 98,095 91,316 7% 16,309 15,976 2% Interruptible 5,261 3,708 42% 13,480 12,148 11% 303 257 18% Transportation and other 19,714 25,619 (23%) 185,735 169,121 10% 252 284 (11%) ------- ------- ------- ------- ------- ------- Total 165,627 139,165 19% 440,284 399,488 10% 150,444 146,093 3% ======= ======= ==== ======= ======= ==== ======= ======= ==== Purchased Gas 104,830 84,002 25% ------- ------- Margin $60,797 $55,163 10% ======= ======= ====
Gas margin increased $5.6 million, or 10 percent, during 1996 compared with 1995 primarily as a result of higher sales. Therm sales increased 10 percent due to a combination of colder weather during the first five months of 1996 as compared to 1995 and customer growth of 3 percent. The 19 percent increase in gas revenues reflects not only the higher therm sales but also the pass through of higher natural gas costs to WP&L's customers as described below. Effective January 1, 1995, PSCW approved the replacement of the purchased gas adjustment clause with an adjustment mechanism based on a prescribed commodity price index. Fluctuations in WP&L's commodity cost of gas as compared to the price index are subject to a customer sharing mechanism with WP&L's gains or losses limited to $1.1 million. Due to favorable gas procurement activities in both 1996 and 1995, WP&L realized favorable contributions to gas margin in those years of $1.1 million and $0.8 million, respectively. Fees, Rents, Non-Utility Energy Sales and Other Revenues Fees, rents, non-utility energy sales and other revenues primarily reflect sales and revenues of the Company's nonregulated subsidiaries, consolidated under HDC, as adjusted for discontinued operations. Revenues of the principal businesses of HDC were as follows: 1996 1995 Environmental and engineering services $84.8 $88.6 Energy marketing 73.8 12.6 Other 14.9 16.4 ----- ----- $173.5 $117.6 ===== ===== Energy marketing revenues were higher due to an increase in the volume of electric power and natural gas sales by the energy marketing subsidiary. The subsidiary meets these sales commitments through spot market purchases and short-term purchase contracts. (See "Other Operation and Cost of Non- Utility Energy"). Revenues at the environmental and engineering business were lower in 1996 due to a softening market for environmental services. In addition to the revenues of the nonregulated businesses, other revenues also include the water operations of WP&L. These revenues were $4.2 million in both 1996 and 1995. Other Operation and Cost of Non-Utility Energy Other operation and cost of non-utility energy expense includes expenses related to WP&L, the parent company and the nonregulated businesses of HDC. The distribution of other operations expense was as follows: 1996 1995 $141.9 $139.9 Utility operations Non-regulated businesses and parent company operations 177.2 113.4 ------ ------ $319.1 $253.3 ====== ====== The increase in operations expense associated with the nonregulated businesses is primarily a result of increased volume at the energy marketing subsidiary. Several commitments made in early 1996 resulted in substantial losses. On a comparative basis, the non-utility energy marketing business incurred net losses of 17 cents per share in 1996 and 3 cents per share in 1995. The environmental and engineering services business also incurred higher contract related costs which were partially offset by labor and benefit savings. The environmental and engineering services business lost 4 cents per share in 1996 as compared to a 7 cent per share contribution in 1995. Operating expenses in the affordable housing business were significantly reduced in 1996 as operations support was outsourced and development activity was curtailed. After adjusting for the tax benefits and credits associated with this business, the affordable housing business contributed approximately 8 cents per share in 1996 including 2 cents per share related to the sale of two properties. In 1995, the affordable housing business contributed 4 cents per share. Maintenance Maintenance expense increased due to higher plant maintenance and the extended 1996 refueling outage at Kewaunee (See "Capital Requirements" section below). Depreciation and Amortization Depreciation and amortization expense increased $4.4 million as a result of property additions and greater amortization of contributions in aid of construction (a reduction of expense) in 1995. Interest Expense and Other The $9.1 million increase in other income is the result of two significant gains recognized in 1996. The sale of a combustion turbine by WP&L resulted in other income of $5.7 million. In addition, HDC recognized a gain of $4.2 million on the sale of its investment in assisted living properties. Interest expense was lower in 1996 as compared to 1995 as a result of less short-term debt outstanding and a slight decrease in interest rates. Income Taxes Income taxes increased for 1996 as a result of higher taxable income. The effective tax rate on continuing operations was 35.4 percent and 32.5 percent for 1996 and 1995, respectively. The lower rate in 1995 was the result of prior years' tax contingencies resolved favorably in 1995 and increased non-deductible merger expenses in 1996. 1995 COMPARED WITH 1994 OVERVIEW Earnings per share decreased to $1.90 in 1995 from $2.13 in 1994 reflecting the 43-cent impact of discontinued operations arising from the sale of A&C, which is discussed in Note 12 of "Notes to Consolidated Financial Statements." Earnings per share from continuing operations increased to $2.33 in 1995 as compared to $2.17 in 1994, after reflecting a restatement of the prior year for discontinued operations. The 16-cent increase per share from continuing operations reflects the impact of two non-recurring items in 1994 as well as higher earnings in 1995 at WP&L. The higher earnings at WP&L were primarily the result of higher electric and gas margins (see "Electric Operations" and "Gas Operations" below) and aggressive cost management. The two non-recurring items affecting net income for 1994 were the reversal of a coal contract penalty and costs associated with early retirement and severance programs. The coal contract item relates to a Wisconsin Supreme Court decision which reversed a coal contract penalty assessed against WP&L in 1989. The following break out presents the recurring aspects of 1995 and 1994 operations. 1995 1994 Earnings per share, as reported $1.90 $2.13 Per share impact of discontinued 0.43 0.04 ------ ------ Earnings per share from continuing 2.33 2.17 Significant non-recurring items: Coal contract penalty reversal ----- (0.16) Early retirement and severance costs ----- 0.27 ------ ------ Earnings per share from continuing before non-recurring items $2.33 $2.28 ====== ====== HDC reported a loss from continuing operations of $1.5 million in 1995 and a gain of $0.1 million in 1994. The decline in earnings is primarily the result of higher interest expense and new business development costs. Electric Operations
Revenues and Costs kWhs Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1995 1994 1995 1994 1995 1994 Residential and Farm $199,850 $194,242 3% 2,937,825 2,776,895 6% 329,643 322,924 2% Industrial 140,562 140,487 0% 3,872,520 3,764,953 3% 795 776 2% Commercial 102,129 101,382 1% 1,773,406 1,688,349 5% 44,730 43,793 2% Sales to other Utilities 97,350 86,400 13% 3,109,385 2,574,121 21% 48 42 14% Other 6,433 9,236 (30%) 54,042 54,518 (1%) 1,294 1,256 3% ------- ------- ---------- ---------- ------- ------- Total 546,324 531,747 3% 11,747,178 10,858,836 8% 376,510 368,791 2% ======= ======= === ========== ========== === ======= ======= === Electric Production Fuels 116,488 123,469 (6%) Purchased Power 44,940 37,913 16% ------- ------- Margin $384,896 $370,365 4% ======= ======= ===
Electric margin increased 4 percent during 1995 compared with 1994 primarily due to higher sales combined with reduced aggregate costs per kWh for electric production fuels and purchased power. Kilowatthour sales increased 8 percent due to a much warmer summer than normal, increased sales to other utilities, a 2 percent growth in customers, and continued economic strength in the service territory. Partially offsetting these sales increases was a 2.8 percent decrease in retail electric rates effective January 1, 1995. A record setting heat wave resulted in WP&L setting a system peak of 2,197 megawatts on July 31, 1995. This reflects a 9.7 percent increase over the previous record system peak of 2,002 megawatts set in 1994. While overall kWh sales increased, the aggregate costs of electric production fuels and purchased power remained relatively unchanged. The stability of these costs reflects lower coal and transportation costs at WP&L's generating units in 1995 as well as the availability of attractive purchased power opportunities in the bulk power market. Gas Operations
Revenues and Costs Therms Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1995 1994 1995 1994 1995 1994 Residential $70,382 $71,555 (2%) 126,903 119,562 6% 129,576 124,938 4% Commercial and Industrial 39,456 41,918 (6%) 91,316 87,487 4% 15,976 15,531 3% Interruptible 3,708 8,777 (58%) 12,148 24,809 (51%) 257 272 (6%) Transportation and other 25,619 29,681 (14%) 169,121 142,252 19% 284 240 18% ------- ------- ------- ------- ------- ------- Total 139,165 151,931 (8%) 399,488 374,110 7% 146,093 140,981 4% ======= ======= === ======= ======= === ======= ======= === Purchased Gas 84,002 100,942 (17%) ------- ------- Margin $55,163 $50,989 8% ======= ======= ===
Gas margin increased 8 percent during 1995 compared with 1994 primarily as a result of higher sales volumes and favorable gas procurement strategies. Therm sales increased 7 percent principally due to residential customer growth reflecting the favorable economic conditions in WP&L's service territory and colder than normal weather in the fourth quarter, offsetting a mild January and February. The 8 percent decrease in gas revenues was the result of a pass through to customers of the lower cost of purchased gas. Under the rate structure discussed previously, reductions in revenues resulting solely from such pass through would not be expected to have a material impact on earnings. The gas incentive program authorized by the PSCW also resulted in additional pre-tax earnings of $0.8 million in 1995. Fees, Rents, Non-Utility Energy Sales and Other Revenues Fees, rents, non-utility energy sales and other revenues primarily reflect sales and revenues of the Company's nonregulated subsidiaries, consolidated under HDC, as adjusted for discontinued operations. Revenues of the principal businesses of HDC were as follows: 1995 1994 Environmental and engineering $88.6 $87.7 Energy marketing 12.6 2.0 Other 16.4 18.2 ------ ------ $117.6 $107.9 ====== ====== While revenues of the environmental and engineering services business were relatively unchanged, margins were lower in 1995 reflecting greater price competition in that industry. Energy marketing revenues increased due to the development of power marketing activities and increased gas transactions in 1995. Due to uncertainties as to the future of the affordable housing tax credit program, HDC discontinued making additional commitments in this area in 1995. In addition to the revenues of the nonregulated businesses, other revenues also include the water operations of WP&L. These revenues were $4.2 million and $4.1 million, respectively, in 1995 and 1994. Other Operation and Cost of Non-Utility Energy Other operation and cost of non-utility energy expense includes expenses related to WP&L, the parent company and the nonregulated businesses of HDC. The distribution of operations expense was as follows: 1995 1994 Utility operations $139.9 $151.0 Non-regulated businesses and parent company operations 113.4 97.8 ----- ----- $253.3 $248.8 ===== ===== The decline in utility-related operations expense principally reflects the impact of a $13.7 million pre-tax charge for early retirement and severance costs in 1994. While WP&L was able to achieve savings in 1995 from its continued reengineering of operations, these savings were offset somewhat by higher conservation expenses. The increase in operations expense associated with the nonregulated businesses and parent company principally reflects higher costs at the energy marketing subsidiary. In addition, this business experienced additional administrative costs associated with new business development resulting in an operating loss in 1995 of 3 cents per share and in 1994 of 2 cents per share. The environmental and engineering services business also incurred higher operations costs in 1995. However, as a result of realigning its business in 1995 through the sale of selected operations, as discussed in the "Interest Expense and Other" section below, the environmental and engineering services business was able to maintain a 7 cent per share contribution to earnings in both 1995 and 1994. Operating expenses exceeded operating revenue in the affordable housing business, however, after adjusting for the tax benefits and credits associated with this business, the affordable housing business contributed approximately 4 cents per share in 1995 and 3 cents per share in 1994. Depreciation and Amortization The increase in depreciation and amortization expense in 1995 is primarily the result of property additions at WP&L. Interest Expense and Other Interest expense increased due to the higher levels of short-term debt and higher short-term interest rates. During the second quarter of 1995, WP&L repurchased $18 million of Series V bonds from private investors. WP&L used short-term debt to acquire the Series V bonds. WP&L applied revenue requirement neutral accounting treatment to these acquired bonds consistent with regulatory requirements. Interest expense and other in 1994 also includes pre-tax income of $8.8 million related to a Wisconsin Supreme Court decision which reversed a coal contract penalty assessed against WP&L in 1989. In addition, income associated with the allowance for funds used during construction (AFUDC) decreased in 1995 due to significantly lower construction work-in-progress amounts and a lower FERC AFUDC rate. Interest expense and other also includes $2.2 million associated with the gain on the sale of various investments and environmental consulting divisions in 1995 by HDC. Income Taxes Despite higher operating income in 1995, the income tax expense was unchanged due to prior years' tax contingencies favorably resolved in 1995. The effective income tax rate on continuing operations was 32.5 percent and 34.1 percent for 1995 and 1994, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity is primarily determined by the level of cash generated from its utility operations and the funding requirements of WP&L's ongoing construction and maintenance programs. WP&L finances its construction expenditures through internally generated funds supplemented, when required, by outside financing. During 1996, 1995 and 1994, the Company generated sufficient cash flows from operations, the sale of other property and equipment and short-term borrowing to cover operating expenses, cash dividends and investing activities. Cash flows from operations increased to $191 million for 1996, compared with $186 million and $168 million in 1995 and 1994, respectively. The decrease in cash flows used for investing activities was primarily attributable to $36.3 million received from the sale of a combustion turbine by WP&L as well as $24.9 million from the sale of a subsidiary and investment at HDC. Rates and Regulatory Matters Effective January 1, 1995, for the two-year period ended December 31, 1996, the PSCW, in rate order UR-109, authorized a 2.8 percent annual decrease in electric rates, a 0.5 percent annual increase in gas rates and a decline in the allowed return on common equity to 11.5 percent from the previous 11.6 percent. See Note 1J of the "Notes to Consolidated Financial Statements" for additional information. WP&L submitted its biennial rate case filing with the PSCW on April 1, 1996, for the test year beginning January 1, 1997. In the filing WP&L requested rate increases of $13.4 million or 3.0 percent for Wisconsin retail electric customers and $2.4 million or 1.6 percent for Wisconsin natural gas customers. This request was based on an 11.9 percent return on common equity. Technical hearings were completed in November 1996. WP&L filed additional testimony subsequent to the conclusion of the November 1996 hearings regarding recovery of replacement power and operations and maintenance expenses for the extended outage at Kewaunee. Because of this additional filing, a final rate order is not expected until April 1997. Refer to "Subsequent Events" for further information relating to this rate order. Industry Outlook The primary business of the Company is that of WP&L, which is subject to regulation by the PSCW and the FERC. The PSCW's inquiries into the future structure of the natural gas and electric utility industries are ongoing. The stated goal of the PSCW in the natural gas docket is to move all gas supply activities out of the existing regulated distribution utilities and allow independent units to compete for the business. The goal of the electric restructuring process is to create open access transmission and distribution services for all customers with competitive generation and customer service markets. Additional proceedings as well as consultation with the legislature are planned prior to a target implementation date after the year 2000. The Company cannot currently predict what impact, if any, these proceedings may have on its future financial condition or results of operations. The Company believes, however, that it is well positioned to compete in a deregulated environment. WP&L's rates to all customer classes are competitive within the state of Wisconsin and below the average in the Midwest region. On April 24, 1996, the FERC issued two orders (No. 888 and 889) that will promote competition by opening access to the nation's wholesale power market. The new orders require public utilities that own, control or operate transmission systems to provide other companies with the same transmission access/service that they provide to themselves. The Company presently has on file with the FERC a pro forma open access transmission tariff, filed in compliance with FERC Order No. 888. On November 13, 1996, the FERC accepted the non-rate terms and conditions of WP&L's tariff for filing without modification. On September 20, 1996, the FERC extended the deadline for compliance with Order No. 889 to January 3, 1997 which was met by WP&L through participation in a regional Open Access Same-Time Information System. On September 26, 1996, the PSCW issued an order which establishes the minimum Standards for a Wisconsin Independent System Operator (Standards). The Standards will be applied by the PSCW in Advance Plan proceedings, merger review cases, transmission construction cases and other proceedings as appropriate. The order provides that the Standards will be reviewed and revised as necessary in light of ongoing regional and national events, such as FERC requirements or policy, regional institutions, or relevant actions of neighboring states. On November 18, 1996, WP&L submitted applications and subsequently became a member of both the MAPP RTG and the Power and Energy Market. WP&L declined membership in the MAPP Regional Reliability Council and will continue its membership in the Mid-American Interconnected Network, Inc. (MAIN) through 1997. As described in Note 1H of the "Notes to Consolidated Financial Statements," WP&L complies with the provisions of Statement of Financial Accounting Standards (SFAS No. 71 ) " Accounting for the Effects of Certain Types of Regulation." In the event WP&L determines that it no longer meets the criteria for following SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS 71 include (1) increasing competition that restricts WP&L's ability to establish prices to recover specific costs and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. WP&L periodically reviews these criteria to ensure that the continuing application of SFAS 71 is appropriate. WP&L believes that it still meets the requirements of SFAS 71. Financing and Capital Structure The level of short-term borrowing fluctuates based on seasonal corporate needs, the timing of long-term financing, and capital market conditions. The Company's operating subsidiaries generally borrow on a short-term basis to provide interim financing of construction and capital expenditures in excess of available internally generated funds. The subsidiaries periodically reduce their outstanding short-term borrowing through the issuance of long-term debt and through the Company's additional investment in their common equity. To maintain flexibility in its capital structure and to take advantage of favorable short-term rates, the Company also uses proceeds from the sales of accounts receivable and unbilled revenues to finance a portion of its long-term cash needs. The Company also anticipates that short-term debt funds will continue to be available at reasonable costs due to strong ratings by independent utility analysts and rating services. Commercial paper has been rated A-1+ by Standard & Poor's Corp. and P-1 by Moody's Investors Service. The Company's bank lines of credit of $120 million at December 31, 1996 are available to support these borrowings. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and commodity price risks. The Company enters into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate long-term debt, short-term debt and the sales of its accounts receivable. The total notional amount of interest rate swaps was $89 million and $123 million, respectively, for the years ended December 31, 1996 and 1995. The Company uses swaps, futures and options to hedge the price risks associated with the purchase and sale of stored gas at WP&L and with the purchases and sales of gas and electric power at the energy marketing subsidiary. The Company's capitalization at December 31, 1996, including the current maturities of long-term debt, variable rate demand bonds and short-term debt, consisted of 48 percent common equity, 5 percent preferred stock and 47 percent debt. The common equity to total capitalization ratio at December 31, 1996, increased to 48 percent from 47 percent at December 31, 1995. The retail rate order effective January 1, 1995 requires WP&L to maintain a utility common equity level of 51.93 percent of total utility capitalization. In addition, the PSCW ordered that it must approve the payment of dividends by WP&L to the Company if such dividends would reduce WP&L's average common equity ratio below 51.93 percent. At December 31, 1996 WP&L's common equity ratio was 53.5 percent. Refer to "Subsequent Events" for further information relating to the new rate order. In accordance with the terms of the Merger Agreement (see Note 2 of "Notes to Consolidated Financial Statements"), the Company may not declare or pay any dividends on any of its capital stock other than the obligations that exist with respect to cumulative preferred stock, and regular quarterly dividends on common stock provided they do not exceed 105 percent of the common stock dividends from the prior year. Capital Requirements The Company's largest subsidiary, WP&L, is a capital-intensive business and requires large investments in long-lived assets. Therefore, the Company's most significant capital requirements relate to construction expenditures at WP&L. Estimated capital requirements for the next five years are as follows: Capital Requirements (in millions) 1997 1998 1999 2000 2001 Construction expenditures Electric $88.7 $89.2 $89.9 $90.6 $91.3 Gas, water and common 45.0 43.8 44.3 44.7 45.2 Nuclear fuel 11.4 6.8 9.4 11.4 6.1 AFUDC 2.1 2.1 2.1 2.1 2.1 ----- ----- ----- ----- ----- Total construction expenditures 147.2 141.9 145.7 148.8 144.7 Changes in working capital and other 22.6 16.8 (5.4) 13.9 13.6 ----- ----- ----- ----- ----- Total construction and operating capital 169.8 158.7 140.3 162.7 158.3 Long-term debt maturities 55.0 8.9 0.0 1.9 0.0 Manufactured gas plant remediation 5.0 1.0 0.5 0.5 0.5 ----- ----- ----- ----- ----- Total capital requirements $229.8 $168.6 $140.8 $165.1 $158.8 ===== ===== ===== ===== ====== Included in the construction expenditure estimates, in addition to recurring additions and improvements to the distribution and transmission systems, are expenditures related to upgrading computer systems in order to improve productivity and customer service. Electric expenditures include the annual contribution to external trust funds to fund the decommissioning of Kewaunee. These amounts are recorded in depreciation expense and recovered in rates. WP&L expects to contribute $19.7 million annually to this fund. Refer to "Subsequent Events" for further information relating to the new rate order. WP&L has a 41 percent ownership interest in Kewaunee. During a scheduled refueling and maintenance outage of the plant in September 1996, steam generator tube degradation was discovered which required that the tubes be repaired before the plant could resume operation. A laser weld repair process was implemented to address the problem. During testing of the success of this process in early February 1997, it was discovered that further repair work or tube plugging would be required for a portion of the welded tubes. Further investigation is ongoing which may delay the return of the plant to service beyond the first quarter of 1997. WP&L's costs associated with these tube repairs are estimated at $2.3 million of which $1.4 million was expensed in 1996. Additional costs associated with the purchase of replacement power, estimated at approximately $500,000 per week, were not recoverable from customers under the retail rate order in effect at the time of the outage. However, if the outage were to extend beyond the implementation of a PSCW rate order expected to be issued in April 1997, replacement power costs incurred subsequent to that order will be recovered through a surcharge mechanism. Refer to "Subsequent Events" for further information relating to the new rate order. Repairs using laser technology may be only temporary because corrosion will continue at a rate which cannot be accurately forecasted. Because of these uncertainties, the PSCW, on January 3, 1997, approved accelerated cost recovery of the remaining depreciation costs and unfunded decommissioning liability based on an expected end of plant life of 2002 rather than the currently licensed end of life of 2013. The accelerated depreciation and decommissioning expense will be incorporated with the retail rate order expected to be issued in April of 1997. Based on a 1992 site specific study, WP&L's share of the costs to decommission Kewaunee was estimated at $142 million. Assuming an annual inflation rate of 6.5 percent, WP&L's liability in current year dollars is approximately $180 million. As of December 31, 1996, $90.7 million, net of tax, was available in external trust funds to meet this liability. See Note 11 of the "Notes to Consolidated Financial Statements" for additional information. Refer to "Subsequent Events" for further information relating to the new rate order. Currently, the owners of Kewaunee have different views of the future market value of energy which impact on the desirability of replacing the steam generators. During the first quarter of 1996, Wisconsin Public Service Corporation filed an application with the PSCW seeking approval to replace the steam generators in 1999. The total cost of the generator replacement would be approximately $89 million. A PSCW decision on this application is expected in October 1997. In addition, the joint owners continue to analyze and discuss other options related to the future of Kewaunee including various ownership transfer alternatives. If it should become necessary to retire Kewaunee permanently, WP&L would replace the Kewaunee generation through a combination of power purchases, increased generation at existing WP&L generating units and new generating unit additions, if necessary. The net book value of WP&L's share of Kewaunee as of December 31, 1996 was $51.4 million, excluding the value of nuclear fuel. Certain matters discussed concerning Kewaunee are forward-looking statements and can generally be identified as such because the content of the statement include the phrase the Company "expects," or other words of similar import. Similarly, statements that describe the Company's future plans, objectives and goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results and outcomes to differ materially from those currently anticipated. In addition to the matters discussed above, factors that could affect actual results or outcomes include the timing and nature of regulatory responses and approvals, technological developments and advancements regarding repair of the steam generator tubes, the useful life of the repairs affected and the cost of purchased electric power or additional generating facilities to replace the power generated by Kewaunee. The staff of the Securities and Exchange Commission also has questioned certain of the current accounting practices of the electric utility industry, including the Company, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the Financial Accounting Standards Board (FASB) has decided to review the accounting for closure and removal costs, including decommissioning of nuclear power plants. Capital requirements for HDC, generally consist of funds used for business acquisition activity and to provide for changes in working capital for the operations of existing businesses. In addition to those items mentioned above, requirements at HDC over the next five years are expected to emphasize growth in the energy and environmental services businesses through additional investments in joint ventures and acquisitions. Capital Resources One of the Company's objectives is to finance utility construction expenditures through WP&L's internally generated funds supplemented, when required, by outside financing. With this objective in place, WP&L has financed 71 percent of its construction expenditures during 1996 from internal sources. However, during the next five years, the Company expects this percentage to increase primarily due to relatively stable level of construction expenditures and higher depreciation rates beginning in 1997. External financing sources such as the issuance of long-term debt and short-term borrowings will be used by WP&L to finance the remaining construction expenditure requirements for this period. Expectations are that approximately $105 million of long-term debt will be issued in 1997. HDC's financing of capital requirements will be accomplished through internally generated funds, supplemented by external borrowings and equity contributions from the Company. NEW ACCOUNTING PRONOUNCEMENT In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes standards for asset and liability recognition when transfers occur. This statement, effective January 1, 1997, is not expected to materially impact the Company's financial position or results of operations. Effective January 1, 1997, the Company adopted the provisions of Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." This Statement provides authoritative guidance for recognition, measurement, display and disclosure of environmental remediation liabilities in financial statements. The Company has recorded environmental remediation liabilities of $74.1 million at December 31, 1996. Adoption of SOP 96-1 is not expected to have a material impact on the Company's financial position or results of operations. INFLATION The impacts of inflation on WP&L are currently mitigated through ratemaking methodologies, customer growth, and productivity improvements. Inflationary impacts on the nonregulated businesses are not anticipated to be material to the Company. OTHER EVENTS Union Contract WP&L and the International Brotherhood of Electrical Workers, Local 965, reached agreement on a new three-year collective bargaining contract on June 14, 1996. The new agreement includes increases in the base wage during the first, second and third years of the contract of 3 