UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] 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
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 the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past (90) days.
Yes X No _____
Number of shares outstanding for each class of common stock as of March
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.)
CONTENTS
Page
Part I. Financial Information
WPL Holdings, Inc.
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets as of March 31,
1997 and 1996 and December 31, 1996 4
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1997 and
1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Wisconsin Power and Light Company
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1996 16
Consolidated Balance Sheets as of March 31,
1997 and 1996 and December 31, 1996 17
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1997 and
1996 19
Notes to Consolidated Financial Statements 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Part II. Other Information 26
Signatures 27
WPL HOLDINGS, INC.
FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1997 1996
(in thousands
except for per share data)
Operating revenues:
Electric $ 158,427 $ 148,500
Gas 71,579 71,741
Fees, rents, non-utility energy
sales and other 31,682 40,636
------- -------
261,688 260,877
------- -------
Operating expenses:
Electric production fuels 30,073 28,604
Purchased power 32,941 15,922
Purchased gas 47,382 45,364
Other operation and cost of non-
utility energy 65,337 76,137
Maintenance 10,280 8,551
Depreciation and amortization 26,212 23,116
Taxes other than income 8,826 9,171
------- -------
221,051 206,865
------- -------
Operating income 40,637 54,012
------- -------
Interest expense and other:
Interest expense 9,679 8,921
Allowance for funds used during
construction (841) (776)
Other (2,903) (4,100)
-------- --------
5,935 4,045
-------- --------
Income before income taxes and
preferred dividend requirement of
subsidiary 34,702 49,967
Income taxes 12,047 17,459
Preferred dividend requirement of
subsidiary 828 828
--------- ---------
Net income $ 21,827 $ 31,680
========= ==========
Earnings per share of common stock $ 0.71 $ 1.03
========= ==========
Weighted average number of shares of
common stock outstanding 30,774 30,774
========= ==========
Cash dividends paid per share of
common stock $ 0.50 $ 0.4925
========= ===========
The accompanying notes are an integral part of the consolidated
financial statements.
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, March 31, December 31,
1997 1996 1996
ASSETS (in thousands)
Utility plant:
Plant in service--
Electric $1,755,985 $ 1,674,322 $ 1,729,311
Gas 229,360 218,973 227,809
Water 23,932 23,072 23,905
Common 157,885 140,504 152,093
--------- --------- ---------
2,167,162 2,056,871 2,133,118
Less--accumulated
provision for
depreciation 990,166 908,603 967,436
--------- --------- ---------
1,176,996 1,148,268 1,165,682
Construction work in
progress 44,593 42,848 55,519
Nuclear fuel, net 19,368 14,976 19,368
--------- --------- ---------
1,240,957 1,206,092 1,240,569
--------- --------- ---------
Other property and
equipment:
Rental, net 114,270 114,270 112,913
Other, net 11,362 21,855 16,350
--------- --------- ---------
125,632 136,125 129,263
--------- --------- ---------
Investments:
Nuclear decommissioning
trust funds 100,588 82,523 90,671
Other investments 14,878 11,975 15,408
--------- --------- ---------
115,466 94,498 106,079
--------- --------- ---------
Current assets:
Cash and equivalents 11,166 7,935 11,070
Net accounts receivable
and unbilled revenue,
less allowance for
doubtful accounts of
$2,132, $1,482 and
$1,524, respectively 60,849 81,797 88,798
Coal, at average cost 14,706 12,285 15,841
Materials and supplies, at
average cost 20,209 20,904 19,915
Gas in storage, at average
cost 2,072 1,048 9,992
Prepayments and other 20,824 23,115 26,786
--------- --------- ---------
129,826 147,084 172,402
--------- --------- ---------
Restricted cash 6,520 8,079 6,848
--------- --------- ---------
Deferred charges:
Regulatory assets 159,890 167,645 160,877
Other 85,919 79,151 84,493
--------- --------- ---------
245,809 246,796 245,370
--------- --------- --------
TOTAL ASSETS $ 1,864,210 $ 1,838,674 $ 1,900,531
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, March 31, December 31,
1997 1996 1996
CAPITALIZATION AND LIABILITIES (in thousands)
Capitalization:
Common stock, $.01 par value,
authorized 100,000,000 shares,
issued and outstanding--
30,773,735, 30,773,588 and
30,773,795, respectively $ 308 $ 308 $ 308
Additional paid-in capital 303,994 305,173 303,856
Reinvested earnings 309,632 308,147 303,191
-------- -------- --------
Total common equity 613,934 613,628 607,355
-------- -------- --------
Subsidiary preferred stock without
mandatory redemption:
Cumulative, without par value,
authorized 3,750,000 shares,
maximum aggregate stated value
$150,000,000:
Cumulative, without par value,
$100 stated value--
449,765 shares outstanding 44,977 44,977 44,977
Cumulative, without par value,
$25 stated value-- 599,460
shares outstanding 14,986 14,986 14,986
-------- -------- --------
Total preferred stock 59,963 59,963 59,963
-------- -------- --------
Long-term debt, net 362,836 428,347 362,564
--------- --------- ---------
1,036,733 1,101,938 1,029,882
--------- --------- ---------
Current liabilities:
Current maturities of long-term
debt 56,665 1,406 67,626
Variable rate demand bonds 56,975 56,975 56,975
Short-term debt 67,510 57,896 102,779
Accounts payable and accruals 94,074 80,256 106,486
Accrued payroll and vacation 15,380 13,207 14,500
