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 September 30, 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 October
31, 1997:
WPL Holdings, Inc. Common Stock, $.01 par value,
30,788,593 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 and Nine
Months Ended September 30, 1997 and 1996 5
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 6
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996 8
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Wisconsin Power and Light Company
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1997 and 1996 22
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 23
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996 25
Notes to Consolidated Financial Statements 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Part II. Other Information 35
Signatures 36
DEFINITIONS
Certain abbreviations or acronyms used in the text and notes are defined
below:
Abbreviation or Acronym Term
DNR Department of Natural Resources
DOJ U.S. Department of Justice
FERC Federal Energy Regulatory Commission
HDC Heartland Development Corporation
HES Heartland Energy Services, Inc.
ICC Illinois Commerce Commission
IEA Industrial Energy Applications, Inc.
IEC Interstate Energy Corporation
IES IES Industries Inc.
IES Diversified IES Diversified Inc.
IES Utilities IES Utilities Inc.
IPC Interstate Power Company
ISO Independent System Operator
IUB Iowa Utilities Board
Kewaunee Kewaunee Nuclear Power Plant
MG&E Madison Gas and Electric Company
MPUC Minnesota Public Utilities Commission
PSCW Public Service Commission of Wisconsin
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
WEPCO Wisconsin Electric Power Company
WP&L Wisconsin Power and Light Company
WPLH WPL Holdings, Inc.
WPSC Wisconsin Public Service Corporation
WPL HOLDINGS, INC.
FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(This page left blank intentionally)
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(in thousands except for per share data)
Operating revenues:
Electric $ 165,465 $ 153,587 $ 475,198 $ 439,172
Gas 13,371 10,827 108,583 110,569
Fees, rents, non-utility energy
sales and other 35,576 47,849 99,000 131,692
-------- -------- -------- --------
214,412 212,263 682,781 681,433
Operating expenses: -------- -------- -------- --------
Electric production fuels 31,253 30,419 89,655 86,363
Purchased power 31,514 22,202 98,610 55,193
Purchased gas 7,135 6,398 68,401 67,452
Other operation and cost of
non-utility energy 63,833 83,584 188,549 235,018
Maintenance 11,598 10,746 36,759 30,237
Depreciation and amortization 28,269 22,162 81,435 67,990
Taxes other than income 8,933 8,335 26,958 26,390
-------- -------- -------- --------
182,535 183,846 590,367 568,643
-------- -------- -------- --------
Operating income 31,877 28,417 92,414 112,790
-------- -------- -------- --------
Interest expense and other:
Interest expense 11,366 8,945 29,955 27,925
Allowance for funds used during
construction (634) (741) (2,155) (2,100)
Other (204) (1,772) (5,568) (12,766)
-------- -------- -------- --------
10,528 6,432 22,232 13,059
-------- -------- -------- --------
Income before income taxes and
preferred dividend requirement
of subsidiary 21,349 21,985 70,182 99,731
Income taxes 6,569 7,264 22,912 35,135
Preferred dividend requirement of
subsidiary 827 828 2,483 2,484
-------- --------- -------- --------
Income from continuing operations 13,953 13,893 44,787 62,112
-------- --------- -------- --------
Discontinued operations:
Loss on disposal of subsidiary,
net of applicable tax benefit
of $575 - 1,297 - 1,297
-------- -------- -------- --------
- 1,297 - 1,297
-------- -------- -------- --------
Net income $ 13,953 $ 12,596 $ 44,787 $ 60,815
======== ======== ======== ========
Earnings per share of common
stock
Income from continuing
operations $ 0.45 $ 0.45 $ 1.46 $ 2.02
Discontinued operations - (0.04) - (0.04)
-------- -------- -------- --------
Net income $ 0.45 $ 0.41 $ 1.46 $ 1.98
======== ======== ======== ========
Weighted average number of shares
of common stock outstanding 30,789 30,795 30,780 30,788
======== ======== ======== ========
Cash dividends paid per share of
common stock $ 0.50 $ 0.4925 $ 1.50 $ 1.4775
======== ======== ======== =========
The accompanying notes are an integral part of the consolidated
financial statements.
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
ASSETS (in thousands)
Utility plant:
Plant in service--
Electric $1,784,781 $1,729,311
Gas 234,211 227,809
Water 24,878 23,905
Common 189,283 152,093
--------- ---------
2,233,153 2,133,118
Less--accumulated provision for
depreciation 1,039,134 967,436
--------- ---------
1,194,019 1,165,682
Construction work in progress 35,693 55,519
Nuclear fuel, net 19,249 19,368
--------- ---------
1,248,961 1,240,569
--------- ---------
Other property and equipment:
Rental, net 111,325 112,913
Other, net 10,573 16,350
--------- ---------
121,898 129,263
--------- ---------
Investments:
Nuclear decommissioning trust funds 103,657 90,671
Other investments 14,743 15,408
--------- --------
118,400 106,079
--------- --------
Current assets:
Cash and equivalents 8,752 11,070
Net accounts receivable and
unbilled revenue, less allowance
for doubtful accounts of
$1,234 and $1,524, respectively 74,596 88,798
Coal, at average cost 20,439 15,841
Materials and supplies, at average
cost 19,721 19,915
Gas in storage, at average cost 13,215 9,992
Prepaid gross receipts tax 15,989 19,389
Prepayments and other 6,024 7,397
--------- --------
158,736 172,402
--------- ---------
Restricted cash 8,045 6,848
--------- ---------
Deferred charges:
Regulatory assets 96,658 160,877
Other 93,803 84,493
--------- ---------
190,461 245,370
--------- ---------
TOTAL ASSETS $ 1,846,501 $ 1,900,531
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
CAPITALIZATION AND LIABILITIES (in thousands)
Capitalization:
Common stock, $.01 par value,
authorized 100,000,000 shares,
issued and outstanding--
30,788,593 and 30,773,795,
respectively $ 308 $ 308
Additional paid-in capital 303,550 303,856
Reinvested earnings 301,810 303,191
--------- ---------
Total common equity 605,668 607,355
--------- ---------
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
Cumulative, without par value,
$25 stated value-- 599,460
shares outstanding 14,986 14,986
-------- ---------
Total preferred stock 59,963 59,963
-------- ---------
Long-term debt, net 458,536 362,564
--------- ---------
1,124,167 1,029,882
--------- ---------
Current liabilities:
Current maturities of long-term debt 10,430 67,626
Variable rate demand bonds 56,975 56,975
Short-term debt 100,113 102,779
Accounts payable and accruals 95,077 106,486
Accrued payroll and vacation 12,120 14,500
Accrued income taxes 4,565 4,669
Accrued interest 6,400 9,085
Other 37,218 45,218
--------- ---------
322,898 407,338
--------- ---------
Other credits:
Accumulated deferred income taxes 250,182 245,686
Accumulated deferred investment tax
credits 35,512 36,931
Accrued environmental remediation
costs 13,080 74,075
Deferred credits and other 100,662 106,619
--------- ---------
399,436 463,311
--------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $1,846,501 $1,900,531
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1997 1996
(in thousands)
Cash flows generated from (used for)
operating activities:
Net income $44,787 $60,815
Adjustments to reconcile net income to
net cash generated from operating
activities:
Depreciation and amortization 81,434 67,990
Deferred income taxes 709 1,654
Investment tax credit restored (1,419) (1,433)
Amortization of nuclear fuel 1,410 6,056
Allowance for equity funds used
during construction (1,591) (1,399)
Gain on sale of other property and
equipment - (5,676)
Gain on sale of subsidiary and
investment - (3,249)
Changes in assets and liabilities:
Restricted cash (1,197) (4,048)
Net accounts receivable and
unbilled revenue 14,202 18,502
Inventories (7,627) (8,947)
Prepayments and other 4,773 1,572
Accounts payable and accruals (16,474) (10,613)
Accrued taxes (104) 7,902
Other, net (8,716) (12,463)
-------- --------
Net cash from (used for)
operating activities 110,187 116,663
-------- --------
Cash flows generated from (used for)
financing activities:
Common stock cash dividends (46,168) (45,490)
Proceeds from issuance of long-
term debt 105,000 -
Net change in short-term debt (2,666) (41,230)
Reduction of long-term debt (65,980) (10,199)
Other, net - 1,088
-------- --------
Net cash from (used for)
financing activities (9,814) (95,831)
-------- --------
Cash flows generated from (used for)
investing activities:
Proceeds from sale of other property
and equipment - 36,264
Proceeds from sale of subsidiary
and investment - 24,930
Additions to utility plant,
excluding AFUDC (85,388) (85,165)
Allowance for borrowed funds used
during construction (565) (701)
Dedicated decommissioning trust
funds (12,986) (12,116)
Net change in other property and
equipment 3,108 20,912
Additions to nuclear fuel (1,292) (5,381)
Other, net (5,568) (4,442)
-------- --------
Net cash from (used for)
investing activities (102,691) (25,699)
-------- --------
Net increase (decrease) in cash and
equivalents (2,318) (4,867)
Cash and equivalents at beginning of
period 11,070 11,386
-------- --------
Cash and equivalents at end of period $ 8,752 $ 6,519
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period:
Interest on debt $31,292 $30,123
Preferred stock dividends of
subsidiary $ 2,483 $ 2,484
Income taxes $17,743 $30,058
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 WPLH, without audit, pursuant to the rules and regulations
of the SEC. 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 WPLH and its
consolidated subsidiaries, including WP&L. These financial statements
should be read in conjunction with the financial statements and the
notes included in WPLH'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 and nine months
ended September 30, 1997 and 1996, (b) the consolidated financial
position at September 30, 1997 and December 31, 1996, and (c) the
consolidated statement of cash flows for the nine months ended
September 30, 1997 and 1996, have been made. Because of the seasonal
nature of WP&L's operations, results for the three and nine months
ended September 30, 1997, as reported for WPLH, 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
to hedge interest rate risk related to the anticipated issuance of $105
million of long-term debt securities. The securities were issued on
June 30, 1997 and the forward contract was settled which resulted in a
cash payment of $3.8 million by WP&L. This payment will be recognized
as an adjustment to interest expense over the life of the new debt
securities to approximate the interest rate implicit in the forward
contract.
