UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
OR
( )1998
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________
Commission Registrant;_______
Name of Registrant, State of
Incorporation; Address;Incorporation, Address of
Commission Principal Executive IRS Employer
File Number Offices and Telephone Number Identification No.
1-9187Number
- ----------- ---------------------------- ---------------------
1-9894 INTERSTATE ENERGY CORPORATION 39-1380265
(a Wisconsin corporation)
222 West Washington Avenue
Madison, Wisconsin 53703
Telephone (608)252-3311
0-4117-1 IES INDUSTRIESUTILITIES INC. 42-0331370
(an Iowa Corporation) 42-1271452
IEScorporation)
Alliant Tower
Cedar Rapids, Iowa 52401
319-398-4411
0-4117-1 IES UTILITIES INC. (an Iowa Corporation) 42-0331370
IES Tower, Cedar Rapids, Iowa 52401
319-398-4411Telephone (319)398-4411
0-337 WISCONSIN POWER AND LIGHT COMPANY 39-0714890
(a Wisconsin corporation)
222 West Washington Avenue
Madison, Wisconsin 53703
Telephone (608)252-3311
Securities registered pursuant to Section 12(b)12 (b) of the Act:
Name of Each Exchange on
Registrant Title of Each Class Which Registered
IES Industries Inc. Common Stock, no par value
Name of Each
Title of Class Exchange on Which Registered
-------------- ----------------------------
Interstate Energy Corporation Common Stock, $.01 Par Value New York Stock Exchange
Interstate Energy Corporation Common Stock Purchase Rights New York Stock Exchange
IES Utilities Inc. 7-7/8% Quarterly Debt Capital Securities New York Stock Exchange
(Subordinated Deferrable Interest Debentures)
Securities registered pursuant to Section 12(g)12 (g) of the Act:
Registrant Title of Class
IES Industries Inc. None--------------
IES Utilities Inc. 4.80% Cumulative Preferred Stock, Par Value
$50 per share
4.80%Wisconsin Power and Light Company Preferred Stock (Accumulation without Par
Value)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d)15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants wereregistrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. Yes X No ----- -----_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of thisthe Form 10-K or any
amendment to this Form 10-K. ______[ ]
This combined Form 10-K is separately filed by Interstate Energy Corporation,
IES Utilities Inc. and Wisconsin Power and Light Company. Information contained
herein relating to any individual registrant is filed by such registrant on its
own behalf. Each registrant makes no representation as to information relating
to the other registrants.
The aggregate market value of the voting stock of IES Industries Inc.and non-voting common equity held by
non-affiliates,nonaffiliates as of January 31, 1997 was approximately
$918,961,374 based upon the Composite Tape closing price as reported in
The Wall Street Journal. (For this purpose only, the individuals listed
under "Security Ownership of Management" in the Definitive Proxy
Statement incorporated herein by reference are considered to be
affiliates.)
The aggregate market value of the voting stock of1999:
Interstate Energy Corporation $2.24 billion
IES Utilities Inc. held by non-affiliates, as of January 31, 1997 was $0.
Indicate the number$0
Wisconsin Power and Light Company $0
Number of shares outstanding of each class of the registrants'
classes of Common Stock,common stock as of January 31,
1997.
IES Industries Inc.1999:
Interstate Energy Corporation Common Stock, no$.01 par value, - 30,162,73177,667,444
shares outstanding
IES Utilities Inc. Common Stock, $2.50 par value, - 13,370,788
shares outstanding (all of which are owned
beneficially and of record by Interstate
Energy Corporation)
Wisconsin Power and Light Company Common Stock,
$5 par value, 13,236,601 shares
outstanding (all of which are owned
beneficially and of record by
Interstate Energy Corporation)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statements relating to Interstate Energy Corporation's
1999 Annual Meeting of Shareowners and Wisconsin Power and Light Company's 1999
Annual Meeting of Shareowners are, or will upon filing with the Securities and
Exchange Commission, be incorporated by reference into Part of this Form 10-K into
Document Which Document is Incorporated
Definitive proxy statement of IES Industries Inc.
to be filed within 120 days of December 31, 1996 III IES INDUSTRIES INC. and IES UTILITIES INC.
Form 10-K for the Year Ended December 31, 1996hereof.
2
TABLE OF CONTENTS
PARTPage
Part I Page No.Number
------
Item 1. Business 3
Proposed Merger of the Company 6
Construction and Acquisition Program and Financing 7
Regulation 8
Employees 9
Environmental Matters 9
Competition 11
Rate Matters 13
Electric Operations 13
Gas Operations 204
Item 2. Properties 2322
Item 3. Legal Proceedings 2425
Item 4. Submission of Matters to a Vote of Security Holders 25
PARTPart II
Item 5. Market for the Registrant's Common StockEquity and Related
Stockholder Matters 26
Item 6. Selected Consolidated Financial Data 27
Item 7. Management's Discussion and Analysis of theFinancial
Condition and Results of Operations 29
Item 7A. Quantitative and Financial Condition 30
Selected Consolidated Quarterly Financial
Data (unaudited) 43Qualitative Disclosures About
Market Risk 60
Item 8. Financial Statements and Supplementary Data IES Industries Inc. Consolidated Financial
Statements 44
IES Industries Inc. Notes to Consolidated Financial
Statements 50
IES Utilities Inc. Consolidated Financial Statements 73
IES Utilities Inc. Notes to Consolidated Financial
Statements 7960
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 84
PART122
Part III
Item 10. Directors and Executive Officers Promoters and
Control Persons of the Registrant 85Registrants 122
Item 11. Executive Compensation 86126
Item 12. Security Ownership of Certain Beneficial Owners
and Management 87129
Item 13. Certain Relationships and Related Transactions 87
PART130
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 88
Schedule II - Valuation131
Signatures 142
3
FORWARD-LOOKING STATEMENTS
Refer to the "Forward-Looking Statements" section in Item 7. "Management's
Discussion and Qualifying
AccountsAnalysis of Financial Condition and Reserves 95
Unaudited Pro Forma Combined Financial
InformationResults of Operations" (MD&A)
for information and disclaimers regarding forward-looking statements contained
in this Annual Report on Form 10-K.
PART I
This Annual Report on Form 10-K includes information relating to Interstate
Energy Corporation 96
Signatures 105
This document contains the Annual Reports on Form 10-K for the
fiscal year ended December 31, 1996 for each of(IEC), IES Utilities Inc. (IESU) and Wisconsin Power and
Light Company (WP&L) (as well as Interstate Power Company (IPC), Alliant Energy
Resources, Inc. (Alliant Energy Resources) and Alliant Energy Corporate
Services, Inc. (Alliant Energy Corporate Services)). Where appropriate,
information relating to a specific entity has been segregated and labeled as
such.
ITEM 1. BUSINESS
A. MERGER
On April 21, 1998, IES Industries Inc. (IES), WPL Holdings, Inc. (WPLH) and IES Utilities Inc. Information contained herein relating to an
individual registrantIPC
completed a three-way merger (Merger) forming IEC. IEC is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, IES Utilities Inc. makes no
representationcurrently doing
business as to information relating to IES Industries Inc. or to
any other companies affiliated with IES Industries Inc. IES Industries
Inc. and its consolidated subsidiaries may collectively be referred to as
"the Company".