Accrued taxes 12,642 24,103 4,669
Accrued interest 6,270 5,284 9,085
Other 49,108 36,171 45,218
-------- -------- --------
358,624 275,298 407,338
-------- -------- --------
Other credits:
Accumulated deferred income taxes 246,333 245,153 245,686
Accumulated deferred investment
tax credits 36,458 38,364 36,931
Accrued environmental remediation
costs 73,691 76,763 74,075
Deferred credits and other 112,371 101,158 106,619
-------- -------- --------
468,853 461,438 463,311
-------- -------- --------
TOTAL CAPITALIZATION
AND LIABILITIES $1,864,210 $1,838,674 $1,900,531
========== ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1997 1996
Cash flows generated from (used for)
operating activities: (in thousands)
Net income $ 21,827 $ 31,680
Adjustments to reconcile net income to net
cash generated from
operating activities:
Depreciation and amortization 26,212 23,116
Deferred income taxes 2,547 377
Investment tax credit restored (473) (478)
Amortization of nuclear fuel - 2,169
Allowance for equity funds used during
construction (632) (530)
(Gain) loss on sale of investment - (3,249)
Changes in assets and liabilities:
Restricted cash 328 (4,813)
Net accounts receivable and unbilled
revenue 27,949 13,172
Inventories 8,761 7,430
Prepayments and other 5,962 4,871
Accounts payable and accruals (14,347) (19,663)
Accrued taxes 7,973 17,620
Other, net 7,166 2,461
-------- --------
Net cash from (used for) operating
activities 93,273 74,163
------- --------
Cash flows generated from (used for)
financing activities:
Common stock cash dividends (15,386) (15,156)
Reduction of long-term debt (10,705) (4,021)
Net change in short-term debt (35,269) (51,629)
Other, net - 111
-------- ---------
Net cash from (used for) financing
activities (61,360) (70,695)
-------- ---------
Cash flows generated from (used for)
investing activities:
Additions to utility plant, excluding
AFUDC (24,668) (22,253)
Allowance for borrowed funds used during
construction (209) (248)
Dedicated decommissioning trust funds (9,917) (9,166)
Proceeds from sale of investment - 22,130
Other, net 2,977 2,618
-------- --------
Net cash from (used for) investing
activities (31,817) (6,919)
-------- --------
Net increase (decrease) in cash and
equivalents 96 (3,451)
Cash and equivalents at beginning of period 11,070 11,386
-------- --------
Cash and equivalents at end of period $ 11,166 $ 7,935
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period:
Interest on debt $ 11,786 $ 12,088
Preferred stock dividends of
subsidiary $ 828 $ 828
Income taxes $ 2,093 $ 4,305
The accompanying notes are an integral part of the consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been
prepared by WPL Holdings, Inc. (the Company), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
consolidated financial statements include the Company and its wholly
owned consolidated subsidiaries including Wisconsin Power and Light
Company (WP&L). These financial statements should be read in
conjunction with the financial statements and the notes thereto
included in the Company's latest Annual Report on Form 10-K.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of (a)
the consolidated results of operations for the three months ended March
31, 1997 and 1996, (b) the consolidated financial position at March 31,
1997 and 1996 and December 31, 1996, and (c) the consolidated statement
of cash flows for the three months ended March 31, 1997 and 1996, have
been made. Because of the seasonal nature of the Company's operations,
results for the quarter ended March 31, 1997 are not necessarily
indicative of results that may be expected for the year ending December
31, 1997.
2. On April 28, 1997, WP&L entered into an interest rate forward contract
related to the anticipated issuance of $105 million of long-term debt
securities. The financial impact of this contract, which will result
in either a cash payment or cash receipt, will be deferred and
recognized as an adjustment to interest expense over the life of the
new bonds to effect the interest rate implicit in the forward contract.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 VS. MARCH 31, 1996:
Proposed Merger
The Company, IES Industries Inc. (IES) and Interstate Power Company (IPC)
have entered into an Agreement and Plan of Merger, as amended, 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. Updates to the status of these
approvals (for additional information regarding the merger please refer to
the Company's 1996 Annual Report on Form 10-K) are as follows:
The Federal Energy Regulatory Commission (FERC) issued an order on January
15, 1997, finding no substantial market-power concerns with the merger.
Some limited issues have been set for hearings which began on April 23,
1997 and ended on May 2, 1997. A final decision is expected in the third
or fourth quarter of 1997.
A hearing regarding the merger is expected to begin July 14, 1997, before
the Iowa Utilities Board.
On May 7, 1997, the Illinois Commerce Commission (ICC) issued an order
approving the proposed merger.
On March 24, 1997, the Minnesota Public Utilities Commission issued an
order approving the merger without hearings, subject to a number of
technical conditions which the parties are willing to meet. Included is
a 4-year rate freeze for IEC's Minnesota customers.
On May 7, 1997, WP&L filed testimony with the Public Service Commission
of Wisconsin proposing a rate freeze from the date of the merger approval
through calendar year 2000.
The companies expect to receive all necessary regulatory approvals
relating to the merger in the third or fourth quarter of 1997.