percent, 3 percent and 3.25 percent, respectively. The new agreement was effective retroactive to June 1, 1996, with wages retroactive to May 26, 1996, which was the beginning of a pay period. At the end of 1996, the contract covered 1,617 of WP&L's employees which represents approximately 69 percent of the total employees at WP&L. Sale of Business Segment The Company's financial statements reflect the discontinuance of operations of A&C its former utility energy and marketing consulting business in 1995. See Note 12 of "Notes to Consolidated Financial Statements" for additional information. Environmental WP&L cannot precisely forecast the effect of future environmental regulations by federal, state and local authorities on its generation, transmission and other facilities, or its operations, but has taken steps to anticipate the future while meeting the requirements of current environmental regulations. The Clean Air Act Amendments of 1977 and subsequent amendments to the Clean Air Act, as well as the new laws affecting the handling and disposal of solid and hazardous wastes, could affect the siting, construction and operating costs of bothpresent and future generating units. Under the Federal Clean Water Act, National Pollutant Discharge Elimination System permits for generating station discharge into water ways are required to be obtained from the DNR to which the permit program has been delegated. These permits must be periodically reviewed. WP&L has obtained such permits for all of its generating stations or has filed timely applications for renewals of such permits. Air quality regulations promulgated by the DNR in accordance with federal standards impose statewide restrictions on the emission of particulates, sulfur dioxide, nitrogen oxides and other air pollutants and require permits from the DNR for the operation of emission sources. WP&L currently has the necessary permits to operate its generating facilities. While periodic exceedances in air emissions may occur, management promptly acts on them and works with the DNR to resolve any permit compliance issues. With the passage of the new Federal Clean Air Act Amendments, the state is required to include these provisions in its permit requirements. WP&L has submitted Title V permit applications in compliance with schedules set forth by the regulators. WP&L has also completed application for Phase II permits under the Clean Air Act in compliance with the time lines identified. The state Title V operating permits, when issued, will consolidate all existing air permit conditions and regulatory requirements into one permit for each facility. Permits have been or are expected to be issued in 1997. Until such time, the facilities will continue to operate under their existing permit conditions. WP&L's compliance strategy for Wisconsin's sulfur dioxide law (discussed above) and the Federal Clean Air Act Amendments required plant upgrades at its generating facilities. The majority of these projects were completed in 1993. WP&L has installed continuous emission monitoring systems at all of its coal fired boilers in compliance with federal requirements. Monitoring for sulfur dioxide was also required by Title IV of the Federal Clean Air Act at WP&L's South Fond du Lac, Wisconsin combustion-turbine site. These requirements were also met. Additional monitoring systems for nitrogen oxides were required in 1996 at the combustion turbine site. WP&L has installed these monitors, and completed certification tests for the equipment. No significant additional investments are anticipated at this time to meet the requirements of the Federal Clean Air Act Amendments. For a discussion of the Company's liability regarding environmental remediation at certain manufactured gas plant sites formerly operated by WP&L, see Note 11 of "Notes to Consolidated Financial Statements." Subsequent Event WP&L submitted its biennial rate case filing (UR-110) with the PSCW on April 1, 1996, for the test year beginning January 1, 1997. In the filing, WP&L requested rate increases of $13.4 million or 3.0 percent for Wisconsin retail electric customers and $2.4 million or 1.6 percent for Wisconsin natural gas customers. This request was based on an 11.9 percent return on common equity. On March 4, 1997, the PSCW finalized certain decisions relating to this rate case. For a description of this filing, refer to "Rates and Regulatory Matters" above. The following decisions were reached: authorization of a surcharge to collect replacement power costs while Kewaunee is out of service; authorization of an increase in the return on equity to 11.7 percent from its current level of 11.5 percent; a requirement to maintain a utility common equity level of 51.98 percent as compared to the current level of 51.93 percent; reinstatement of the electric fuel adjustment clause; and continuation of a modified gas performance based ratemaking incentive mechanism. Preliminary estimates for UR-110 indicate an $11.2 million or 2.5 percent reduction for Wisconsin retail electric customers and a $1.3 million or 2.3 percent reduction for Wisconsin natural gas customers. Although the PSCW has publicly announced the foregoing decisions, a final order in WP&L's rate case is not expected to be issued by the PSCW until April 1997. As previously discussed in the MD&A under "Capital Requirements," Kewaunee is in the process of using laser technology for tube repairs and further investigation is ongoing which may delay the return of the plant to service beyond the first quarter of 1997. Because of these uncertainties, the PSCW, on January 3, 1997, approved accelerated cost recovery of the remaining depreciation costs and unfunded decommissioning liability based on an expected end of plant life of 2002 rather than the currently licensed end of life of 2013. The accelerated depreciation and decommissioning expense will be incorporated with the retail rate order UR-110. Based on the March 4, 1997 decisions by the PSCW, WP&L expects to recover in rates an additional $3.0 million annually related to the accelerated depreciation of Kewaunee and to increase the annual contribution to the external decommissioning trust funds to $16 million from its current level of $10.7 million. The forecasted level of the contribution included in the capital requirements section was $19.7 million. After-tax earnings on the tax-qualified and non-qualified decommissioning funds are assumed to be 5.6 percent and 7.0 percent, respectively. Based on a 1992 site specific study, WP&L's share of the costs to decommission Kewaunee was estimated at $142 million. WP&L's share of the decommissioning costs of Kewaunee was previously established to be $180 million (in 1996 dollars) using an annual inflation rate of 6.5 percent. The inflation assumptions applied in UR-110 were as follows: labor, 4.12 percent; burial costs, 10.42 percent; energy 3.66 percent; and other, 8.00 percent for a weighted average inflation rate of 5.44 percent. Based on this revised inflation rate, WP&L's liability in current year dollars is approximately $176 million. As of December 31, 1996, $90.7 million, net of tax, was available in external trust funds to meet this liability. See Note 11 of the "Notes to Consolidated Financial Statements" for additional information. The undiscounted amount of decommissioning costs estimated to be expended between the years 2014 and 2050 was $1,016 million. Based on the revised funding plan this amount was decreased to $611 million to be expended between the years 2003 and 2039. Kewaunee has been out of service since September 21, 1996, when it was shut down for a refueling and maintenance outage. Start-up has been delayed by problems associated with repairing the tubes in Kewaunee's two steam generators. In early February, testing of the laser welding repair of the tubes revealed unexpected problems with the quality of the welds. After further inspection and laboratory testing, WPSC is now planning to undertake additional repairs which could allow Kewaunee to return to service in the June 1997 time frame. The additional repairs involve removing metal sleeves that were installed previously to repair the corroded tubes. New, slightly longer sleeves will be installed to cover the areas of concern in the original steam generator tubes. WPSC's management believes that the NRC will approve this repair process because it only requires minor changes to the presently approved sleeving process. The cost of the additional repairs is expected to be between $4.5 million and $10.0 million, depending on the number of previously repaired sleeves that can remain in service. WP&L's shares of the costs is in the range of $1.8 to $4.1 million based on its 41.0% ownership in the plant. Dividend Declaration On January 22, 1997, the Board of Directors of the Company declared a quarterly dividend on WPLH Common Stock. The dividend is 50 cents per share payable February 15 to shareowners of record on January 31, 1997. Selected Consolidated Quarterly Financial Data (Unaudited) The summarized quarterly financial data below were not audited by independent public accountants, but reflect all adjustments necessary, in the opinion of the Company, for a fair presentation of the data. The quarterly amounts can be affected by seasonal weather conditions. Refer to MD&A for a discussion of the impacts of weather. Operating Operating Net Earnings Revenues Income Income per Share Quarter Ended (in thousands except per share data) 1996: March 31 $260,877 $54,162 $31,680 $1.03 June 30 208,293 31,127 16,539 0.54 September 30 212,263 28,867 12,596 0.41 December 31 251,411 27,348 11,093 0.36 1995: March 31 $215,874 $44,701 $19,653 $0.64 June 30 175,990 21,427 6,939 0.23 September 30 196,131 41,923 20,709 0.67 December 31 219,260 37,947 11,131 0.36 REPORT ON THE FINANCIAL INFORMATION WPL Holdings, Inc. management is responsible for all the information appearing in this annual report and for the accuracy and internal consistency of that information. The consolidated financial statements that follow have been prepared in accordance with generally accepted accounting principles. In addition to selecting appropriate accounting principles, management is responsible for the manner of presentation and for the reliability of the financial information. In fulfilling that responsibility, it is necessary for management to make estimates based on currently available information and judgments of current conditions and circumstances. Through a well-developed system of internal controls, management seeks to ensure the integrity and objectivity of the financial information presented in this report. This system of internal control is designed to provide reasonable assurance that the assets of the company are safeguarded and that the transactions are executed according to management's authorizations and are recorded in accordance with the appropriate accounting principles. The Board of Directors participates in the financial information reporting process through its Audit Committee. Erroll B. Davis Jr. President and Chief Executive Officer WPL Holdings, Inc. Edward M. Gleason Vice President, Treasurer and Corporate Secretary Principal Financial Officer WPL Holdings, Inc. January 30, 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareowners of WPL Holdings, Inc.: We have audited the accompanying consolidated balance sheets and statements of capitalization of WPL Holdings, Inc. (a Wisconsin corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flow and common shareowners' investment for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WPL Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 30, 1997 WPL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 1996 1995 1994 (in thousands except for per share data) Operating revenues: Electric $589,482 $546,324 $531,747 Gas 165,627 139,165 151,931 Fees, rents, non-utility energy sales and other 177,735 121,766 112,039 ------- ------- ------- 932,844 807,255 795,717 ------- ------- ------- Operating expenses: Electric production fuels 114,470 116,488 123,469 Purchased power 81,108 44,940 37,913 Purchased gas 104,830 84,002 100,942 Other operation and cost of non-utility energy 319,154 253,277 248,847 Maintenance 46,492 42,043 41,227 Depreciation and amortization 90,683 86,319 80,351 Taxes other than income 34,603 34,188 33,788 ------- ------- ------- 791,340 661,257 666,537 ------- ------- ------- Operating income 141,504 145,998 129,180 ------- ------- ------- Interest expense and other: Interest expense 42,027 43,559 37,686 Allowance for funds used during construction (3,208) (2,088) (4,038) Other (15,644) (6,509) (10,245) ------- ------- ------- 23,175 34,962 23,403 ------- ------- ------- Income from continuing operations before income taxes 118,329 111,036 105,777 Income taxes 41,814 36,108 36,043 Preferred dividend requirement of subsidiary 3,310 3,310 3,310 ------- ------- ------- Income from continuing operations 73,205 71,618 66,424 ------- ------- ------- Discontinued operations: Loss from operation of discontinued subsidiary, net of applicable tax benefits of $1,451 and $632 --- 2,212 1,174 Loss on disposal of subsidiary, net of applicable tax benefit of $575 and tax expense of $3,271 1,297 10,974 --- ------- ------- ------- 1,297 13,186 1,174 ------- ------- ------- Net income $71,908 $58,432 $65,250 ======= ======= ======= Earnings per share: Income from continuing operations $2.38 $2.33 $2.17 Discontinued operations (0.04) (0.43) (0.04) ------- ------- ------- Net income $2.34 $1.90 $2.13 ======= ======= ======= Weighted average number of shares of common stock outstanding 30,790 30,774 30,671 ======= ======= ======= Cash dividends paid per share $1.97 $1.94 $1.92 ======= ======= ======== The accompanying notes are an integral part of the consolidated financial statements. WPL HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS December 31, 1996 1995 ASSETS (in thousands) Utility plant: Plant in service-- Electric $1,729,311 $1,665,611 Gas 227,809 217,678 Water 23,905 22,518 Common 152,093 136,943 --------- --------- 2,133,118 2,042,750 Less--accumulated provision for depreciation 967,436 887,562 --------- --------- 1,165,682 1,155,188 Construction work in progress 55,519 36,996 Nuclear fuel, net 19,368 18,867 --------- --------- 1,240,569 1,211,051 --------- --------- Other property and equipment: Rental, net 112,913 102,206 Other, net 16,350 42,563 --------- --------- 129,263 144,769 --------- --------- Investments: Nuclear decommissioning trust funds 90,671 73,357 Other investments 15,408 12,628 --------- --------- 106,079 85,985 --------- --------- Current assets: Cash and equivalents 11,070 11,386 Net accounts receivable and unbilled revenue, less allowance for doubtful accounts of $1,524 and $1,735, respectively 88,798 94,648 Coal, at average cost 15,841 14,625 Materials and supplies, at average cost 19,915 20,723 Gas in storage, at average cost 9,992 6,319 Prepayments and other 26,786 27,987 --------- --------- 172,402 175,688 --------- --------- Restricted cash 6,848 3,266 --------- --------- Deferred charges: Regulatory assets 160,877 170,269 Other 84,493 81,386 --------- --------- 245,370 251,655 --------- --------- TOTAL ASSETS $1,900,531 $1,872,414 ========= ========= CAPITALIZATION AND LIABILITIES Capitalization (See Consolidated Statements of Capitalization): Common shareowners' investment $607,355 $597,470 Subsidiary preferred stock not mandatorily redeemable 59,963 59,963 Long-term debt, net 362,564 430,362 --------- --------- 1,029,882 1,087,795 --------- --------- Current liabilities: Current maturities of long-term debt 67,626 3,397 Variable rate demand bonds 56,975 56,975 Short-term debt 102,779 109,525 Accounts payable and accruals 106,486 94,898 Accrued payroll and vacation 14,500 14,299 Accrued taxes 4,669 6,483 Accrued interest 9,085 9,214 Other 45,218 26,783 --------- --------- 407,338 321,574 --------- --------- Other credits: Accumulated deferred income taxes 245,686 241,150 Accumulated deferred investment tax credits 36,931 38,842 Accrued environmental remediation costs 74,075 76,852 Deferred credits and other 106,619 106,201 --------- --------- 463,311 463,045 --------- --------- Commitments and contingencies (Note 11) TOTAL CAPITALIZATION AND LIABILITIES $1,900,531 $1,872,414 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. WPL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1996 1995 1994 (in thousands) Cash flows generated from (used for) operating activities: Net income $71,908 $58,432 $65,250 Adjustments to reconcile net income to net cash generated from operating activities: Depreciation and amortization 90,683 86,319 80,351 Deferred income taxes 14,540 10,716 12,299 Investment tax credit restored (1,911) (1,916) (1,926) Amortization of nuclear fuel 6,057 7,787 6,707 Allowance for equity funds used during construction (2,270) (1,425) (3,009) (Gain) loss on sale of subsidiary and investment (4,149) 10,974 --- (Gain) loss on sale of other property and equipment (5,676) --- --- Changes in assets and liabilities: Restricted cash (3,582) (49) 3,495 Net accounts receivable and unbilled revenue 5,850 (23,183) (3,842) Inventories (4,081) 3,750 1,057 Prepayments and other 1,201 2,292 (7,028) Accounts payable and accruals 11,661 19,966 (6,320) Accrued taxes (1,814) 88 6,965 Other, net 12,302 12,166 13,774 ------- ------- ------- Net cash from (used for) operating activities 190,719 185,917 167,773 ------- ------- ------- Cash flows generated from (used for) financing activities: Common stock cash dividends, less dividends reinvested (60,656) (59,701) (49,357) Proceeds from issuance of long- term debt 1,370 756 24,993 Reduction of long-term debt (5,000) (18,000) --- Net change in short-term debt (6,746) 45,024 (27,401) Other, net (1,367) 941 (1,064) ------- ------- ------- Net cash from (used for) financing activities (72,399) (30,980) (52,829) ------- ------- ------- Cash flows generated from (used for) investing activities: Proceeds from sale of other property and equipment 36,264 --- --- Additions to utility plant, excluding AFUDC (120,732) (99,746) (119,272) Additions to nuclear fuel (6,558) (7,258) (8,103) Allowance for borrowed funds used during construction (938) (663) (1,029) Dedicated decommissioning trust funds (17,314) (21,566) (1,988) Proceeds from sale of subsidiary and investments 24,930 --- --- Purchase of other property and equipment (20,824) (26,696) (13,127) Other, net (13,464) 5,105 16,380 ------- ------- ------- Net cash from (used for) investing activities (118,636) (150,824) (127,139) ------- ------- ------- Net increase (decrease) in cash and equivalents (316) 4,113 (12,195) Cash and equivalents at beginning of year 11,386 7,273 19,468 ------- ------- ------- Cash and equivalents at end of year $11,070 $11,386 $7,273 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year: Interest on debt $35,855 $39,984 $36,914 Preferred stock dividends of subsidiary $3,310 $3,310 $3,310 Income taxes $39,795 $29,499 $22,902 Non-cash financing activities: Dividends reinvested --- --- $9,653 The accompanying notes are an integral part of the consolidated financial statements. WPL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, 1996 1995 (in thousands except for share data) Common shareowners' investment: Common stock $.01 par value, authorized 100,000,000 shares, issued and outstanding--30,773,735 and 30,773,588 shares, respectively $308 $308 Additional paid-in capital 303,856 305,223 Reinvested earnings 303,191 291,939 ------- ------- 607,355 597,470 ------- ------- Preferred stock: Wisconsin Power and Light Company-- Cumulative, without par value, authorized 3,750,000 shares, maximum aggregate stated value $150,000,000: Preferred stock without mandatory redemption, $100 stated value-- 4.50% series, 99,970 shares outstanding 9,997 9,997 4.80% series, 74,912 shares outstanding 7,491 7,491 4.96% series, 64,979 shares outstanding 6,498 6,498 4.40% series, 29,957 shares outstanding 2,996 2,996 4.76% series, 29,947 shares outstanding 2,995 2,995 6.20% series, 150,000 shares outstanding 15,000 15,000 Cumulative, without par value, $25 stated value- 6.50% series, 599,460 shares outstanding 14,986 14,986 ------- ------- 59,963 59,963 ------- ------- Long-term debt: Wisconsin Power and Light Company-- First mortgage bonds: Series L, 6.25%, due 1998 8,899 8,899 1984 Series A, variable rate, due 2014 (4.60% at 12/31/96) 8,500 8,500 1988 Series A, variable rate, due 2015 (4.25% at 12/31/96) 14,600 14,600 1990 Series V, 9.3%, due 2025 27,000 32,000 1991 Series A, variable rate, due 2015 (5.00% at 12/31/96) 16,000 16,000 1991 Series B, variable rate, due 2005 (5.00% at 12/31/96) 16,000 16,000 1991 Series C, variable rate, due 2000 (5.00% at 12/31/96) 1,000 1,000 1991 Series D, variable rate, due 2000 (5.00% at 12/31/96) 875 875 1992 Series W, 8.6%, due 2027 90,000 90,000 1992 Series X, 7.75%, due 2004 62,000 62,000 1992 Series Y, 7.6%, due 2005 72,000 72,000 1992 Series Z, 6.125%, due 1997 55,000 55,000 ------- ------- 371,874 376,874 ------- ------- Heartland Development Corporation-- Multifamily Housing Revenue Bonds issued by various housing and community development authorities, due 2004-2024, 2.00% - 7.55% 37,445 38,326 Other mortgage notes payable, due 1997-2042, 0% - 10.75% 45,086 42,834 ------- ------- 82,531 81,160 ------- ------- WPL Holdings, Inc.-- 8.96% Senior notes, due 1997 10,000 10,000 8.59% Senior notes, due 2004 24,000 24,000 ------- ------- 34,000 34,000 ------- ------- Less-- Current maturities (67,626) (3,397) Variable rate demand bonds (56,975) (56,975) Unamortized discount and premium, net (1,240) (1,300) ------- ------- 362,564 430,362 ------- ------- TOTAL CAPITALIZATION $1,029,882 $1,087,795 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. WPL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMMON SHAREOWNERS' INVESTMENT Year Ended December 31, 1996 1995 1994 (in thousands except for per share data) Common stock: Balance at beginning of year $308 $308 $305 Issued in connection with dividend reinvestment plan --- --- 3 ------- ------- ------- Balance at end of year 308 308 308 ------- ------- ------- Additional paid-in capital: Balance at beginning of year 305,223 304,442 297,916 Received in connection with dividend reinvestment plan --- --- 9,650 Other (1,367) 781 (3,124) ------- ------- ------- Balance at end of year 303,856 305,223 304,442 ------- ------- ------- Reinvested earnings: Balance at beginning of year 291,939 293,048 284,745 Net income 71,908 58,432 65,250 Cash dividends ($1.97 per share, $1.94 per share and $1.92 per share, respectively) (60,656) (59,701) (59,010) Expense of issuing stock and other --- 160 2,063 ------- ------- ------- Balance at end of year 303,191 291,939 293,048 ------- ------- ------- TOTAL COMMON SHAREOWNERS' INVESTMENT $607,355 $597,470 $597,798 ======= ======= ======= The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands except as otherwise indicated) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. General The consolidated financial statements include the accounts of WPL Holdings, Inc. (WPLH) and its consolidated subsidiaries (collectively the Company). WPLH is an investor-owned holding company whose primary operating company, Wisconsin Power & Light Company (WP&L), is engaged principally in the generation, transmission, distribution and sale of electric energy and the purchase, distribution, transportation and sale of natural gas primarily in the state of Wisconsin. WP&L's principal consolidated subsidiary is South Beloit Water, Gas and Electric Co. The Company also has various non-utility subsidiaries which are primarily engaged in the environmental and engineering service, affordable housing and energy marketing businesses. All subsidiaries for which the Company owns directly or indirectly more than 50% of the voting stock are included as consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. Investments for which the Company has at least a 20% interest are generally accounted for under the equity method of accounting. These investments are stated at acquisition cost, increased or decreased for the Company's equity in undistributed net income or loss, which is included in other income and deductions in the consolidated statements of income. Investments that do not meet the criteria for consolidation or the equity method of accounting are accounted for under the cost method. b. Regulation WP&L's financial records are maintained in accordance with the uniform system of accounts prescribed by its regulators. The Public Service Commission of Wisconsin (PSCW) and the Illinois Commerce Commission (ICC) have jurisdiction over retail electric and gas revenues. The Federal Energy Regulatory Commission (FERC) has jurisdiction over wholesale electric revenues. c. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. d. Cash and Equivalents The Company considers all highly liquid debt instruments purchased and investments with a maturity of three months or less to be cash equivalents. e. Utility Plant and Other Property and Equipment Utility plant and other property and equipment are recorded at original cost. Utility plant costs include financing costs that are capitalized using the FERC method for allowance for funds used during construction (AFUDC). The AFUDC capitalization rate for 1996, 1995 and 1994 was 10.23 %, 6.68% and 10.15%, respectively. These capitalized costs are recovered in rates as the cost of the utility plant is depreciated. Normal repairs, maintenance and minor items of utility plant and other property and equipment are expensed. Ordinary utility plant retirements, including removal costs less salvage value, are charged to accumulated depreciation upon removal from utility plant accounts, and no gain or loss is recognized. Upon retirement or sale of other property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in other income and deductions. f. Depreciation The Company uses the straight-line method of depreciation. For utility plant, straight-line depreciation is computed on the average balance of depreciable property at individual straight-line PSCW approved rates that consider the estimated useful life and removal cost or salvage value as follows: 1996 1995 1994 Electric 3.3% 3.3% 3.2% Gas 3.7% 3.7% 3.7% Water 2.6% 2.5% 2.5% Common 8.1% 7.9% 7.9% Depreciation expense related to WP&L's share of the decommissioning of the Kewaunee Nuclear Power Plant is discussed in Note 11 "Commitments and Contingencies". WP&L will implement higher depreciation rates effective January 1, 1997. Estimated useful lives related to other property and equipment are from 4 to 12 years for equipment and 31.5 to 40 years for buildings. g. Nuclear Fuel Nuclear fuel is recorded at its original cost and is amortized to expense based upon the quantity of heat produced for the generation of electricity. This accumulated amortization assumes spent nuclear fuel will have no residual value. Estimated future disposal costs of such fuel are expensed based on kilowatthours generated. h. Regulatory Assets and Liabilities Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," provides that rate-regulated public utilities such as WP&L record certain costs and credits allowed in the ratemaking process in different periods than for unregulated entities. These are deferred as regulatory assets or regulatory liabilities and are recognized in the consolidated statements of income at the time they are reflected in rates. If a portion of WP&L's operations become no longer subject to the provisions of SFAS No. 71, a write-off of regulatory assets and liabilities would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. As of December 31, 1996 and 1995, regulatory created assets include the following: 1996 1995 Environmental remediation costs (Note 11) $81,431 $81,431 Tax related (Note 6) 57,198 62,796 Jurisdictional plant differences 7,603 7,517 Decontamination and decommissioning costs of Federal enrichment facilities 6,061 6,555 Other 8,584 11,970 ------- ------- Total $160,877 $170,269 ======= ======= As of December 31, 1996 and 1995, WP&L had recorded regulatory related liabilities of $33,901 and $37,898, respectively. These liabilities are primarily tax related. i. Revenue The Company accrues revenues for services provided but not yet billed at month-end. j. Rate Matters Effective January 1, 1995, for the two-year period ended December 31, 1996, the PSCW in rate order UR-109, authorized a 2.8 percent annual decrease in electric rates, a 0.5 percent annual increase in gas rates and a decline in the allowed return on common equity to 11.5 percent from 11.6 percent. Further, the PSCW approved certain incentive programs described below: 1. The electric fuel adjustment mechanism, which allowed costs to fluctuate within a 3 percent band width, was eliminated. The elimination of the adjustment mechanism did not have a material impact on earnings. 2. The automatic purchased gas adjustment clause was eliminated and replaced by a performance based rate (PBR) mechanism. Fluctuations in the commodity cost of gas above or below a prescribed commodity price index increase or decrease WP&L's margin on gas sales. Both benefits and exposures are subject to customer sharing provisions. WP&L's share is capped at $1.1 million pre-tax. For 1996 and 1995, WP&L earned $1.1 million and $0.8 million, respectively, under this PBR mechanism. 3. In order to promote air quality and delivery system reliability, there are SO2 emissions and service reliability performance and incentive clauses. Positive incentives available under these clauses include $1.5 million pre-tax for the SO2 emissions and $0.5 million pre-tax for the service reliability. WP&L's earnings are also negatively exposed for equal amounts. For 1996 and 1995, WP&L collected $2.0 million pre-tax in revenues and also deferred $2.6 and $2.1 million pre-tax in revenues, respectively. WP&L made its required biennial rate case filing with the PSCW on April 1, 1996. Technical hearings took place during 1996. A final order is expected in April of 1997. k. Income Taxes The Company follows the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax liabilities and assets, as appropriate, for all temporary differences between the tax basis of assets and liabilities and the amounts reported in the financial statements using currently enacted tax rates as shown in Note 6. Investment tax credits are accounted for on a deferred basis and reflected in income ratably over the life of the related utility plant. As part of the affordable housing business, the Company is eligible to claim affordable housing and historic rehabilitation credits. These tax credits reduce current federal taxes to the extent the Company has consolidated taxes payable. l. Reclassifications Certain reclassifications have been made to the prior years financial statements to conform with the current year presentation. NOTE 2. PROPOSED MERGER OF THE COMPANY On November 10, 1995, the Company, IES Industries Inc. (IES), and Interstate Power Company (IPC) entered into an Agreement and Plan of Merger, as amended (Merger Agreement), providing for: a) IPC becoming a wholly-owned subsidiary of the Company, and b) the merger of IES with and into the Company, which merger will result in the combination of IES and the Company as a single holding company (collectively, the Proposed Merger). The new holding company will be named Interstate Energy Corporation (IEC). The Proposed Merger, which will be accounted for as a pooling of interests and is intended to be tax-free for federal income tax purposes, has been approved by the respective Boards of Directors and shareholders. It is still subject to approval by several federal and state regulatory agencies. The companies expect to receive the regulatory approvals by the end of the third quarter of 1997. The summary below contains selected unaudited pro forma financial data for the year ended December 31, 1996. The financial data should be read in conjunction with the historical consolidated financial statements and related notes of the Company, IES and IPC and in conjunction with the unaudited pro forma combined financial statements and related notes of IEC included in the Form 10-K Annual Report of WPL Holdings, Inc. The pro forma combined earnings per share reflect the issuance of shares associated with the exchange ratios discussed below.