3. On June 30, 1997, WP&L issued $105 million of 7% debentures due June
15, 2007. Approximately $50 million of the net proceeds was used to
repay maturing short-term debt and finance utility construction
expenditures. The balance of the proceeds was used to retire the $55
million of WP&L First Mortgage Bonds, Series Z, 6.125%, due July 15,
1997.
4. WP&L has a current or previous ownership interest in 11 properties,
consisting of 14 individual sites, associated in the past with the
production of manufactured gas. Some of these sites contain coal tar
waste products which may present an environmental hazard. WP&L owns
six of these sites, three are currently owned by municipalities and the
remaining five are all or partially owned by private companies.
WP&L conducted a comprehensive review in the third quarter of 1997 of
its liability at each of the 14 sites. This comprehensive review
considered several recent significant developments and resulted in a
reduction in the estimate of the probable liability for cleanup to
$13.1 million. In addition, management believes it is possible but not
likely that an additional $3.2 million of remediation costs may be
incurred. In 1996, the DNR approved less costly containment and
control strategies as an alternative to excavation processes at two
sites. The decline in the liability of approximately $59 million is
due to the successful implementation of these strategies at those two
sites and several additional sites. Further reductions in the
liability resulted from WP&L receiving an additional close out letter
from the DNR, bringing the total number of sites with close out letters
to four, and the resolution of liability issues have been reached or
are pending with the current owners of two sites.
The cleanup estimate discussed above includes the costs of feasibility
studies, data collection, soil and groundwater remediation activities,
and ongoing monitoring activities through 2027. The estimate is based
on a number of factors including the estimated extent and volume of
contaminated soil and/or groundwater. Changes in the estimate are
reasonably possible in the near term.
Changes in the liability do not immediately impact the earnings of
WP&L. Under the current rate making treatment approved by the PSCW,
the costs expended in the environmental remediation of these sites, net
of any insurance proceeds, are deferred and collected from gas
customers over a five year period after new rates are implemented.
Although no assurance can be given, management currently believes
future costs will also be recovered in rates. The associated regulatory
asset is $16.5 million as of September 30, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROPOSED MERGER
WPLH, IES and 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 IEC.
IES is a holding company headquartered in Cedar Rapids, Iowa, and is the
parent company of IES Utilities and 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 still subject to approval by the SEC.
On March 24, 1997, the MPUC issued an order approving the merger without
hearings, subject to a number of technical conditions that the parties are
willing to meet. Included is a four-year rate freeze for IPC's Minnesota
customers.
On May 7, 1997, the ICC issued an order approving the proposed merger.
On September 26, 1997, the IUB issued its order granting final approval of
the proposed merger. The order included a four-year rate freeze for Iowa
customers.
On November 5, 1997, the PSCW issued its final order approving the
proposed merger. The approval included a number of conditions, including
a four-year rate freeze and a requirement for the merger partners to file
an ISO proposal within one month of FERC approval.
The FERC issued an order on January 15, 1997. Some limited issues were
set for hearings that began on April 23, 1997 and ended on May 2, 1997.
On July 3, 1997, an administrative law judge issued a non-binding
recommendation that FERC approve the merger subject to the terms of a
stipulation agreement on competition issues entered into between the
companies and the FERC trial staff. On November 12, 1997, FERC accepted
these conditions and issued an order approving the merger.
The SEC comment period relating to approval under the Public Utility
Holding Company Act of 1935 ended November 5, 1996. The companies expect
to receive a final decision from the SEC by the end of 1997.
An impact review of the merger on market power, which is required by the
Hart-Scott-Rodino Antitrust Improvements Act, was completed by the DOJ in
1997. All requirements of this review were satisfied.
Additional information regarding the merger is available in WPLH's 1996
Annual Report on Form 10-K.
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996:
OVERVIEW
WPLH reported consolidated third quarter earnings from continuing
operations of 45 cents per share for 1997 and 1996. Level earnings were
the result of higher electric and gas margins at WPLH's utility
subsidiary, WP&L, and improvement in the performance of the non-regulated
energy marketing subsidiary that were offset by increases in maintenance,
depreciation and interest expenses.
HDC, parent company of WPLH's non-regulated operations, reported net
income of $0.2 million for the third quarter of 1997 compared with a net
loss of $1.4 million for the same period in 1996. Performance in the
third quarter of 1996 was impaired by performance of the energy marketing
and environmental consulting subsidiaries. Also, during the third quarter
of 1996, a loss of $1.3 million resulted from additional fees and expenses
related to the discontinued operation of A&C Enercom Consultants, Inc.
Electric Operations
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $ 50,194 $ 50,863 (1%) 763,566 758,394 1% 342,514 336,221 2%
Industrial 38,812 36,789 5% 1,100,036 1,025,866 7% 846 816 4%
Commercial 27,944 28,150 (1%) 498,777 493,528 1% 46,614 45,558 2%
Sales to other
Utilities 44,464 36,134 23% 1,591,089 1,371,639 16% 107 93 15%
Other 4,051 1,651 145% 12,894 13,193 (2%) 1,738 1,741 0%
------- ------- --------- --------- -------- --------
Total $165,465 $153,587 8% 3,966,362 3,662,620 8% 391,819 384,429 2%
======= ======= ====== ========= ========= ==== ======== ======== =====
Electric
Production Fuels 31,253 30,419 3%
Purchased Power 31,514 22,202 42%
------- -------
Margin $102,698 $100,966 2%
======= ======= ====
Electric revenues increased $11.9 million, or 8 percent, as compared with
the third quarter of 1996. Continued customer growth, economic strength
in the service area, and increased sales to other utilities contributed to
the increase in revenues. These increases were partially offset by the
average retail rate reduction of 2.4 percent which was effective April 29,
1997.