OVERVIEW
The Company reported consolidated first quarter net income of $21.8
million or 71 cents per share compared with $31.7 million or $1.03 per
share for the same period in 1996. The decrease in earnings primarily
reflects the operation of the Company's utility subsidiary, WP&L.
Increased electric production and purchased power costs combined with
warmer weather in the first quarter of 1997 compared with the same period
last year resulted in lower electric and gas margins.
Electric margin decreased by $8.6 million due to various plant outages
that resulted in more costly purchased power. Gas margin decreased $2.2
million as a result of warmer weather in the first quarter of 1997
compared with the first quarter of 1996. Depreciation expense also
increased due to higher depreciation rates and property additions.
Heartland Development Corporation (HDC), parent company of the Company's
non-regulated operations, reported a net loss of $1.1 million for the
first quarter of 1997 compared with net income of $0.1 million for the
same period in 1996. HDC's first quarter 1997 results were adversely
impacted by the softening market for the environmental service business.
Without giving effect to the after-tax gain of $2.0 million related to the
sale of HDC's investment in assisted living properties, HDC's net loss for
the first quarter of 1996 was $1.9 million. This loss was primarily a
result of contract losses associated with the start-up of the energy
marketing subsidiary during the beginning of 1996.
Electric Operations
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $54,804 $55,651 (2%) 810,813 833,669 (3%) 338,837 332,335 2%
Industrial 35,282 34,112 3% 995,318 931,586 7% 825 809 2%
Commercial 26,799 26,399 2% 466,859 447,966 4% 46,123 45,035 2%
Sales to other
Utilities 38,504 30,911 25% 1,386,957 1,192,342 16% 98 88 11%
Other 3,038 1,427 113% 20,193 14,680 38% 1,736 1,717 1%
-------- -------- --------- --------- -------- --------
Total 158,427 148,500 7% 3,680,140 3,420,243 8% 387,619 379,984 2%
======== ======== ===== ========= ========= ======= ======== ======== ======
Electric
Production Fuels 30,073 28,604 5%
Purchased Power 32,941 15,922 107%
-------- --------
Margin $95,413 $103,974 (8%)
======== ======== ======
Electric revenues increased $9.9 million, or 7 percent, as compared with
the first quarter in 1996. The increase was the result of higher sales
to other utilities and continued economic strength among industrial
customers. Warmer weather in 1997 resulted in a 3 percent decline in
sales to residential customers.
Despite higher electric revenues, electric margin decreased $8.6 million,
or 8 percent, during the first quarter of 1997 as compared with the first
quarter of 1996. The decline in margin reflects the impact of the
shutdown at the Kewaunee Nuclear Power Plant (Kewaunee) throughout the
first quarter of 1997 for steam generator tube repairs as well as several
temporary outages at WP&L's coal-fired plants. These temporary outages
resulted in greater reliance on more costly purchased power to meet
customer requirements (for further discussion of the Kewaunee plant
outage, see the "Capital Requirements" section below). The Kewaunee
outage and increased sales to other utilities resulted in a 107 percent
increase in purchased power.
Gas Operations
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $41,633 $39,434 6% 60,529 65,866 (8%) 134,858 130,555 3%
Commercial and
Industrial 24,112 21,787 11% 42,128 44,863 (6%) 16,622 16,198 3%
Interruptible 883 1,064 (17%) 1,953 2,968 (34%) 273 288 (5%)
Transportation
and other 4,951 9,456 (48%) 61,782 65,417 (6%) 308 161 91%
-------- ------- -------- -------- -------- --------
Total 71,579 71,741 --- 166,392 179,114 (7%) 152,061 147,202 3%
======== ======= ===== ======== ======== ======= ======== ======== =====
Purchased Gas 47,382 $45,364 4%
------- -------
Margin $24,197 $26,377 (8%)
======= ======= =====
Gas revenues were unchanged from the first quarter of 1997 as compared
with the first quarter of 1996. Therm sales declined 7 percent primarily
as a result of warmer weather in the first quarter of 1997 compared with
the first quarter of 1996. Partially offsetting the margin impact of the
decline in sales was the pass through to customers of the higher costs of
natural gas.
Effective January 1, 1995, the Public Service Commission of Wisconsin
(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 with 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 WP&L realized favorable contributions to gas margin of $0.9
million for the first quarter of 1997 and $1.0 million for the first
quarter of 1996. A modified gas incentive mechanism has been approved,
effective with the retail rate order discussed below under "Capital
Resources, Rates and Regulatory Matters."
The review of the gas incentive program for 1996 by the PSCW resulted in a
$5.9 million refund to residential natural gas customers in April 1997.
The full amount of the refund will be reflected in the financial results
in the second quarter of 1997, which does not have a material impact on
earnings.
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 non-regulated subsidiaries,
consolidated under HDC. The decrease in these revenues for the first
quarter of 1997 primarily reflects the formation of a joint venture
effective January 1, 1997, between the gas marketing business of the
energy services subsidiary and Industrial Energy Applications (IEA), the
energy marketing subsidiary of IES Industries Inc. Earnings related to
this joint venture are included in the first quarter of 1997 with
"Interest Expense and Other." First quarter revenues in 1996 included
$7.7 million related to gas marketing sales now associated with the joint
venture.