From time to time, the Company may make forward-looking statements
within the meaningAlliant Energy Corporation. As a result of the federal securities laws that involve judgments,
assumptionsMerger, the first
tier subsidiaries of IEC include: IESU, WP&L, IPC, Alliant Energy Resources and
other uncertainties beyond the controlAlliant Energy Corporate Services.
As part of the Company.
These forward-looking statements may include, among others, statements
concerning revenueapproval process for the Merger, IEC agreed to various rate
freezes and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changesrate caps implemented in certain jurisdictions for periods not to
exceed four years commencing on the utility industry, planned capital expenditures, financing needs
and availability, statementseffective date of the Company's expectations, beliefs,
future plansMerger (refer to Item
7. MD&A "Liquidity and strategies, anticipated events or trendsCapital Resources - Rates and similar
comments concerning matters that are not historical facts. Investors
and other usersRegulatory Matters" for a
further discussion).
A brief description of the forward-looking statements are cautioned that
such statements are not a guaranteefirst-tier subsidiaries of future performance of the
CompanyIEC is as follows:
1) IESU - incorporated in Iowa in 1925 as Iowa Railway and that such forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ
materially from those expressed in, or implied by, such statements.
Some, but not all, of the risks and uncertainties include weather
effects on sales and revenues, competitive factors, general economic
conditions in the Company's service territory, federal and state
regulatory and government actions, the operating of a nuclear
facility and changes in the rate of inflation.
PART I
Item 1. Business
IES Industries Inc.
IES Industries Inc. (Industries) is a holding company which is
incorporated under the laws of Iowa. Industries' wholly-owned
subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc.
(Diversified). Utilities is primarily an electric and natural gas utility
company operating in the State of Iowa and serving
approximately 336,000 electric and 176,000 natural gas
retail customers as well as 30 electric resale customers in more than
550 Iowa communities. Diversified is a holding company for non-utility
subsidiaries which are primarily engaged in the energy-related,
transportation and real estate development businesses. Industries'
consolidated assets and earnings are predominantly those of Utilities.
Utilities
UtilitiesLight Corporation.
IESU is primarily a public utility operating company engaged principally in providingthe
generation, transmission, distribution and sale of electric energy,energy; the
purchase, distribution, transportation and sale of natural gasgas; and to a limited extent,the
provision of steam used for industrial and heating purposes,services in selective markets, in the State of Iowa. Utilities' only wholly-owned subsidiary as ofAt
December 31, 1996,
was IES Ventures Inc. (Ventures), which is a holding company for
unregulated investments. Ventures' wholly-owned subsidiary at
December 31, 1996, was IES Midland Development Inc. (Midland), which
owns and operates a landfill in Ottumwa, Iowa. Ventures also has a 35%
equity investment in Aqua Ventures L.C., which is an aquaculture
facility formed to raise fish for human consumption.
Utilities' sales of electricity (in Kwh), excluding off-system
sales, increased 1.7%, 5.3% and 4.3%, during the years 1996-1994,
respectively. Under historically normal weather conditions, total sales
(excluding off-system sales) would have increased 3.5%, 3.6% and 4.8%
during 1996-1994, respectively. Total gas delivered by Utilities,
including transported volumes, increased or (decreased) 5.9%, 4.8% and
(2.7)% during the years 1996-1994, respectively. Under historically
normal weather conditions, Utilities' gas sales and transported volumes
would have increased 1.9%, 3.5% and 0.7% during 1996-1994, respectively.
There are seasonal variations in Utilities' electric and gas
businesses, which are principally related to the use of energy for air
conditioning and heating. In 1996, 39.8% of Utilities' electric
revenues were earned in June through September, reflecting the use of
electricity for cooling, and 72.0% of Utilities' gas revenues were
earned in the months of January - March, November and December,
reflecting the use of gas for heating.
The approximate percentages of Utilities' revenue and operating
income derived from the sale of electricity and gas during the years
1996-1994 are as follows:
1996 1995 1994
Revenues:
Electric 76% 79% 78%
Gas 21% 19 20
Operating income:
Electric 86% 92% 93%
Gas 11% 6 6
The relationships between the electric and gas percentages
presented above are influenced by changes in energy sales, timing of
regulatory price proceedings and changes in the costs of fuel or
purchased gas billed to customers through related adjustment clauses.
For additional information concerning electric and gas operations,
see Item 1. "Other Information Relating to Utilities Only", Item 7.
"Management's Discussion and Analysis of the Results of Operations and
Financial Condition" and the "Electric Operations" and "Gas Operations"
sections of Item 1.
Diversified
Other than Utilities' unregulated investments, the non-utility
operations of the Company are organized under Diversified. Diversified
is a holding company whose wholly-owned subsidiaries include IES
Transportation Inc. (IES Transportation), IES Energy Inc. (IES Energy),
IES Investments Inc. (IES Investments) and IES International Inc. (IES
International).
IES Transportation is a holding company whose wholly-owned
subsidiaries at December 31, 1996, included the Cedar Rapids and Iowa
City Railway Company (CRANDIC) and IES Transfer Services Inc.
(Transfer). CRANDIC is a short-line railway which renders freight
service between Cedar Rapids and Iowa City. Transfer's operations
include transloading and storage services. IES Transportation also has
a 75% equity investment in IEI Barge Services, Inc. (Barge) which
provides barge terminal and hauling service on the Mississippi River.
In addition, IES Transportation has investments in two Iowa railroad
companies. IES Transportation's 1996 operating revenues and assets at
December 31, 1996 were as follows:
Operating
Revenues Assets
(in 000s)
CRANDIC $ 17,375 $ 39,162
Barge 1,872 8,112
Transfer 415 838
Other (including eliminations) - 286
$ 19,662 $ 48,398
IES Energy is a holding company whose wholly-owned subsidiaries at
December 31, 1996, included Industrial Energy Applications, Inc. (IEA)
and Whiting Petroleum Corporation (Whiting). IEA offers commodities-
based and facilities-based energy services for customers, including
purchasing energy, standby generation, cogeneration, steam production
and propane air systems. Whiting is organized to purchase, develop and
produce crude oil and natural gas. IES Energy's 1996 operating revenues
and assets at December 31, 1996 were as follows:
Operating
Revenues Assets
(in 000s)
IEA $ 126,932 $ 52,204
Whiting 65,724 129,227
Other (including eliminations) (1,670) (1,255)
$ 190,986 $ 180,176
IES Investments is a holding company whose primary wholly-owned
subsidiaries at December 31, 1996, included Iowa Land and Building
Company (Iowa Land), IES Investco Inc. (Investco) and Village
Lakeshares, Inc. (Lakeshares). Iowa Land is organized to pursue real
estate and economic development activities in Utilities' service
territory. Investco is a holding company for certain equity investments
and currently has no operating revenues. The gains and losses on the
sale of such investments are recorded in "Miscellaneous, net" in Industries'
Consolidated Statements of Income. Lakeshares is a holding company for
resort properties in Iowa.
IES Investments had a $29.2 million investment in McLeod, Inc.