Electric margin increased $1.7 million, or 2 percent, as compared with the
third quarter of 1996. This increase is primarily due to higher sales (as
discussed above) which were partially offset by the increase in purchased
power expense and the rate decrease. Purchased power costs per kWh were
driven higher in the third quarter of 1997 compared with the same period
in 1996 due to areas in Wisconsin and the Upper Midwest region
experiencing unusual power shortages as a result of the outages of several
area nuclear generating facilities. Refer to the "Power Supply" section
below for further discussion of these shortages.
Gas Operations
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $ 5,631 $ 5,576 1% 7,784 7,564 3% 136,167 132,084 3%
Commercial and
Industrial 3,705 3,625 2% 7,802 6,659 17% 16,678 16,169 3%
Interruptible 438 377 16% 1,108 987 12% 287 247 16%
Transportation
and other 3,597 1,249 188% 34,356 38,044 (10%) 467 329 42%
-------- ------- -------- ------- -------- --------
Total $ 13,371 $ 10,827 23% 51,050 53,254 (4%) 153,599 148,829 3%
======== ======= ===== ======== ======= ===== ======== ======== ====
Purchased Gas 7,135 6,398 12%
-------- -------
Margin $ 6,236 $ 4,429 41%
======== ======= =====
Gas revenues increased $2.5 million, or 23 percent, as compared with the
third quarter of 1996. Customer growth contributed to increased therm
sales to native customers which was offset by reduced off system sales and
the average retail rate decrease of 2.2 percent effective April 29, 1997.
Despite reduced therm sales, gas revenues increased due to the pass
through to customers of higher costs per therm of natural gas.
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 with the price index are subject to a customer sharing
mechanism. A modified gas incentive mechanism has been approved and
became effective April 29, 1997 with the retail rate order discussed below
under "Rates and Regulatory Matters." This incentive did not have a
significant impact on gas margin for the third quarter of 1997 and 1996.
Fees, Rents, Non-Utility Energy Sales and Other Revenues
Fees, rents, non-utility energy sales and other revenues primarily
reflects sales and revenues of WPLH's non-regulated subsidiaries,
consolidated under HDC. The decrease in these revenues for the third
quarter of 1997 is primarily due to the formation of a joint venture,
effective January 1, 1997, between the gas marketing business of the
energy marketing subsidiary and IEA, the energy marketing subsidiary of
IES. HDC owns 50 percent of this joint venture and accounts for the
investment under the equity method. Therefore, earnings related to this
joint venture are included with "Interest Expense and Other." Third
quarter revenues in 1996 included $5.1 million related to gas marketing
sales now associated with the joint venture. In addition, the softening
market for the environmental service business and reduced activity in the
electric trading area of the energy marketing subsidiary also contributed
to the decline in revenues.
Other Operation and Cost of Non-Utility Energy
The decrease in other operation and cost of non-utility energy is
partially due to the recording of the earnings associated with the gas
marketing joint venture under "Interest Expense and Other," as discussed
above. Third quarter operating expenses in 1996 included $5.3 million
related to gas marketing sales now associated with the joint venture. In
addition, the softening market for the environmental service business and
the reduced activity in the electric trading area of the energy marketing
subsidiary also contributed to the decline in other operations expense.
Conservation expense at WP&L was reduced significantly under the new rate
order, UR-110. This reduction decreased WP&L's operating expenses by $3.3
million during the third quarter of 1997 compared with the same period in
1996.
Depreciation and Amortization
Depreciation expense increased due to higher depreciation rates at WP&L
approved by the PSCW, effective January 1, 1997, and property additions.
The PSCW approved increased contributions to the nuclear decommissioning
trust fund which also contributed to the increase in depreciation expense.
Interest Expense and Other
The increase in interest expense is due to higher levels of long-term debt
which was used to repay short-term debt and to finance utility
construction expenditures. The decrease in other income and deductions is
primarily due to timing of revenues related to the non-utility products
and services.
Income Taxes
The decrease in income taxes between quarters is consistent with lower
taxable income.
Discontinued Operations
During the nine months ended September 30, 1996, WPLH recognized an
additional $1.3 million of fees and expenses related to the disposition of
A&C Enercom Consultants, Inc., its utility energy and marketing consulting
business.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996
OVERVIEW
WPLH reported consolidated income from continuing operations for the nine
months ended September 30, 1997 of $44.8 million , or $1.46 per share,
compared with $62.1 million, or $2.02 per share, for the same period in
1996. The decrease in earnings primarily reflects the operation of WPLH's
utility subsidiary, WP&L. Contributing to the decrease in earnings were
lower electric and gas margins and increased depreciation expense for the
nine months ended September 30, 1997 as compared with the same period in
1996. In addition, several non-recurring gains were recognized during
1996: a $3.4 million after-tax gain on the sale of a combustion turbine
and a $2.1 million after-tax gain on the sale of HDC's investment in
assisted living properties.
HDC, parent company of WPLH's non-regulated operations, reported a net
loss of $1.2 million for the nine months ended September 30, 1997 compared
with a net loss of $3.5 million for the same period in 1996. Performance
in 1996 was impaired by contract losses associated with the start-up of
the energy marketing subsidiary. Partially offsetting these losses was
the after-tax gain of $2.1 million as discussed above.
Electric Operations
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $150,205 $150,291 0% 2,227,210 2,225,758 0% 342,514 336,221 2%
Industrial 113,003 107,351 5% 3,144,605 2,961,325 6% 846 816 4%
Commercial 80,481 79,069 2% 1,403,341 1,362,592 3% 46,614 45,558 2%
Sales to other
Utilities 123,015 98,412 25% 4,383,936 3,854,199 14% 107 93 15%
Other 8,494 4,049 110% 46,351 43,464 7% 1,738 1,741 0%
-------- ------- ---------- ---------- -------- --------
Total $475,198 $439,172 8% 11,205,443 10,447,338 7% 391,819 384,429 2%
======== ======= ==== ========== ========== ==== ======== ======== ====
Electric
Production Fuels 89,655 86,363 4%
Purchased Power 98,610 55,193 79%
------- -------
Margin $286,933 $297,616 (4%)
======= ======= ====
Electric revenues increased $36.0 million, or 8 percent, as compared with
the nine months ended September 30, 1996. Continued customer growth,
economic strength in the service area and increased sales to other
utilities offset the impact of warmer weather during the first four months
of 1997. WP&L had an average retail rate decrease of 2.4 percent
effective April 29, 1997. The Kewaunee surcharge, which was effective
April 29, 1997 through July 1, 1997, offset a portion of this rate
decrease. Refer to the "Rates and Regulatory Matters" section below for
further discussion of these rate modifications.
Despite higher electric revenues, electric margin decreased $10.7 million,
or 4 percent, as compared with the nine months ended September 30, 1996.
The decline in margin reflects the impact of the shutdown at Kewaunee
throughout most of the first half of 1997 for steam generator tube repairs
as well as several temporary, routine outages at WP&L's coal-fired plants
through the first five months of 1997. These outages caused a greater
reliance on more costly purchased power to meet customer requirements.
Refer to the "Capital Requirements" section below for further discussion
of the Kewaunee plant outage. The Kewaunee outage and increased sales to
other utilities resulted in a 79 percent increase in the cost of purchased
power.
Gas Operations
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $ 59,037 $ 59,713 (1%) 88,866 96,676 (8%) 136,167 132,084 3%
Commercial and
Industrial 33,942 33,267 2% 63,888 67,014 (5%) 16,678 16,169 3%
Interruptible 1,775 2,052 (13%) 4,408 5,613 (21%) 287 247 16%
Transportation
and other 13,829 15,537 (11%) 134,392 137,801 (2%) 467 329 42%
------- ------- ------- ------- ------- -------
Total $108,583 $110,569 (2%) 291,554 307,104 (5%) 153,599 148,829 3%
======= ======= ===== ======= ======= ===== ======= ======= ====
Purchased Gas 68,401 67,452 1%
------- -------
Margin $ 40,182 $ 43,117 (7%)
======= ======== =====
Gas revenues decreased $2.0 million, or 2 percent, as compared with the
nine months ended September 30, 1996. The average retail rate decrease of
2.2 percent effective April 29, 1997 and reduced therm sales due to warmer
weather in the first four months of 1997 resulted in the revenue decrease.