PRO FORMA WPLH IES IPC COMBINED (in thousands except per share data) (as reported) (as reported) (as reported) (Unaudited) Operating Revenues $932,844 $973,912 $326,084 $2,232,840 Income from Continuing Operations $73,205 $60,907 $25,860 $159,972 Earnings per share from Continuing Operations $2.38 $2.04 $2.69 $2.12 Assets at December 31, 1996 $1,900,531 $2,125,562 $639,200 $4,665,293 Long-term obligations, net at December 31, 1996 $430,190 $744,298 $188,731 $1,363,219
Under the terms of the Merger Agreement, the outstanding shares of the Company's common stock will remain unchanged and outstanding as shares of IEC. Each outstanding share of IES common stock will be converted to 1.14 shares of IEC common stock. Each share of IPC common stock will be converted to 1.11 shares of IEC common stock. It is anticipated that IEC will retain the Company's common share dividend payment level as of the effective time of the merger. On January 22, 1997, the Board of Directors of the Company declared a quarterly dividend of $0.50 per share. This represents an annual rate of $2.00 per share. IES is a holding company headquartered in Cedar Rapids, Iowa, and is the parent company of IES Utilities Inc. (IES Utilities) and IES Diversified Inc. (IES Diversified). IES Utilities supplies electric and gas service to approximately 336,000 and 176,000 customers, respectively, in Iowa. IES Diversified and its principal subsidiaries are primarily engaged in the energy-related, transportation and real estate development businesses. IPC, an operating public utility headquartered in Dubuque, Iowa, supplies electric and gas service to approximately 165,000 and 49,000 customers, respectively, in northeast Iowa, northwest Illinois and southern Minnesota. IEC will be the parent company of WP&L, IES Utilities and IPC and will be registered under the Public Utility Holding Company Act of 1935, as amended (1935 Act). The Merger Agreement provides that these operating utility companies will continue to operate as separate entities for a minimum of three years beyond the effective date of the merger. In addition, the non-utility operations of the Company and IES Diversified will be combined shortly after the effective date of the merger under one entity to manage the diversified operations of IEC. The corporate headquarters of IEC will be in Madison, Wisconsin. The Securities and Exchange Commission (SEC) historically has interpreted the 1935 Act to preclude registered holding companies, with limited exceptions, from owning both electric and gas utility systems. Although the SEC has recommended that registered holding companies be allowed to hold both gas and electric utility operations if the affected states agree, it remains possible that the SEC may require as a condition to its approval of the Proposed Merger that the Company, IES and IPC divest their gas utility properties, and possibly certain non-utility ventures of the Company and IES, within a reasonable time after the effective date of the Proposed Merger. NOTE 3. JOINTLY OWNED UTILITY PLANTS WP&L participates with other Wisconsin utilities in the construction and operation of several jointly owned utility generating plants. Each of the respective owners is responsible for the financing of its portion of the construction costs. Kilowatt-hour generation and operating expenses are divided on the same basis of ownership with each owner reflecting its respective costs in its consolidated statements of income. The chart below represents WP&L's proportionate share of such plants as reflected in the consolidated balance sheets at December 31, 1996 and 1995.
1996 1995 Accumulated Accumulated Plant Provision Provision Ownership Inservice MW Plant in for Plant in for Interest % Date Capacity Service Depreciation CWIP Service Depreciation CWIP Coal: Columbia Energy 1975 & Center 46.2 1978 1,023 $161,811 $86,375 $1,581 $160,348 $79,521 $881 Edgewater Unit 4 68.2 1969 330 50,796 28,056 702 50,762 26,759 216 Edgewater Unit 5 75.0 1985 380 228,805 73,697 51 229,429 68,515 0 Nuclear: Kewaunee Nuclear Power Plant 41.0 1974 535 131,207 80,577 810 132,211 76,096 836 ------- ------- ----- ------- ------- ----- Total $572,619 $268,705 $3,144 $572,750 $250,891 $1,933 ======= ======= ===== ======= ======= =====
NOTE 4. NET ACCOUNTS RECEIVABLE WP&L has a contract with a financial organization to sell, with limited recourse, certain accounts receivable and unbilled revenues. These receivables include customer receivables, sales to other public utilities and billings to the co-owners of the jointly owned electric generating plants that WP&L operates. The contract allows WP&L to sell up to $150 million of receivables at any time. Expenses related to the sale of receivables are paid to the financial organization under this contract, and include, along with various other fees, a monthly discount charge on the outstanding balance of receivables sold that approximated a 5.90 percent annual rate during 1996. These costs are recovered in retail utility rates as an operating expense. All billing and collection functions remain the responsibility of WP&L. The contract expires August 16, 1998, unless extended by mutual agreement. As of December 31, 1996 and 1995, the balance of sold accounts receivable that had not been collected totaled $86.5 million and $79.5 million, respectively. During 1996, the monthly proceeds from the sale of accounts receivable averaged $86.6 million, compared with $77.5 million in 1995. The Company does not have any significant concentrations of credit risk in the December 31, 1996 and 1995 net accounts receivable balances. In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes standards for asset and liability recognition when transfers occur. This statement, effective January 1, 1997, specifies conditions when control has been surrendered which determines if sale treatment of the receivables would be allowed. At the present time, this new standard is not expected to materially impact the Company's financial position or results of operations. NOTE 5. EMPLOYEE BENEFIT PLANS a. Pension Plans WP&L has noncontributory, defined benefit retirement plans covering substantially all employees. The benefits are based upon years of service and levels of compensation. The projected unit credit actuarial cost method was used to compute net pension costs and the accumulated and projected benefit obligations. WP&L's policy is to fund the pension cost at an amount that is at least equal to the minimum funding requirements mandated by the Employee Retirement Income Security Act (ERISA) and that does not exceed the maximum tax deductible amount for the year. The following table sets forth the funded status of the plans and amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995: 1996 1995 Accumulated benefit obligation Vested benefits ($161,031) ($157,111) Non-vested benefits (3,298) (2,755) ------- ------- Total (164,329) (159,866) Projected benefit obligation (189,653) (184,937) Plan assets at fair value 218,920 202,343 ------- ------- Plan assets in excess of projected benefit obligation 29,267 17,406 Unrecognized net transition asset (14,480) (16,928) Unrecognized prior service cost 3,712 4,022 Unrecognized net loss 15,011 24,685 ------- ------- Prepaid pension costs $33,510 $29,185 ======= ======= Assumed rate of return on plan assets 9.00% 9.00% ===== ===== Discount rate of projected benefit obligation 7.50% 7.25% ===== ===== Range of assumed rate increases for future compensation levels 3.50-4.50% 3.50-4.50% ========== ========== The net pension cost (benefit) recognized in the consolidated statements of income for 1996, 1995 and 1994 included the following components: 1996 1995 1994 Service cost $5,072 $3,879 $5,123 Interest cost on projected benefit obligation 13,625 12,911 12,051 Actual return on assets (24,962) (31,548) 1,016 Amortization and deferrals 5,452 15,103 (17,795) ------- ------- ------- Net pension cost (benefit) ($813) $345 $395 ======= ======= ======= b. Other Postretirement Benefits WP&L accrues for the expected cost of postretirement health-care and life insurance benefits during the employees' years of service based on actuarial methodologies that closely parallel pension accounting requirements. WP&L elected delayed recognition of the transition obligation in accordance with current accounting principles and is amortizing the discounted present value of the transition obligation to expense over 20 years. For WP&L, the cost of providing postretirement benefits, including the transition obligation, is being recovered in retail rates under current regulatory practices. The following table sets forth the funded status of the plans and amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995: 1996 1995 Accumulated benefit obligation Retirees ($32,244) ($35,639) Fully eligible active plan participants ($4,954) ($6,261) Other active plan participants (9,396) (8,091) ------- ------- Total (46,594) (49,991) Plan assets at fair value 13,801 11,768 ------- ------- Accumulated benefit obligation in excess of plan assets (32,793) (38,223) Unrecognized transition obligation 23,532 25,003 Unrecognized prior service cost (294) --- Unrecognized net loss (5,045) 1,166 ------- ------- Accrued postretirement benefits liability ($14,600) ($12,054) ======= ======= Assumed rate of return on plan assets 9.00% 9.00% ======= ======= Discount rate of projected benefit obligation 7.50% 7.25% ====== ======= Medical cost trend on paid charges: Initial trend rate 9.00% 9.00% ====== ======= Ultimate trend rate 5.00% 5.00% ====== ======= The net postretirement benefits cost recognized in the consolidated statements of income for 1996, 1995 and 1994 included the following components: 1996 1995 1994 Service cost $1,804 $1,495 $1,739 Interest cost on projected benefit obligation 3,375 3,567 3,135 Actual return on assets (1,351) (2,051) (253) Amortization of transition obligation 1,471 1,471 1,527 Amortization and deferrals 371 1,313 (381) ------- ------- ------- Net pension cost (benefit) $5,670 $5,795 $5,767 ======= ======= ======= Increasing the medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $2.0 million and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year by $0.3 million. c. Long-Term Equity Incentive Plan The Company has a long-term equity incentive plan which permits the grant of non-qualified stock options and equivalent performance units. SFAS No. 123, "Accounting for Stock Based Compensation Plans," establishes standards of financial accounting and reporting for stock-based compensation plans. As allowed under SFAS No. 123, the Company elected to continue to apply APBO No. 25, "Accounting for Stock Issued to Employees", in accounting for stock based compensation plans. Proforma disclosures pursuant to SFAS No. 123 for stock options have not been presented as the impact would not change reported earnings per share. NOTE 6. INCOME TAXES The following table reconciles the statutory federal income tax rate to the effective income tax rate on continuing operations: 1996 1995 1994 Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 6.8 6.0 5.3 Investment tax credits restored (1.6) (1.7) (1.9) Amortization of excess deferred taxes (1.4) (1.5) (1.6) Affordable housing and historical tax credits (5.0) (4.5) (4.6) Other differences, net 1.6 (0.8) 1.9 ----- ----- ----- Effective income tax 35.4% 32.5% 34.1% ===== ===== ===== The breakdown of income tax expense as reflected in the consolidated statements of income is as follows: 1996 1995 1994 Current federal $32,817 $25,867 $26,793 Current state 9,700 7,240 5,673 Deferred 7,078 9,908 10,321 Investment tax credit restored (1,912) (1,916) (1,926) Affordable housing and historical tax credits (5,869) (4,991) (4,818) ------- ------- ------- $41,814 $36,108 $36,043 ======= ======= ======= The temporary differences that resulted in accumulated deferred income taxes (assets) and liabilities as of December 31, 1996 and 1995, are as follows: 1996 1995 Property tax related $229,263 $220,428 Investment tax credit related (19,886) (20,915) Decommissioning related 14,541 12,613 Other 21,768 29,024 ------- ------- $245,686 $241,150 ======= ======= NOTE 7. SHORT-TERM DEBT AND LINES OF CREDIT The Company and its subsidiaries maintain committed bank lines of credit, most of which are at the bank prime rates, to obtain short-term borrowing flexibility, including pledging lines of credit as security for any commercial paper outstanding. Amounts available under these lines of credit totaled $120 million as of December 31, 1996. Information regarding short-term debt and lines of credit is as follows: 1996 1995 1994 As of year end-- Lines of credit borrowings $ ---- $ ---- $ ---- Commercial paper outstanding $59,500 $56,500 $50,500 Notes payable outstanding $43,279 $53,025 $14,001 Discount rates on commercial paper 5.35-5.65% 5.73-5.77% 5.64-6.12% Interest rates on notes payable 5.28-6.31% 5.80-6.42% 6.04-6.07% For the year ended-- Maximum month-end amount of short-term debt $103,500 $117,000 $81,000 Average amount of short-term debt (based on daily outstanding balances) $60,800 $68,725 $61,835 Average interest rate on short-term debt 5.72% 5.95% 4.49% NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and commodity price risks. Interest rate swaps: WP&L enters into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate debt and fees associated with the sale of its accounts receivable. The notional principal amount of interest rate swaps outstanding as of December 31, 1996, was $89.0 million. Average variable rates are based on rates implied in the forward yield curve at the reporting date. The average pay and receive rates associated with these agreements are 5.08 percent and 4.78 percent, respectively. The swap agreements have contract maturities from two days to three years. It is not WP&L's intent to terminate these contracts, however, the total cost to WP&L if it were to terminate all of the agreements existing at December 31, 1996, is $0.1 million. In 1995, WP&L entered into an interest rate forward contract related to the anticipated issuance of $60 million of long-term debt securities. The securities were not issued in 1996 and the forward contract was closed which resulted in a gain of $0.8 million to WP&L. The gain was deferred and will be recognized as an adjustment to interest expense over the life of the bonds expected to be issued during 1997 as discussed in Note 10(b). Gas Swaps: WP&L uses gas commodity swaps to reduce the impact of price fluctuations on gas purchased and injected into storage during the summer months and withdrawn and sold at current market prices during the winter months. Variances between underlying commodity prices and financial contracts on these agreements are deferred and recognized as increases or decreases in the cost of gas at the time the storage gas is sold. At December 31, 1996 and 1995, the commodity swap agreements outstanding were immaterial. Other: The Company's non-utility energy marketing business periodically uses commodity futures contracts, options and swaps to hedge the impact of natural gas and electric power price fluctuations on its purchase and sale commitments. Gains and losses on these instruments are deferred and recognized in income as adjustments to the costs of energy when the related transaction being hedged is finalized. At December 31, 1996 and 1995, the instruments outstanding were immaterial. NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments at December 31, 1996 and 1995, and the basis upon which they were estimated are as follows: Cash, nuclear decommissioning trust funds and short-term debt: The carrying amount of cash and short-term debt approximates fair value due to their short maturities. As of December 31, 1996 and 1995, the investments in the nuclear decommissioning trust, which are carried at fair value, included a net unrealized gain of $9.4 million and $4.7 million, respectively. Cumulative Preferred Stock of WP&L: The estimated fair value of the preferred stock is $47.7 million and $49.3 million at December 31, 1996 and 1995, respectively. These amounts are based on the market yield of similar securities and quoted market prices. Long-Term Debt: At December 31, 1996 and 1995, the estimated fair value of long-term debt is $435.9 million and $523.6 million, respectively. These amounts are based upon the market yield of similar securities and quoted market prices. Since WP&L is subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of WP&L's nuclear decommissioning trust funds and long-term debt may not be realized by the Company's shareholders. NOTE 10. CAPITALIZATION a. Common Shareowners' Investment During 1996, 1995 and 1994, respectively, the Company issued 0, 0 and 337,980 new shares of common stock through its Dividend Reinvestment and Stock Purchase Plan and 401(k) Savings Plan, generating proceeds of $0, $0 and $9.6 million, respectively. In February 1989, the Board of Directors of the Company declared a dividend distribution of one common stock purchase right (right) on each outstanding share of the Company's common stock. Each right would initially entitle shareowners to buy one-half of one share of the Company's common stock at an exercise price of $60.00 per share, subject to adjustment. The rights are not currently exercisable, but would become exercisable if certain events occurred related to a person or group acquiring or attempting to acquire 20 percent or more of the outstanding shares of common stock. The rights expire on February 22, 1999, unless redeemed or exchanged earlier by the Company. A retail rate order effective January 1, 1995, requires WP&L to maintain a utility common equity level of 51.93 percent of total utility capitalization during the test years January 1, 1995 to December 31, 1996. In addition, the PSCW ordered that it must approve the payment of dividends by WP&L to the Company that are in excess of the level forecasted in the rate order ($58.1 million), if such dividends would reduce WP&L's average common equity ratio below 51.93 percent. At December 31, 1996, WP&L's common equity ratio was 53.53 percent. b. Long-Term Debt Substantially, all of WP&L's utility plant is secured by its first mortgage bonds. In addition, the Company's long term debt includes notes payable and revenue bonds related to its affordable housing properties. Current maturities of long-term debt of the Company are as follows: $67.6 million in 1997, $11.5 million in 1998, $4.4 million in 1999, $4.1 million in 2000 and $2.7 million in 2001. On September 14, 1995, WP&L received an order from the PSCW authorizing the sale of up to $60 million of long-term debt securities. WP&L had expected to make an offering of the long-term debt securities before December 31, 1996. WP&L did not make this offering and does not intend to request an extension of this order. WP&L expects to request PSCW permission for the sale of up to $105 million of long-term debt securities to be issued before December 31, 1997. WP&L intends to use the net proceeds from the sale of these securities to provide funds for the retirement of Series Z Bonds and to repurchase on the open market Series V and/or Series W Bonds. The remainder of the net proceeds will be used to repay other short-term debt incurred by WP&L, to finance utility construction expenditures and for general corporate purposes. NOTE 11. COMMITMENTS AND CONTINGENCIES a. Coal Contract Commitments To ensure an adequate supply of coal, WP&L has entered into certain long-term coal contracts. These contracts include a demand or take-or-pay clause under which payments are required if contracted quantities are not purchased. Purchase obligations on these coal and related rail contracts total approximately 14.5 million tons through December 31, 2001. WP&L's management believes it will meet minimum coal and rail purchase obligations under the contracts. Minimum purchase obligations on these contracts over the next five years are estimated to be $36 million in 1997, $37 million in 1998, $28 million in 1999, $9 million in 2000 and $9 million in 2001. b. Purchased Power and Gas Under firm purchased power and gas contracts, the Company is obligated as follows (dollars in millions): Purchased Power Purchased Gas 1997 $80.2 $71.6 1998 16.8 40.2 1999 20.2 30.7 2000 27.6 26.2 2001 28.9 21.6 Thereafter 84.9 46.1 c. Manufactured Gas Plant Sites WP&L has a current or previous ownership interest in 11 properties associated in the past with the production of manufactured gas. Some of these sites may contain coal tar waste products which may present an environmental hazard. WP&L owns five of these sites, three are currently owned by municipalities and the remaining three are currently owned by private companies. Through ongoing investigations and studies, WP&L confirmed that there was no contamination at two of the sites and only a minimal likelihood of contamination at a third site. As WP&L has received close out letters from the State of Wisconsin Department of Natural Resources (DNR) for these three sites, WP&L has no further obligation at these sites. WP&L has also implemented DNR- approved remediation plans at two additional sites in the last several years. An air sparging/biosparging remediation system was implemented at one of the sites, while excavation and disposal of the coal tar residue and contaminated soils was implemented at the other. Groundwater monitoring is ongoing at both sites. WP&L currently estimates that the remaining remediation costs associated with the former manufactured gas plant sites is $74 million. The estimate includes the costs of feasibility studies, data collection, soil and groundwater remediation activities and ongoing monitoring activities through 2027. The estimate is based on a number of factors including the estimated extent and volume of contaminated soil and/or groundwater. The estimate is also premised in part on a remediation method that involves treatment or removal of contaminated soil. Based on recent approvals from the DNR, WP&L may be able to implement a less-costly containment and control remediation strategy at two of the remaining sites. WP&L plans to implement this remediation at these two sites in 1997. If remediation is successful, management believes there may be a significant reduction in the estimated liability. Changes in the liability do not immediately impact the earnings of WP&L. Under the current rate making treatment approved by the PSCW, the costs expended in the environmental remediation of these sites are deferred and collected from gas customers over a five year period after new rates are implemented. Management believes future costs will also be recovered in rates. d. Spent Nuclear Fuel and Decommissioning Costs WP&L's share of the decommissioning costs of Kewaunee Nuclear Power Plant (Kewaunee) is estimated to be $180 million (in 1996 dollars, assuming the plant is operating through 2013) based on a 1992 site-specific study, using the immediate dismantlement method of decommissioning. The costs of decommissioning are assumed to escalate at an annual rate of 6.5 percent. The undiscounted amount of decommissioning costs estimated to be expended between the years 2014 and 2050 is $1,016 million. As required by the PSCW and FERC, WP&L makes annual contributions to qualified and nonqualified external trust funds to provide for decommissioning of Kewaunee. The Company's annual contribution is $10.7 million for the years ended December 31, 1996, 1995 and 1994. This amount is fully recovered in rates. The after-tax income of the external trust funds was $2.7 million, $2.8 million and $2.7 million for 1996, 1995 and 1994, respectively. Decommissioning costs, which include the annual contribution to external trust funds and earnings on the assets of these trusts, are recorded as depreciation expense in the consolidated statements of income with the cumulative amount included in the accumulated provision for depreciation on the consolidated balance sheets. As of December 31, 1996, the total decommissioning costs included in the accumulated provision for depreciation were $90.7 million. Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy (DOE) is responsible for the ultimate storage and disposal of spent nuclear fuel removed from nuclear reactors. Interim storage space for spent nuclear fuel is currently provided at Kewaunee. Currently there is on-site storage capacity for spent fuel through the year 2001. An investment of approximately $2.5 million could provide additional storage sufficient to meet spent fuel storage needs until the expiration of the current operating license. The following summarizes the investment at December 31, 1996 and 1995: 1996 1995 Original cost of nuclear fuel $166,342 $160,997 Less-Accumulated amortization 146,974 142,130 ------- ------- Nuclear fuel, net $19,368 $ 18,867 ======= ======= e. Nuclear Performance In September 1996, Kewaunee was taken out of service for a scheduled refueling and maintenance outage which was originally projected to be of five weeks duration. During the outage, however, extensive tube degradation was encountered which extended the outage through the first quarter of 1997. The estimated costs attributable to the outage extension are replacement power costs of $500,000 per week and WP&L's share of the repair costs are approximately $2.3 million of which $1.4 million was expensed in 1996. Additional details of the Kewaunee outage can be found elsewhere in this report in "Management's Discussion and Analysis of Financial Condition and Results of Operations." f. Nuclear Insurance The Price Anderson Act provides for the payment of funds for public liability claims arising from a nuclear incident. Accordingly, in the event of a nuclear incident, WP&L, as a 41-percent owner of Kewaunee, is subject to an overall assessment of approximately $32.5 million per incident, not to exceed $4.1 million payable in any given year. Through its membership in Nuclear Mutual Limited and Nuclear Electric Insurance Limited, WP&L has obtained property damage and decontamination insurance totaling $2 billion for loss from damage at Kewaunee. In addition, WP&L maintains outage and replacement power insurance coverage totaling $101.4 million in the event an outage exceeds 21 weeks. g. Planned Capital Expenditures Plans for the construction and financing of future additions to utility plant can be found elsewhere in this report in "Management's Discussion and Analysis of Financial Condition and Results of Operations." h. Loan Commitments As of December 31, 1996, the Company's affordable housing subsidiary had extended commitments to provide $24.7 million in nonrecourse, fixed rate, permanent financing to developers which are secured by affordable housing properties. The Company anticipates other lenders will ultimately finance these properties. NOTE 12. DISCONTINUED OPERATIONS The Company's financial statements reflect the discontinuance of operations of its utility energy and marketing consulting business in 1995. The discontinuance of this business resulted in a pre-tax loss in the fourth quarter of 1995 of $7.7 million. The after tax loss on disposition was $11.0 million reflecting the associated tax expense on disposition due to the non-deductibility of the carrying value of goodwill at sale. During 1996, the Company recognized an additional $1.3 million, net of applicable income tax benefit, associated with the final disposition of the business. Operating revenues, operating expenses, other income and expense and income taxes for the discontinued operations for the time periods presented have been excluded from income from continuing operations. Interest expense has been adjusted for the amounts associated with direct obligations of the discontinued operations. Operating revenues, related losses, and income tax benefits associated with the discontinued operations for the years ending December 31 were are follows: 1995 1994 Operating revenues $24,979 $34,798 ====== ====== Loss from discontinued operations before income tax $3,663 $1,806 Income tax benefit 1,451 632 ------ ------ Loss from discontinued operations $2,212 $1,174 ====== ====== The assets and liabilities associated with discontinued operations included in the balance sheets at December 31, 1996 and 1995, were as follows: 1996 1995 Assets: Other property and equipment, net and investments $ 0 $ 1,612 Accounts receivable, net 253 4,942 Prepayments and other 222 333 Deferred charges 0 5,717 Liabilities: Long-term debt, net 0 147 Current maturities of long-term debt 0 65 Accounts payable and accruals 1,920 1,491 Other accrued liabilities 0 684 Deferred credits 0 736 ------ ----- Net (liabilities) assets ($1,445) $9,481 ====== ===== NOTE 13. SEGMENT INFORMATION The following table sets forth certain information relating to the Company's consolidated continuing operations: 1996 1995 1994 Operation information: Customer revenues-- Electric-utility $589,482 $546,324 $531,747 Gas-utility 165,627 139,165 151,931 Environmental and engineering services 84,859 88,574 87,673 Other 92,876 33,192 24,366 Operating income (loss) Electric-utility $136,339 $134,180 $118,782 Gas-utility 18,929 16,963 13,075 Environmental and engineering services 92 3,680 6,038 Other (a) (13,856) (8,825) (8,715) Investment information: Identifiable assets, including allocated common plant at December 31-- Electric-utility $1,225,321 $1,226,786 $1,176,670 Gas-utility 262,090 250,643 234,815 Environmental and engineering services 33,508 38,116 41,187 Other 379,612 356,869 353,229 Other information: Construction and nuclear fuel expenditures-- Electric-utility $125,894 $122,297 $103,420 Gas-utility 17,978 16,905 20,319 Other 22,494 14,607 5,949 Depreciation and amortization expense Electric-utility $74,492 $71,379 $64,695 Gas-utility 9,756 9,629 8,082 Other 6,435 5,311 7,574 (a)Excludes the effects of affordable housing and historical tax credits of $5.9 million, $5.0 million and $4.8 million in 1996, 1995 and 1994, respectively. WISCONSIN POWER AND LIGHT COMPANY AND SUBSIDIARIES 1996 SELECTED FINANCIAL DATA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL STATEMENTS SELECTED FINANCIAL DATA 1996 1995 1994 1993 1992 (in millions) Operating revenues $759 $690 $688 $644 $601 Net income available for common $79 $75 $68 $60 $55 Total assets (at December 31) $1,678 $1,641 $1,585 $1,551 $1,414 Long-term debt, net (at $259 $319 $337 $336 $336 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) WPLH, the parent company of Wisconsin Power and Light Company (WP&L), has entered into an Agreement and Plan of Merger, as amended (Merger Agreement), dated November 10, 1995, with IES Industries Inc. (IES) and Interstate Power Company (IPC). The Merger Agreement provides for the combination of WPLH, IES and IPC. Following the merger, WP&L will be a subsidiary of the combined company, Interstate Energy Corporation (IEC). As a result of the merger, IEC, currently anticipates cost savings of approximately $749 million over a ten-year period, net of transaction costs and costs to achieve the savings of approximately $14 million and $64.4 million, respectively. The estimate of potential cost savings constitutes a forward-looking statement and actual results may differ materially from this estimate. The estimate is necessarily based upon various assumptions that involve judgments with respect to, among other things, future national and regional economic and competitive conditions, technological developments, inflation rates, regulatory treatments, weather conditions, financial market conditions, future business decisions and other uncertainties. No assurance can be given that the estimated costs savings will actually be realized. The merger, which is conditioned upon, among other things, receipt of certain regulatory and governmental approvals, is expected to close by the end of the third quarter of 1997. As part of the approval process, management has proposed rate freezes to be implemented in certain jurisdictions for periods not to exceed four years. See Note 2 of "Notes to Consolidated Financial Statements" for additional information regarding the proposed merger. 1996 COMPARED WITH 1995 OVERVIEW WP&L reported consolidated net income of $79.2 million as compared with net income of $75.3 million in 1995. The increase in earnings in 1996 primarily reflects continued customer growth in the service territory and increased power marketing activity which contributed to a $9 million increase in electric margin in 1996 as compared with 1995. Gas margins also increased due primarily to higher weather-driven sales. (See "Electric Operations" and "Gas Operations" below). In addition, a $3.4 million after-tax gain on the sale of a combustion turbine was recognized during 1996. These events were partially offset by higher plant maintenance and depreciation expenses in 1996. During 1996, WP&L incurred $2.7 million after-tax in expenses associated with its proposed merger with IES and IPC. See Note 2 of "Notes to Consolidated Financial Statements" for additional information. Electric Operations
Revenues and Costs kWhs Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1996 1995 1996 1995 1996 1995 Residential and Farm $201,690 $199,850 1% 2,979,826 2,937,825 1% 336,933 329,643 2% Industrial 143,734 140,562 2% 3,985,672 3,872,520 3% 815 795 3% Commercial 105,319 102,129 3% 1,814,324 1,773,406 2% 45,669 44,730 2% Sales to Other Utilities 131,836 97,350 35% 5,245,812 3,109,385 69% 90 48 88% Other 6,903 6,433 7% 57,757 54,042 7% 1,730 1,294 34% -------- -------- ---------- ---------- -------- -------- Total 589,482 546,324 8% 14,083,391 11,747,178 20% 385,237 376,510 2% ======== ======== ==== ========== ========== ==== ======== ======== ===== Electric Production Fuels 114,470 116,488 (2%) Purchased Power 81,108 44,940 80% -------- -------- Margin $393,904 $384,896 2% ======== ======== ====
Electric margin increased $9.0 million, or 2 percent, during 1996 compared with 1995 primarily due to higher sales to commercial and industrial customers as well as other utilities combined with reduced costs per kWh for electric production fuels and purchased power. Although fuel and purchased power costs declined on a per kWh basis, purchased power expense increased by 80 percent. This increase was due to WP&L's higher level of sales to other utilities as well as a $5.0 million increase in purchased power related to purchases of replacement power during the extended 1996 refueling outage at the Kewaunee Nuclear Power Plant ( Kewaunee). Partially offsetting increased purchased power costs were slightly lower delivered coal and nuclear fuel costs per kWh. Gas Operations
Revenues and Costs Therms Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1996 1995 1996 1995 1996 1995 Residential $90,382 $70,382 28% 142,974 126,903 13% 133,580 129,576 3% Commercial and Industrial 50,270 39,456 27% 98,095 91,316 7% 16,309 15,976 2% Interruptible 5,261 3,708 42% 13,480 12,148 11% 303 257 18% Transportation and other 19,714 25,619 (23%) 185,735 169,121 10% 252 284 (11%) -------- -------- -------- -------- -------- -------- Total 165,627 139,165 19% 440,284 399,488 10% 150,444 146,093 3% ======== ======== ==== ======== ======== ==== ======== ======== ==== Purchased Gas 104,830 84,002 25% -------- -------- Margin $60,797 $55,163 10% ======== ======== ====
Gas margin increased $5.6 million, or 10 percent, during 1996 compared with 1995 primarily as a result of higher sales. Therm sales increased 10 percent due to a combination of colder weather during the first five months of 1996 as compared to 1995 and customer growth of 3 percent. The 19 percent increase in gas revenues reflects not only the higher therm sales but also the pass through of higher natural gas costs to WP&L's customers as described below. Effective January 1, 1995, the PSCW approved the replacement of the purchased gas adjustment clause with an adjustment mechanism based on a prescribed commodity price index. Fluctuations in WP&L's commodity cost of gas as compared to the price index are subject to a customer sharing mechanism with WP&L's gains or losses limited to $1.1 million. Due to favorable gas procurement activities in both 1996 and 1995, WP&L realized favorable contributions to gas margin in those years of $1.1 million and $0.8 million, respectively. Other Operation Expense Other operation expense increased $2.0 million due to expenses associated with the proposed merger (See Note 2 of "Notes to Consolidated Financial Statements" for additional information) which were partially offset by a decrease in operation expense due to cost saving efforts at Kewaunee. Maintenance Expense Maintenance expense increased $4.4 million due to higher plant maintenance and the extended 1996 refueling outage at Kewaunee (See "Capital Requirements" section below). Depreciation Depreciation expense increased $3.8 million as a result of property additions and greater amortization of contributions in aid of construction (a reduction of expense) in 1995. Interest Expense and Other Interest expense was lower in 1996 compared to 1995 by $2.3 million as a result of less short-term debt outstanding and a slight decrease in interest rates. Other income increased $5.0 million due to a $5.7 million gain on the sale of a combustion turbine. Income Taxes Income taxes increased for 1996 as a result of higher taxable income. The effective tax rate was 39.5 percent and 36.7 percent for 1996 and 1995, respectively. The lower rate in 1995 was the result of prior years' tax contingencies resolved favorably in 1995 and increased non-deductible merger expenses in 1996. 1995 COMPARED WITH 1994 OVERVIEW Net income of WP&L increased to $75.3 million in 1995 compared with $68.2 million in 1994. Net income for 1994 was significantly affected by two non-recurring items. These items were the reversal of a coal contract penalty and costs associated with early retirement and severance programs. The coal contract item relates to a Wisconsin Supreme Court decision which reversed a coal contract penalty assessed against WP&L in 1989. The following break out presents the recurring aspects of 1995 and 1994 operations (dollars in millions). 1995 1994 Net income, as reported $75.3 $68.2 Non-recurring items: Coal contract penalty reversal --- ($5.3) Early retirement and severance costs --- $8.2 ----- ----- Net income before non-recurring items $75.3 $71.1 ===== ===== The increase in the net income before non-recurring items primarily reflects higher electric and gas margins, resulting from an increase in weather related sales, and aggressive cost management. Electric Operations
Revenues and Costs kWhs Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1995 1994 1995 1994 1995 1994 Residential and Farm $199,850 $194,242 3% 2,937,825 2,776,895 6% 329,643 322,924 2% Industrial 140,562 140,487 0% 3,872,520 3,764,953 3% 795 776 2% Commercial 102,129 101,382 1% 1,773,406 1,688,349 5% 44,730 43,793 2% Sales to other Utilities 97,350 86,400 13% 3,109,385 2,574,121 21% 48 42 14% Other 6,433 9,236 (30%) 54,042 54,518 (1%) 1,294 1,256 3% -------- -------- ---------- ---------- -------- -------- Total 546,324 531,747 3% 11,747,178 10,858,836 8% 376,510 368,791 2% ======== ======== ==== ========== ========== ==== ======== ======== ==== Electric Production Fuels 116,488 123,469 (6%) Purchase Power 44,940 37,913 16% -------- -------- Margin $384,896 $370,365 4% ======== ======== ====
Electric margin increased 4 percent during 1995 compared with 1994 primarily due to higher sales combined with reduced aggregate costs per kWh for electric production fuels and purchased power. Kilowatthour sales increased 8 percent due to a much warmer summer than normal, increased sales to other utilities, a 2 percent growth in customers, and continued economic strength in the service territory. Partially offsetting these sales increases was a 2.8 percent decrease in retail electric rates effective January 1, 1995. A record setting heat wave resulted in WP&L setting a system peak of 2,197 megawatts on July 31, 1995. This reflects a 9.7 percent increase over the previous record system peak of 2,002 megawatts set in 1994. While overall kWh sales increased, the aggregate costs of electric production fuels and purchased power remained relatively unchanged. The stability of these costs reflects lower coal and transportation costs at WP&L's generating units in 1995 as well as the availability of attractive purchased power opportunities in the bulk power market. Gas Operations
Revenues and Costs Therms Sold Customers at (In Thousands) Change (In Thousands) Change Year End Change 1995 1994 1995 1994 1995 1994 Residential $70,382 $71,555 (2%) 126,903 119,562 6% 129,576 124,938 4% Commercial and Industrial 39,456 41,918 (6%) 91,316 87,487 4% 15,976 15,531 3% Interruptible 3,708 8,777 (58%) 12,148 24,809 (51%) 257 272 (6%) Transportation and other 25,619 29,681 (14%) 169,121 142,252 19% 284 240 18% -------- -------- -------- -------- -------- -------- Total 139,165 151,931 (8%) 399,488 374,110 7% 146,093 140,981 4% ======== ======== ==== ======== ======== ==== ======== ======== ==== Purchased Gas 84,002 100,942 (17%) -------- -------- Margin $55,163 $50,989 8% ======== ======== ====
Gas margin increased 8 percent during 1995 compared with 1994 primarily as a result of higher sales volumes and favorable gas procurement strategies. Therm sales increased 7 percent principally due to residential customer growth reflecting the favorable economic conditions in WP&L's service territory and colder than normal weather in the fourth quarter of 1995, offsetting a mild January and February. The 8 percent decrease in gas revenues was the result of a pass through to customers of the lower cost of purchased gas. Under the rate structure discussed previously reductions in revenues resulting solely from such pass through would not be expected to have a material impact on earnings. The gas incentive program authorized by the PSCW also resulted in additional pre-tax earnings of $0.8 million in 1995. Operating Expenses The decline in operations expense principally reflects the impact of a $13.7 million charge for early retirement and severance costs in 1994. While WP&L was able to achieve savings in 1995 from its continued reengineering of operations, these savings were offset somewhat by higher conservation expenses. The increase in depreciation expense in 1995 is primarily the result of property additions at WP&L. Interest Expense and Other Interest expense increased due to the higher levels of short-term debt and higher short-term interest rates. During the second quarter of 1995, WP&L repurchased $18 million of its Series V bonds from private investors. WP&L applied revenue requirement neutral accounting treatment to these acquired bonds consistent with regulatory requirements. Other income and deductions in 1994 includes after-tax income of $5.3 million related to a Wisconsin Supreme Court decision which reversed a coal contract penalty assessed against WP&L in 1989. In addition, income associated with the allowance for funds used during construction ("AFUDC") decreased in 1995 due to significantly lower construction work in progress amounts and a lower FERC AFUDC rate. Income Taxes Despite higher operating income in 1995, the income tax expense was unchanged due to prior years' tax contingencies resolved in 1995. LIQUIDITY AND CAPITAL RESOURCES WP&L finances its construction expenditures through internally generated funds supplemented, when required, by outside financing. During 1996, 1995 and 1994, WP&L generated sufficient cash flows from operations, the sale of other property and equipment and short-term borrowing to cover operating expenses, cash dividends and investing activities. Cash flows from operations decreased to $188 million for 1996, compared with $196 million and $183 million in 1995 and 1994, respectively. The decrease in cash flows used for investing activities in 1996 was primarily attributable to $36.3 million received from the sale of a combustion turbine. Rates and Regulatory Matters Effective January 1, 1995, for the two-year period ended December 31, 1996, the PSCW, in rate order UR-109, authorized a 2.8 percent annual decrease in electric rates, a 0.5 percent annual increase in gas rates and a decline in the allowed return on common equity to 11.5 percent from the previous 11.6 percent . None of these events are expected to have a material impact on earnings. See Note 1J of the "Notes to Consolidated Financial Statements" for additional information. WP&L submitted its biennial rate case filing with the PSCW on April 1, 1996, for the test year beginning January 1, 1997. In the filing, WP&L requested rate increases of $13.4 million or 3.0 percent for Wisconsin retail electric customers and $2.4 million or 1.6 percent for Wisconsin natural gas customers. This request was based on an 11.9 percent return on common equity. Technical hearings were completed in November 1996. WP&L filed additional testimony subsequent to the conclusion of the November 1996 hearings regarding recovery of replacement power and operations and maintenance expenses for the extended outage at Kewaunee. Because of this additional filing, a final rate order is not expected until April 1997. Refer to "Subsequent Events" for further information relating to the new rate order. Industry Outlook WP&L is subject to regulation by the PSCW and the FERC. The PSCW's inquiries into the future structure of the natural gas and electric utility industries are ongoing. The stated goal of the PSCW in the natural gas docket is to move all gas supply activities out of the existing regulated distribution utilities and allow independent units to compete for the business. The goal of the electric restructuring process is to create open access transmission and distribution services for all customers with competitive generation and customer service markets. Additional proceedings as well as consultation with the legislature are planned prior to a target implementation date after the year 2000. WP&L cannot currently predict what impact, if any, these proceedings may have on its future financial condition or results of operations. WP&L believes, however, that it is well positioned to compete in a deregulated environment. WP&L's rates to all customer classes are competitive within the State of Wisconsin and are below the average in the Midwest region. On April 24, 1996, the FERC issued two orders (No. 888 and 889) that will promote competition by opening access to the nation's wholesale power market. The new orders require public utilities that own, control or operate transmission systems to provide other companies with the same transmission access/service that they provide to themselves. WP&L presently has on file with the FERC a pro forma open access transmission tariff, filed in compliance with FERC Order No. 888. On November 13, 1996, the FERC accepted the non-rate terms and conditions of WP&L's tariff for filing without modification. On September 20, 1996, the FERC extended the deadline for compliance with Order No. 889 to January 3, 1997, which was met by WP&L through participation in a regional Open Access Same-Time Information System. On September 26, 1996, the PSCW issued an order which establishes the minimum Standards for a Wisconsin Independent System Operator (Standards). The Standards will be applied by the PSCW in Advance Plan proceedings, merger review cases, transmission construction cases and other proceedings as appropriate. The order provides that the Standards will be reviewed and revised as necessary in light of ongoing regional and national events, such as FERC requirements or policy, regional institutions, or relevant actions of neighboring states. On November 18, 1996, WP&L submitted applications and subsequently became a member of both the MAPP RTG and the Power and Energy Market. WP&L declined membership in the MAPP Regional Reliability Council and will continue its membership in the Mid-American Interconnected Network, Inc. (MAIN) through 1997. As described in Note 1H of the "Notes to Consolidated Financial Statements," WP&L complies with the provisions of Statement of Financial Accounting Standards (SFAS No. 71), " Accounting for the Effects of Certain Types of Regulation." In the event WP&L determines that it no longer meets the criteria for following SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS 71 include (1) increasing competition that restricts WP&L's ability to establish prices to recover specific costs and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. WP&L periodically reviews these criteria to ensure that the continuing application of SFAS 71 is appropriate. WP&L believes that it still meets the requirements of SFAS 71. Financing and Capital Structure The level of short-term borrowing fluctuates based on seasonal corporate needs, the timing of long-term financing, and capital market conditions. WP&L generally borrows on a short-term basis to provide interim financing of construction and capital expenditures in excess of available internally generated funds. WP&L periodically reduces its outstanding short-term borrowings through the issuance of long-term debt and through WPLH's additional investment in its common equity. To maintain flexibility in its capital structure and to take advantage of favorable short-term rates, WP&L also uses proceeds from the sales of accounts receivable and unbilled revenues to finance a portion of its long-term cash needs. WP&L also anticipates that short-term debt funds will continue to be available at reasonable costs due to strong ratings by independent utility analysts and rating services. Commercial paper has been rated A-1+ by Standard & Poor's Corp. and P-1 by Moody's Investors Service. WP&L's bank lines of credit of $70 million at December 31, 1996 are available to support these borrowings. WP&L has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and commodity price risks. WP&L enters into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate long-term debt, short-term debt and the sales of its accounts receivable. The total notional amount of interest rate swaps was $89 million and $123 million, respectively, for the years ended December 31, 1996 and 1995. WP&L uses swaps, futures and options to hedge the price risks associated with the purchase and sale of stored gas. WP&L's capitalization at December 31, 1996, including the current maturities of long-term debt, variable rate demand bonds and short-term debt, consisted of 54 percent common equity, 6 percent preferred stock and 40 percent debt. The common equity to total capitalization ratio at December 31, 1996 increased to 54 percent from 53 percent at December 31, 1995. The retail rate order effective January 1, 1995 requires WP&L to maintain a utility common equity level of 51.93 percent of total utility capitalization. In addition, the PSCW ordered that it must approve the payment of dividends by WP&L to WPLH if such dividends would reduce WP&L's average common equity ratio below 51.93 percent. At December 31, 1996, WP&L's common equity ratio was 53.5 percent. Refer to "Subsequent Events" for further information relating to the new rate order. In accordance with the terms of the Merger Agreement (see Note 2 of the "Notes to Consolidated Financial Statements"), WPLH may not declare or pay any dividends on any of its capital stock other than the obligations that exist with respect to cumulative preferred stock, and regular quarterly dividends on common stock provided they do not exceed 105 percent of the common stock dividends from the prior year. Capital Requirements WP&L operates a capital-intensive business and requires large investments in long-lived assets. WP&L's most significant capital requirements relate to construction expenditures. Estimated capital requirements for the next five years are as follows: Capital Requirements (in millions) 1997 1998 1999 2000 2001 Construction expenditures Electric $88.7 $89.2 $89.9 $90.6 $91.3 Gas, water and common 45.0 43.8 44.3 44.7 45.2 Nuclear fuel 11.4 6.8 9.4 11.4 6.1 AFUDC 2.1 2.1 2.1 2.1 2.1 ----- ----- ----- ----- ----- Total construction expenditures 147.2 141.9 145.7 148.8 144.7 Changes in working capital and other 22.6 16.8 (5.4) 13.9 13.6 ----- ----- ----- ----- ----- Total construction and operating capital 169.8 158.7 140.3 162.7 158.3 Long-term debt maturities 55.0 8.9 0.0 1.9 0.0 Manufactured gas plant remediation 5.0 1.0 0.5 0.5 0.5 ----- ----- ----- ----- ----- Total capital requirements $229.8 $168.6 $140.8 $165.1 $158.8 ===== ===== ===== ===== ===== Included in the construction expenditure estimates, in addition to recurring additions and improvements to the distribution and transmission systems, are expenditures related to upgrading computer systems in order to improve productivity and customer service. Electric expenditures include the annual contribution to external trust funds to fund the decommissioning of Kewaunee. These amounts are recorded in depreciation expense and recovered in rates. WP&L expects to contribute $19.7 million annually to this fund. Refer to "Subsequent Events" for further information relating to the new rate order. WP&L has a 41 percent ownership interest in Kewaunee. During a scheduled refueling and maintenance outage of the plant in September 1996, steam generator tube degradation was discovered which required that the tubes be repaired before the plant could resume operation. A laser weld repair process was implemented to address the problem. During testing of the success of this process in early February 1997, it was discovered that further repair work or tube plugging would be required for a portion of the welded tubes. Further investigation is ongoing which may delay the return of the plant to service beyond the first quarter of 1997. WP&L's costs associated with these tube repairs are estimated at $2.3 million of which $1.4 million was expensed in 1996. Additional costs associated with the purchase of replacement power, estimated at approximately $500,000 per week, were not recoverable from customers under the retail rate order in effect at the time of the outage. However, if the outage were to extend beyond the implementation of a PSCW rate order expected to be issued in April 1997, replacement power costs incurred subsequent to that order are expected to be recovered through a surcharge mechanism. Refer to "Subsequent Events" for further information relating to the new rate order. Repairs using laser technology may be only temporary because corrosion will continue at a rate which cannot be accurately forecasted. Because of these uncertainties, the PSCW, on January 3, 1997, approved accelerated cost recovery of the remaining depreciation costs and unfunded decommissioning liability based on an expected end of plant life of 2002 rather than the currently licensed end of life of 2013. The accelerated depreciation and decommissioning expense will be incorporated with the retail rate order expected to be issued in April of 1997. Based on a 1992 site specific study, WP&L's share of the costs to decommission Kewaunee was estimated at $142 million. Assuming an annual inflation rate of 6.5 percent, WP&L's liability in current year dollars is approximately $180 million. As of December 31, 1996, $90.7 million, net of tax, was available in external trust funds to meet this liability. Refer to Note 11 "Notes to Consolidated Financial Statements" for additional information. Refer to "Subsequent Events" for further information relating to the new rate order. Currently, the owners of Kewaunee have different views of the future market value