In addition to the revenues of the non-regulated businesses, fees, rents ,
non-utility energy sales and other revenues also include revenue from the
water utility operations of WP&L. These revenues represent $1 million for
the three months ended March 31, 1997 and 1996.
Other Operation and Cost of Non-Utility Energy
The decrease in other operation and cost of non-utility energy is
primarily due to the recording of the earnings associated with the joint
venture under "Interest Expense and Other" as discussed above. First
quarter operating expenses in 1996 included $10.4 million related to gas
marketing sales now associated with the joint venture.
Maintenance Expense
Maintenance expense increased as a result of higher plant maintenance
expenses at Kewaunee and several of WP&L's coal-fired plants as previously
discussed under "Electric Operations".
Depreciation and Amortization
Depreciation expense increased due to higher depreciation rates at WP&L
approved by the PSCW, effective January 1, 1997, and property additions.
Interest Expense and Other
Other income decreased during the first quarter of 1997 primarily due to
the one-time first quarter 1996 gain on the sale of HDC's investment in
assisted living properties.
Income Taxes
The decrease in income taxes between quarters is consistent with lower
taxable income. The effective rate was 35 percent for both the first
quarter of 1997 and the first quarter of 1996.
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. The Board of Directors of WP&L has
authorized the issuance of long term debt not to exceed $105 million in
aggregate principal amount. Subject to relevant market and other
considerations, WP&L currently intends to issue the long term debt prior
to the end of the second quarter of 1997.
During the first quarter of 1997 and the first quarter of 1996, the
Company generated sufficient cash flows from operations to cover operating
expenses, cash dividends and investing activities. Cash flows from
operations increased to $93 million for the first quarter of 1997 compared
with $74 million for the first quarter in 1996. Cash flows used for
investing activities increased from $6.9 million in the first quarter of
1996 to $31.8 million in the first quarter of 1997. The major factor
contributing to the $25 million change in investing activities between
years was the recognition in the first quarter of 1996 of $22 million in
proceeds from the sales of A&C Enercom and Heartland Retirement Services.
A&C Enercom was the Company's utility energy and marketing subsidiary
which was sold in the fourth quarter of 1995.
Rates and Regulatory Matters
The PSCW has approved new rates effective April 29, 1997, which extend
through 1998. On average WP&L's retail electric rates will decline by 2.4
percent and retail gas rates will decline by 2.2 percent Other items
included in the rate order are: authorization of a surcharge to collect
replacement power costs while Kewaunee remains 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 with 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. The gas performance incentive was modified to eliminate the
maximum gain or loss to be recognized by WP&L. The incentive includes a
sharing mechanism, whereby 40 percent of all gains and losses relative to
current commodity prices as well as other benchmarks are recognized by
WP&L rather than refunded to or recovered from customers.
Industry Outlook
The primary business of the Company is that of WP&L, which is subject to
regulation by the PSCW and the Federal Energy Regulatory Commission
(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 accommodate competition but not create
it." The goal of the electric restructuring process is to create open
access transmission and distribution services for all customers and create
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 (Nos. 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. On March 4,
1997, FERC issued its orders on rehearing for FERC orders No. 888-A and
No. 889-A. The purpose of the orders on rehearing are to address
continued areas of disagreement or areas that require clarification in
FERC's final rules.
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.
Power Supply
In April 1997, members of the Wisconsin Reliability Assessment Group
announced that certain areas in Wisconsin and the Upper Midwest region are
facing unusual electric supply challenges that could effect customers over
the next six months. Approximately one-third of the region's nuclear
generating capacity is temporarily out of service due to maintenance
outages. This includes Kewaunee, which is operated by Wisconsin Public
Service Corporation and co-owned by WP&L and Madison Gas and Electric, and
the Point Beach nuclear power plant operated by Wisconsin Electric Power
Company as well as several nuclear units owned by Commonwealth Edison in
northern Illinois. Needed maintenance has also reduced output at some of
the region's coal-fired power plants, adding to the energy supply
challenges. Several actions are taking place in an attempt to assure
adequate power supplies for customers in the coming months such as
rescheduling maintenance to increase plant availability, upgrading the
transmission system to improve capacity, and continuing efforts to bring
the nuclear plants on line in June 1997. No assurance can be given that
business and residential customers will not be impacted due to electric
energy supply challenges.
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. 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. The Company's bank lines of credit
of $120 million at March 31,1997 are available to support these
borrowings.
The Company's capitalization at March 31, 1997, including the current
maturities of long-term debt, variable rate demand bonds and short-term
debt, consisted of 50 percent common equity, 5 percent preferred stock and
45 percent debt. The common equity total capitalization ratio was 50
percent at March 31, 1997 and March 31, 1996.
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. Construction expenditures for the three months
ended March 31,1997 were $25.5 million. The estimated construction
expenditures for the remainder of 1997 are $121.7 million which are
expected to be funded primarily through internally generated funds.
WP&L has a 41 percent ownership interest in Kewaunee. Kewaunee remains
out of service for the repair of the steam generators. It is anticipated
that Kewaunee will return to service no earlier than mid to late June
1997. The steam generator tube repair costs total approximately $7.5
million of which WP&L's share is $3.1 million. The PSCW has authorized
deferral of such costs incurred after March 20, 1997. The owners will
request future rate recovery of these deferred costs. The PSCW
authorization to defer repair costs does not constitute assurance of
future recovery in customer rates or a finding that such costs have been
prudently incurred. As a result, it is possible that WP&L will never
recover such costs in its rates.