A shift in the sales mix from residential, commercial and interruptible
customers to lower margin transportation customers resulted in reduced
margin.
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 with the price index are subject to a customer sharing
mechanism. A modified gas incentive mechanism has been approved and
became effective April 29, 1997 with the retail rate order discussed below
under "Rates and Regulatory Matters." WP&L realized favorable
contributions to gas margin of $0.2 million and $1.2 million for the nine
months ended September 30, 1997 and 1996, respectively. 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 which did not
have a significant effect on earnings in 1997.
Fees, Rents, Non-Utility Energy Sales and Other Revenues
Fees, rents, non-utility energy sales and other revenues primarily
reflects sales and revenues of WPLH's non-regulated subsidiaries,
consolidated under HDC. The decrease in these revenues for the nine
months ended September 30, 1997 is primarily due to the formation of a
joint venture, effective January 1, 1997, between the gas marketing
business of the energy marketing subsidiary and IEA, the energy marketing
subsidiary of IES. HDC owns 50 percent of this joint venture and accounts
for the investment under the equity method. Therefore, earnings related
to this joint venture are included with "Interest Expense and Other."
Revenues for the nine months ended September 30, 1996 included $18.1
million related to gas marketing sales now associated with the joint
venture. In addition, the softening market for the environmental service
business and reduced activity in the electric trading area of the energy
marketing subsidiary also contributed to the decline in revenues for 1997.
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 gas
marketing joint venture under "Interest Expense and Other," as discussed
above. Operating expenses for the nine months ended September 30, 1996
included $22.7 million related to gas marketing sales now associated with
the joint venture. In addition, the softening market for the
environmental service business and the reduced activity in the electric
trading area of the energy marketing subsidiary also contributed to the
decline in other operations expense for 1997.
Conservation expense at WP&L was reduced significantly under the new rate
order, UR-110. This reduction decreased WP&L's operating expenses by $5.5
million for the nine months ended September 30, 1997 compared with the
same period in 1996.
Maintenance Expense
Maintenance expense increased as a result of higher plant maintenance
expenses at Kewaunee and several of WP&L's coal-fired plants, as discussed
above under "Electric Operations."
Depreciation and Amortization
Depreciation expense increased due to higher depreciation rates at WP&L
approved by the PSCW, effective January 1, 1997, and property additions.
The PSCW approved increased contributions to the nuclear decommissioning
trust fund which also contributed to the increase in depreciation expense.
Interest Expense and Other
The increase in interest expense is due to higher levels of long-term debt
which was used to repay short-term debt and to finance utility
construction expenditures. Other income and deductions for the nine
months ended September 30, 1996 included a second quarter $5.2 million
pre-tax gain from the sale of a combustion turbine and a first quarter
$3.3 million pre-tax gain from the sale of HDC's investment in assisted
living properties.
Income Taxes
The decrease in income taxes between periods is consistent with lower
taxable income.
Discontinued Operations
During the nine months ended September 30, 1996, WPLH recognized an
additional $1.3 million of fees and expenses related to the disposition of
A&C Enercom Consultants, Inc., its utility energy and marketing consulting
business.
LIQUIDITY AND CAPITAL RESOURCES
WPLH'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. On June 30, 1997, WP&L issued $105
million of 7% debentures due June 15, 2007. Approximately $50 million of
the net proceeds was used to repay maturing short-term debt and finance
utility construction expenditures. The balance of the proceeds was used
to retire $55 million of WP&L First Mortgage Bonds, Series Z, 6.125%,
which matured on July 15, 1997.
During the first nine months of 1997, WPLH generated sufficient cash flows
from operations and from the issuance of debentures (as discussed above)
to cover operating expenses, cash dividends and investing activities.
Cash flows from operations decreased to $110.2 million for the nine months
ended September 30, 1997 compared with $116.7 million for the same period
in 1996. The increase in cash flows from financing activities of $86.0
million is primarily a result of the 7% debentures issued in June 1997 as
discussed above. Cash flows used for investing activities increased $77
million for the first nine months of 1997 compared to the same period in
1996. Cash flows related to investing activities in 1996 were offset by
recognition of $25 million in proceeds primarily from the sale of the
investment in assisted living properties at HDC and $36 million in
proceeds from the sale of a combustion turbine at WP&L.
Rates and Regulatory Matters
The PSCW approved new rates effective April 29, 1997, which extend through
1998. On average WP&L's retail electric rates declined by 2.4 percent and
retail gas rates declined by 2.2 percent. Other items included in the
rate order were: authorization of a surcharge to collect replacement power
costs while Kewaunee was out of service; authorization of an increase in
the return on equity to 11.7 percent from 11.5 percent; a requirement to
maintain a utility common equity level of 51.98 percent as compared with
51.93 percent; reinstatement of the electric fuel adjustment clause;
continuation of a modified gas performance based ratemaking incentive
mechanism; and a modified SO2 incentive. The gas performance incentive
was modified to eliminate the maximum gain or loss to be recognized by
WP&L. Previously, this incentive was limited to $1.1 million to WP&L The
incentive includes a sharing mechanism, whereby 40 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 WPLH 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 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
Wisconsin Legislature, are planned prior to a target implementation date
after the year 2000. WPLH cannot currently predict what impact, if any,
these proceedings may have on its future financial condition or results of
operations. WPLH's strategy for dealing with these emerging issues
includes seeking growth opportunities, improving customer service, ongoing
cost reductions and productivity enhancements. The major objective of
these actions is to allow WP&L to better prepare for a competitive,
deregulated electric utility industry.
On April 24, 1996, the FERC issued two orders (Nos. 888 and 889) intended
to promote competition by opening access to the nation's wholesale power
market. The orders require public utilities that own, control or operate
transmission systems to provide the same transmission access and service
for wholesale transactions that they provide to themselves. On March 4,
1997, FERC issued its orders on rehearing in 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 required clarification in FERC's final
rules. In compliance with these orders, WP&L filed revised transmission
tariffs. WPLH cannot predict the long-term consequences of these rules on
its results of operations or financial condition.
WP&L complies with the provisions of 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
(comprised of seven of the state's major energy suppliers) announced that
eastern Wisconsin and other portions of the Midwest region would be facing
unusual electric supply challenges in the upcoming months.
During the spring of 1997, approximately one-third of the region's nuclear
generating capacity was temporarily out of service due to maintenance
outages. This included the Kewaunee Nuclear Power Plant (which is
operated by WPSC and owned by WPSC, WP&L and MG&E), the Point Beach
Nuclear Power Plant (which is owned and operated by WEPCO) and several
nuclear units owned by Commonwealth Edison in northern Illinois. There
are also capacity limits on the regional transmission system that moves
power into and out of Wisconsin.
Several actions were taken in an attempt to ensure adequate power supplies
for customers in the summer months, such as rescheduling maintenance to
increase power plant availability, upgrading the transmission system to
improve capacity, and continuing efforts to bring nuclear power plants on
line (Kewaunee returned to full operation in June). As a result of these
efforts, Wisconsin utilities were able to meet all customer demand
(customers with voluntary interruptible contracts did, however, experience
periodic interruptions).
The power supply concerns of 1997 have raised awareness of the electric
system reliability challenges facing Wisconsin and the Midwest region.
On Oct. 1, a group of 11 Wisconsin utilities responded to a request by
Gov. Tommy Thompson by providing consensus recommendations for improving
electric system reliability. The recommendations included increasing
regional transmission capacity, providing additional electric generation
in eastern Wisconsin and streamlining the regulatory approval process.
Gov. Thompson is currently reviewing reliability recommendations from
utilities, state regulators and customer groups, and legislative proposals
are anticipated in early 1998.
Environmental Liabilities
WP&L conducted a comprehensive review in the third quarter of 1997 of its
liability related to its manufactured gas sites. This comprehensive review
considered several recent significant developments and resulted in a
reduction in the estimate of the probable liability for cleanup to $13.1
million. In addition, management believes it is possible but not likely
that an additional $3.2 million of remediation costs may be incurred.