of energy which impact on the desirability of replacing the steam generators. During the first quarter of 1996, Wisconsin Public Service Corporation filed an application with the PSCW seeking approval to replace the steam generators in 1999. The total cost of the generator replacement would be approximately $89 million. A PSCW decision on this application is expected in October 1997. In addition, the joint owners continue to analyze and discuss other options related to the future of Kewaunee, including various ownership transfer alternatives. If it should become necessary to retire Kewaunee permanently, WP&L would replace the Kewaunee generation through a combination of power purchases, increased generation at existing WP&L generating units and new generating unit additions, if necessary. The net book value of WP&L's share of Kewaunee as of December 31, 1996 was $51.4 million, excluding the value of nuclear fuel. Certain matters discussed concerning Kewaunee are forward-looking statements and can generally be identified as such because the content of the statement include the phrase WP&L , "expects" or other words of similar import. Similarly, statements that describe the WP&L's future plans, objectives and goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results and outcomes to differ materially from those currently anticipated. In addition to the matters discussed above, factors that could affect actual results or outcomes include the timing and nature of regulatory responses and approvals, technological developments and advancements regarding repair of the steam generator tubes, the useful life of the repairs effected and the cost of purchased electric power or additional generating facilities to replace the power generated by Kewaunee. The staff of the Securities and Exchange Commission also has questioned certain of the current accounting practices of the electric utility industry, including WP&L, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the Financial Accounting Standards Board (FASB) has decided to review the accounting for closure and removal costs, including decommissioning of nuclear power plants. Capital Resources One of WP&L's objectives is to finance utility construction expenditures through WP&L's internally generated funds supplemented, when required, by outside financing. With this objective in place, WP&L financed 70 percent of its construction expenditures during 1996 from internal sources. However, during the next five years, WP&L expects this percentage to increase primarily due relatively stable levels of construction expenditures and higher depreciation rates beginning in 1997. External financing sources such as the issuance of long-term debt and short-term borrowings will be used by WP&L to finance the remaining construction expenditure requirements for this period. Expectations are that approximately $105 million of long-term debt will be issued in 1997. NEW ACCOUNTING PRONOUNCEMENT In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes standards for asset and liability recognition when transfers occur. This statement, effective January 1, 1997, is not expected to materially impact WP&L's financial position or results of operations. Effective January 1, 1997, WP&L adopted the provisions of Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." This Statement provides authoritative guidance for recognition, measurement, display and disclosure of environmental remediation liabilities in financial statements. WP&L has recorded environmental remediation liabilities of $74.1 million at December 31, 1996. Adoption of SOP 96-1 is not expected to have a material impact on WP&L's financial position or results of operations. INFLATION The impacts of inflation on WP&L are currently mitigated through ratemaking methodologies, customer growth and productivity improvements. OTHER EVENTS Union Contract WP&L and the International Brotherhood of Electrical Workers, Local 965, reached agreement on a new three-year collective bargaining contract on June 14, 1996. The new agreement includes increases in the base wage during the first, second and third years of the contract of 3 percent, 3 percent and 3.25 percent, respectively. The new agreement was effective retroactive to June 1, 1996, with wages retroactive to May 26, 1996, which was the beginning of a pay period. At the end of 1996, the contract covered 1,617 of WP&L's employees which represents approximately 69 percent of the total employees at WP&L. Environmental WP&L cannot precisely forecast the effect of future environmental regulations by federal, state and local authorities on its generation, transmission and other facilities, or its operations, but has taken steps to anticipate the future while meeting the requirements of current environmental regulations. The Clean Air Act Amendments of 1977 and subsequent amendments to the Clean Air Act, as well as the new laws affecting the handling and disposal of solid and hazardous wastes, could affect the siting, construction and operating costs of both present and future generating units. Under the Federal Clean Water Act, National Pollutant Discharge Elimination System permits for generating station discharge into water ways are required to be obtained from the DNR to which the permit program has been delegated. These permits must be periodically reviewed. WP&L has obtained such permits for all of its generating stations or has filed timely applications for renewals of such permits. Air quality regulations promulgated by the DNR in accordance with federal standards impose statewide restrictions on the emission of particulates, sulfur dioxide, nitrogen oxides and other air pollutants and require permits from the DNR for the operation of emission sources. WP&L currently has the necessary permits to operate its generating facilities. While periodic exceedances in air emissions may occur, management promptly acts on them and works with the DNR to resolve any permit compliance issues. With the passage of the new Federal Clean Air Act Amendments, the state is required to include these provisions in its permit requirements. WP&L has submitted Title V permit applications in compliance with schedules set forth by the regulators. WP&L has also completed application for Phase II permits under the Clean Air Act in compliance with the time lines identified. The state Title V operating permits, when issued, will consolidate all existing air permit conditions and regulatory requirements into one permit for each facility. Permits have been or are expected to be issued in 1997. Until such time, the facilities will continue to operate under their existing permit conditions. WP&L's compliance strategy for Wisconsin's sulfur dioxide law (discussed above) and the Federal Clean Air Act Amendments required plant upgrades at its generating facilities. The majority of these projects were completed in 1993. WP&L has installed continuous emission monitoring systems at all of its coal fired boilers in compliance with federal requirements. Monitoring for sulfur dioxide was also required by Title IV of the Federal Clean Air Act at WP&L's South Fond du Lac , Wisconsin combustion-turbine site. These requirements were also met. Additional monitoring systems for nitrogen oxides were required in 1996 at the combustion turbine site. WP&L has installed these monitors, and completed certification tests for the equipment. No significant additional investments are anticipated at this time to meet the requirements of the Federal Clean Air Act Amendments. For a discussion of WP&L's liability regarding environmental remediation at certain manufactured gas plant sites formerly operated by WP&L, see Note 11 of "Notes to Consolidated Financial Statements." Subsequent Event WP&L submitted its biennial rate case filing (UR-110) with the PSCW on April 1, 1996, for the test year beginning January 1, 1997. In the filing, WP&L requested rate increases of $13.4 million or 3.0 percent for Wisconsin retail electric customers and $2.4 million or 1.6 percent for Wisconsin natural gas customers. This request was based on an 11.9 percent return on common equity. On March 4, 1997, the PSCW finalized certain decisions relating to this rate case. For a description of this filing, refer to "Rates and Regulatory Matters" above. The following decisions were reached: authorization of a surcharge to collect replacement power costs while Kewaunee is out of service; authorization of an increase in the return on equity to 11.7 percent from its current level of 11.5 percent; a requirement to maintain a utility common equity level of 51.98 percent as compared to the current level of 51.93 percent; reinstatement of the electric fuel adjustment clause; and continuation of a modified gas performance based ratemaking incentive mechanism. Preliminary estimates for UR-110 indicate an $11.2 million or 2.5 percent reduction for Wisconsin retail electric customers and a $1.3 million or 2.3 percent reduction for Wisconsin natural gas customers. Although the PSCW has publicly announced the foregoing decisions, a final order in WP&L's rate case is not expected to be issued by the PSCW until April 1997. As previously discussed in the MD&A under "Capital Requirements," Kewaunee is in the process of using laser technology for tube repairs and further investigation is ongoing which may delay the return of the plant to service beyond the first quarter of 1997. Because of these uncertainties, the PSCW, on January 3, 1997, approved accelerated cost recovery of the remaining depreciation costs and unfunded decommissioning liability based on an expected end of plant life of 2002 rather than the currently licensed end of life of 2013. The accelerated depreciation and decommissioning expense will be incorporated with the retail rate order UR-110. Based on the March 4, 1997 decisions by the PSCW, WP&L expects to recover in rates an additional $3.0 million annually related to the accelerated depreciation of Kewaunee and to increase the annual contribution to the external decommissioning trust funds to $16 million from its current level of $10.7 million. The forecasted level of the contribution included in the capital requirements section was $19.7 million. After-tax earnings on the tax-qualified and non-qualified decommissioning funds are assumed to be 5.6 percent and 7.0 percent, respectively. Based on a 1992 site specific study, WP&L's share of the costs to decommission Kewaunee was estimated at $142 million. WP&L's share of the decommissioning costs of Kewaunee was previously established to be $180 million (in 1996 dollars) using an annual inflation rate of 6.5 percent. The inflation assumptions applied in UR-110 were as follows: labor, 4.12 percent; burial costs, 10.42 percent; energy 3.66 percent; and other, 8.00 percent for a weighted average inflation rate of 5.44 percent. Based on this revised inflation rate, WP&L's liability in current year dollars is approximately $176 million. As of December 31, 1996, $90.7 million, net of tax, was available in external trust funds to meet this liability. See Note 11 of the "Notes to Consolidated Financial Statements" for additional information. The undiscounted amount of decommissioning costs estimated to be expended between the years 2014 and 2050 was $1,016 million. Based on the revised funding plan this amount was decreased to $611 million to be expended between the years 2003 and 2039. Kewaunee has been out of service since September 21, 1996, when it was shut down for a refueling and maintenance outage. Start-up has been delayed by problems associated with repairing the tubes in Kewaunee's two steam generators. In early February, testing of the laser welding repair of the tubes revealed unexpected problems with the quality of the welds. After further inspection and laboratory testing, WPSC is now planning to undertake additional repairs which could allow Kewaunee to return to service in the June 1997 time frame. The additional repairs involve removing metal sleeves that were installed previously to repair the corroded tubes. New, slightly longer sleeves will be installed to cover the areas of concern in the original steam generator tubes. WPSC's management believes that the NRC will approve this repair process because it only requires minor changes to the presently approved sleeving process. The cost of the additional repairs is expected to be between $4.5 million and $10.0 million, depending on the number of previously repaired sleeves that can remain in service. WP&L's shares of the costs is in the range of $1.8 to $4.1 million based on its 41.0% ownership in the plant. Selected Consolidated Quarterly Financial Data (Unaudited) The summarized quarterly financial data below were not audited by independent public accountants, but reflect all adjustments necessary, in the opinion of WP&L, for a fair presentation of the data. The quarterly amounts can be affected by seasonal weather conditions. Refer to MD&A for a discussion of the impacts of weather. Operating Operating Net Revenues Income Income Quarter Ended (in thousands) 1996: March 31 $221,234 $59,958 $31,950 June 30 166,117 34,436 19,538 September 30 165,536 32,625 15,152 December 31 206,388 29,323 12,535 1995: March 31 $187,342 $45,132 $20,899 June 30 149,557 22,972 8,846 September 30 165,481 42,678 21,124 December 31 187,292 42,041 24,473 REPORT ON THE FINANCIAL INFORMATION Wisconsin Power and Light Company's management is responsible for all the information appearing in this annual report and for the accuracy and internal consistency of that information. The consolidated financial statements that follow have been prepared in accordance with generally accepted accounting principles. In addition to selecting appropriate accounting principles, management is responsible for the manner of presentation and for the reliability of the financial information. In fulfilling that responsibility, it is necessary for management to make estimates based on currently available information and judgments of current conditions and circumstances. Through a well-developed system of internal controls, management seeks to ensure the integrity and objectivity of the financial information presented in this report. This system of internal control is designed to provide reasonable assurance that the assets of the company are safeguarded and that the transactions are executed according to management's authorizations and are recorded in accordance with the appropriate accounting principles. The Board of Directors participates in the financial information reporting process through its Audit Committee. Erroll B. Davis Jr. President and Chief Executive Officer WPL Holdings, Inc. Edward M. Gleason Vice President, Treasurer and Corporate Secretary Principal Financial Officer WPL Holdings, Inc. January 30, 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Sharehowners of Wisconsin Power and Light Company: We have audited the accompanying consolidated balance sheets and statements of capitalization of Wisconsin Power and Light Company (a Wisconsin corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flow and common shareowners' investment for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of WP&L's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wisconsin Power and Light Company and subsidiaries as of December 31, 1996 and 1995, and the results of operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 30, 1997 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 1996 1995 1994 (in thousands) Operating revenues: Electric $589,482 $546,324 $531,747 Gas 165,627 139,165 151,931 Water 4,166 4,183 4,133 ------- ------- ------- 759,275 689,672 687,811 ------- ------- ------- Operating expenses: Electric production fuels 114,470 116,488 123,469 Purchased power 81,108 44,940 37,913 Purchased gas 104,830 84,002 100,942 Other operation 141,885 139,877 150,995 Maintenance 46,492 42,043 41,227 Depreciation 84,942 81,164 73,194 Taxes other than income 29,206 28,335 27,100 ------- ------- ------- 602,933 536,849 554,840 ------- ------- ------- Operating income 156,342 152,823 132,971 ------- ------- ------- Interest expense and other: Interest expense 31,472 33,821 31,148 Allowance for funds used during construction (3,208) (2,088) (4,038) Other (8,215) (3,168) (10,361) ------- ------- ------- 20,049 28,565 16,749 ------- ------- ------- Income from operations before income taxes 136,293 124,258 116,222 Income taxes 53,808 45,606 44,727 Preferred dividend requirement 3,310 3,310 3,310 ------- ------- ------- Net income $79,175 $75,342 $68,185 ======= ======= ======= The accompanying notes are an integral part of the consolidated financial statements. WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED BALANCE SHEETS 1996 1995 ASSETS (in thousands) Utility plant: Plant in service Electric $1,729,311 $1,665,611 Gas 227,809 217,678 Water 23,905 22,518 Common 152,093 136,943 ---------- ---------- 2,133,118 2,042,750 Less--accumulated provision for depreciation 967,436 887,562 ---------- ---------- 1,165,682 1,155,188 Construction work in progress 55,519 36,996 Nuclear fuel, net 19,368 18,867 ---------- ---------- 1,240,569 1,211,051 ---------- ---------- Other property and equipment, net 1,397 22,275 ---------- ---------- Investments: Nuclear decommissioning trust funds 90,671 73,357 Other investments 15,354 13,011 ---------- ---------- 106,025 86,368 ---------- ---------- Current assets: Cash and equivalents 4,167 4,671 Net accounts receivable and unbilled revenue 34,220 33,971 Coal, at average cost 15,841 14,625 Materials and supplies, at average cost 19,915 20,611 Gas in storage, at average cost 9,992 6,319 Prepayments and other 22,053 21,190 ---------- ---------- 106,188 101,387 ---------- ---------- Deferred charges: Regulatory assets 160,877 170,269 Other 62,758 49,815 ---------- ---------- 223,635 220,084 ---------- ---------- TOTAL ASSETS $1,677,814 $1,641,165 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization (See Consolidated Statements of Capitalization): Common shareowners' investment $576,158 $563,070 Preferred stock not mandatorily redeemable 59,963 59,963 Long-term debt, net 258,660 318,599 ---------- ---------- 894,781 941,632 ---------- ---------- Current liabilities: Current maturities of long-term debt 55,000 --- Variable rate demand bonds 56,975 56,975 Short-term debt 69,500 72,500 Accounts payable and accruals 92,719 82,428 Accrued payroll and vacation 11,687 11,011 Accrued taxes 3,616 7,795 Accrued interest 7,504 7,574 Other 34,424 22,356 ---------- ---------- 331,425 260,639 ---------- ---------- Other credits: Accumulated deferred income taxes 244,817 239,812 Accumulated deferred investment tax credits 36,931 38,842 Accrued environmental remediation costs 74,075 76,852 Deferred credits and other 95,785 83,388 ---------- ---------- 451,608 438,894 ---------- ---------- Commitments and contingencies (Note 11) TOTAL CAPITALIZATION AND LIABILITIES $1,677,814 $1,641,165 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1996 1995 1994 (in thousands) Cash flows generated from (used for) operating activities: Net income $82,485 $78,652 $71,495 Adjustments to reconcile net income to net cash generated from operating activities: Depreciation 84,942 81,164 73,194 Deferred income taxes 14,540 10,716 12,299 Investment tax credit restored (1,911) (1,916) (1,926) Amortization of nuclear fuel 6,057 7,787 6,707 Allowance for equity funds used during construction (2,270) (1,425) (3,009) Gain on sale of other property and equipment (5,676) --- --- Changes in assets and liabilities: Net accounts receivable and unbilled revenue (250) (12,281) 11,000 Inventories (4,193) 3,079 1,841 Prepayments and other (863) 1,121 (634) Accounts payable and accruals 10,896 13,203 (4,406) Accrued taxes (4,179) 496 6,495 Other, net 8,551 15,674 10,028 -------- -------- -------- Net cash from (used for) operating activities 188,129 196,270 183,084 -------- -------- -------- Cash flows generated from (used for) financing activities: Common stock cash dividends, less dividends reinvested (66,087) (56,778) (55,911) Preferred stock dividends (3,310) (3,310) (3,310) Retirement of first mortgage bonds (5,000) (18,000) --- Net change in short-term debt (3,000) 22,000 (8,500) Other, net --- --- 9,649 -------- -------- -------- Net cash from (used for) financing activities (77,397) (56,088) (58,072) -------- -------- -------- Cash flows generated from (used for) investing activities: Proceeds from sale of other property and equipment 36,264 --- --- Additions to utility plant, excluding AFUDC (120,732) (99,746) (119,272) Additions to nuclear fuel (6,558) (7,258) (8,103) Allowance for borrowed funds used during construction (938) (663) (1,029) Dedicated decommissioning trust funds (17,314) (21,566) (1,988) Other, net (1,958) (8,512) 1,684 -------- -------- -------- Net cash from (used for) investing activities (111,236) (137,745) (128,708) -------- -------- -------- Net increase (decrease) in cash and equivalents (504) 2,437 (3,696) Cash and equivalents at beginning of year 4,671 2,234 5,930 -------- -------- -------- Cash and equivalents at end of year $4,167 $4,671 $2,234 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year: Interest on debt $28,786 $30,841 $30,156 Income taxes $48,622 $37,968 $29,642 The accompanying notes are an integral part of the consolidated financial statements. WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, 1996 1995 (in thousands except for share data) Common shareowners' investment: Common stock $5 par value, authorized 18,000,000 shares, issued and outstanding--13,236,601 shares $66,183 $66,183 Premium on capital stock 197,423 $197,423 Capital surplus 1,747 1,747 Reinvested earnings 310,805 297,717 ------- ------- 576,158 563,070 ------- ------- Preferred stock: Cumulative, without par value, authorized 3,750,000 shares, maximum aggregate stated value $150,000,000: Preferred stock without mandatory redemption, $100 stated value-- 4.50% series, 99,970 shares outstanding 9,997 9,997 4.80% series, 74,912 shares outstanding 7,491 7,491 4.96% series, 64,979 shares outstanding 6,498 6,498 4.40% series, 29,957 shares outstanding 2,996 2,996 4.76% series, 29,947 shares outstanding 2,995 2,995 6.20% series, 150,000 shares outstanding 15,000 15,000 Cumulative, without par value, $25 stated value-- 6.50% series, 599,460 shares outstanding 14,986 14,986 -------- -------- 59,963 59,963 -------- -------- Long-term debt: First mortgage bonds: Series L, 6.25%, due 1998 8,899 8,899 1984 Series A, variable rate, due 2014 (4.60% at 12/31/96) 8,500 8,500 1988 Series A, variable rate, due 2015 (4.25% at 12/31/96) 14,600 14,600 1990 Series V, 9.3%, due 2025 27,000 32,000 1991 Series A, variable rate, due 2015 (5.00% at 12/31/96) 16,000 16,000 1991 Series B, variable rate, due 2005 (5.00% at 12/31/96) 16,000 16,000 1991 Series C, variable rate, due 2000 (5.00% at 12/31/96) 1,000 1,000 1991 Series D, variable rate, due 2000 (5.00% at 12/31/96) 875 875 1992 Series W, 8.6%, due 2027 90,000 90,000 1992 Series X, 7.75%, due 2004 62,000 62,000 1992 Series Y, 7.6%, due 2005 72,000 72,000 1992 Series Z, 6.125%, due 1997 55,000 55,000 -------- -------- 371,874 376,874 -------- -------- Less-- Current maturities (55,000) --- Variable rate demand bonds (56,975) (56,975) Unamortized discount and premium, net (1,239) (1,300) -------- -------- 258,660 318,599 -------- -------- TOTAL CAPITALIZATION $894,781 $941,632 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF COMMON SHAREOWNERS' INVESTMENT Year Ended December 31, 1996 1995 1994 (in thousands) Common stock: Balance at beginning and end of year $66,183 $66,183 $66,183 Premium on capital stock: Balance at beginning of year 197,423 197,423 187,774 Equity contribution from parent --- --- 9,649 ------- ------- ------- Balance at end of year 197,423 197,423 197,423 Capital surplus: Balance at beginning and end of year 1,747 1,747 1,747 Reinvested earnings: Balance at beginning of year 297,717 279,153 267,000 Income before preferred dividends 82,485 78,652 71,494 Cash dividends on preferred stock (3,310) (3,310) (3,310) Cash dividends to parent on common stock (66,087) (56,778) (55,911) Other --- --- (120) -------- -------- -------- Balance at end of year 310,805 297,717 279,153 -------- -------- -------- TOTAL COMMON SHAREOWNERS' INVESTMENT $576,158 $563,070 $544,506 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands except as otherwise indicated) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. General Wisconsin Power and Light Company (WP&L) is a subsidiary of WPL Holdings, Inc. (WPLH). WP&L is a public utility predominately engaged in the transmission and distribution of electric energy and the generation and bulk purchase of electric energy for sale. WP&L also transports, distributes and sells natural gas purchased from gas suppliers. Nearly all of WP&L's retail customers are located in south and central Wisconsin. WP&L's principal consolidated subsidiary is South Beloit Water, Gas and Electric Company. b. Regulation WP&L's financial records are maintained in accordance with the uniform system of accounts prescribed by its regulators. The Public Service Commission of Wisconsin (PSCW) and the Illinois Commerce Commission (ICC) have jurisdiction over retail electric and gas revenues. The Federal Energy Regulatory Commission (FERC) has jurisdiction over wholesale electric revenues. c. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. d. Cash and Equivalents WP&L considers all highly liquid debt instruments purchased and investments with a maturity of three months or less to be cash equivalents. e. Utility Plant and Other Property and Equipment Utility plant and other property and equipment are recorded at original cost. Utility plant costs include financing costs that are capitalized using the FERC method for allowance for funds used during construction (AFUDC). The AFUDC capitalization rate for 1996, 1995 and 1994 was 10.23 %, 6.68% and 10.15%, respectively. These capitalized costs are recovered in rates as the cost of the utility plant is depreciated. Normal repairs, maintenance and minor items of utility plant and other property and equipment are expensed. Ordinary utility plant retirements, including removal costs less salvage value, are charged to accumulated depreciation upon removal from utility plant accounts, and no gain or loss is recognized. Upon retirement or sale of other property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in other income and deductions. f. Depreciation WP&L uses the straight-line method of depreciation. For utility plant, straight-line depreciation is computed on the average balance of depreciable property at individual straight-line PSCW approved rates that consider the estimated useful life and removal cost or salvage value as follows: 1996 1995 1994 Electric 3.3% 3.3% 3.2% Gas 3.7% 3.7% 3.7% Water 2.6% 2.5% 2.5% Common 8.1% 7.9% 7.9% Depreciation expense related to WP&L's share of the decommissioning of the Kewaunee Nuclear Power Plant is discussed in Note 11 "Commitments and Contingencies". WP&L will implement higher depreciation rates effective January 1, 1997. Estimated useful lives related to other property and equipment are from 4 to 12 years for equipment and 31.5 to 40 years for buildings. g. Nuclear Fuel Nuclear fuel is recorded at its original cost and is amortized to expense based upon the quantity of heat produced for the generation of electricity. This accumulated amortization assumes spent nuclear fuel will have no residual value. Estimated future disposal costs of such fuel are expensed based on kilowatthours generated. h. Regulatory Assets and Liabilities Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," provides that rate-regulated public utilities such as WP&L record certain costs and credits allowed in the ratemaking process in different periods than for unregulated entities. These are deferred as regulatory assets or regulatory liabilities and are recognized in the consolidated statements of income at the time they are reflected in rates. If a portion of WP&L's operations become no longer subject to the provisions of SFAS No. 71, a write-off of regulatory assets and liabilities would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. As of December 31, 1996 and 1995, regulatory created assets include the following: 1996 1995 Environmental remediation costs (Note 11) $81,431 $81,431 Tax related (Note 6) 57,198 62,796 Jurisdictional plant differences 7,603 7,517 Decontamination and decommissioning costs of Federal enrichment facilities 6,061 6,555 Other 8,584 11,970 ------- ------- Total $160,877 $170,269 ======= ======= As of December 31, 1996 and 1995, WP&L had recorded regulatory related liabilities of $33,901 and $37,898, respectively. These liabilities are primarily tax related. i. Revenue WP&L accrues revenues for services provided but not yet billed at month- end. j. Rate Matters Effective January 1, 1995, for the two-year period ended December 31, 1996, the PSCW in rate order UR-109, authorized a 2.8 percent annual decrease in electric rates, a 0.5 percent annual increase in gas rates and a decline in the allowed return on common equity to 11.5 percent from 11.6 percent. Further, the PSCW approved certain incentive programs described below: 1. The electric fuel adjustment mechanism, which allowed costs to fluctuate within a 3 percent band width, was eliminated. The elimination of the adjustment mechanism did not have a material impact on earnings. 