WP&L is also incurring costs associated with the acquisition of
replacement power while Kewaunee remains out of service. These costs are
expected to exceed the cost of WP&L generated power by approximately
$500,000 per week. WP&L was authorized to include a surcharge on customer
bills, effective April 29,1997, to recover the additional costs of
replacement power. The surcharge of $0.223 per mwh which is subject to
refund will remain in effect until Kewaunee is returned to service. For
additional information on Kewaunee please refer to the Company's 1996
Annual Report on Form 10-K.
The net book value of WP&L's share of Kewaunee as of March 31, 1997 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 "it is anticipated" or
"expected," or other words of similar import. 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. 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.
NEW ACCOUNTING PRONOUNCEMENT
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (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, has been adopted by the Company and did not result in a material
impact on the Company's financial position or results of operations.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share
(EPS). This statement, effective for financial statements issued for
periods ending after December 15, 1997, is not expected to change the
presentation of EPS for the Company as previously required by APB Opinion
No. 15.
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 included 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 or approximately 69 percent of the total
employees at WP&L.
Dividend Declaration
On April 15, 1997, the Board of Directors of the Company declared a
quarterly dividend on the Company's Common Stock. The dividend is 50
cents per share payable May 15, 1997 to shareowners of record on April 30,
1997.
WISCONSIN POWER AND LIGHT COMPANY
FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1997 1996
(in thousands)
Operating revenues:
Electric $ 158,427 $ 148,500
Gas 71,579 71,741
Water 999 993
-------- --------
231,005 221,234
-------- --------
Operating expenses:
Electric production fuels 30,073 28,604
Purchased power 32,941 15,922
Purchased gas 47,382 45,364
Other operation 34,790 33,761
Maintenance 10,280 8,551
Depreciation and amortization 24,837 21,667
Taxes other than income 7,427 7,557
-------- --------
187,730 161,426
-------- --------
43,275 59,808
-------- --------
Operating income
Interest expense and other:
Interest expense 8,005 7,756
Allowance for funds used during
construction (841) (778)
Other (2,313) (894)
-------- ---------
4,851 6,084
-------- ---------
Income before income taxes and preferred
dividend requirement 38,424 53,724
Income taxes 15,073 20,946
Preferred dividend requirement 828 828
------- --------
Net income $ 22,523 $ 31,950
======= ========
The accompanying notes are an integral part of the consolidated
financial statements.
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, March 31, December 31,
1997 1996 1996
ASSETS (in thousands)
Utility plant:
Plant in service--
Electric $ 1,755,985 $ 1,674,322 $ 1,729,311
Gas 229,360 218,973 227,809
Water 23,932 23,072 23,905
Common 157,885 140,504 152,093
--------- --------- ---------
2,167,162 2,056,871 2,133,118
Less--accumulated
provision for
depreciation 990,166 908,603 967,436
--------- --------- ---------
1,176,996 1,148,268 1,165,682
Construction work in
progress 44,593 42,848 55,519
Nuclear fuel, net 19,368 14,976 19,368
1,240,957 1,206,092 1,240,569
--------- --------- ---------
Other property and
equipment, net 1,384 22,600 1,397
-------- -------- --------
Investments:
Nuclear decommissioning
trust funds 100,588 82,523 90,671
Other investments 14,824 12,432 15,354
-------- -------- --------
115,412 94,955 106,025
-------- -------- --------
Current assets:
Cash and equivalents 5,844 4,744 4,167
Net accounts receivable
and unbilled revenue 19,542 20,547 34,220
Coal, at average cost 14,706 12,285 15,841
Materials and supplies, at
average cost 20,209 20,826 19,915
Gas in storage, at average
cost 2,072 1,048 9,992
Prepayments and other 17,019 18,823 22,053
-------- -------- --------
79,392 78,273 106,188
-------- -------- --------
Deferred charges:
Regulatory assets 159,890 167,645 160,877
Other 64,723 50,309 62,758
-------- -------- --------
224,613 217,954 223,635
-------- -------- --------
TOTAL ASSETS $ 1,661,758 $ 1,619,874 $ 1,677,814
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, March 31, December 31,
1997 1996 1996
(in thousands)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $5 par value,
authorized 18,000,000
shares, issued and
outstanding--13,236,601
shares $ 66,183 $ 66,183 $ 66,183
Additional paid-in capital 199,170 199,170 199,170
Reinvested earnings 318,432 315,052 310,805
------- ------- -------
Total common equity 583,785 580,405 576,158
------- ------- -------
Preferred stock without mandatory
redemption:
Cumulative, without par value,
authorized 3,750,000 shares,
maximum aggregate stated value
$150,000,000
Cumulative, without par value,
$100 stated value--
449,765 shares outstanding 44,977 44,977 44,977
Cumulative, without par value,
$25 stated value--
599,460 shares outstanding 14,986 14,986 14,986
------- ------- -------
Total preferred stock 59,963 59,963 59,963
------- ------- -------
Long-term debt, net 258,676 318,615 258,660
------- ------- -------
902,424 958,983 894,781
------- ------- -------
Current liabilities:
Current maturities of long-term
debt 55,000 --- 55,000
Variable rate demand bonds 56,975 56,975 56,975
Short-term debt 30,388 26,000 69,500
Accounts payable and accruals 88,340 69,998 92,719
Accrued payroll and vacation 13,137 10,477 11,687
Accrued taxes 13,106 20,997 3,616
Accrued interest 5,040 5,202 7,504
Other 41,174 29,113 34,424
------- ------- -------
303,160 218,762 331,425
------- ------- -------
Other credits:
Accumulated deferred income taxes 244,352 239,690 244,817
Accumulated deferred investment tax
credits 36,458 38,364 36,931
Accrued environmental remediation
costs 73,691 76,763 74,075
Deferred credits and other 101,673 87,312 95,785
------- ------- -------
456,174 442,129 451,608
------- ------- -------
TOTAL CAPITALIZATION AND
LIABILITIES $1,661,758 $1,619,874 $1,677,814
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1997 1996
(in thousands)
Cash flows generated from (used for) operating
activities:
Net income $ 23,351 $ 32,778
Adjustments to reconcile net income to net
cash generated from
operating activities:
Depreciation and amortization 24,836 21,667
Deferred income taxes 2,547 377
Investment tax credit restored (473) (478)
Amortization of nuclear fuel - 2,169
Allowance for equity funds used during
construction (632) (530)
Changes in assets and liabilities:
Net accounts receivable and unbilled
revenue 14,678 13,423
Inventories 8,761 7,396
Prepayments and other 5,034 2,367
Accounts payable and accruals (5,393) (15,337)
Accrued taxes 9,490 13,202
Other, net 8,511 12,874
------- -------
Net cash from (used for) operating
activities 90,710 89,908
------- -------
Cash flows generated from (used for) financing
activities:
Common stock cash dividends (14,896) (14,615)
Preferred stock dividends (828) (828)
Net change in short-term debt (39,112) (46,500)
Other, net 16 -
-------- --------
Net cash from (used for) financing
activities (54,820) (61,943)
-------- --------
Cash flows generated from (used for) investing
activities:
Additions to utility plant, excluding
AFUDC (24,668) (22,253)
Allowance for borrowed funds used
during construction (209) (248)
Dedicated decommissioning trust funds (9,917) (9,166)
Other, net 581 3,775
-------- --------
Net cash from (used for) investing
activities (34,213) (27,892)
-------- --------
Net increase (decrease) in cash and
equivalents 1,677 73
Cash and equivalents at beginning of period 4,167 4,671
------- --------
Cash and equivalents at end of period $ 5,844 $ 4,744
======= ========
Supplemental disclosures of cash flow
information:
Cash paid during the period:
Interest on debt $ 9,750 $ 9,931
Income taxes $ 2,093 $ 2,803
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been
prepared by Wisconsin Power & Light (WP&L), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
consolidated financial statements include WP&L and its wholly owned
consolidated subsidiaries. WP&L is a subsidiary of WPL Holdings, Inc.
These financial statements should be read in conjunction with the
financial statements and the notes thereto included in WP&L's latest
Annual Report on Form 10-K.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of (a)
the consolidated results of operations for the three months ended March
31, 1997 and 1996, (b) the consolidated financial position at March 31,
1997 and 1996 and December 31, 1996, and (c) the consolidated statement
of cash flows for the three months ended March 31, 1997 and 1996, have
been made. Because of the seasonal nature of WP&L's operations,
results for the quarter ended March 31, 1997 are not necessarily
indicative of results that may be expected for the year ending December
31, 1997.
2. On April 28, 1997, WP&L entered into an interest rate forward contract
related to the anticipated issuance of $105 million of long-term debt
securities. The financial impact of this contract, which will result
in either a cash payment or cash receipt, will be deferred and
recognized as an adjustment to interest expense over the life of the
new bonds to effect the interest rate implicit in the forward contract.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 VS. MARCH 31, 1996:
WPL Holdings, Inc., IES Industries Inc. (IES) and Interstate Power Company
(IPC) have entered into an Agreement and Plan of Merger, as amended,
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. Updates to the status of these
approvals (for additional information regarding the merger please refer to
WPL Holdings, Inc. 1996 Annual Report on Form 10-K) are as follows:
The Federal Energy Regulatory Commission (FERC) issued an order on January
15, 1997, finding no substantial market-power concerns with the merger.
Some limited issues have been set for hearings which began on April 23,
1997 and ended on May 2, 1997. A final decision is expected in the third
or fourth quarter of 1997.
A hearing regarding the merger is expected to begin July 14, 1997, before
the Iowa Utilities Board.
On March 24, 1997, the Minnesota Public Utilities Commission issued an
order approving the merger without hearings, subject to a number of
technical conditions which the parties are willing to meet. Included is
a 4-year rate freeze for IEC's Minnesota customers.
On May 7, 1997, the Illinois Commerce Commission (ICC) issued an order
approving the proposed merger.
On May 7, 1997, WP&L filed testimony with the Public Service Commission
of Wisconsin proposing a rate freeze from the date of the merger approval
through calendar year 2000.