Refer to "Notes to Consolidated Financial Statements" for additional
details.
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. WPLH's bank lines of credit of $120
million at September 30, 1997 are available to support these borrowings.
WPLH's capitalization at September 30, 1997, including the current
maturities of long-term debt, variable rate demand bonds and short-term
debt, consisted of 47 percent common equity, 5 percent preferred stock and
48 percent debt. The common equity total capitalization ratio was 47
percent at September 30, 1997 and 48 percent at December 31, 1996.
Capital Requirements
WPLH's largest subsidiary, WP&L, is a capital-intensive business and
requires large investments in long-lived assets. Therefore, WPLH's most
significant capital requirements relate to construction expenditures at
WP&L. Construction expenditures for the nine months ended September 30,
1997 were $87.5 million. The estimated capital expenditures for the
remainder of 1997 are $28.6 million. These are expected to be funded
primarily through internally generated funds.
WP&L has a 41 percent ownership interest in Kewaunee. Kewaunee resumed
operations on June 12, 1997 after being out of service since September 21,
1996 for refueling and repairs to the steam generator tubes. Kewaunee is
jointly owned by WP&L, WPSC and MG&E. The joint owners continue to
analyze and discuss other options related to the future of Kewaunee
including various ownership transfer alternatives. The steam generator
tube repair costs were approximately $10.0 million. WP&L's share of these
costs is $4.1 million. The PSCW has authorized deferral of such costs
incurred after March 20, 1997. Therefore, WP&L has deferred $3.3 million
of these costs. WP&L 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 incurred additional costs associated with the acquisition of
replacement power while Kewaunee was out of service. These costs were
approximately $500,000 per week. WP&L was authorized to include a
surcharge on customer bills with a refund provision, effective April 29,
1997 through July 1, 1997, to recover the additional costs of replacement
power during that period. Refer to WP&L's 1996 Annual Report on Form 10-K
for additional information on Kewaunee.
The net book value of WP&L's share of Kewaunee as of September 30, 1997
was $46.7 million, excluding the value of nuclear fuel.
Year 2000
WPLH utilizes software, embedded systems, and related technologies
throughout its businesses that will be affected by the date change in the
Year 2000. An internal project is currently under way to determine the
full scope, work plan and related costs to insure that WPLH's systems
continue to meet its customer and internal needs. WPLH has begun to incur
expenses in 1997 to resolve this issue. These expenses may continue
through the year 1999 and may be significant.
INFLATION
The impacts of inflation on WP&L currently are mitigated through
ratemaking methodologies, customer growth and productivity improvements.
Inflationary impacts on the nonregulated businesses are not anticipated to
be material to WPLH.
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 3.00 percent,
3.00 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. As of September 30, 1997,
the contract covered 1,565 of WP&L's employees, or approximately 69
percent of the total employees at WP&L.
Joint Venture
On June 11, 1997, WPLH announced the formation of a joint venture with
Cargill, Inc. The joint venture, to be named Cargill-IEC, LLC, will be an
energy-commodity trading company that will offer a range of energy
trading, marketing and risk management services to wholesale electric
customers. WPLH, through its subsidiary, HES, has been an active
participant in the bulk power market since 1994. Power trading will begin
under the joint venture upon receipt of a FERC license which is
anticipated during the fourth quarter of 1997.
Dividend Declaration
On October 22, 1997, the Board of Directors of WPLH declared a quarterly
dividend on WPLH's common stock. The dividend is 50 cents per share
payable November 15, 1997 to shareowners of record on October 31, 1997.
Special Note Regarding Forward-Looking Statements
The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are forward-looking statements intended to qualify for
safe harbors from liability established by the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ
materially from those currently anticipated. These factors include,
without limitation, future national and regional economic and competitive
conditions, technological developments, inflation rates, regulatory
treatment (including rate recovery of environmental remediation costs) and
weather conditions. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on
such statements. The forward-looking statements included herein are made
as of the date hereof and WPLH undertakes no obligation to update publicly
such statements to reflect subsequent events or circumstances.
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WISCONSIN POWER AND LIGHT COMPANY
FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(this page left blank intentionally)
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(in thousands)
Operating revenues:
Electric $ 165,465 $ 153,587 $ 475,198 $ 439,172
Gas 13,371 10,827 108,583 110,569
Water 1,356 1,122 3,481 3,146
-------- -------- -------- ---------
180,192 165,536 587,262 552,887
-------- -------- -------- ---------
Operating expenses:
Electric production fuels 31,253 30,419 89,655 86,363
Purchased power 31,514 22,202 98,610 55,193
Purchased gas 7,135 6,398 68,401 67,452
Other operation 30,340 35,336 95,723 102,048
Maintenance 11,598 10,746 36,759 30,237
Depreciation and amortization 26,801 21,111 77,177 63,788
Taxes other than income 7,782 7,149 23,199 22,153
------- ------- ------- -------
146,423 133,361 489,524 427,234
------- ------- ------- -------
Operating income 33,769 32,175 97,738 125,653
------- ------- ------- -------
Interest expense and other:
Interest expense 9,176 7,745 23,058 23,359
Allowance for funds used
during construction (634) (741) (2,155) (2,100)
Other 410 (1,090) (4,539) (9,224)
------- ------- ------- -------
8,952 5,914 16,364 12,035
------- ------- ------- -------
Income before income taxes and
preferred dividend requirement 24,817 26,261 81,374 113,618
Income taxes 9,581 10,281 31,743 44,494
Preferred dividend requirement 827 828 2,483 2,484
------- ------- ------- ------
Net income $ 14,409 $ 15,152 $ 47,148 $ 66,640
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
ASSETS (in thousands)
Utility plant:
Plant in service--
Electric $1,784,781 $1,729,311
Gas 234,211 227,809
Water 24,878 23,905
Common 189,283 152,093
--------- ---------
2,233,153 2,133,118
Less--accumulated provision for
depreciation 1,039,134 967,436
--------- ---------
1,194,019 1,165,682
Construction work in progress 35,693 55,519
Nuclear fuel, net 19,249 19,368
--------- ---------
1,248,961 1,240,569
--------- ---------
Other property and equipment, net 1,383 1,397
--------- ---------
Investments:
Nuclear decommissioning trust
funds 103,657 90,671
Other investments 14,689 15,354
--------- ---------
118,346 106,025
--------- ---------
Current assets:
Cash and equivalents 3,121 4,167
Net accounts receivable and
unbilled revenue 12,275 34,220
Coal, at average cost 20,439 15,841
Materials and supplies, at
average cost 19,721 19,915
Gas in storage, at average cost 13,215 9,992
Prepaid gross receipts tax 15,989 19,389
Prepayments and other 2,627 2,664
--------- ---------
87,387 106,188
--------- ---------
Deferred charges:
Regulatory assets 96,658 160,877
Other 73,891 62,758
--------- ---------
170,549 223,635
--------- ---------
TOTAL ASSETS $1,626,626 $1,677,814
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 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
Additional paid-in capital 199,170 199,170
Reinvested earnings 301,576 310,805
-------- --------
Total common equity 566,929 576,158
-------- --------
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
Cumulative, without par
value, $25 stated value--
599,460 shares outstanding 14,986 14,986
-------- --------
Total preferred stock 59,963 59,963
-------- --------
Long-term debt, net 354,517 258,660
-------- --------
981,409 894,781
-------- --------
Current liabilities:
Current maturities of long-term
debt 8,899 55,000
Variable rate demand bonds 56,975 56,975
Short-term debt 54,000 69,500
Accounts payable and accruals 87,718 92,719
Accrued payroll and vacation 9,196 11,687
Accrued income taxes 2,837 3,616
Accrued interest 6,183 7,504
Other 29,793 34,424
-------- --------
255,601 331,425
-------- --------
Other credits:
Accumulated deferred income
taxes 248,071 244,817
Accumulated deferred investment
tax credits 35,512 36,931
Accrued environmental
remediation costs 13,080 74,075
Deferred credits and other 92,953 95,785
--------- ---------
389,616 451,608
--------- ---------
TOTAL CAPITALIZATION AND
LIABILITIES $1,626,626 $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
Nine Months Ended
September 30,
1997 1996
(in thousands)
Cash flows generated from (used for)
operating activities:
Net income $ 49,631 $ 69,124
Adjustments to reconcile net income to
net cash generated from operating
activities:
Depreciation and amortization 77,177 63,788
Deferred income taxes 709 4,021
Investment tax credit restored (1,419) (1,433)
Amortization of nuclear fuel 1,410 6,056
Allowance for equity funds used
during construction (1,591) (1,399)
Gain on sale of other property -
and equipment (5,676)
Changes in assets and liabilities:
Net accounts receivable and
unbilled revenue 21,945 20,577
Inventories (7,627) (9,059)
Prepayments and other 3,437 (2,583)
Accounts payable and accruals (8,813) (8,634)
Accrued taxes (779) (565)
Other, net (5,287) (3,381)
------- -------
Net cash from (used for)
operating activities 128,793 130,836
------- -------
Cash flows generated from (used for)
financing activities:
Common stock cash dividends (56,377) (43,349)
Preferred stock dividends (2,483) (2,484)
Proceeds from issuance of long-
term debt 105,000 -
Net change in short-term debt (15,500) (36,000)
Retirement of first mortgage
bonds (55,000) (5,001)
Other, net (244) -
-------- ---------
Net cash from (used for)
financing activities (24,604) (86,834)
-------- ---------
Cash flows generated from (used for)
investing activities:
Proceeds from sale of other
property and equipment - 36,264
Additions to utility plant,
excluding AFUDC (85,388) (85,165)
Allowance for borrowed funds used
during construction (565) (701)
Dedicated decommissioning trust
funds (12,986) (12,116)
Additions to nuclear fuel (1,292) (5,381)
Other, net (5,004) 21,234
-------- ---------
Net cash from (used for)
investing activities (105,235) (45,865)
-------- ---------
Net increase (decrease) in cash and
equivalents (1,046) (1,863)
Cash and equivalents at beginning of
period 4,167 4,671
------- -------
Cash and equivalents at end of period $ 3,121 $ 2,808
======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period:
Interest on debt $ 24,395 $ 24,065
Income taxes $ 26,169 $ 38,757
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 WP&L, without audit, pursuant to the rules and regulations
of the SEC. 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
consolidated subsidiaries. WP&L is a subsidiary of WPLH. These
financial statements should be read in conjunction with the financial
statements and the notes 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 and nine months
ended September 30, 1997 and 1996, (b) the consolidated financial
position at September 30, 1997 and December 31, 1996, and (c) the
consolidated statement of cash flows for the nine months ended
September 30, 1997 and 1996, have been made. Because of the seasonal
nature of WP&L's operations, results for the three and nine months
ended September 30, 1997, as reported for WP&L, 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
to hedge interest rate risk related to the anticipated issuance of $105
million of long-term debt securities. The securities were issued on
June 30, 1997 and the forward contract was settled which resulted in a
cash payment of $3.8 million by WP&L. This payment will be recognized
as an adjustment to interest expense over the life of the new debt
securities to approximate the interest rate implicit in the forward
contract.
3. On June 30, 1997, WP&L issued $105 million of 7% debentures due June
15, 2007. Approximately $50 million of the net proceeds was used to
repay maturing short-term debt and finance utility construction
expenditures. The balance of the proceeds was used to retire the $55
million of WP&L First Mortgage Bonds, Series Z, 6.125%, due July 15,
1997.
4. WP&L has a current or previous ownership interest in 11 properties,
consisting of 14 individual sites, associated in the past with the
production of manufactured gas. Some of these sites contain coal tar
waste products which may present an environmental hazard. WP&L owns
six of these sites, three are currently owned by municipalities and the
remaining five are all or partially owned by private companies.
WP&L conducted a comprehensive review in the third quarter of 1997 of
its liability at each of the 14 sites. This comprehensive review
considered several recent significant developments and resulted in a
reduction in the estimate of the probable liability for cleanup to
$13.1 million. In addition, management believes it is possible but not
likely that an additional $3.2 million of remediation costs may be
incurred. In 1996, the DNR approved less costly containment and
control strategies as an alternative to excavation processes at two
sites. The decline in the liability of approximately $59 million is
due to the successful implementation of these strategies at those two
sites and several additional sites. Further reductions in the
liability resulted from WP&L receiving an additional close out letter
from the DNR, bringing the total number of sites with close out letters
to four, and the resolution of liability issues have been reached or
are pending with the current owners of two sites.
The cleanup estimate discussed above includes the costs of feasibility
studies, data collection, soil and groundwater remediation activities,
and ongoing monitoring activities through 2027. The estimate is based
on a number of factors including the estimated extent and volume of
contaminated soil and/or groundwater. Changes in the estimate are
reasonably possible in the near term.
Changes in the liability do not immediately impact the earnings of
WP&L. Under the current rate making treatment approved by the PSCW,
the costs expended in the environmental remediation of these sites, net
of any insurance proceeds, are deferred and collected from gas
customers over a five year period after new rates are implemented.
Although no assurance can be given, management currently believes
future costs will also be recovered in rates. The associated regulatory
asset is $16.5 million as of September 30, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROPOSED MERGER
WPLH, IES and 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 IEC.
IES is a holding company headquartered in Cedar Rapids, Iowa, and is the
parent company of IES Utilities and 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 still subject to approval by the SEC.
On March 24, 1997, the MPUC issued an order approving the merger without
hearings, subject to a number of technical conditions that the parties are
willing to meet. Included is a four-year rate freeze for IPC's Minnesota
customers.
On May 7, 1997, the ICC issued an order approving the proposed merger.
On September 26, 1997, the IUB issued its order granting final approval of
the proposed merger. The order included a four-year rate freeze for Iowa
customers.
On November 5, 1997, the PSCW issued its final order approving the
proposed merger. The approval included a number of conditions, including
a four-year rate freeze and a requirement for the merger partners to file
an ISO proposal within one month of FERC approval.
The FERC issued an order on January 15, 1997. Some limited issues were
set for hearings that began on April 23, 1997 and ended on May 2, 1997.
On July 3, 1997, an administrative law judge issued a non-binding
recommendation that FERC approve the merger subject to the terms of a
stipulation agreement on competition issues entered into between the
companies and the FERC trial staff. On November 12, 1997, FERC accepted
these conditions and issued an order approving the merger.
The SEC comment period relating to approval under the Public Utility
Holding Company Act of 1935 ended November 5, 1996. The companies expect
to receive a final decision from the SEC by the end of 1997.
An impact review of the merger on market power, which is required by the
Hart-Scott-Rodino Antitrust Improvements Act, was completed by the DOJ in
1997. All requirements of this review were satisfied.
Additional information regarding the merger is available in WPLH's 1996
Annual Report on Form 10-K.
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996:
OVERVIEW
WP&L reported consolidated third quarter earnings from continuing
operations of $14.4 million for 1997 and $15.2 million for the same period
in 1996. The decrease in earnings was the result of higher electric and
gas margins which were offset by increases in maintenance, depreciation
and interest expenses.
Electric Operations
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $ 50,194 $ 50,863 (1%) 763,566 758,394 1% 342,514 336,221 2%
Industrial 38,812 36,789 5% 1,100,036 1,025,866 7% 846 816 4%
Commercial 27,944 28,150 (1%) 498,777 493,528 1% 46,614 45,558 2%
Sales to other
Utilities 44,464 36,134 23% 1,591,089 1,371,639 16% 107 93 15%
Other 4,051 1,651 145% 12,894 13,193 (2%) 1,738 1,741 0%
------- ------- --------- --------- -------- --------
Total $165,465 $153,587 8% 3,966,362 3,662,620 8% 391,819 384,429 2%
======= ======= ==== ========= ========= ==== ======== ======== ====
Electric
Production Fuels 31,253 30,419 3%
Purchased Power 31,514 22,202 42%
------- -------
Margin $102,698 $100,966 2%
======= ======= ====
Electric revenues increased $11.9 million, or 8 percent, as compared with
the third quarter of 1996. Continued customer growth, economic strength
in the service area, and increased sales to other utilities contributed to
the increase in revenues. These increases were partially offset by the
average retail rate reduction of 2.4 percent which was effective April 29,
1997.