(McLeod), a holding company for various telecommunications businesses,
at December 31, 1996. The McLeod investment is not consolidated,
therefore Industries does not include any of McLeod's operating revenues in
its consolidated results. IES Investments also has direct and indirect
equity interests in various real estate ventures, primarily concentrated
in Cedar Rapids, and holds other passive investments. IES Investments'
1996 operating revenues and assets, other than the international
investments noted below, at December 31, 1996, were as follows:
Operating
Revenues Assets
(in 000s)
Iowa Land $ 1,570 $ 11,969
Investco - 2,941
Lakeshares 4,313 11,230
Real estate ventures 3,863 24,893
Investment in McLeod - 29,200
Other (including eliminations) - 13,535
$ 9,746 $ 93,768
IES International is a holding company whose wholly-owned
subsidiaries are IES New Zealand Limited (IES New Zealand) and
Interstate Energy Corporation Pte Ltd. (IECP). IES New Zealand has
equity investments in two New Zealand electric distribution entities.
IECP has a 50% equity investment in JIES Heat and Power Ltd., a
cogeneration facility in China. None of the investments under IES
International are consolidated, therefore IES International has no
operating revenues. (IES Investments also has several investments in
foreign entities, including a loan to a New Zealand company and an
investment in an international venture capital fund. These investments
are considered international investments for management purposes and
therefore are included in the following schedule.) IES International's
assets at December 31, 1996, were as follows:
Assets
(in 000s)
IES New Zealand $ 19,819
Investment in JIES Heat and Power Ltd. 13,598
IES Investments' foreign investments 11,665
Other (including eliminations) (136)
$ 44,946
Refer to Note 15 of Industries' Notes to Consolidated Financial
Statements for a further discussion of the Company's segments of business.
Other Information Relating to the Company
PROPOSED MERGER OF THE COMPANY. Industries, WPL Holdings, Inc.
(WPLH) and Interstate Power Company (IPC) have entered into an
Agreement and Plan of Merger, as amended (Merger Agreement), dated
November 10, 1995, which provides for the combination of all three
companies (Proposed Merger). The new company will be named Interstate Energy
Corporation (IEC).
WPLH is a holding company headquartered in Madison, Wisconsin, and
is the parent company of Wisconsin Power and Light Company (WP&L) and
Heartland Development Corporation (HDC). WP&L supplies1998, IESU supplied electric and gas service to approximately
385,000341,000 and 150,000179,000 customers, respectively,respectively. In 1998, 1997 and 1996, IESU had no
single customer for which electric and/or gas sales accounted for 10% or more of
IESU's consolidated revenues. IESU also owns varying interests in several other
subsidiaries and investments which are not material to IESU's operations.
2) WP&L - incorporated in Wisconsin in 1917 as the Eastern Wisconsin Electric
Company, is a public utility engaged principally in the generation,
transmission, distribution and sale of electric energy; the purchase,
distribution, transportation and sale of natural gas; and the provision of water
services in selective markets. Nearly all of WP&L's customers are located in
south and central Wisconsin. HDC and its principal subsidiariesWP&L operates in municipalities pursuant to permits
of indefinite duration which are engaged in businesses in three major areas: environmental engineering
and consulting, affordable housing and energy services. IPC, a public
utility headquartered in Dubuque, Iowa, suppliesregulated by Wisconsin law. At December 31,
1998, WP&L supplied electric and gas service to approximately 165,000401,000 and
49,000159,000 customers, respectively, in
northeast Iowa, northwest Illinoisrespectively. WP&L also has approximately 35,000 water
customers. In 1998, 1997 and southern Minnesota.
The Proposed Merger,1996, WP&L had no single customer for which
will beelectric and/or gas sales accounted for as a pooling10% or more of interests, has been approved by the respective Boards of Directors and
shareholders. The merger is conditioned on the receipt of approvals of
several federal and state regulatory agencies. The status of these
approvals is as follows:
On January 15, 1997, the Federal Energy Regulatory Commission
(FERC) issued an order in which it accepted several provisionsWP&L's consolidated
revenues.
WP&L owns all of the IEC merger application withoutoutstanding capital stock of South Beloit Water, Gas and
Electric Company (South Beloit), a public utility supplying electric, gas and
water service, principally in Winnebago County, Illinois, which was incorporated
in 1908. WP&L also owns varying interests in several other subsidiaries and
investments which are not material to WP&L's operations.
3) IPC - a public utility incorporated in 1925 under the need for public hearings. The FERC
has set limited issues for hearing, including generation market powerlaws of the State of
Delaware. IPC is engaged principally in the transmission-constrained Wisconsin Upper Michigan System (WUMS)
subregion in Wisconsin. The FERC has also orderedgeneration, transmission,
distribution and sale of electric energy and the merger partners to
attempt to negotiate a wholesale customer protection mechanism with
those intervenors who are not satisfied with the four year rate freeze
proposedpurchase, distribution,
transportation
4
and sale of natural gas in the application. If an agreement between the merger
partnersStates of Iowa, Minnesota and the intervenors is not reached, the FERC will decide the
issue. A final decision on the merger is expected to be issued by the
FERC by the end of the third quarter of 1997.
Utilities andIllinois. At
December 31, 1998, IPC announced in 1996 their intentions to hold retail
electric prices to their current levels until at least January 1, 2000.
The companies made the proposal as part of their testimony in the IEC
merger application filed with the Iowa Utilities Board (IUB). The
proposal excludes price changes due to government-mandated programs,
such as energy efficiency cost recovery, or unforeseen dramatic changes
in operations. Hearings before the IUB are expected to be held in the
summer of 1997 with a decision expected by the end of the third quarter
of 1997.
In March of 1996, an application requesting approval of the merger
was filed with the Public Service Commission of Wisconsin (PSCW).
Hearings are currently scheduled for June 4, 1997, with a decision
anticipated in the third quarter of 1997. Legislation was introduced in
the Wisconsin State Senate in February 1997 which could delay the PSCW
approval of the merger. Industries cannot predict the outcome of such
legislation.
In March of 1996, an application requesting approval of the merger
was also submitted to the Illinois Commerce Commission (ICC). The ICC
conducted hearings on November 12, 1996 and final briefs were filed on
December 23, 1996. A decision is pending.
On January 15, 1997, the Minnesota Public Utilities Commission
(MPUC) announced that it had approved the IEC merger without hearings,
subject to a number of technical conditions, which Industries
anticipates will not be opposed by the merger partners. Included in
these conditions is a four year rate freeze for IEC'sprovided electric and gas service to approximately
166,000 and 50,000 customers, respectively. In 1998, 1997 and 1996, IPC had no
single customer for which electric and/or gas sales accounted for 10% or more of
IPC's consolidated revenues.
4) ALLIANT ENERGY RESOURCES - following the Merger, the holding companies for
the nonregulated businesses of the former WPLH and IES (Heartland Development
Corporation (HDC) and IES Diversified Inc., respectively) were merged. The
resulting company from this merger is Alliant Energy Resources. Alliant Energy
Resources was incorporated in the state1988 in Wisconsin as Heartland Development
Corporation. The majority of Minnesota.
An applicationIEC's nonregulated investments are organized under
Alliant Energy Resources.
Alliant Energy Resources' wholly-owned subsidiaries include Alliant Energy
Industrial Services, Inc. (ISCO), Alliant Energy International, Inc.
(International), Alliant Energy Investments, Inc. (Investments), Alliant Energy
Transportation, Inc. (Transportation), Heartland Properties, Inc. (HPI) and
Capital Square Financial Corporation (Capital Square).
5) ALLIANT ENERGY CORPORATE SERVICES - subsidiary formed to establishprovide
administrative services to IEC and its subsidiaries as a registered holding companyrequired under the Public
Utility Holding Company Act of 1935 (1935 Act) was
submitted(PUHCA).