2. The automatic purchased gas adjustment clause was eliminated and replaced by a performance based rate (PBR) mechanism. Fluctuations in the commodity cost of gas above or below a prescribed commodity price index increase or decrease WP&L's margin on gas sales. Both benefits and exposures are subject to customer sharing provisions. WP&L's share is capped at $1.1 million pre-tax. For 1996 and 1995, WP&L earned $1.1 million and $0.8 million, respectively, under this PBR mechanism. 3. In order to promote air quality and delivery system reliability, there are SO2 emissions and service reliability performance and incentive clauses. Positive incentives available under these clauses include $1.5 million pre-tax for the SO2 emissions and $0.5 million pre-tax for the service reliability. WP&L's earnings are also negatively exposed for equal amounts. For 1996 and 1995, WP&L collected $2.0 million pre-tax in revenues and also deferred $2.6 and $2.1 million pre-tax in revenues, respectively. WP&L made its required biennial rate case filing with the PSCW on April 1, 1996. Technical hearings took place during 1996. A final order is expected in April of 1997. k. Income Taxes WP&L follows the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax liabilities and assets, as appropriate, for all temporary differences between the tax basis of assets and liabilities and the amounts reported in the financial statements using currently enacted tax rates as shown in Note 6. l. Reclassifications Certain reclassifications have been made to the prior years financial statements to conform with the current year presentation. NOTE 2. PROPOSED MERGER OF THE COMPANY On November 10, 1995, WPLH, IES Industries Inc. (IES), and Interstate Power Company (IPC) entered into an Agreement and Plan of Merger, as amended (Merger Agreement), providing for: a) IPC becoming a wholly-owned subsidiary of WPLH, and b) the merger of IES with and into WPLH, which merger will result in the combination of IES and WPLH as a single holding company (collectively, the Proposed Merger). The new holding company will be named Interstate Energy Corporation (IEC). The Proposed Merger, which will be accounted for as a pooling of interests and is intended to be tax- free for federal income tax purposes, has been approved by the respective Boards of Directors and shareholders. It is still subject to approval by several federal and state regulatory agencies. The companies expect to receive the regulatory approvals by the end of the third quarter of 1997. The summary below contains selected unaudited pro forma financial data for the year ended December 31, 1996. The financial data should be read in conjunction with the historical consolidated financial statements and related notes of WPLH, IES and IPC and in conjunction with the unaudited pro forma combined financial statements and related notes of IEC included in the Form 10-K Annual Report of WPLH. The pro forma combined earnings per share reflect the issuance of shares associated with the exchange ratios discussed below. WPLH IES IPC PRO FORMA (in thousands except (as (as (as COMBINED per share data) reported) reported) reported) (Unaudited) Operating Revenues $932,844 $973,912 $326,084 $2,232,840 Income from Continuing Operations $73,205 $60,907 $25,860 $159,972 Earnings per share from Continuing Operations $2.38 $2.04 $2.69 $2.12 Assets at December 31, 1996 $1,900,531 $2,125,562 $639,200 $4,665,293 Long-term obligations, net at December 31, 1996 $430,190 $744,298 $188,731 $1,363,219 Under the terms of the Merger Agreement, the outstanding shares of WPLH common stock will remain unchanged and outstanding as shares of IEC. Each outstanding share of IES common stock will be converted to 1.14 shares of IEC common stock. Each share of IPC common stock will be converted to 1.11 shares of IEC common stock. It is anticipated that IEC will retain WPLH's common share dividend payment level as of the effective time of the merger. On January 22, 1997, the Board of Directors of WPLH declared a quarterly dividend of $0.50 per share. This represents an annual rate of $2.00 per share. IES is a holding company headquartered in Cedar Rapids, Iowa, and is the parent company of IES Utilities Inc. (IES Utilities) and IES Diversified Inc. (IES Diversified). IES Utilities supplies electric and gas service to approximately 336,000 and 176,000 customers, respectively, in Iowa. IES Diversified and its principal subsidiaries are primarily engaged in the energy-related, transportation and real estate development businesses. IPC, an operating public utility headquartered in Dubuque, Iowa, supplies electric and gas service to approximately 165,000 and 49,000 customers, respectively, in northeast Iowa, northwest Illinois and southern Minnesota. IEC will be the parent company of WP&L, IES Utilities and IPC and will be registered under the Public Utility Holding Company Act of 1935, as amended (1935 Act). The Merger Agreement provides that these operating utility companies will continue to operate as separate entities for a minimum of three years beyond the effective date of the merger. In addition, the non-utility operations of WPLH and IES Diversified will be combined shortly after the effective date of the merger under one entity to manage the diversified operations of IEC. The corporate headquarters of IEC will be in Madison, Wisconsin. The Securities and Exchange Commission (SEC) historically has interpreted the 1935 Act to preclude registered holding companies, with limited exceptions, from owning both electric and gas utility systems. Although the SEC has recommended that registered holding companies be allowed to hold both gas and electric utility operations if the affected states agree, it remains possible that the SEC may require as a condition to its approval of the Proposed Merger that WPLH, IES and IPC divest their gas utility properties, and possibly certain non-utility ventures of WPLH and IES, within a reasonable time after the effective date of the Proposed Merger. NOTE 3. JOINTLY OWNED UTILITY PLANTS WP&L participates with other Wisconsin utilities in the construction and operation of several jointly owned utility generating plants. Each of the respective owners is responsible for the financing of its portion of the construction costs. Kilowatt-hour generation and operating expenses are divided on the same basis of ownership with each owner reflecting its respective costs in its consolidated statements of income. The chart below represents WP&L's proportionate share of such plants as reflected in the consolidated balance sheets at December 31, 1996 and 1995.
1996 1995 Accumulated Plant Provision Accumulated Ownership Inservice MW Plant in for Plant in Provision for Interest % Date Capacity Service Depreciation CWIP Service Depreciation CWIP Coal: Columbia Energy 1975 & Center 46.2 1978 1,023 $161,811 $86,375 $1,581 $160,348 $79,521 $881 Edgewater Unit 4 68.2 1969 330 50,796 28,056 702 50,762 26,759 216 Edgewater Unit 5 75.0 1985 380 228,805 73,697 51 229,429 68,515 0 Nuclear: Kewaunee Nuclear Power Plant 41.0 1974 535 131,207 80,577 810 132,211 76,096 836 ------- ------- ------ ------- ------- ------ Total $572,619 $268,705 $3,144 $572,750 $250,891 $1,933 ======= ======= ====== ======= ======= ======
NOTE 4. NET ACCOUNTS RECEIVABLE WP&L has a contract with a financial organization to sell, with limited recourse, certain accounts receivable and unbilled revenues. These receivables include customer receivables, sales to other public utilities and billings to the co-owners of the jointly owned electric generating plants that WP&L operates. The contract allows WP&L to sell up to $150 million of receivables at any time. Expenses related to the sale of receivables are paid to the financial organization under this contract, and include, along with various other fees, a monthly discount charge on the outstanding balance of receivables sold that approximated a 5.90 percent annual rate during 1996. These costs are recovered in retail utility rates as an operating expense. All billing and collection functions remain the responsibility of WP&L. The contract expires August 16, 1998, unless extended by mutual agreement. As of December 31, 1996 and 1995, the balance of sold accounts receivable that had not been collected totaled $86.5 million and $79.5 million, respectively. During 1996, the monthly proceeds from the sale of accounts receivable averaged $86.6 million, compared with $77.5 million in 1995. WP&L does not have any significant concentrations of credit risk in the December 31, 1996 and 1995 net accounts receivable balances. In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes standards for asset and liability recognition when transfers occur. This statement, effective January 1, 1997, specifies conditions when control has been surrendered which determines if sale treatment of the receivables would be allowed. At the present time, this new standard is not expected to materially impact WP&L's financial position or results of operations. NOTE 5. EMPLOYEE BENEFIT PLANS a. Pension Plans WP&L has noncontributory, defined benefit retirement plans covering substantially all employees. The benefits are based upon years of service and levels of compensation. The projected unit credit actuarial cost method was used to compute net pension costs and the accumulated and projected benefit obligations. WP&L's policy is to fund the pension cost at an amount that is at least equal to the minimum funding requirements mandated by the Employee Retirement Income Security Act (ERISA) and that does not exceed the maximum tax deductible amount for the year. The following table sets forth the funded status of the plans and amounts recognized in WP&L's consolidated balance sheets at December 31, 1996 and 1995: 1996 1995 Accumulated benefit obligation Vested benefits ($161,031) ($157,111) Non-vested benefits (3,298) (2,755) --------- --------- Total (164,329) (159,866) Projected benefit obligation (189,653) (184,937) Plan assets at fair value 218,920 202,343 --------- --------- Plan assets in excess of projected benefit obligation 29,267 17,406 Unrecognized net transition asset (14,480) (16,928) Unrecognized prior service cost 3,712 4,022 Unrecognized net loss 15,011 24,685 --------- --------- Prepaid pension costs $33,510 $29,185 ========= ========= Assumed rate of return on plan assets 9.00% 9.00% ========= ========= Discount rate of projected benefit obligation 7.50% 7.25% ======== ========= Range of assumed rate increases for future compensation levels 3.50-4.50% 3.50-4.50% ========== ========== The net pension cost (benefit) recognized in the consolidated statements of income for 1996, 1995 and 1994 included the following components: 1996 1995 1994 Service cost $5,072 $3,879 $5,123 Interest cost on projected benefit obligation 13,625 12,911 12,051 Actual return on assets (24,962) (31,548) 1,016 Amortization and deferrals 5,452 15,103 (17,795) -------- -------- --------- Net pension cost (benefit) ($813) $345 $395 ======== ======== ========= b. Other Postretirement Benefits WP&L accrues for the expected cost of postretirement health-care and life insurance benefits during the employees' years of service based on actuarial methodologies that closely parallel pension accounting requirements. WP&L elected delayed recognition of the transition obligation in accordance with current accounting principles and is amortizing the discounted present value of the transition obligation to expense over 20 years. For WP&L, the cost of providing postretirement benefits, including the transition obligation, is being recovered in retail rates under current regulatory practices. The following table sets forth the funded status of the plans and amounts recognized in WP&L's consolidated balance sheets at December 31, 1996 and 1995: 1996 1995 Accumulated benefit obligation Retirees ($32,244) ($35,639) Fully eligible active plan participants ($4,954) ($6,261) Other active plan participants (9,396) (8,091) -------- -------- Total (46,594) (49,991) Plan assets at fair value 13,801 11,768 -------- -------- Accumulated benefit obligation in excess of plan assets (32,793) (38,223) Unrecognized transition obligation 23,532 25,003 Unrecognized prior service cost (294) --- Unrecognized net loss (5,045) 1,166 -------- -------- Accrued postretirement benefits liability ($14,600) ($12,054) ======== ======== Assumed rate of return on plan assets 9.00% 9.00% ======== ======== Discount rate of projected benefit obligation 7.50% 7.25% ======== ======== Medical cost trend on paid charges: Initial trend rate 9.00% 9.00% ======== ======== Ultimate trend rate 5.00% 5.00% ======== ======== The net postretirement benefits cost recognized in the consolidated statements of income for 1996, 1995 and 1994 included the following components: 1996 1995 1994 Service cost $1,804 $1,495 $1,739 Interest cost on projected benefit obligation 3,375 3,567 3,135 Actual return on assets (1,351) (2,051) (253) Amortization of transition obligation 1,471 1,471 1,527 Amortization and deferrals 371 1,313 (381) ------ ------ ------ Net pension cost (benefit) $5,670 $5,795 $5,767 ====== ====== ====== Increasing the medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $2.0 million and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year by $0.3 million. c. Long-Term Equity Incentive Plan WPLH has a long-term equity incentive plan which permits the grant of non- qualified stock options and equivalent performance units. SFAS No. 123, "Accounting for Stock Based Compensation Plans," establishes standards of financial accounting and reporting for stock-based compensation plans. As allowed under SFAS No. 123, WP&L elected to continue to apply APBO No. 25, "Accounting for Stock Issued to Employees", in accounting for stock based compensation plans. Proforma disclosures pursuant to SFAS No. 123 for stock options have not been presented as the impact would not change reported earnings per share. NOTE 6. INCOME TAXES The following table reconciles the statutory federal income tax rate to the effective income tax rate on continuing operations: 1996 1995 1994 Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 6.1 5.8 5.6 Investment tax credits restored (1.4) (1.5) (1.7) Amortization of excess deferred taxes (1.3) (1.4) (1.5) Affordable housing and historical tax credits 0.0 (1.5) 1.3 Other differences, net 1.1 0.3 (0.2) ----- ----- ----- Effective income tax 39.5% 36.7% 38.5% ===== ===== ===== The breakdown of income tax expense as reflected in the consolidated statements of income is as follows: 1996 1995 1994 Current federal $37,945 $29,847 $27,406 Current state 9,558 6,959 6,448 Deferred 8,217 10,716 12,799 Investment tax credit restored (1,912) (1,916) (1,926) ------ ------ ------ $53,808 $45,606 $44,727 ====== ====== ====== The temporary differences that resulted in accumulated deferred income taxes (assets) and liabilities as of December 31, 1996 and 1995, are as follows: 1996 1995 Property tax related $223,386 $214,793 Investment tax credit related (19,886) (20,915) Decommissioning related 14,541 12,613 Other 26,776 33,321 ------- ------- $244,817 $239,812 ======= ======== NOTE 7. SHORT-TERM DEBT AND LINES OF CREDIT WP&L and its subsidiaries maintain committed bank lines of credit, most of which are at the bank prime rates, to obtain short-term borrowing flexibility, including pledging lines of credit as security for any commercial paper outstanding. Amounts available under these lines of credit totaled $70 million as of December 31, 1996. Information regarding short-term debt and lines of credit is as follows: 1996 1995 1994 As of year end-- Lines of credit borrowings $ ---- $ ---- $ ---- Commercial paper outstanding $59,500 $56,500 $50,500 Notes payable outstanding $10,000 $16,000 $ ---- Discount rates on commercial paper 5.35-5.65% 5.73-5.77% 5.64-6.12% Interest rates on notes payable 5.95% 5.80%-5.83% ---- For the year ended-- Maximum month-end amount of short-term debt $69,500 $80,000 $50,500 Average amount of short-term debt (based on daily outstanding balances) $33,901 $48,760 $25,374 Average interest rate on short-term debt 5.86% 5.90% 4.39% NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS WP&L has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well- defined interest rate and commodity price risks. Interest rate swaps: WP&L enters into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate debt and fees associated with the sale of its accounts receivable. The notional principal amount of interest rate swaps outstanding as of December 31, 1996, was $89.0 million. Average variable rates are based on rates implied in the forward yield curve at the reporting date. The average pay and receive rates associated with these agreements are 5.08 percent and 4.78 percent, respectively. The swap agreements have contract maturities from two days to three years. It is not WP&L's intent to terminate these contracts, however, the total cost to WP&L if it were to terminate all of the agreements existing at December 31, 1996, is $0.1 million. In 1995, WP&L entered into an interest rate forward contract related to the anticipated issuance of $60 million of long-term debt securities. The securities were not issued in 1996 and the forward contract was closed which resulted in a gain of $0.8 million to WP&L. The gain was deferred and will be recognized as an adjustment to interest expense over the life of the bonds expected to be issued during 1997 as discussed in Note 10b. Gas Swaps: WP&L uses gas commodity swaps to reduce the impact of price fluctuations on gas purchased and injected into storage during the summer months and withdrawn and sold at current market prices during the winter months. Variances between underlying commodity prices and financial contracts on these agreements are deferred and recognized as increases or decreases in the cost of gas at the time the storage gas is sold. At December 31, 1996 and 1995, the commodity swap agreements outstanding were immaterial. NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments at December 31, 1996 and 1995, and the basis upon which they were estimated are as follows: Cash, nuclear decommissioning trust funds and short-term debt: The carrying amount of cash and short-term debt approximates fair value due to their short maturities. As of December 31, 1996 and 1995, the investments in the nuclear decommissioning trust, which are carried at fair value, included a net unrealized gain of $9.4 million and $4.7 million, respectively. Cumulative Preferred Stock of WP&L: The estimated fair value of the preferred stock is $47.7 million and $49.3 million at December 31, 1996 and 1995, respectively. These amounts are based on the market yield of similar securities and quoted market prices. Long-Term Debt: At December 31, 1996 and 1995, the estimated fair value of long-term debt is $331.9 million and $408.4 million, respectively. These amounts are based upon the market yield of similar securities and quoted market prices. Since WP&L is subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of WP&L's nuclear decommissioning trust funds and long-term debt may not be realized by it's shareholders. NOTE 10. CAPITALIZATION a. Common Shareowners' Investment A retail rate order effective January 1, 1995, requires WP&L to maintain a utility common equity level of 51.93 percent of total utility capitalization during the test years January 1, 1995 to December 31, 1996. In addition, the PSCW ordered that it must approve the payment of dividends by WP&L to WPLH that are in excess of the level forecasted in the rate order ($58.1 million), if such dividends would reduce WP&L's average common equity ratio below 51.93 percent. At December 31, 1996, WP&L's common equity ratio was 53.53 percent. b. Long-Term Debt Substantially, all of WP&L's utility plant is secured by its first mortgage bonds. Current maturities of long-term debt of WP&L are as follows: $55.0 million in 1997, $8.9 million in 1998, $0.0 million in 1999, $1.9 million in 2000 and $0.0 million in 2001. On September 14, 1995, WP&L received an order from the PSCW authorizing the sale of up to $60 million of long-term debt securities. WP&L had expected to make an offering of the long-term debt securities before December 31, 1996. WP&L did not make this offering and does not intend to request an extension of this order. WP&L expects to request PSCW permission for the sale of up to $105 million of long-term debt securities to be issued before December 31, 1997. WP&L intends to use the net proceeds from the sale of these securities to provide funds for the retirement of Series Z Bonds and to repurchase on the open market Series V and/or Series W Bonds. The remainder of the net proceeds will be used to repay other short-term debt incurred by WP&L, to finance utility construction expenditures and for general corporate purposes. NOTE 11. COMMITMENTS AND CONTINGENCIES a. Coal Contract Commitments To ensure an adequate supply of coal, WP&L has entered into certain long-term coal contracts. These contracts include a demand or take-or-pay clause under which payments are required if contracted quantities are not purchased. Purchase obligations on these coal and related rail contracts total approximately 14.5 million tons through December 31, 2001. WP&L's management believes it will meet minimum coal and rail purchase obligations under the contracts. Minimum purchase obligations on these contracts over the next five years are estimated to be $36 million in 1997, $37 million in 1998, $28 million in 1999, $9 million in 2000 and $9 million in 2001. b. Purchased Power and Gas Under firm purchased power and gas contracts, WP&L is obligated as follows (dollars in millions): Purchased Power Purchased Gas 1997 $64.2 $46.8 1998 16.8 40.2 1999 20.2 30.7 2000 27.6 26.2 2001 28.9 21.6 Thereafter 84.9 46.1 c. Manufactured Gas Plant Sites WP&L has a current or previous ownership interest in 11 properties associated in the past with the production of manufactured gas. Some of these sites may contain coal tar waste products which may present an environmental hazard. WP&L owns five of these sites, three are currently owned by municipalities and the remaining three are currently owned by private companies. Through ongoing investigations and studies, WP&L confirmed that there was no contamination at two of the sites and only a minimal likelihood of contamination at a third site. As WP&L has received close out letters from the State of Wisconsin Department of Natural Resources (DNR) for these three sites, WP&L has no further obligation at these sites. WP&L has also implemented DNR- approved remediation plans at two additional sites in the last several years. An air sparging/biosparging remediation system was implemented at one of the sites, while excavation and disposal of the coal tar residue and contaminated soils was implemented at the other. Groundwater monitoring is ongoing at both sites. WP&L currently estimates that the remaining remediation costs associated with the former manufactured gas plant sites is $74 million. The estimate includes the costs of feasibility studies, data collection, soil and groundwater remediation activities and ongoing monitoring activities through 2027. The estimate is based on a number of factors including the estimated extent and volume of contaminated soil and/or groundwater. The estimate is also premised in part on a remediation method that involves treatment or removal of contaminated soil. Based on recent approvals from the DNR, WP&L may be able to implement a less-costly containment and control remediation strategy at two of the remaining sites. WP&L plans to implement this remediation at these two sites in 1997. If remediation is successful, management believes there may be a significant reduction in the estimated liability. Changes in the liability do not immediately impact the earnings of WP&L. Under the current rate making treatment approved by the PSCW, the costs expended in the environmental remediation of these sites are deferred and collected from gas customers over a five year period after new rates are implemented. Management believes future costs will also be recovered in rates. d. Spent Nuclear Fuel and Decommissioning Costs WP&L's share of the decommissioning costs of Kewaunee Nuclear Power Plant (Kewaunee) is estimated to be $180 million (in 1996 dollars, assuming the plant is operating through 2013) based on a 1992 site-specific study, using the immediate dismantlement method of decommissioning. The costs of decommissioning are assumed to escalate at an annual rate of 6.5 percent. The undiscounted amount of decommissioning costs estimated to be expended between the years 2014 and 2050 is $1,016 million. As required by the PSCW and FERC, WP&L makes annual contributions to qualified and nonqualified external trust funds to provide for decommissioning of Kewaunee. WP&L's annual contribution is $10.7 million for the years ended December 31, 1996, 1995 and 1994. This amount is fully recovered in rates. The after-tax income of the external trust funds was $2.7 million, $2.8 million and $2.7 million for 1996, 1995 and 1994, respectively. Decommissioning costs, which include the annual contribution to external trust funds and earnings on the assets of these trusts, are recorded as depreciation expense in the consolidated statements of income with the cumulative amount included in the accumulated provision for depreciation on the consolidated balance sheets. As of December 31, 1996, the total decommissioning costs included in the accumulated provision for depreciation were $90.7 million. Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy (DOE) is responsible for the ultimate storage and disposal of spent nuclear fuel removed from nuclear reactors. Interim storage space for spent nuclear fuel is currently provided at Kewaunee. Currently there is on-site storage capacity for spent fuel through the year 2001. An investment of approximately $2.5 million could provide additional storage sufficient to meet spent fuel storage needs until the expiration of the current operating license. The following summarizes the investment at December 31, 1996 and 1995: 1996 1995 Original cost of nuclear fuel $166,342 $160,997 Less-Accumulated amortization 146,974 142,130 ------- ------- Nuclear fuel, net $ 19,368 $ 18,867 ======= ======= e. Nuclear Performance In September 1996, Kewaunee was taken out of service for a scheduled refueling and maintenance outage which was originally projected to be of five weeks duration. During the outage, however, extensive tube degradation was encountered which extended the outage through the first quarter of 1997. The estimated costs attributable to the outage extension are replacement power costs of $500,000 per week and WP&L's share of the repair costs are approximately $2.3 million of which $1.4 million was expensed in 1996. Additional details of the Kewaunee outage can be found elsewhere in this report in "Management's Discussion and Analysis of Financial Condition and Results of Operations." f. Nuclear Insurance The Price Anderson Act provides for the payment of funds for public liability claims arising from a nuclear incident. Accordingly, in the event of a nuclear incident, WP&L, as a 41-percent owner of Kewaunee, is subject to an overall assessment of approximately $32.5 million per incident, not to exceed $4.1 million payable in any given year. Through its membership in Nuclear Mutual Limited and Nuclear Electric Insurance Limited, WP&L has obtained property damage and decontamination insurance totaling $2 billion for loss from damage at Kewaunee. In addition, WP&L maintains outage and replacement power insurance coverage totaling $101.4 million in the event an outage exceeds 21 weeks. g. Planned Capital Expenditures Plans for the construction and financing of future additions to utility plant can be found elsewhere in this report in "Management's Discussion and Analysis of Financial Condition and Results of Operations." NOTE 12. SEGMENT INFORMATION The following table sets forth certain information relating to WP&L's consolidated continuing operations: 1996 1995 1994 Operation information: Customer revenues-- Electric $589,482 $546,324 $531,747 Gas 165,627 139,165 151,931 Water 4,166 4,183 4,133 Operating income (loss) Electric $136,339 $134,180 $118,782 Gas 18,929 16,963 13,075 Water 1,074 1,680 1,114 Investment information: Identifiable assets, including allocated common plant at December 31-- Electric $1,225,321 $1,226,786 $1,176,670 Gas 262,090 250,643 234,815 Water 21,389 20,111 18,791 Assets not allocated 169,014 143,625 154,848 Other information: Construction and nuclear fuel expenditures-- Electric $125,894 $122,297 $103,420 Gas 17,978 16,905 20,319 Water 1,669 2,124 2,149 Depreciation and amortization expense Electric $74,492 $71,379 $64,695 Gas 9,756 9,629 8,082 Water 694 156 417 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 relating to directors and nominees for election of directors at the 1997 Annual Meetings of Shareowners is incorporated herein by reference to the information under the caption "Election of Directors" in each registrant's Proxy Statements for the 1997 Annual Meeting of Shareowners (the 1997 Proxy Statements). The 1997 Proxy Statements will be filed with the Securities and Exchange Commission within 120 days after the end of each registrant's fiscal year. The information required by Item 10 relating to executive officers is included in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the information under the captions "Compensation of Executive Officers" and "Meetings and Committees of the Board-Compensation of Directors" (but not including WPLH's Proxy Statement Report of the Compensation and Personnel Committee on Executive Compensation) in each of the registrant's 1997 Proxy Statements. The 1997 Proxy Statements will be filed with the Securities and Exchange Commission within 120 days after the end of each registrant's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the information under the caption "Ownership of Voting Securities" in each of the registrant's 1997 Proxy Statements. The 1997 Proxy Statements will be filed with the Securities and Exchange Commission within 120 days after the end of each registrant's fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the information under the caption "Compensation of Executive Officers" (but not including the Report of the Compensation and Personnel Committee on Executive Compensation) in each of the registrant's 1997 Proxy Statements. The 1997 Proxy Statements will be filed with the Securities and Exchange Commission within 120 days after the end of each registrant's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Consolidated Financial Statements Refer to Index to Financial Statements at Item 8 "Financial Statements and Supplementary Data." (a) (2) Financial Statement Schedules WPL Holdings, Inc. Report of Independent Public Accountants on Schedules Schedule I. Parent Company Financial Statements Schedule II. Valuation and Qualifying Accounts and Reserves Wisconsin Power and Light Company Report of Independent Public Accountants on Schedules Schedule II. Valuation and Qualifying Accounts and Reserves All other schedules are omitted because they are not applicable or not required, or because that required information is shown either in the consolidated financial statements or in the notes thereto. (a)(3) Exhibits Required by Securities and Exchange Commission Regulation S-K The following Exhibits are filed herewith or incorporated herein by reference. Documents indicated by an asterisk (*) are incorporated herein by reference. 2A* Agreement and Plan of Merger, dated as of November 10, 1995, by and among WPL Holdings, Inc., IES industries Inc., Interstate Power Company and AMW Acquisition, Inc. (incorporated by reference to Exhibit 2.1 in WPLH's Current Report on Form 8-K, dated November 10, 1995) 2B* Amendment No. 1 to Agreement and Plan of Merger and Stock Option Agreements, dated May 22, 1996, by and among WPL Holdings, Inc., IES Industries Inc., Interstate Power Company, a Delaware corporation, AMW Acquisition, Inc., WPLH Acquisition Co. and Interstate Power Company, a Wisconsin corporation (incorporated by reference to Exhibit 2.1 in WPLH's Current Report on Form 8- K, dated May 22, 1996) 2C* Amendment No. 2 to Agreement and Plan of Merger, dated August 16, 1996, by and among WPL Holdings, Inc., IES Industries Inc., Interstate Power Company, a Delaware corporation, WPLH Acquisition Co. and Interstate Power Company, a Wisconsin corporation (incorporated by reference to Exhibit 2.1 in WPLH's Current Report on Form 8-K, dated August 15, 1996) 2D* Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, as amended, by and among WPL Holdings, Inc. and IES Industries Inc. (incorporated by reference to Annex B in WPLH's Registration Statement on Form S-4 (No. 333-07931)) 2E* Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, as amended, by and among WPL Holdings, Inc. and Interstate Power Company. (incorporated by reference to Annex C in WPLH's Registration Statement on Form S-4 (No. 333-07931)) 2F* Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, as amended, by and among IES Industries Inc. and WPL Holdings, Inc. (incorporated by reference to Annex D in WPLH's Registration Statement on Form S-4 (No. 333-07931)) 2G* Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, as amended, by and among IES Industries, Inc. and Interstate Power Company. (incorporated by reference to Annex E in WPLH's Registration Statement on Form S-4 (No. 333-07931)) 2H* Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, as amended, by and among Interstate Power Company and WPL Holdings, Inc. (incorporated by reference to Annex F in WPLH's Registration Statement on Form S-4 (No. 333-07931)) 2I* Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, as amended, by and among Interstate Power Company and IES Industries Inc. (incorporated by reference to Annex G in WPLH's Registration Statement on Form S-4 (No. 333-07931)) 3A* Restated Articles of Incorporation of WPL Holdings, Inc. (incorporated by reference to Exhibit 4.1 in WPLH's Form S-3 Registration Statement No. 33-59972) 3B* Form of Amendment of the Restated Articles of Incorporation of WPL Holdings, Inc., providing for an increase in the number of authorized shares of common stock from 100,000,000 to 200,000,000 (incorporated by reference to Exhibit 4.2 in WPLH's Registration Statement on Form S-4 (No. 333-07931)) 3C* By-Laws of WPL Holdings, Inc., as amended (incorporated by reference to Exhibit 3B in WPLH's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 3D* Restated Articles of Incorporation of Wisconsin Power and Light Company, as amended (incorporated by reference to Exhibit 3.1 of WP&L's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994) 3E* By-Laws of Wisconsin Power and Light Company as Amended (incorporated by reference to Exhibit 3B to WP&L Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 4A* Indenture of Mortgage or Deed of Trust dated August 1, 1941, between Wisconsin Power and Light Company and First Wisconsin Trust Company and George B. Luhman, as Trustees, filed as Exhibit 7(a) in File No. 2-6409, and the indentures supplemental thereto dated, respectively, January 1, 1948, September 1, 1948, June 1, 1950, April 1, 1951, April 1, 1952, September 1, 1953, October 1, 1954, March 1, 1959, May 1, 1962, August 1, 1968, June 1, 1969, October 1, 1970, July 1, 1971, April 1, 1974, December 1, 1975, May 1, 1976, May 15, 1978, August 1, 1980, January 15, 1981, August 1, 1984, January 15, 1986, June 1, 1986, August 1, 1988, December 1, 1990, September 1, 1991, October 1, 1991, March 1, 1992, May 1, 1992, June 1, 1992 and July 1, 1992 (Second Amended Exhibit 7(b) in File No. 2-7361; Amended Exhibit 7(c) in File No. 2-7628; Amended Exhibit 7.02 in File No. 2-8462; Amended Exhibit 7.02 in File No. 2-8882; Second Amendment Exhibit 4.03 in File No. 2-9526; Amended Exhibit 4.03 in File No. 2-10406; Amended Exhibit 2.02 in File No. 2-11130; Amended Exhibit 2.02 in File No. 2-14816; Amended Exhibit 2.02 in File No. 2-20372; Amended Exhibit 2.02 in File No. 2-29738; Amended Exhibit 2.02 in File No. 2-32947; Amended Exhibit 2.02 in File No. 2-38304; Amended Exhibit 2.02 in File No. 2-40802; Amended Exhibit 2.02 in File No. 2-50308; Exhibit 2.01(a) in File No. 2-57775; Amended Exhibit 2.02 in File No. 2-56036; Amended Exhibit 2.02 in File No. 2-61439; Exhibit 4.02 in File No. 2-70534; Amended Exhibit 4.03 File No. 2-70534; Exhibit 4.02 in File No. 33-2579; Amended Exhibit 4.03 in File No. 33-2579; Amended Exhibit 4.02 in File No. 33-4961; Exhibit 4B to WP&L's Form 10-K for the year ended December 31, 1988, Exhibit 4.1 to WP&L's Form 8-K dated December 10, 1990, Amended Exhibit 4.26 in File No. 33-45726, Amended Exhibit 4.27 in File No.33-45726, Exhibit 4.1 to WP&L's Form 8-K dated March 9, 1992, Exhibit 4.1 to WP&L's Form 8-K dated May 12, 1992, Exhibit 4.1 to WP&L's Form 8-K dated June 29, 1992 and Exhibit 4.1 to WP&L's Form 8-K dated July 20, 1992) 4B* Rights Agreement, dated February 22, 1989, between WPL Holdings, Inc. and Morgan Shareholder Services Trust Company (incorporated by reference to Exhibit 4 in WPLH's Current Report on Form 8-K dated February 27, 1989) 10A*# Executive Tenure Compensation Plan as revised November 1992 (incorporated by reference to Exhibit 10A in WPLH's Form 10-K for the year ended December 31, 1992) 10B*# Form of Supplemental Retirement Plan, as revised November 1992 (incorporated by reference to Exhibit 10B in WPLH's Form 10-K for the year ended December 31, 1992) 10C*# Forms of Deferred Compensation Plans, as amended June, 1990 (incorporated by reference to Exhibit 10C in WPLH's Form 10-K for the year ended December 31, 1990) 10C.1*# Officer's Deferred Compensation Plan II, as adopted September 1992 (incorporated by reference to Exhibit 10C.1 in WPLH's Form 10-K for the year ended December 31, 1992) 10C.2*# Officer's Deferred Compensation Plan III, as adopted January 1993 (incorporated by reference to Exhibit 10C.2 in WPLH's Form 10-K for the year ended December 31, 1993) 10F*# Pre-Retirement Survivor's Income Supplemental Plan, as revised November 1992 (incorporated by reference to Exhibit 10F in WPLH's Form 10-K for the year ended December 31, 1992) 10H*# Wisconsin Power and Light Company Management Incentive Plan (incorporated by reference to Exhibit 10H in WPLH's Form 10-K for the year ended December 31, 1992) 10I*# Deferred Compensation Plan for Directors, as amended January 17, 1995 (incorporated by reference to Exhibit 10I in WPLH's Form 10-K for the year ended December 31, 1995) 10J*# WPL Holdings, Inc. Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 4.1 in WPLH's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994) 10K*# Key Executive Employment and Severance Agreement by and between WPL Holdings, Inc. and E.B. Davis, Jr. (incorporated by reference to Exhibit 4.2 in WPLH's Quarterly Report on Form 10- Q for the quarter ended June 30, 1994) 10L*# Key Executive Employment and Severance Agreement by and between WPL Holdings, Inc. and each of L.W. Ahearn, W.D. Harvey, E.G. Protsch, and A.J. Amato (incorporated by reference to Exhibit 4.3 in WPLH's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994) 10M*# Key Executive Employment and Severance Agreement by and between WPL Holdings, Inc. and each of E.M. Gleason, B.J. Swan, D.A. Doyle, N.E. Boys, D.E. Ellestad, P.J. Wegner, and K.K. Zuhlke (incorporated by reference to Exhibit 4.4 in WPLH's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994) 10N*# Restricted Stock Agreement -- Lance W. Ahearn (incorporated by reference to Exhibit 10J in WPLH's Form 10-K for the year ended December 31, 1992) 10O*# Restricted Stock Agreement -- Erroll B. Davis, Jr. (incorporated by reference to Exhibit 10O in WPLH's Form 10-K for the year ended December 31, 1994.) 21A Subsidiaries of WPL Holdings, Inc. 21B Subsidiaries of Wisconsin Power and Light Company 23 Consent of Independent Public Accountants 27A Financial Data Schedule of WPL Holdings, Inc. 27B Financial Data Schedule of Wisconsin Power and Light Company Pursuant to Item 601(b)(4)(iii) of Regulation S-K, both registrants agree to furnish to the Securities and Exchange Commission, upon request, any instrument defining the rights of holders of unregistered long-term debt not filed as an exhibit to this Form 10-K. No such instrument authorizes securities in excess of 10 percent of the total assets of either company. # - A management contract or compensatory plan or arrangement. (b) Reports on Form 8-K None UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION WPL Holdings, Inc. (WPLH), IES Industries Inc. (IES), Interstate Power Company (IPC), and certain related parties have entered into an Agreement and Plan of Merger, dated as of November 10, 1995, as amended (the Merger Agreement), providing for (a) the merger of IES with and into WPLH and (b) the merger of IPC with a subsidiary of WPLH pursuant to which IPC will become a subsidiary of WPLH (the above referenced mergers are collectively referred herein to as the Mergers). In connection with the consummation of the Mergers, WPLH will change its name to Interstate Energy Corporation. Detailed information with respect to the Merger Agreement and the proposed Mergers is contained in the Joint Proxy Statement/Prospectus, dated July 11, 1996, as supplemented by the Supplement to Joint Proxy Statement/Prospectus, dated August 21, 1996, contained in WPLH's Registration Statements on Form S-4, Registration Nos. 333-07931 and 333-10401 relating to the meetings of shareowners of WPLH, IES and IPC to vote on the Merger Agreement and related matters. The following unaudited pro forma financial information combines the historical consolidated balance sheets and statements of income of WPLH, IES and IPC, including their respective subsidiaries, after giving effect to the Mergers. The historical data for WPLH have been adjusted to reflect the restatement of such data to account for certain discontinued operations discussed in the notes hereto. The unaudited pro forma combined balance sheet at December 31, 1996 gives effect to the Mergers as if they had occurred at December 31, 1996. The unaudited pro forma combined statements of income for each of the three years in the period ended December 31, 1996 give effect to the Mergers as if they had occurred at January 1, 1994. These statements are prepared on the basis of accounting for the Mergers as a pooling of interests and are based on the assumptions set forth in the notes thereto. In addition, the pro forma financial information does not give effect to the expected synergies or the cost to be incurred to achieve such synergies. The pro forma financial information, however, does reflect the transaction costs to effect the Mergers. The following pro forma financial information has been prepared from, and should be read in conjunction with, the historical consolidated financial statements and related notes thereto of WPLH, IES and IPC. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Mergers been consummated on the date, or at the beginning of the periods, for which the Mergers are being given effect nor is it necessarily indicative of future operating results or financial position. INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET 12/31/96 (In thousands)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined ASSETS UTILITY PLANT Electric $1,729,311 $2,007,839 $853,007 $--- $4,590,157 Gas 227,809 175,472 68,047 --- 471,328 Other 175,998 126,850 ---- --- 302,848 --------- --------- -------- ------ --------- Total 2,133,118 2,310,161 921,054 --- 5,364,333 Accumulated provision for depreciation 967,436 1,030,390 426,471 --- 2,424,297 Construction work in progress 55,519 43,719 3,129 --- 102,367 Nuclear fuel--net 19,368 34,725 --- --- 54,093 --------- --------- -------- ------ --------- Net utility plant 1,240,569 1,358,215 497,712 --- 3,096,496 OTHER PROPERTY, PLANT AND EQUIPMENT --- NET AND INVESTMENTS (NOTE 8) 144,671 314,071 453 --- 459,195 CURRENT ASSETS Cash and cash equivalents 11,070 8,675 3,072 --- 22,817 Accounts receivable --- net 88,798 62,861 28,227 --- 179,886 Fossil fuel inventories, at average cost 15,841 13,323 16,623 --- 45,787 Materials and supplies, at average cost 29,907 22,842 6,214 --- 58,963 Prepayments and other 26,786 70,350 13,497 --- 110,633 --------- --------- -------- ------ --------- Total current assets 172,402 178,051 67,633 --- 418,086 EXTERNAL DECOMMISSIONING FUND 90,671 59,325 --- --- 149,996 DEFERRED CHARGES AND OTHER 252,218 215,900 73,402 --- 541,520 --------- --------- -------- ------ --------- TOTAL ASSETS $1,900,531 $2,125,562 $639,200 $--- $4,665,293 ========= ========= ======= ======= =========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued) 12/31/96 (In thousands)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined LIABILITIES AND EQUITY CAPITALIZATION Common Stock Equity: Common Stock (Note 1) $308 $407,635 $33,848 ($441,033) $758 Other stockholders' equity (Note 1 607,047 219,246 172,210 430,033 1,428,536 ---------- --------- --------- --------- ---------- Total common stock equity 607,355 626,881 206,058 (11,000) 1,429,294 Preferred stock not mandatorily redeemable 59,963 18,320 10,819 ---- 89,102 Preferred stock mandatory sinking fund ---- ---- 24,147 ---- 24,147 Long-term debt ---net 362,564 701,100 171,731 ---- 1,235,395 ---------- --------- --------- --------- ---------- Total capitalization 1,029,882 1,346,301 412,755 (11,000) 2,777,938 CURRENT LIABILITIES Current maturities, sinking funds, and capital lease obligations 67,626 23,598 17,000 ---- 108,224 Commercial paper, notes payable and other 102,779 135,000 28,700 ---- 266,479 Variable rate demand bonds 56,975 ---- ---- ---- 56,975 Accounts payable and accruals 120,986 99,861 14,013 ---- 234,860 Taxes accrued 4,669 43,926 16,953 ---- 65,548 Other accrued liabilities 54,303 54,498 11,785 11,000 131,586 ---------- --------- --------- --------- ---------- Total current liabilities 407,338 356,883 88,451 11,000 863,672 OTHER LIABILITIES Deferred income taxes 245,686 262,675 99,303 ---- 607,664 Deferred investment tax credits 36,931 34,470 17,013 ---- 88,414 Accrued environmental remediation costs 74,075 47,502 7,234 ---- 128,811 Capital lease obligations ---- 19,600 ---- ---- 19,600 Other liabilities and deferred credits 106,619 58,131 14,444 ---- 179,194 ---------- --------- --------- --------- ---------- Total other liabilities 463,311 422,378 137,994 ---- 1,023,683 ---------- --------- --------- --------- ---------- TOTAL CAPITALIZATION AND LIABILITIES $1,900,531 $2,125,562 $639,200 $ ---- $4,665,293 ========== ========= ========= ========= ==========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1996 (In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined Operating Revenues Electric $589,482 $574,273 $276,620 $---- $1,440,375 Gas 165,627 273,979 49,464 ---- 489,070 Other 177,735 125,660 --- ---- 303,395 ---------- --------- --------- --------- ---------- Total operating revenues 932,844 973,912 326,084 ---- 2,232,840 Operating Expenses Electric production fuels 114,470 84,579 57,560 ---- 256,609 Purchased power 81,108 88,350 61,556 ---- 231,014 Cost of gas sold 104,830 217,351 31,617 ---- 353,798 Other operation 319,154 214,759 53,134 ---- 587,047 Maintenance 46,492 49,001 16,164 ---- 111,657 Depreciation and amortization 90,683 107,393 31,087 ---- 229,163 Taxes other than income taxes 34,603 48,171 16,064 ---- 98,838 ---------- --------- --------- --------- ---------- Total operating expenses 791,340 809,604 267,182 ---- 1,868,126 ---------- --------- --------- --------- ---------- Operating Income 141,504 164,308 58,902 ---- 364,714 Other Income (Expense) Allowance for equity funds used during construction 2,270 (100) 13 ---- 2,183 Other income and deductions ---net 15,644 (2,333) 3,763 ---- 17,074 ---------- --------- --------- --------- ---------- Total other income (expense) 17,914 (2,433) 3,776 ---- 19,257 Interest Charges 41,089 52,619 16,222 ---- 109,930 ---------- --------- --------- --------- ---------- Income from continuing operations before income taxes and preferred dividends 118,329 109,256 46,456 ---- 274,041 Income Taxes 41,814 47,435 18,133 ---- 107,382 Preferred dividends of subsidiaries (Note 2) 3,310 914 2,463 ---- 6,687 ---------- --------- --------- --------- ---------- Income from continuing Operations (Notes 3 and 6) $73,205 $60,907 $25,860 $---- $159,972 ========== ========= ========= ========= ========== Average Common Shares Outstanding (Note 1) 30,790 29,861 9,594 5,236 75,481 Earnings per share of Common Stock from continuing operations $2.38 $2.04 $2.69 $---- $2.12 ===== ===== ===== ===== ====
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1995 (In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined Operating Revenues Electric $546,324 $560,471 $274,873 $ ---- $1,381,668 Gas 139,165 190,339 43,669 ---- 373,173 Other 121,766 100,200 ---- ---- 221,966 ---------- --------- --------- --------- ---------- Total operating revenues 807,255 851,010 318,542 ---- 1,976,807 Operating Expenses Electric production fuels 116,488 96,256 62,164 ---- 274,908 Purchased power 44,940 66,874 57,566 ---- 169,380 Cost of gas sold 84,002 141,716 25,888 ---- 251,606 Other operation 253,277 201,390 45,717 ---- 500,384 Maintenance 42,043 46,093 14,881 ---- 103,017 Depreciation and amortization 86,319 97,958 29,560 ---- 213,837 Taxes other than income taxes 34,188 49,011 15,990 ---- 99,189 ---------- --------- --------- --------- ---------- Total operating expenses 661,257 699,298 251,766 ---- 1,612,321 ---------- --------- --------- --------- ---------- Operating Income 145,998 151,712 66,776 ---- 364,486 Other Income (Expense) Allowance for equity funds used during construction 1,425 386 ---- ---- 1,811 Other income and deductions ---net 6,509 3,170 (2,872) ---- 6,807 ---------- --------- --------- --------- ---------- Total other income (expense) 7,934 3,556 (2,872) ---- 8,618 Interest Charges 42,896 47,689 16,795 ---- 107,380 ---------- --------- --------- --------- ---------- Income from continuing operations before income taxes and preferred dividends 111,036 107,579 47,109 ---- 265,724 Income Taxes 36,108 42,489 19,453 ---- 98,050 Preferred dividends of subsidiaries (Note 2) 3,310 914 2,458 ---- 6,682 ---------- --------- --------- --------- ---------- Income from continuing Operations (Notes 3 and 6) $71,618 $64,176 $25,198 $---- $160,992 ========== ========= ========= ========= ========== Average Common Shares Outstanding (Note 1) 30,774 29,202 9,564 5,140 74,680 Earnings per share of Common Stock from continuing operations $2.33 $2.20 $2.63 $---- $2.16 ===== ===== ===== ===== =====
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1994 (In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined Operating Revenues Electric $531,747 $537,327 $261,730 $ ---- $1,330,804 Gas 151,931 165,569 45,920 ---- 363,420 Other 112,039 82,968 ---- ---- 195,007 -------- -------- -------- ------- ---------- Total operating revenues 795,717 785,864 307,650 ---- 1,889,231 Operating Expenses Electric production fuels 123,469 85,952 61,384 ---- 270,805 Purchased power 37,913 68,794 58,339 ---- 165,046 Cost of gas sold 100,942 120,795 30,905 ---- 252,642 Other operation 248,847 176,863 51,917 ---- 477,627 Maintenance 41,227 52,841 17,160 ---- 111,228 Depreciation and amortization 80,351 86,378 28,212 ---- 194,941 Taxes other than income taxes 33,788 46,308 16,298 ---- 96,394 -------- -------- -------- ------- --------- Total operating expenses 666,537 637,931 264,215 ---- 1,568,683 -------- -------- -------- ------- --------- Operating Income 129,180 147,933 43,435 ---- 320,548 Other Income (Expense) Allowance for equity funds used during construction 3,009 2,299 166 ---- 5,474 Other income and deductions ---net 10,245 3,472 3,100 ---- 16,817 -------- -------- -------- ------- --------- Total other income (expense) 13,254 5,771 3,266 ---- 22,291 Interest Charges 36,657 44,399 16,845 ---- 97,901 -------- -------- -------- ------- --------- Income from continuing operations before income taxes and preferred dividends 105,777 109,305 29,856 ---- 244,938 Income Taxes 36,043 41,573 9,189 ---- 86,805 Preferred dividends of subsidiaries (Note 2) 3,310 914 2,454 ---- 6,678 -------- -------- -------- ------- --------- Income from continuing Operations (Notes 3 and 6) $66,424 $66,818 $18,213 $---- $151,455 ======== ======== ======== ======= ========= Average Common Shares Outstanding (Note 1) 30,671 28,560 9,479 5,041 73,751 Earnings per share of Common Stock from continuing operations $2.17 $2.34 $1.92 $---- $2.05 ===== ===== ===== ===== =====
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements INTERSTATE ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 1. The pro forma combined financial statements reflect the conversion of each share of IES Common Stock (no par value) outstanding into 1.14 shares of WPLH Common Stock ($.01 par value) and the conversion of each share of IPC Common Stock ($3.50 par value) into 1.11 shares of WPLH Common Stock ($.01 par value), and the continuation of each share of WPLH Common Stock ($.01 par value) outstanding as one share of Interstate Energy Common Stock, as provided in the Merger Agreement. The pro forma adjustment to common stock equity restates the common stock account to equal par value for all shares to be issued ($.01 par value per share of Interstate Energy Common Stock) and reclassifies the excess to other stockholders' equity. The pro forma combined statements of income are presented as if the companies were combined on January 1, 1994. The pro forma combined balance sheet gives effect to the Mergers as if they occurred at December 31, 1996. The number of shares of common stock used for calculating per share amounts is based on the exchange ratio shown below.