Electric margin increased $1.7 million, or 2 percent, as compared with the
third quarter of 1996. This increase is primarily due to higher sales (as
discussed above) which were partially offset by the increase in purchased
power expense and the rate decrease. Purchased power costs per kWh were
driven higher in the third quarter of 1997 compared with the same period
in 1996 due to areas in Wisconsin and the Upper Midwest region
experiencing unusual power shortages as a result of the outages of several
area nuclear generating facilities. Refer to the "Power Supply" section
below for further discussion of these shortages.
Gas Operations
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $ 5,631 $ 5,576 1% 7,784 7,564 3% 136,167 132,084 3%
Commercial and
Industrial 3,705 3,625 2% 7,802 6,659 17% 16,678 16,169 3%
Interruptible 438 377 16% 1,108 987 12% 287 247 16%
Transportation
and other 3,597 1,249 188% 34,356 38,044 (10%) 467 329 42%
-------- ------- -------- -------- -------- -------
Total $ 13,371 $ 10,827 23% 51,050 53,254 (4%) 153,599 148,829 3%
======== ======= ==== ======== ======== ==== ======== ======= ====
Purchased Gas 7,135 6,398 12%
-------- -------
Margin $ 6,236 $ 4,429 41%
======== ======= ====
Gas revenues increased $2.5 million, or 23 percent, as compared with the
third quarter of 1996. Customer growth contributed to increased therm
sales to native customers which was offset by reduced off system sales and
the average retail rate decrease of 2.2 percent effective April 29, 1997.
Despite reduced therm sales, gas revenues increased due to the pass
through to customers of higher costs per therm of natural gas.
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 with the price index are subject to a customer sharing
mechanism. A modified gas incentive mechanism has been approved and
became effective April 29, 1997 with the retail rate order discussed below
under "Rates and Regulatory Matters." This incentive did not have a
significant impact on gas margin for the third quarter of 1997 and 1996.
Other Operation
Conservation expense at WP&L was reduced significantly under the new rate
order, UR-110. This reduction decreased WP&L's operating expenses by $3.3
million during the third quarter of 1997 compared with the same period in
1996.
Depreciation and Amortization
Depreciation expense increased due to higher depreciation rates at WP&L
approved by the PSCW, effective January 1, 1997, and property additions.
The PSCW approved increased contributions to the nuclear decommissioning
trust fund which also contributed to the increase in depreciation expense.
Interest Expense and Other
The increase in interest expense is due to higher levels of long-term debt
which was used to repay short-term debt and to finance utility
construction expenditures. The decrease in other income and deductions is
primarily due to timing of revenues related to the non-utility products
and services.
Income Taxes
The decrease in income taxes between quarters is consistent with lower
taxable income.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996
OVERVIEW
WP&L reported consolidated income from continuing operations for the nine
months ended September 30, 1997 of $47.1 million, compared with $66.6
million for the same period in 1996. Contributing to the decrease in
earnings were lower electric and gas margins and increased depreciation
expense for the nine months ended September 30, 1997 as compared with the
same period in 1996. In addition, a non-recurring gain of $3.4 million
after-tax was recognized during 1996 for the sale of a combustion turbine.
Electric Operations
Revenues and Costs kWhs Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $150,205 $150,291 0% 2,227,210 2,225,755 0% 342,514 336,221 2%
Industrial 113,003 107,351 5% 3,144,605 2,961,325 6% 846 816 4%
Commercial 80,481 79,069 2% 1,403,341 1,362,592 3% 46,614 45,558 2%
Sales to other
Utilities 123,015 98,412 25% 4,383,936 3,854,199 14% 107 93 15%
Other 8,494 4,049 110% 46,351 43,464 7% 1,738 1,741 0%
------- ------- ---------- ---------- -------- --------
Total $475,198 $439,172 8% 11,205,443 10,447,338 7% 391,819 384,429 2%
======= ======= ==== ========== ========== ==== ======== ======== ====
Electric
Production Fuels 89,655 86,363 4%
Purchased Power 98,610 55,193 79%
------- -------
Margin $286,933 $297,616 (4%)
======= ======= ====
Electric revenues increased $36.0 million, or 8 percent, as compared with
the nine months ended September 30, 1996. Continued customer growth,
economic strength in the service area and increased sales to other
utilities offset the impact of warmer weather during the first four months
of 1997. WP&L had an average retail rate decrease of 2.4 percent
effective April 29, 1997. The Kewaunee surcharge, which was effective
April 29, 1997 through July 1, 1997, offset a portion of this rate
decrease. Refer to the "Rates and Regulatory Matters" section below for
further discussion of these rate modifications.
Despite higher electric revenues, electric margin decreased $10.7 million,
or 4 percent, as compared with the nine months ended September 30, 1996.
The decline in margin reflects the impact of the shutdown at Kewaunee
throughout most of the first half of 1997 for steam generator tube repairs
as well as several temporary, routine outages at WP&L's coal-fired plants
through the first five months of 1997. These outages caused a greater
reliance on more costly purchased power to meet customer requirements.
Refer to the "Capital Requirements" section below for further discussion
of the Kewaunee plant outage. The Kewaunee outage and increased sales to
other utilities resulted in a 79 percent increase in the cost of purchased
power.
Gas Operations
Revenues and Costs Therms Sold Customers at
(In Thousands) Change (In Thousands) Change Month End Change
1997 1996 1997 1996 1997 1996
Residential
and Farm $ 59,037 $ 59,713 (1%) 88,866 96,676 (8%) 136,167 132,084 3%
Commercial and
Industrial 33,942 33,267 2% 63,888 67,014 (5%) 16,678 16,169 3%
Interruptible 1,775 2,052 (13%) 4,408 5,613 (21%) 287 247 16%
Transportation
and other 13,829 15,537 (11%) 134,392 137,801 (2%) 467 329 42%
------- ------- ------- ------- ------- -------
Total $108,583 $110,569 (2%) 291,554 307,104 (5%) 153,599 148,829 3%
======= ======= ==== ======= ======= ==== ======= ======= ====
Purchased Gas 68,401 67,452 1%
------- -------
Margin $ 40,182 $ 43,117 (7%)
======= ======= ====
Gas revenues decreased $2.0 million, or 2 percent, as compared with the
nine months ended September 30, 1996. The average retail rate decrease of
2.2 percent effective April 29, 1997 and reduced therm sales due to warmer
weather in the first four months of 1997 resulted in the revenue decrease.
A shift in the sales mix from residential, commercial and interruptible
customers to lower margin transportation customers resulted in reduced
margin.
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 with the price index are subject to a customer sharing
mechanism. A modified gas incentive mechanism has been approved and
became effective April 29, 1997 with the retail rate order discussed below
under "Rates and Regulatory Matters." WP&L realized favorable
contributions to gas margin of $0.2 million and $1.2 million for the nine
months ended September 30, 1997 and 1996, respectively. 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 which did not
have a significant effect on earnings in 1997.
Other Operation
Conservation expense at WP&L was reduced significantly under the new rate
order, UR-110. This reduction decreased WP&L's operating expenses by $5.5
million for the nine months ended September 30, 1997 compared with the
same period in 1996.
Maintenance Expense
Maintenance expense increased as a result of higher plant maintenance
expenses at Kewaunee and several of WP&L's coal-fired plants, as discussed
above under "Electric Operations."
Depreciation and Amortization
Depreciation expense increased due to higher depreciation rates at WP&L
approved by the PSCW, effective January 1, 1997, and property additions.
The PSCW approved increased contributions to the nuclear decommissioning
trust fund which also contributed to the increase in depreciation expense.
Interest Expense and Other
The increase in interest expense is due to higher levels of long-term debt
which was used to repay short-term debt and to finance utility
construction expenditures. Other income and deductions for the nine
months ended September 30, 1996 included a second quarter $5.2 million
pre-tax gain from the sale of a combustion turbine.