Refer to Note 14 of the "Notes to Consolidated Financial Statements" for a
further discussion of IEC's business segments.
B. INFORMATION RELATING TO IEC ON A CONSOLIDATED BASIS
EMPLOYEES
As of December 31, 1998, IEC had the following employees (full-time and
part-time):
Number of
Bargaining Number of
Number of Unit Bargaining
Employees Employees Agreements
------------- -------------- -------------
IESU 1,834 1,117 6
WP&L 1,684 1,547 1
IPC 645 525 3
Alliant Energy Resources 1,001 88 5
Alliant Energy Corporate Services 1,188 - -
------------- -------------- -------------
IEC Total 6,352 3,277 15
============= ============== =============
Eight bargaining agreements at the utilities are scheduled to expire in 1999 and
represent substantially all employees covered under collective bargaining
agreements. These employees represent approximately 50% of all IEC employees.
IEC has not experienced any significant work stoppage problems in the past.
While negotiations have commenced, IEC is currently unable to predict the
outcome of these negotiations.
CAPITAL EXPENDITURE AND INVESTMENT AND FINANCING PLANS
Refer to the "Liquidity and Capital Resources" section in Item 7. MD&A for a
discussion of anticipated construction and acquisition expenditures for
1999-2003 and details regarding the financing of future capital requirements.
REGULATION
IEC operates as a registered public utility holding company subject to
regulation by the Securities and Exchange Commission (SEC). The period
for comments by interested parties closed on November 5, 1996. A
decision on under the application is expected at the end of the third quarter
of 1997. The SEC historically has interpreted the 1935 Act to preclude
registered holding companies, with limited exceptions, from owning both
electricPUHCA. IEC
and gas utility systems. In addition, the SEC could also
require that IEC divest certain non-utility ventures of Industries and
WPLH. As part of the application, IEC has requested permission to
retain its existing gas utility properties and non-utility ventures.
An impact review of the merger on market power, which is required
by the Hart-Scott-Rodino Antitrust Improvements Act, was completed by
the U.S. Department of Justice (DOJ). All requirements of this review
have been satisfied. If the merger is not consummated before July 7,
1997, the merger partners will be required to submit new information to
the DOJ. The merger partners do not believe that any such resubmission
would cause a material delay in approval.
An application was filed with the Nuclear Regulatory Commission
(NRC) to approve the transfer of indirect control over the licenses of
Utilities and WP&L for the Duane Arnold Energy Center (DAEC) nuclear
facility and Kewaunee Nuclear Power Plant, respectively, to IEC. Both
plants are jointly owned with other companies. The application, which
was filed on October 1, 1996, is pending.
See Note 2 of Industries' Notes to Consolidated Financial
Statements and Item 14 for further information and the unaudited pro
forma financial statements of IEC, respectively.
CONSTRUCTION AND ACQUISITION PROGRAM AND FINANCING.
The Company's construction and acquisition program
anticipates expenditures of approximately $225 million
for 1997, of which approximately $147 million represents
expenditures at Utilities and approximately $78 million
represents expenditures at Diversified. Of the $147 million
of Utilities' expenditures, 39% represents expenditures for
electric transmission and distribution facilities, 21%
represents electric generation expenditures, 21% represents
information technology expenditures and 5% represents
gas expenditures. The remaining 14% represents
miscellaneous electric, steam and general expenditures.
Diversified's anticipated expenditures include approximately
$75 million for domestic and international energy-related
construction and acquisition expenditures.
The Company's levels of construction and acquisition
expenditures are projected to be $208 million in 1998,
$212 million in 1999, $182 million in 2000 and $198
million in 2001. It is estimated that virtually all of Utilities'
construction and acquisition expenditures will be provided by
cash from operating activities (after payment of dividends)
for the five-year period 1997 - 2001. Financing plans for
Diversified's construction and acquisition program will
vary, depending primarily on the level of energy-related
acquisitions.
Capital expenditure and investment and financing planssubsidiaries are subject to continual reviewthe regulatory provisions of PUHCA,
5
including provisions relating to the issuance and change.sales of securities,
acquisitions and sales of certain utility properties, acquisitions and retention
of interests in non-utility businesses and the services provided by Alliant
Energy Corporate Services to IEC and its subsidiaries.
IEC is subject to regulation by the Public Service Commission of Wisconsin
(PSCW). The capital
expenditurePSCW regulates, among other things, the type and investment programs may be revised
significantlyamount of IEC's
investments in non-utility businesses. WP&L is also subject to regulation by the
PSCW as to retail utility rates and service, accounts, issuance and use of
proceeds of securities, certain additions and extensions to facilities and in
other respects. WP&L is generally required to file a result of many considerations including
changes in economic conditions, variations in actual sales
and load growth compared to forecasts, requirements of
environmental, nuclear and other regulatory authorities,
acquisition and business combination opportunities,rate case with the availability of alternate energy and purchased power sources,
the ability to obtain adequate and timelyPSCW
every two years with requests for rate relief escalations
in construction costs and conservation and energy efficiency
programs.
Under provisionsbased on a forward-looking test
year period. However, as one of the conditions for approval of the Merger, Agreement, there are
restrictionsthe
PSCW has required WP&L to freeze on the amounta post-merger basis retail electric, natural
gas, and water rates for a period of constructionfour years.
IESU and acquisition
expenditures the Company can make pending the merger.
The Company does not expect the restrictions to have a
material effect on its ability to implement its anticipated
construction and acquisition program.
Other than Utilities' periodic sinking fund requirements,
which Utilities intends to meet by pledging additional
property, the following long-term debt will mature prior
to December 31, 2001:
(in millions)
Utilities $207.2
Diversified's credit facility 172.1
Other subsidiaries' debt 11.2
$390.5
The Company intends to refinance the majority of the
debt maturities with long-term securities.
For a discussion regarding the Company's assumptions in financing
future capital requirements, see the "Liquidity and Capital Resources"
section of Item 7. "Management's Discussion and Analysis of the Results
of Operations and Financial Condition."
REGULATION. Because of its ownership of Utilities, Industries is a
"holding company" as defined by the 1935 Act. However, Industries
claims exemption from regulationIPC operate under the 1935 Act (except for Section
9(a)2 thereof, which requires that any acquisition of securities of a
utility company by Industries be approved by the SEC) on the basis that
Industries and Utilities are both organized in the same state and
Utilities conducts its business in that state. Congress began examining
repeal of PUHCA during 1995 and is expected to continue reviewing this
issue. No assurance can be given as to when or if such legislation will
be considered or enacted.
Utilities operates pursuant to the laws of the State of Iowa and is
thereby subject to the jurisdiction of the IUB.Iowa Utilities Board (IUB).
The IUB has authority to regulate rates and standards of service, to prescribe
accounting requirements and to approve the location and construction of electric
generating facilities having a capacity in excess of 25,000 Kw. The IUB
is comprised of three Commissioners appointed by the Governor and
ratified by the State Senate.kilowatts (KW).
Requests for price relief are based on historical test periods, adjusted for
certain known and measurable changes. The IUB must decide on requests for price
relief within 10 months of the date of the application for which relief is filed
or the interim prices granted become permanent. Interim prices, if allowed, are
permitted to become effective, subject to refund, no later than 90 days after
the price increase application is filed. Notwithstanding this process, IESU and
IPC have agreed to a four-year price cap effective with the Merger as part of
the Merger approval process.