The companies expect to receive all necessary regulatory approvals
relating to the merger in the third or fourth quarter of 1997.
OVERVIEW
WP&L reported consolidated first quarter net income of $22.5 million
compared with $32.0 million for the same period in 1996. Increased
electric production and purchased power costs combined with warmer weather
in the first quarter of 1997 compared with the same period last year
resulted in lower electric and gas margins.
Electric margin decreased by $8.6 million due to various plant outages
which resulted in more costly purchased power. Gas margin decreased $2.2
million as a result of warmer weather in the first quarter of 1997
compared with the first quarter of 1996. Depreciation expense also
increased due to higher depreciation rates and property additions.
Electric Operations
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $54,804 $55,651 (2%) 810,813 833,669 (3%) 338,837 332,335 2%
Industrial 35,282 34,112 3% 995,318 931,586 7% 825 809 2%
Commercial 26,799 26,399 2% 466,859 447,966 4% 46,123 45,035 2%
Sales to other
Utilities 38,504 30,911 25% 1,386,957 1,192,342 16% 98 88 11%
Other 3,038 1,427 113% 20,193 14,680 38% 1,736 1,717 1%
------- ------- --------- --------- ------- -------
Total 158,427 148,500 7% 3,680,140 3,420,243 8% 387,619 379,984 2%
======= ======= ===== ========= ========= ===== ======= ======= =====
Electric
Production
Fuels 30,073 28,604 5%
Purchased Power 32,941 15,922 107%
------- --------
Margin $95,413 $103,974 (8%)
======= ======== =====
Electric revenues increased $9.9 million, or 7 percent, as compared with
the first quarter in 1996. The increase was the result of higher sales to
other utilities and continued economic strength among industrial
customers. Warmer weather in 1997 resulted in a 3 percent decline in
sales to residential customers.
Despite higher electric revenues, electric margin decreased $8.6 million,
or 8 percent, during the first quarter of 1997 as compared with the first
quarter of 1996. The decline in margin reflects the impact of the
shutdown at the Kewaunee Nuclear Power Plant (Kewaunee) throughout the
first quarter of 1997 for steam generator tube repairs as well as several
temporary outages at WP&L's coal-fired plants. These temporary outages
resulted in greater reliance on more costly purchased power to meet
customer requirements (for further discussion of the Kewaunee plant outage
see the "Capital Requirements" section below). The Kewaunee outage and
increased sales to other utilities resulted in a 107 percent increase in
purchased power.
Gas Operations
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Year End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $41,633 $39,434 6% 60,529 65,866 (8%) 134,858 130,555 3%
Commercial and
Industrial 24,112 21,787 11% 42,128 44,863 (6%) 16,622 16,198 3%
Interruptible 883 1,064 (17%) 1,953 2,968 (34%) 273 288 (5%)
Transportation
and other 4,951 9,456 (48%) 61,782 65,417 (6%) 308 161 91%
------- ------- ------- ------- ------- -------
Total 71,579 71,741 --- 166,392 179,114 (7%) 152,061 147,202 3%
======= ======= ====== ======= ======= ===== ======= ======= =====
Purchased Gas 47,382 $45,364 4%
Margin $24,197 $26,377 (8%)
======= ======= =====
Gas revenues were unchanged from the first quarter of 1997 as compared
with the first quarter of 1996. Therm sales declined 7 percent primarily
as a result of warmer weather in the first quarter of 1997 compared with
the first quarter of 1996. Partially offsetting the margin impact of the
decline in sales was the pass through to customers of the higher costs of
natural gas.
Effective January 1, 1995, the Public Service Commission of Wisconsin
(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 with 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 WP&L realized favorable contributions to gas margin of $0.9
million for the first quarter of 1997 and $1.0 million for the first
quarter of 1996. A modified gas incentive mechanism has been approved,
effective with the retail rate order discussed below under "Capital
Resources, Rates and Regulatory Matters."
The review of the gas incentive program for 1996 by the PSCW resulted in a
$5.9 million refund to residential natural gas customers in April 1997.
The full amount of the refund will be reflected in the financial results
in the second quarter of 1997, which does not have a material impact on
earnings.
Maintenance
Maintenance expense increased primarily as a result of higher plant
maintenance expenses at Kewaunee and several of WP&L's coal-fired plants
as previously discussed under "Electric Operations."
Depreciation and Amortization
Depreciation expense increased due to higher depreciation rates at WP&L
approved by the PSCW, effective January 1, 1997, and property additions.
Income Taxes
Income taxes decreased between first quarters consistent with lower
taxable income. The effective rate was 39 percent for both the first
quarter of 1997 and the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
WP&L's liquidity is primarily determined by the level of cash generated
from operations and the funding requirements of its ongoing construction
and maintenance programs. WP&L finances its construction expenditures
through internally generated funds supplemented, when required, by outside
financing. The Board of Directors of WP&L has authorized the issuance of
long term debt not to exceed $105 million in aggregate principal amount.
Subject to relevant market and other considerations, WP&L currently
intends to issue the long term debt prior to the end of the second quarter
of 1997.
During the first quarter of 1997 and the first quarter of 1996, WP&L
generated sufficient cash flows from operations to cover operating
expenses, cash dividends and investing activities. Cash flows from
operations increased to $91 million for the first quarter of 1997 compared
with $90 million for the first quarter in 1996.