Income Taxes
The decrease in income taxes between periods is consistent with lower
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
WP&L's liquidity is primarily determined by the level of cash generated
from its operations and the funding requirements of it's ongoing
construction and maintenance programs. WP&L finances its construction
expenditures through internally generated funds supplemented, when
required, by outside financing. On June 30, 1997, WP&L issued $105
million of 7% debentures due June 15, 2007. Approximately $50 million of
the net proceeds was used to repay maturing short-term debt and finance
utility construction expenditures. The balance of the proceeds was used
to retire $55 million of WP&L First Mortgage Bonds, Series Z, 6.125%,
which matured on July 15, 1997.
During the first nine months of 1997, WP&L generated sufficient cash flows
from operations and from the issuance of debentures (as discussed above)
to cover operating expenses, cash dividends and investing activities.
Cash flows from operations decreased to $128.8 million for the nine months
ended September 30, 1997 compared with $130.8 million for the same period
in 1996. The increase in cash flows from financing activities of $62.2
million is primarily a result of the 7% debentures issued in June 1997 as
discussed above. Cash flows used for investing activities increased $59.4
million for the first nine months of 1997 compared to the same period in
1996. Cash flows related to investing activities in 1996 were offset by
recognition of $36 million in proceeds from the sale of a combustion
turbine.
Rates and Regulatory Matters
The PSCW approved new rates effective April 29, 1997, which extend through
1998. On average WP&L's retail electric rates declined by 2.4 percent and
retail gas rates declined by 2.2 percent. Other items included in the
rate order were: authorization of a surcharge to collect replacement power
costs while Kewaunee was out of service; authorization of an increase in
the return on equity to 11.7 percent from 11.5 percent; a requirement to
maintain a utility common equity level of 51.98 percent as compared with
51.93 percent; reinstatement of the electric fuel adjustment clause;
continuation of a modified gas performance based ratemaking incentive
mechanism; and a modified SO2 incentive. The gas performance incentive
was modified to eliminate the maximum gain or loss to be recognized by
WP&L. Previously, this incentive was limited to $1.1 million to WP&L The
incentive includes a sharing mechanism, whereby 40 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
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 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 Wisconsin 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's
strategy for dealing with these emerging issues includes seeking growth
opportunities, improving customer service, ongoing cost reductions and
productivity enhancements. The major objective of these actions is to
allow WP&L to better prepare for a competitive, deregulated electric
utility industry.
On April 24, 1996, the FERC issued two orders (Nos. 888 and 889) intended
to promote competition by opening access to the nation's wholesale power
market. The orders require public utilities that own, control or operate
transmission systems to provide the same transmission access and service
for wholesale transactions that they provide to themselves. On March 4,
1997, FERC issued its orders on rehearing in 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 required clarification in FERC's final
rules. In compliance with these orders, WP&L filed revised transmission
tariffs. WP&L cannot predict the long-term consequences of these rules on
its results of operations or financial condition.
WP&L complies with the provisions of 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
(comprised of seven of the state's major energy suppliers) announced that
eastern Wisconsin and other portions of the Midwest region would be facing
unusual electric supply challenges in the upcoming months.
During the spring of 1997, approximately one-third of the region's nuclear
generating capacity was temporarily out of service due to maintenance
outages. This included the Kewaunee Nuclear Power Plant (which is
operated by WPSC and owned by WPSC, WP&L and MG&E), the Point Beach
Nuclear Power Plant (which is owned and operated by WEPCO) and several
nuclear units owned by Commonwealth Edison in northern Illinois. There
are also capacity limits on the regional transmission system that moves
power into and out of Wisconsin.
Several actions were taken in an attempt to ensure adequate power supplies
for customers in the summer months, such as rescheduling maintenance to
increase power plant availability, upgrading the transmission system to
improve capacity, and continuing efforts to bring nuclear power plants on
line (Kewaunee returned to full operation in June). As a result of these
efforts, Wisconsin utilities were able to meet all customer demand
(customers with voluntary interruptible contracts did, however, experience
periodic interruptions).
The power supply concerns of 1997 have raised awareness of the electric
system reliability challenges facing Wisconsin and the Midwest region.
On Oct. 1, a group of 11 Wisconsin utilities responded to a request by
Gov. Tommy Thompson by providing consensus recommendations for improving
electric system reliability. The recommendations included increasing
regional transmission capacity, providing additional electric generation
in eastern Wisconsin and streamlining the regulatory approval process.
Gov. Thompson is currently reviewing reliability recommendations from
utilities, state regulators and customer groups, and legislative proposals
are anticipated in early 1998.
Environmental Liabilities
WP&L conducted a comprehensive review in the third quarter of 1997 of its
liability related to its manufactured gas sites. This comprehensive review
considered several recent significant developments and resulted in a
reduction in the estimate of the probable liability for cleanup to $13.1
million. In addition, management believes it is possible but not likely
that an additional $3.2 million of remediation costs may be incurred.
Refer to "Notes to Consolidated Financial Statements" for additional
details.
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 September 30, 1997 are available to support these borrowings.
WP&L's capitalization at September 30, 1997, including the current
maturities of long-term debt, variable rate demand bonds and short-term
debt, consisted of 52 percent common equity, 5 percent preferred stock and
43 percent debt. The common equity total capitalization ratio was 52
percent at September 30, 1997 and 53 percent at December 31, 1996.
Capital Requirements
WP&L is a capital-intensive business and requires large investments in
long-lived assets. Construction expenditures for the nine months ended
September 30, 1997 were $87.5 million. The estimated capital expenditures
for the remainder of 1997 are $28.6 million. These are expected to be
funded primarily through internally generated funds.
WP&L has a 41 percent ownership interest in Kewaunee. Kewaunee resumed
operations on June 12, 1997 after being out of service since September 21,
1996 for refueling and repairs to the steam generator tubes. Kewaunee is
jointly owned by WP&L, WPSC and MG&E. The joint owners continue to
analyze and discuss other options related to the future of Kewaunee
including various ownership transfer alternatives. The steam generator
tube repair costs were approximately $10.0 million. WP&L's share of these
costs is $4.1 million. The PSCW has authorized deferral of such costs
incurred after March 20, 1997. Therefore, WP&L has deferred $3.3 million
of these costs. WP&L 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 incurred additional costs associated with the acquisition of
replacement power while Kewaunee was out of service. These costs were
approximately $500,000 per week. WP&L was authorized to include a
surcharge on customer bills with a refund provision, effective April 29,
1997 through July 1, 1997, to recover the additional costs of replacement
power during that period. Refer to WP&L's 1996 Annual Report on Form 10-K
for additional information on Kewaunee.
The net book value of WP&L's share of Kewaunee as of September 30, 1997
was $46.7 million, excluding the value of nuclear fuel.
Year 2000
WP&L utilizes software, embedded systems, and related technologies
throughout its businesses that will be affected by the date change in the
Year 2000. An internal project is currently under way to determine the
full scope, work plan and related costs to insure that WP&L's systems
continue to meet its customer and internal needs. WP&L has begun to incur
expenses in 1997 to resolve this issue. These expenses may continue
through the year 1999 and may be significant.
INFLATION
The impacts of inflation on WP&L currently are 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 included increases in the base wage
during the first, second and third years of the contract of 3.00 percent,
3.00 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. As of September 30, 1997,
the contract covered 1,565 of WP&L's employees, or approximately 69
percent of the total employees at WP&L.
Special Note Regarding Forward-Looking Statements
The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are forward-looking statements intended to qualify for
safe harbors from liability established by the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ
materially from those currently anticipated. These factors include,
without limitation, future national and regional economic and competitive
conditions, technological developments, inflation rates, regulatory
treatment (including rate recovery of environmental remediation costs) and
weather conditions. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on
such statements. The forward-looking statements included herein are made
as of the date hereof and WP&L undertakes no obligation to update publicly
such statements to reflect subsequent events or circumstances.
Part II
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
27 A Financial Data Schedule of WPLH
27 B Financial Data Schedule of WP&L
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 November 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 November 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 WPLH
27 B Financial Data Schedule of WP&L