As Pro As Pro As Exchange reported forma reported forma reported Pro forma Ratio 12/31/96 12/31/96 12/31/95 12/31/95 12/31/94 12/31/94 IES 1.14 29,861 34,042 29,202 33,290 28,560 32,558 IPC 1.11 9,594 10,649 9,564 10,616 9,479 10,522 WPLH N/A 30,790 30,790 30,774 30,774 30,671 30,671
2. The Preferred Stock of IPC has been reclassified in the pro forma statements as preferred stock of subsidiary companies and deducted in the determination of income from continuing operations which reflects the holding company structure of the entity formed through the Mergers. 3. IES's income from continuing operations for the year ended December 31, 1996 included costs incurred relating to its successful defense of a hostile takeover attempt mounted by MidAmerican Energy Company. The after-tax impact on income from continuing operations was a decrease of $4.6 million. Nonrecurring items affecting WPLH's performance for the year ended December 31, 1996 included the impact of the sale of a combustion turbine and the sale of WPLH's assisted-living real estate investments. The after-tax impact of these items on continuing operations was an increase of $5.9 million. Nonrecurring items affecting WPLH's 1994 performance included the impact of early retirement and severance programs and the reversal of a coal contract penalty assessed by the Public Service Commission of Wisconsin which was charged to income in 1989. The net after-tax impact of these items on income from continuing operations for the year ended December 31, 1994 was a decrease of $8.3 million related to the early retirement and severance programs offset by an increase of $4.9 million related to the coal contract penalty reversal. 4. The allocation between WPLH, IES and IPC and their customers of the estimated cost savings of approximately $749 million over ten years resulting from the Mergers, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. Costs arising from the proposed Mergers are currently estimated to be approximately $78 million (including transaction costs of $11 million related to fees for financial advisors, attorneys, accountants and consultants). The estimate of potential cost savings constitutes a forward-looking statement and actual results may differ materially from this estimate. The estimate is necessarily based upon various assumptions that involve judgments with respect to, among other things, future national and regional economic and competitive conditions, technological developments, inflation rates, regulatory treatments, weather conditions, financial market conditions, future business decisions and other uncertainties. No assurance can be given that the estimated costs savings will actually be realized. In addition to the $11 million remaining transaction costs, since the announcement of the Merger Agreement on November 11, 1995, IES, IPC and WPLH have collectively incurred $6 million of merger-related transaction costs through December 31, 1996, which have been expensed and are reflected in the combined income statements as presented. The remaining merger-related $11 million of transaction costs have been reflected in the pro forma balance sheet at December 31, 1996 such that shareowners' equity has been reduced by $11 million and accrued liabilities have been increased by $11 million. None of the estimated cost savings, or costs to achieve such savings, have been reflected in the pro forma combined financial statements. 5. Intercompany transactions (including purchased and exchange power transactions) between WPLH, IES and IPC during the periods presented were included in the determination of regulated rates and were not material. Accordingly, no pro forma adjustments were made to eliminate such transactions. 6. The financial statements of WPLH reflect the discontinuance of operations of its utility energy and marketing consulting business in 1995. The discontinuance of this business resulted in a pre-tax loss in the fourth quarter of 1995 of $7.7 million. The after-tax loss on disposition was $11.0 million reflecting the associated tax expense on disposition due to the non-deductibility of the carrying value of goodwill at sale. During 1996, WPLH recognized an additional loss of $1.3 million, net of applicable income tax benefit, associated with the final disposition of the business. Operating revenues, operating expenses, other income and expense and income taxes for the discontinued operations for the time periods presented have been excluded from income from continuing operations. Interest expense has been adjusted for the amounts associated with direct obligations of the discontinued operations. Operating revenues, related losses, and income tax benefits associated with the discontinued operations for the years ending December 31 were are follows: 1995 1994 Operating revenues $24,979 $34,798 ====== ====== Loss from discontinued operations before income tax $3,663 $1,806 Income tax benefit 1,451 632 ------ ------ Loss from discontinued operations $2,212 $1,174 ====== ====== 7. Accounting principles have been consistently applied in the financial statement presentations for WPLH, IES and IPC with one exception. IPC does not include unbilled electric and gas revenues in its calculation of total revenues. The utility subsidiaries of WPLH and IES accrue unbilled revenues. The impact of this difference in accounting principles among the companies does not have a material impact on the unaudited pro forma combined financial statements as presented and, accordingly, no adjustments have been made to conform accounting principles. 8. At December 31, 1996, IES had a $20.0 million investment in Class A common stock of McLeod, Inc. (McLeod), a $9.2 million investment in Class B common stock and vested options that, if exercised, would represent an additional investment of approximately $2.3 million. McLeod provides local, long-distance and other telecommunications services. McLeod completed an Initial Public Offering (IPO) of its Class A common stock in June 1996 and a secondary offering in November 1996. As of December 31, 1996, IES is the beneficial owner of approximately 10.6 million total shares on a fully diluted basis. Class B shares are convertible at the option of IES into Class A shares at any time on a one-for-one basis. The rights of McLeod Class A common stock and Class B common stock are substantially identical except that Class A common stock has 1 vote per share and Class B common stock has 0.40 vote per share. IES currently accounts for this investment under the cost method. IES has entered into an agreement with McLeod which provides that for two years commencing on June 10, 1996, IES cannot sell or otherwise dispose of any of its securities of McLeod without the consent of the McLeod Board of Directors. This contractual sale restriction results in restricted stock under the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain Investments in Debt and Equity Securities, until such time as the restrictions lapse and such shares became qualified for sale within a one year period. As a result, IES currently carries this investment at cost. The closing price of the McLeod Class A common stock on December 31, 1996, on the Nasdaq National Market, was $25.50 per share. The current market value of the shares IES beneficially owns (approximately 10.6 million shares) is currently impacted by, among other things, the fact that the shares cannot be sold for a period of time and it is not possible to estimate what the market value of the shares will be at the point in time such sale restrictions are lifted. In addition, any gain upon an eventual sale of this investment would likely be subject to a tax. Under the provisions of SFAS No. 115, the carrying value of the McLeod investment will be adjusted to estimated fair value at the time such shares become qualified for sale within a one year period; this will occur on June 10, 1997, which is one year before the contractual restrictions on sale are lifted. At that time, the adjustment to reflect the estimated fair value of this investment will be reflected as an increase in the investment carrying value with the unrealized gain reported as a net of tax amount in other common shareholders' equity until realized (i.e. until the shares are sold by IES). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 17th day of March 1997. WPL HOLDINGS, INC. By: /s/ Erroll B. Davis, Jr. Erroll B. Davis, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 17th day of March 1997. /s/ Erroll B. Davis, Jr. President, Chief Executive Officer and Erroll B. Davis, Jr. Director (principal executive officer) /s/ Edward M. Gleason Vice President, Treasurer and Corporate Edward M. Gleason Secretary (principal financial and accounting officer) /s/ L. David Carley Director /s/ Milton E. Neshek Director L. David Carley Milton E. Neshek /s/ Rockne G. Flowers Director /s/ Henry C. Prange Director Rockne G. Flowers Henry C. Prange /s/ Donald R. Haldeman Director /s/ Carol T. Toussaint Director Donald R. Haldeman Carol T. Toussaint /s/ Katharine C. Lyall Director /s/ Judith D. Pyle Director Katharine C. Lyall Judith D. Pyle /s/ Arnold M. Nemirow Director Arnold M. Nemirow SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 17th day of March 1997. WISCONSIN POWER AND LIGHT COMPANY By: /s/ Erroll B. Davis, Jr. Erroll B. Davis, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 17th day of March 1997. /s/ Erroll B. Davis, Jr. President, Chief Executive Officer Erroll B. Davis, Jr. and Director (principal executive officer) /s/ Edward M. Gleason Controller, Treasurer and Corporate Edward M. Gleason Secretary (principal financial and accounting officer) /s/ L. David Carley Director /s/ Milton E. Neshek Director L. David Carley Milton E. Neshek /s/ Rockne G. Flowers Director /s/ Henry C. Prange Director Rockne G. Flowers Henry C. Prange /s/ Donald R. Haldeman Director /s/ Carol T. Toussaint Director Donald R. Haldeman Carol T. Toussaint /s/ Katharine C. Lyall Director /s/ Judith D. Pyle Director Katharine C. Lyall Judith D. Pyle /s/ Arnold M. Nemirow Director Arnold M. Nemirow INDEX TO FINANCIAL STATEMENT SCHEDULES FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 FINANCIAL STATEMENT SCHEDULES: WPL Holdings, Inc. I. Parent Company Financial Statements II. Valuation and Qualifying Accounts and Reserves Wisconsin Power and Light Company II. Valuation and Qualifying Accounts and Reserves NOTE: All other schedules are omitted because they are not applicable or not required, or because that required information is shown either in the financial statements or in the notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To the Shareowners of WPL Holdings, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the 1996 Form 10-K of WPL Holdings, Inc. and have issued our report thereon dated January 30, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Supplemental Schedules I and II are the responsibility of management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin January 30, 1997 SCHEDULE 1 - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPL HOLDINGS, INC. (Parent Company Only) Supplemental Notes to Parent Company Only Financial Statements The following are supplemental notes to the WPL Holdings, Inc. (the Company) Parent Company Financial Statements and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in WPL Holdings, Inc. 1996 Annual Report, which are hereby incorporated by reference. Note A. The parent company files a consolidated federal income tax return with its subsidiaries. Note B. Net amounts due to (due from) affiliates result from intercompany transactions including loans and an administrative allowance. Note C. Information regarding short term debt is as follows: 1996 1995 (in thousands) As of end of year: Notes payable $28,500 $37,000 Interest rates on notes payable 5.28-6.31% 5.83-6.42% For the year ended: Maximum month-end amount of short-term debt $34,000 $37,000 Average amount of short-term debt $26,899 $19,965 Average interest rate on short-term debt 5.55% 5.99% Note D. During 1996, 1995 and 1994, Wisconsin Power and Light Company allocated and billed certain administrative and general expenses to the Company using an allocation method approved by the Public Service Commission of Wisconsin. These expenses totaled $1,516,585, $2,005,000 and $759,000 during 1996, 1995 and 1994, respectively. Note E. Certain reclassifications have been made to prior years financial statements to conform with the current year presentation. SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPL HOLDINGS, INC. (Parent Company Only) STATEMENTS OF INCOME AND REINVESTED EARNINGS As of December 31, 1996 1995 1994 (in thousands) Income: Undistributed subsidiary earnings (loss) Wisconsin Power and Light Company $79,175 $75,342 $68,185 Heartland Development Corporation (5,068) (14,647) (1,708) Investment income and other 1,081 250 681 ------ ------ ------ 75,188 60,945 67,158 ------ ------ ------ Expenses: Operating (Note D) 2,136 2,443 1,978 Interest and other 1,437 1,248 842 ------ ------ ------ 3,573 3,691 2,820 ------ ------ ------ Income before income tax benefit 71,615 57,254 64,338 ------ ------ ------ Income tax benefit (expense): Current 627 1,178 974 Deferred (334) 0 (62) ------- ------- ------- 293 1,178 912 ------- ------- ------- Net income 71,908 58,432 65,250 ------- ------- ------- Reinvested earnings, beginning of year 291,939 293,048 284,745 Cash dividends (60,656) (59,701) (59,010) Other 0 160 2,063 ------- ------- ------- Reinvested earnings, end of year $303,191 $291,939 $293,048 ======= ======= ======= SCHEDULE 1 - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPL HOLDINGS, INC. (Parent Company Only) BALANCE SHEETS December 31, 1996 1995 ASSETS: (in thousands) Current Assets Cash and equivalents $3,817 $266 Notes receivable - affiliates (Note B) 47,308 53,182 ------- ------- 51,125 53,448 ------- ------- Accounts receivable from WPL Holdings DRIP 150 150 ------- ------- Tax benefit receivable 507 823 ------- ------- Property and equipment, net 999 999 ------- ------- Investments and other 1,948 200 ------- ------- Investments in subsidiaries, at equity: Wisconsin Power and Light Company 576,158 563,070 Heartland Development Corporation 41,115 49,145 ------- ------- 617,273 612,215 ------- ------- Deferred income taxes 52 387 ------- ------- Total assets $672,054 $668,222 ======= ======= LIABILITIES AND CAPITALIZATION: Current Liabilities: Short term debt (Note C) $28,500 $37,000 Current maturities of long-term debt 10,000 --- Accounts payable - affiliates (Note B) 1,723 (17) Accrued taxes --- (1,170) Accrued interest and other 107 248 Dividends payable 308 254 ------- ------- 40,638 36,315 Long-term debt 24,000 34,000 Deferred credit 61 437 ------- ------- 64,699 70,752 ------- ------- Capitalization: Common stock, $.01 par value, authorized 100,000,000 shares; issued and outstanding- 30,773,735 and 30,773,588 shares, respectively 308 308 Additional paid-in capital 303,856 305,223 Reinvested earnings 303,191 291,939 ------- ------- 607,355 597,470 ------- ------- Total Liabilities and Capitalization $672,054 $668,222 ======= ======= SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS WPL HOLDING, INC. (Parent Company Only) STATEMENT OF CASH FLOW For the years ended December 31, 1996 1995 1994 (in thousands) Cash flows generated from (used for) operating activities: Net income $71,908 $58,432 $65,250 Undistributed earnings of subsidiaries (4,952) (994) (7,467) Equity investments in subsidiaries (106) 119 (9,649) Depreciation --- 10 13 Deferred income taxes 335 (288) (62) Changes in assets and liabilities: Receivables 6,190 (24,028) (2,764) Investments (1,748) 67 7 Accounts payable 1,740 129 (4,876) Accrued taxes 1,170 (258) (818) Accrued interest and other (141) 28 (519) Dividends payable 54 26 80 Other (376) (778) 355 ------- ------- ------- Net cash from (used for) operating activities 74,074 32,465 39,550 Cash flows generated from (used for) financing activities: Issuance of long-term debt --- --- 23,537 Long-term debt maturities --- --- (56) Net change in short term debt (8,500) 25,500 (21,402) Common stock cash dividends less dividends revinvested (60,656) (59,701) (49,357) Other (1,367) 941 147 ------- ------- ------- Net cash from (used for) investing activities (70,523) (33,260) (47,131) Net increase (decrease) in cash and equivalents 3,551 (795) (7,581) Cash and equivalents at beginning of year 266 1,061 8,642 ------- ------- -------- Cash and equivalents at end of year $3,817 $266 $1,061 ======= ======= ======== SCHEDULE II WPL HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)
Additions Balance at charged to Balance at beginning costs and end of Description of period expenses Deductions period Year ended December 31, 1996 Allowance for doubtful accounts $1,735 $928 $1,139 [1] $1,524 ====== ==== ====== ===== Year ended December 31, 1995 Allowance for doubtful accounts $1,964 $966 $1,195 [1] $1,735 ====== ==== ====== ===== Year ended December 31, 1994 Allowance for doubtful accounts $1,662 $1,027 $725 [1] $1,964 ====== ===== ==== ===== [1] Uncollectible accounts written off, net of recoveries
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To the Shareowners of Wisconsin Power and Light Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the 1996 Form 10-K of Wisconsin Power and Light Company and have issued our report thereon dated January 30, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Supplemental Schedule II is the responsibility of WP&L's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin January 30, 1997 SCHEDULE II WISCONSIN POWER AND LIGHT COMPANY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)
Additions Balance at charged to Balance at beginning costs and end of Description of period expenses Deductions period Year ended December 31, 1996 Allowance for doubtful accounts $0 $0 $0 [1] $0 ==== ==== ==== ==== Year ended December 31, 1995 Allowance for doubtful accounts $209 $0 $209 [1] $0 ==== ==== ==== ==== Year ended December 31, 1994 Allowance for doubtful accounts $259 $150 $200 [1] $209 ==== ==== ==== ==== [1] Uncollectible accounts written off, net of recoveries
Exhibit Index For the Year Ended December 31, 1996 Item Description 21A Subsidiaries of WPL Holdings, Inc. 21B Subsidiaries of Wisconsin Power and Light Company 23 Consent of Independent Public Accountants 27A Financial Data Schedule of WPL Holdings, Inc. 27B Financial Data Schedule of Wisconsin Power and Light Company EX-21 2 EXHIBIT 21A SUBSIDIARY LIST EXHIBIT 21A SUBSIDIARIES OF WPL HOLDINGS, INC. The subsidiaries and affiliates of as of December 31, 1996, are as follows: Name of Subsidiary % of Voting Stock Owned Directly or Indirectly by the Company State of Incor. A. Wisconsin Power and Light Company (100%) Wisconsin 1. South Beloit Water, Gas and Electric Company (100%) Illinois 2. REAC, Inc (100%) Wisconsin 3. Wisconsin River Power Company (33-1/3%) Wisconsin 4. Wisconsin Valley Improvement Company (13%) Wisconsin B. Heartland Development Corporation (98.91%) Wisconsin 1. Energy Services a. Heartland Energy Services, Inc. (100%) Wisconsin b. Enserv, Inc. (100%) Wisconsin 2. Environmental Services a. Environmental Holding Company (95%) Wisconsin b. RMT, Inc. (100%) Wisconsin c. Jones & Neuse, Inc. (100%) Wisconsin d. QES, Inc. (100%) Wisconsin 3. Affordable Housing a. Heartland Properties, Inc. (100%) Wisconsin b. Tool Kit Property Management Systems, Inc. (100%) Wisconsin c. Capital Square Financial Corp. (100%) Wisconsin d. Heartland Capital Co. (47%) Wisconsin C. WPLH Acquisition Co. (100%) Wisconsin EX-21 3 EXHIBIT 12B SUBSIDIARY LIST EXHIBIT 21B SUBSIDIARIES OF WISCONSIN POWER AND LIGHT COMPANY The subsidiaries and affiliates of as of December 31, 1996, are as follows: Name of Subsidiary % of Voting Stock Owned Directly or Indirectly by the Company State of Incor. A. South Beloit Water, Gas and Electric Company (100%) Illinois B. REAC, Inc (100%) Wisconsin C. Wisconsin River Power Company (33-1/3%) Wisconsin D. Wisconsin Valley Improvement Company (13%) Wisconsin EX-23 4 CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports on the consolidated financial statements and the financial statement schedules of WPL Holdings, Inc. included in this WPL Holdings, Inc. Form 10-K into WPL Holdings, Inc.'s previously filed Registration Statements on Form S-8 (Nos. 33-6671, 2-78551 and 33-52215) and Form S-3 (No. 33-21482). ARTHUR ANDERSEN LLP Milwaukee, Wisconsin March 17, 1997 EX-27 5 EXHIBIT 27A FINANCIAL DATA SCHEDULE
UT WPL HOLDINGS, INC. 0000352541 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 PER-BOOK 1240569 2335342 172402 245370 6848 1900531 308 303856 303191 607355 0 59963 362564 43279 56975 59500 67626 0 0 0 643269 1900531 932844 41814 319154 791340 141504 15644 115334 38819 76515 3310 73205 60656 35855 190719 2.38 0 Applicable accounting rules do not require WPL Holdings, Inc. to report earnings per share on a fully diluted basis.
EX-27 6 EXHIBIT 27B FINANCIAL DATA SCHEDULE
UT WISCONSIN POWER AND LIGHT COMPANY 0000107832 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 PER-BOOK 1240569 107422 106188 223635 0 1677814 66183 199170 310805 576158 0 59963 258660 10000 56975 59500 55000 0 0 0 601558 1677814 759275 53808 141885 602933 156342 8215 110749 28264 82485 3310 79175 66088 28786 188129 0 0 Earnings per share of common stock is not reflected because all of such shares are held by WPL Holdings, Inc.
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