In Iowa, non-exclusive franchises, which cover the use of streets and alleys for
public utility facilities in incorporated communities, are granted for a maximum
of twenty-five years by a majority vote of local qualified residents. In
addition, the IUB defines the boundaries of mutually exclusive service
territories for all electric utilities. The IUB has jurisdiction and grants
franchises for the use of public highway rights-of-way for electric and gas
facilities outside corporate limits.
IPC is also subject to regulation by the Minnesota Public Utilities isCommission
(MPUC). Requests for price relief can be based on either historical or projected
data. The MPUC must reach a final decision within 10 months. Interim rates are
permitted. The MPUC also has jurisdiction to approve IPC's capital structure on
an annual basis.
In addition, South Beloit and IPC are subject to regulation by the Illinois
Commerce Commission (ICC) for retail utility rates and service, accounts,
issuance and use of proceeds of securities, certain additions and extensions to
facilities and in other respects. Requests for rate relief must be decided
within 11 months.
The Federal Energy Regulatory Commission (FERC) has jurisdiction under the
Federal Power Act over certain of the electric utility facilities and
operations, wholesale rates and accounting practices of WP&L, IESU and IPC, and
in certain other respects. In addition, certain natural gas facilities and
operations of the companies are subject to the jurisdiction of the FERC withunder
the Natural Gas Act.
With respect to wholesale electric sales, its accounting practices and the issuance
of securities. Revenues derived from Utilities' wholesale and off-
system sales amounted to 6.5%, 6.3% and 6.9% of electric revenues for
1996-1994, respectively. Utilities' consolidated subsidiaries are not
subject to regulation by the IUB or the FERC.
Following consummation of the Proposed Merger, Interstate Energy
will be subject to regulation by the PSCW, as WPLH and
WP&L are currently. The PSCW regulates, among otherthings,
the type and amount of investments in non-utility businesses.
The Company does not expect such regulation to have a materially adverse
effect upon Interstate Energy following the Proposed Merger.
See the "Environmental Matters", "Competition", "Electric
Operations" and "Gas Operations" sections of Item 1 for a discussion of
various other regulatory issues.
EMPLOYEES. At December 31, 1996, the Company had a total of 2,406
(2,016 at Utilities) regular full-time employees. At December 31, 1996,
Utilities had 1,081 employees subject to 6 collective bargaining
agreements (776 of these employees were part of one agreement), CRANDIC
had 71 employees subject to 4 collective bargaining agreements and Barge
had 6 employees subject to 1 collective bargaining agreement. None of
Utilities' bargaining agreements expires in 1997.
ENVIRONMENTAL MATTERS. The Company is regulated in environmental protection matters, by a number of federal, state and local agencies.
Such regulations are the result of a number of environmental protection
laws passed by the U. S. Congress, state legislature and local
governments and enforced by federal, state and county agencies. The
laws impacting the Company's operations include the Clean Water Act;
Clean Air Act, as amended by the Clean Air Act Amendments of 1990;
National Environmental Policy Act; Resource Conservation and Recovery
Act; Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (CERCLA), as amended by the Superfund Amendments and
Reauthorization Act of 1986; Occupational Safety and Health Act;
National Energy Policy Act of 1992 and a number of others. The Company
regularly secures and renews federal, state and local permits to comply
with the environmental protection laws and regulations. Costs
associated with such compliances have increased in recent years and are
expected to increase moderately in the future.
Utilities has been named as a Potentially Responsible Party (PRP)
by various federal and state environmental agencies for 28 Former
Manufactured Gas Plant (FMGP) sites. Utilities has recorded
environmental liabilities related to the FMGP sites of approximately $36
million (including $4.7 million as current liabilities) at December 31,
1996. Regulatory assets of approximately $36 million, which reflect the
future recovery that is being provided through Utilities' rates, have
been recorded in the Consolidated Balance Sheets. Considering the
current rate treatment allowed by the IUB, management believes that the
clean-up costs incurred by Utilities for these FMGP sites will not have
a material adverse effect on its financial position or results of
operations. Refer to Note 13(f) of Industries' Notes to Consolidated
Financial Statements for a further discussion, including a discussion of
a lawsuit filed by Utilities seeking recovery of FMGP-related costs from
its insurance carriers.
The Clean Air Act Amendments of 1990 (Act) requires emission
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve
reductions of atmospheric chemicals believed to cause acid rain. The Act
and other federal laws also require the United States Environmental
Protection Agency (EPA) to studyadministers certain federal statutes and regulate, if necessary, additional
issues that potentially affecthas delegated the
electric utility industry, including
emissions relating to NOx, ozone transport, mercury and particulate
control; toxic release inventories and modificationsadministration of other environmental initiatives to the PCB rules.applicable state
environmental agencies. In 1995,addition, the EPA publishedstate agencies have jurisdiction over
air and water quality standards associated with fossil fuel fired electric
generation and the Sulfur Dioxide Network Design Review
for Cedar Rapids, Iowa, which, based on the EPA's assumptionslevel and worst-
case modeling method suggests that the Cedar Rapids area could be
classified as "nonattainment" for the National Ambient Air Quality
Standards established for SO2. The worst-case modeling study suggested
that twoflow of Utilities' generating facilities contributewater, safety and other matters pertaining
to hydroelectric generation.
WP&L and IESU are subject to the modeled
exceedences.
Pursuant to a routine review of operations, Utilities determined
that certain changes undertaken during the previous three years at one
of its power plants may have required a federal Prevention of
Significant Deterioration (PSD) permit. Refer to Note 13(g) of
Industries' Notes to Consolidated Financial Statements for a further
discussionjurisdiction of the above mentioned air quality issues.
The National Energy Policy Act of 1992 requires owners of nuclear
power plants to pay a special assessment into a "Uranium Enrichment
Decontamination and Decommissioning Fund." Refer to Note 13(f) of
Industries' Notes to Consolidated Financial Statements for a further
discussion.
The Nuclear Waste Policy Act of 1982 assigned responsibilityRegulatory
Commission (NRC), with respect to the U.S.Kewaunee Nuclear Power Plant (Kewaunee) in
the case of WP&L and the Duane Arnold Energy Center (DAEC) in the case of IESU,
and to the jurisdiction of the United States Department of Energy (DOE) with
respect to establish a facility for the ultimate
dispositiondisposal of high level waste and spent nuclear fuel and authorizedother radioactive wastes from
Kewaunee and the DOEDAEC.
Refer to enter into contracts with partiesItem 7. MD&A for the disposal of such
material beginning in January 1998. Utilities entered into such a
contractadditional information regarding regulation and has made the agreed paymentsIEC's
rate matters.
6
YEAR 2000
Refer to the Nuclear Waste Fund
(NWF) held by the U.S. Treasury. The DOE, however, has experienced
significant delays"Other Matters - Year 2000" section in its efforts and material acceptance is now
expected to occur no earlier than 2010 with the possibility of further
delay being likely. Utilities has been storing spent nuclear fuel on-
site since plant operations began in 1974 and has current on-site
capability to store spent fuel until 2001. Utilities is aggressively
reviewing options for expanding on-site storage. Utilities has been
formally notified by the DOE that they anticipate being unable to begin
acceptance of spent nuclear fuel by January 31, 1998. Utilities is
evaluating courses of action to protect the interests of its customers
and its rights under the DOE contract. Utilities is also evaluating
legislation proposed to the Congress addressing this issue. In July
1996, the IUB initiated a Notice of Inquiry (NOI) on spent nuclear fuel.