Rates and Regulatory Matters
The PSCW has approved new rates effective April 29, 1997, which extend
through 1998. On average WP&L's retail electric rates will decline by 2.4
percent and retail gas rates will decline by 2.2 percent Other items
included in the rate order are: authorization of a surcharge to collect
replacement power costs while Kewaunee remains 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 with 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. The gas performance incentive was modified to eliminate the
maximum gain or loss to be recognized by WP&L. The incentive includes a
sharing mechanism, whereby 40 percent of all gains and losses relative to
current commodity prices as well as other benchmarks are recognized by
WP&L rather than refunded to or recovered from customers.
Industry Outlook
The PSCW inquiries into the future structure of the natural gas and
electric utility industries are ongoing. The stated goal of the PSCW in
the natural gas docket is "to accommodate competition but not create it."
The goal of the electric restructuring process is to create open access
transmission and distribution services for all customers and create
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 below the average in the Midwest region.
On April 24, 1996, the FERC issued two orders (Nos. 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. On March 4,
1997, FERC issued its orders on rehearing for FERC orders No. 888-A and
No. 889-A. The purpose of the orders on rehearing are to address
continued areas of disagreement or areas that require clarification in
FERC's final rules.
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.
Power Supply
In April 1997 members of the Wisconsin Reliability Assessment Group
announced that certain areas in Wisconsin and the Upper Midwest region are
facing unusual electric supply challenges that could effect customers over
the next six months. Approximately one-third of the region's nuclear
generating capacity is temporarily out of service due to maintenance
outages. This includes Kewaunee, which is operated by Wisconsin Public
Service Corporation and co-owned by WP&L and Madison Gas and Electric, and
the Point Beach nuclear power plant operated by Wisconsin Electric Power
Company as well as several nuclear units owned by Commonwealth Edison in
northern Illinois. Needed maintenance has also reduced output at some of
the region's coal-fired power plants, adding to the energy supply
challenges. Several actions are taking place in an attempt to assure
adequate power supplies for customers in the coming months such as
rescheduling maintenance to increase plant availability, upgrading the
transmission system to improve capacity, and continuing efforts to bring
the nuclear plants on line in June 1997. No assurance can be given that
business and residential customers will not be impacted due to electric
energy supply challenges.
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. 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's bank lines of credit of $70
million at March 31, 1997 are available to support these borrowings.
WP&L's capitalization at March 31, 1997, including the current maturities
of long-term debt, variable rate demand bonds and short-term debt,
consisted of 56 percent common equity, 6 percent preferred stock and 38
percent debt. The common equity total capitalization ratio was 56 percent
at March 31, 1997 and 57 percent at March 31, 1996.
Capital Requirements
WP&L is a capital-intensive business and requires large investments in
long-lived assets; therefore, WP&L's most significant capital
requirements relate to construction expenditures at WP&L. Construction
expenditures for the three months ended March 31,1997 were $25.5 million.
The estimated construction expenditures for the remainder of 1997 are
$121.7 million which are expected to be funded primarily through
internally generated funds.
WP&L has a 41 percent ownership interest in Kewaunee. Kewaunee remains
out of service for the repair of the steam generators. It is anticipated
that Kewaunee will return to service no earlier than mid to late June
1997. The steam generator tube repair costs total approximately $7.5
million of which WP&L's share is $3.1 million. The PSCW has authorized
deferral of such costs incurred after March 20, 1997. The owners will
request future rate recovery of these deferred costs. The PSCW
authorization to defer repair costs does not constitute assurance of
future recovery in customer rates or a finding that such costs have been
prudently incurred.
WP&L is also incurring costs associated with the acquisition of
replacement power while Kewaunee remains out of service. These costs are
expected to exceed the cost of WP&L generated power by approximately
$500,000 per week. WP&L was authorized to include a surcharge on customer
bills, effective April 29,1997, to recover the additional costs of
replacement power. The surcharge of $0.223 per Mwh will remain in effect
until Kewaunee is returned to service at which time it will be determined
if a refund is necessary. For additional information on Kewaunee please
refer to the WPL Holdings, Inc. 1996 Annual Report on Form 10-K.
The net book value of WP&L's share of Kewaunee as of March 31, 1997 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 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 affected and the cost of purchased
electric power or additional generating facilities to replace the power
generated by Kewaunee.
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, has been adopted by
WP&L and did not result in 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.
Inflationary impacts on the nonregulated businesses are not anticipated to
be material to WP&L.
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 or approximately 69 percent of the total
employees at WP&L.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
27 A Financial Data Schedule of WPL Holdings, Inc.
27 B Financial Data Schedule of Wisconsin Power and Light Company
2. Reports on Form 8-K: None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of May 1997.
WPL Holdings, Inc.
By: /s/ Edward M. Gleason
Edward M. Gleason, Vice President, Treasurer and Corporate Secretary
(principal financial officer)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of May 1997.
Wisconsin Power and Light Company
By: /s/ Edward M. Gleason
Edward M. Gleason, Controller, Treasurer and Corporate Secretary
(principal financial officer)
EXHIBIT INDEX
Exhibit No. Description
27 A Financial Data Schedule of WPL Holdings, Inc.
27 B Financial Data Schedule of Wisconsin Power and Light Company