One purpose of the NOI was to evaluate whether the current collection of
money from Utilities' customers for payment to the NWF should be placed
in an escrow account in lieu of being paid to the NWF. Utilities
believes that the issue of using an escrow account should be decided at
the federal level rather than the state level. Utilities cannot predict
the outcome of this NOI.
The Low-Level Radioactive Waste Policy Amendments Act of 1985
mandated that each state must take responsibility for the storage of low-
level radioactive waste produced within its borders. The State of Iowa
has joined the Midwest Interstate Low-Level Radioactive Waste Compact
Commission (Compact), which is planning a storage facility to be located
in Ohio to store waste generated by the Compact's six member states. At
December 31, 1996, Utilities has prepaid costs of approximately
$1.1 million to the Compact for the building of such a facility. A
Compact disposal facility is anticipated to be in operation in
approximately ten years after approval of new enabling legislation by
the member states. Such legislation was approved in 1996 by all six
states that are members of the Compact. Final approval by the U.S.
Congress is now required. On-site storage capability currently exists
for low-level radioactive waste expected to be generated until the
Compact facility is able to accept waste materials. In addition, the
Barnwell, South Carolina disposal facility has reopened for an
indefinite time period and Utilities is in the process of shipping to
Barnwell the majority of the low-level radioactive waste it has
accumulated on-site, and currently intends to ship the waste it produces
in the future as long as the Barnwell site remains open, thereby
minimizing the amount of low-level waste stored on-site. However,
management of the Barnwell site has modified its fee schedule to
emphasize total radioactivity content and weight, instead of the
historical volume related fees. Utilities is evaluating the outcome of
these changes on its potential future disposal costs at the Barnwell
site; such changes could result in a revision to Utilities' future
disposal plans.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric
sources may result in adverse health effects has been the subject of
increased public, governmental, industry and media attention. A recent
study completed by the National Research Council concluded that the
current body of evidence does not support the notion that exposure to
these fields may result in adverse health effects. Utilities will
continue to monitor the events in this area, including future scientific
research.
Whiting is responsible for certain dismantlement and abandonment
costs related to various off-shore oil and gas properties. Refer to
Note 13(f) of Industries' Notes to Consolidated Financial Statements for
a further discussion.
Utilities was notified in 1986 that it was designated by the EPA as
a PRP (there are 832 in total) for the investigation and cleanup of the
Maxey Flats Nuclear Disposal site at Morehead, Kentucky. The EPA notice
encouraged all PRPs to undertake voluntary clean up activities at the
site. A Steering Committee was organized and Utilities is participating
in its activities. The Steering Committee has reached settlement of the
issues with the EPA, the State of Kentucky and deminimis parties.
Consent Decrees have been finalized and Utilities' share of the cost is
estimated at $250,000, which is included in the $53 million of
environmental liabilities the Company has recorded at December 31, 1996.
Refer to Note 13 of Industries' Notes to Consolidated Financial
Statements for further discussion of environmental matters.
Other Information Relating to Utilities Only
COMPETITION. Utilities and its predominant business, electric
energy generation, transmission and distribution, are in a period of
fundamental change in the manner in which customers obtain, and energy
suppliers provide, energy services. As legislative, regulatory,
economic and technological changes occur, electric utilities are faced
with increasing pressure to become more competitive. Such competitive
pressures could result in loss of customers and an incurrence of
stranded costs (i.e., the cost of assets rendered unrecoverable as the
result of competitive pricing). To the extent stranded costs cannot be
recovered from customers, they would be borne by security holders.
The National Energy Policy Act of 1992 addresses several matters
designed to promote competition in the electric wholesale power
generation market. In April 1996, the FERC issued final rules (FERC
Orders 888 and 889), largely confirming earlier proposals, requiring
electric utilities to open their transmission lines to other wholesale
buyers and sellers of electricity. The rules became effective on July
9, 1996. Utilities filed conforming pro-forma open access transmission
tariffs with the FERC which became effective October 1, 1995. In
response to FERC Order 888, Utilities filed its final pro-forma tariffs
with FERC on July 9, 1996. The non-rate provisions of the tariffs were
approved on November 13, 1996. FERC has not yet ruled on the rate
provisions of the tariffs. The geographic position of Utilities'
transmission system could provide revenue opportunities in the open
access environment. The Company cannot predict the long-term
consequences of these rules on its results ofoperations or financial
condition.
FERC does not have jurisdiction over the retail jurisdiction, and
thus the final FERC rules do not provide for the recovery of stranded
costs resulting from retail competition. The various states retain
jurisdiction over the question of whether to permit retail competition,
the terms of such retail competition and the recovery of any portion of
stranded costs that are ultimately determined by FERC and the states to
have resulted from retail competition.
The IUB initiated a Notice of Inquiry (Docket No. NOI-95-1) in
early 1995 on the subject of "Emerging Competition in the Electric
Utility Industry" to address all forms of competition in the electric
utility industry and to gather information and perspectives on electric
competition from all persons or entities with an interest or stake in
the issues. In January 1996, the IUB created its own timeline for
evaluating industry restructuring in Iowa. Included in the IUB's
process was the creation of a 22-member advisory panel, of which
Utilities is a member. The IUB conducted public information meetings
around the State of Iowa. A draft report was created by the IUB staff
and is expected to be finalized in the first quarter of 1997. The draft
report indicated that the IUB is of the opinion that there is no
compelling reason to move quickly into restructuring the electric
utility industry in Iowa. However, they will continue the analysis and
debate on restructuring and retail competition in Iowa.
As part of Utilities' strategy for the emerging and competitive
power markets, Utilities, IPC, WP&L and a number of other utilities have
proposed the creation of an independent system operator (ISO) for the
companies' power transmission grid. The companies would retain
ownership and control of the facilities, but the ISO would set rates for
access and assure fair treatment for all companies seeking access. The
proposal requires approval from state regulators and the FERC. Various
other proposals for ISO's have been made by other companies and
Utilities is monitoring all such proposals. Membership in an ISO could
become a condition of merger approval by the various regulatory bodies.
Utilities is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). If a portion of Utilities' operations
become no longer subject to the provisions of SFAS 71, as a result of
competitive restructurings or otherwise, a write-down of related
regulatory assets would be required, unless some form of transition cost
recovery is established by the appropriate regulatory body. In
addition, the Company would be required to determine any impairment to
other assets and write-down such assets to their fair value. Utilities
believes that it still meets the requirements of SFAS 71.
The Company cannot predict the long-term consequences of these
competitive issues on its results of operations or financial condition.
The Company's strategy for dealing with these emerging issues includes
seeking growth opportunities, continuing to offer quality customer
service, ongoing cost reductions and productivity enhancements, the
major objective of which is to allow Utilities to better prepare for a
competitive, deregulated electric utility industry. In this connection,
Utilities is in the final stages of a significant process improvement
program to improve its service levels, reduce its cost structure and
become more market-focused and customer oriented. (The Company's
continuous improvement efforts, in general, will be an ongoing effort,
however).
Examples of the process improvement changes being implemented are,
but are not limited to: managing the business in business unit form,
rather than functionally; formation of alliances with vendors of certain
types of material and/or services rather than opening most purchases to
a bidding process; changing standards and construction practices in
transmission and distribution areas; changing certain work practices in
power plants; making investments in information technology upgrades; and
improving the method by which service is delivered to customers in all
customer classes. The specific changes range from simple improvements
in current operations to radical changes in the way work is performed
and service is delivered. Some of the changes are currently in the
pilot stage thus the results from this evaluation period or the
potential effects of the pending merger could prove that some of the
changes are not efficient or effective and must be revised or
eliminated. Subject to delays caused by implementing any such
revisions, implementation of the changes began in 1996 and will continue
into 1997; however, certain results will not be realized until 1997. In
addition, the Company must give consideration to the potential effects
of the pending merger as part of the implementation process so that
duplication of efforts are avoided.
RATE MATTERS. Refer to Note 3 of Industries' Notes to Consolidated
Financial StatementsItem 7. MD&A for a
discussion of Utilities' rate matters,
includingIEC's Year 2000 initiatives.
C. INFORMATION RELATING TO UTILITY OPERATIONS
IEC realized 56%, 39%, 3% and 2% of its electric price freeze proposals.
ELECTRIC OPERATIONS -
General Utilities' net peak load (60 minutes integrated) of 1,833,203
kilowatts occurred on August 6, 1996,utility revenues in 1998 in
Iowa, Wisconsin, Minnesota and represented a new energy peak
demand record. At the timeIllinois, respectively. Approximately 87% of the
peak load, 75 interruptible customerselectric revenues were interrupted representing approximately 206,000 kilowattsregulated by the respective state commissions while the
other 13% were regulated by the FERC. IEC realized 58%, 36%, 3% and 3% of a
possible 382,259 kilowatts available for interruption. Utilities'
additional reserve obligation atits
gas utility revenues in Iowa, Wisconsin, Minnesota and Illinois, respectively,
during the timesame period.
IESU realized 100% of its electric and gas utility revenues in 1998 in Iowa.
Approximately 93% of the peak was 262,980
kilowatts andelectric revenues in 1998 were regulated by the net capability of Utilities' generating stations was
1,864,390 kilowatts, with an additional 232,000 kilowatts being
available under purchase contracts, thereby providing an aggregate
capability of 2,096,390 kilowatts.
Utilities projects an electric sales growth rate of approximately 2
to 3 percent per year overIUB
while the next five years, which will be metother 7% were regulated by a
mixthe FERC.
WP&L realized 98% of its existing generation, capacity purchaseselectric utility revenues in 1998 in Wisconsin and new construction.
The construction activities will be undertaken2%
in a fashion that best
meetsIllinois. Approximately 79% of the needselectric revenues in 1998 were regulated
by the PSCW or the ICC while the other 21% were regulated by the FERC. WP&L
realized 96% of individual customersits gas utility revenues in 1998 in Wisconsin and 4% in Illinois
during the system as a whole. See
Note 13(b)same period.
IPC realized 77%, 17% and 6% of Industries' Notesits electric utility revenues in 1998 in Iowa,
Minnesota and Illinois, respectively. Approximately 92% of the electric revenues
were regulated by the respective state commissions while the other 8% were
regulated by the FERC. IPC realized 70%, 22% and 8% of its gas utility revenues
in Iowa, Minnesota and Illinois, respectively, during the same period.
UTILITY INDUSTRY OUTLOOK
Refer to Consolidated Financial Statementsthe "Utility Industry Outlook" section in Item 7. MD&A for a discussion
of Utilities' firm contractsvarious competitive issues impacting utility operations.
ELECTRIC UTILITY OPERATIONS
General
IESU provides electricity in Iowa. As of December 31, 1998, IESU provided
electricity to approximately 341,000 retail customers in approximately 525 Iowa
communities. IESU also currently provides electricity to five wholesale
customers. WP&L provides electricity in 34 counties in southern and central
Wisconsin and four counties in northern Illinois. As of December 31, 1998, WP&L
provided retail electric service to approximately 401,000 customers in 599
communities and wholesale service to 24 municipal utilities, one privately owned
utility, three rural electric cooperatives, one Native American nation and to
the Wisconsin Public Power, Inc. system for the purchaseprovision of capacity.
Utilities'retail service to
14 communities. IPC provides electricity in portions of 22 counties in northern
and northeastern Iowa, in portions of 22 counties in southern Minnesota and in
portions of five counties in northwestern Illinois. As of December 31, 1998, IPC
provided retail electric facilitiesservice to approximately 166,000 customers in 234
communities and wholesale service to 10 small communities.
The percentages of utility operating revenues and utility operating income from
electric utility operations for each individual company for the year ended
December 31, 1998 were as follows:
Percent of Percent of
Operating Operating
Revenues Income
------------- -------------
IESU 79.2% 92.5%
WP&L 84.0 94.3
IPC 88.0 89.5
7
Electric sales are interconnectedseasonal to some extent with certain Iowa
and neighboring utilities. Also, Utilities is a member of the Mid-Continent Area Power Pool (MAPP). This pool is comprised of 18
utilities which are Transmission Owning Members (TOMs) and 58 energy-
related companies providing servicesannual peak normally
occurring in the upper midwest region ofsummer months. In 1998, the United States,maximum peak hour demand for IESU
was 1,965 megawatts (MW) and operates pursuant to an agreement which provides foroccurred on June 26, 1998. For WP&L and IPC, the
interchange of electric energy, the sharing of responsibilities for
production capacitymaximum peak hour demands were 2,292 MW and reserve971 MW, respectively, and the supply of electric energy.
Utilities is a party to the Twin Cities-Iowa-St. Louis 345 Kv
Interconnection Coordinating Agreement (the Coordinating Agreement) with
five other midwestern utilities, three of which operate in the State of
Iowa. The Coordinating Agreement provides for the interconnection of
the respective systems of the companies through a 345 Kv transmission
line and for the interchange of powerboth
occurred on various bases. The rates under
the Coordinating Agreement are primarily determined by agreement between
the delivering and receiving companies.
UtilitiesJuly 14, 1998.
IESU maintains and operates transmission and substation facilities connecting
with its high voltage transmission systems pursuant to a non-cancelable
operatingoperation agreement (the Operating Agreement) with Central Iowa Power
Cooperative (CIPCO). The Operating Agreement, which will terminate on December
31, 2035, provides for the joint use of certain transmission facilities of UtilitiesIESU
and CIPCO.
The Resale Power Group of Iowa (RPGI), consisting of virtually all
of Utilities' wholesale customers,IEC has notified Utilities that it will
not purchase its power supply from Utilities after December 31, 1998.
It is possible that certain RPGI customers will drop out of RPGItransmission interconnections at various locations with eleven other
transmission owning utilities in order to remain as Utilities' customers. RPGI will continue to purchase
transmission services from Utilities after December 31, 1998. While the Company cannot determineMidwest. These interconnections enhance the
outcome of this issue at this time, the
result will not have a material adverse effect on its financial position
or results of operations given 1) Utilities' wholesale sales only
accounted for approximately 5% of Utilities' total 1996 electric sales,
excluding off-system sales; 2) Utilities currently has to supplement its
generating capability with purchased power to meet its sales load; and
3) Utilities' annual electric sales growth rate continues to be strong.
Upon consummationoverall reliability of the Proposed Merger, Utilities expectsIEC transmission system and provide access to
realize reduced electric production costsmultiple sources of economic and emergency power and energy.
IESU and IPC are full members of the Mid-Continent Area Power Pool (MAPP). WP&L
is a member of the MAPP Regional Transmission Group. MAPP is one of the ten
regional members of the North American Electric Reliability Council (NERC). Each
regional member of NERC is responsible for maintaining reliability in its area
through coordination of planning and operations. WP&L is also a full member of
the joint dispatchMid-America Interconnected Network, Inc. (MAIN), another regional member of
systems and increased marketing opportunitiesNERC.
In an effort to bring the entire IEC system under one regional organization,
while maintaining flexibility in the wholesaleface of rapid industry changes, IESU, WP&L
and interchange markets through electric interconnections with other
utilities.
For comments relatingIPC have given withdrawal notices to agreements between UtilitiesMAPP and its
partners forWP&L has also given a
withdrawal notice to MAIN. IEC's decision on what regional organization to join
will be dependent upon the joint ownershippotential reorganization of some NERC regions and the
eventual configuration of the DAEC,independent transmission company (ITC). Refer to
the Ottumwa Generating
Station (OGS) and Neal Unit No. 3, see"Utility Industry Outlook" section in Item 7. MD&A for a discussion of IEC's
ITC initiative.
Refer to Item 2. "Properties" and Note 14
of Industries' Notes to Consolidated Financial Statements.for additional information regarding electric
facilities.
Fuel Supply The following table details the sources of the electricity
sold by Utilities during 1996 and expected sources for the following
three years:
Actual /------------ Expected ------------/
1996 1997 1998 1999
Fossil, primarily coal 42% 63% 64% 63%
Nuclear 23 26 23 23
Purchases 35 11 13 14
100% 100% 100% 100%
The 1996 fossil percentage was lower than anticipated because of
several maintenance outages at the various fossil-fueled generating
facilities. Utilities expects its off-system sales in 1997-1999 to be
significantly lower than they were in 1996 as the result of the
implementation of FERC Order 888. This results in a significant
reduction in the purchases figures in 1997-1999. Utilities is
currently on an eighteen-month cycle for nuclear refueling
outages and the above percentages assume outages will
occur during both 1998 and 1999. There was also a refueling outage in
1996.
Utilities' primary fuel source is coal and the generation mix is
influenced directly by refueling outages at the DAEC.
The average cost of fuel per million British thermal units (Btu's) used for
electric generation by UtilitiesIESU, WP&L and IPC for the years 1996-1994 is
presented below:1998, 1997 and 1996 1995was
as follows:
Nuclear Coal All Fuels
------------ ------------ -------------
IESU - 1998 $ 0.605 $ 0.885 $ 0.887
- 1997 0.650 0.958 0.945
- 1996 0.730 0.944 0.937
WP&L - 1998 0.450 1.171 1.085
- 1997 0.450 1.175 1.129
- 1996 0.469 1.155 1.077
IPC - 1998 N/A 1.287 1.344
- 1997 N/A 1.340 1.414
- 1996 N/A 1.437 1.484
Refer to the Electric Operating Information tables for details on the sources of
electric energy for IEC, IESU, WP&L and IPC during 1994 Average costto 1998.
Coal
IEC estimates its 1999 coal requirements will be approximately 12.3 million
tons. Alliant Energy Corporate
8
Services, as an agent of fuel:
Nuclear, per million Btu's $ .73 $ .76 $ .67
Coal, per million Btu's .95 .97 .97
Average for all fuels, per million Btu's .94 .95 .89
The decrease in the average costIESU, WP&L and IPC, has negotiated several agreements
with different suppliers to ensure that a specified supply of coal during 1996 was primarily
due tois available
at known prices for the respective utilities for calendar years 1999, 2000, and
2001. These contracts, in combination with existing agreements, provide for a
decline in Wyomingportfolio of coal pricessupplies that cover approximately 95%, 55% and burning more lower priced
Wyoming coal and less higher priced Illinois Basin coal. The increase
in the average cost of nuclear fuel during 1995 was the result of
compounded interest charges on uranium acquired during the mid-1980's.
Utilities used the last of this uranium during the 1996 refueling
outage. Utilities has entered into a contract to meet its nuclear
fuel needs beyond 1996 and the average cost of such fuel is expected to
be significantly lower than the prior periods.
The following table summarizes Utilities' minimum coal contract
commitments at December 31, 1996:
Average
Annual Maximum estimated base price
Quantity Termination Sulfur per ton of coal delivered
(000s Tons) Date Content 1997 1998 1999
Cordero Mining Co.
(OGS) (1) 774 12/31/01 0.6% $ 18.86 $ 19.40 $ 19.99
Koch Carbon Inc.
(Sutherland) 100 12/31/99 6.2% $ 19.77 $ 20.07 $ 20.37
Powder River Coal Co.
(OGS or BGS) (2) 1,200 12/31/97 0.4% $ 13.19 $ N/A $ N/A
Caballo Coal Co.
(Sutherland) 450 12/31/97 0.5% $ 12.66 $ N/A $ N/A
Caballo Rojo / Ft. Union
(BGS) (3) 714 12/31/97 0.3% $ 14.83 $ N/A $ N/A
Caballo Rojo / Ft. Union
(Prairie Creek) (3) 986 12/31/97 0.3% $ 16.43 $ N/A $ N/A
Franklin Coal Sales Co.
(OGS) 225 9/30/97 0.5% $ 12.68 $ N/A $ N/A
(1) Cost under the contract is comprised of base contract
prices plus specifically contracted periodic adjustments for
increases in certain specific costs of producing the coal.
The effect of such adjustments to the base contract prices of
future coal cannot currently be predicted with any certainty.
(2) The contract covers 1,200,000 annual tons delivered to
either the OGS or the Burlington Generating Station (BGS).
Utilities anticipates that 100%40% of the
total 1997 contract
tonsthree utilities' estimated coal supply needs for the years 1999 through 2001,
respectively. Management believes this portfolio of coal supplies represents a
reasonable balance between ensuring an adequate supply and ensuring that the
prices paid for coal is at the then current market conditions. Remaining coal
requirements will be delivered to OGS. The price listed in the table
is for OGS, with the BGS price being $16.04 per ton.
(3) The contract covers 1,700,000 annual tons to be delivered
to either the Prairie Creek Generating Station (PC) or the
BGS, from either Caballo Rojo or Ft. Union. The price listed
in the table for BGS is for Ft. Union coal and the price
listed in the table for PC is for Caballo Rojo coal. Utilities
anticipates that 100% of PC's shipments will be
Caballo Rojo coal, with BGS shipments being 35% from Caballo
Rojo and the remaining 65% from Ft. Union. The price for
Caballo Rojo coal to BGS is $15.39 per ton.
During 1996, Utilities purchased a total of 3,518,000 tons of coal
for its generating plants. At December 31, 1996, Utilities had a
weighted average of approximately 60 days' usage of coal inventory at
its principal generating stations based upon the 1997 expected usage.
Utilities estimates that its existing coal fired generating units
will require approximately 12,837,000 tons of coal to operate during the
period 1997-1999. The average annual quantities listed in the preceding
table represent Utilities' minimum commitments. Many of the contracts
contain provisions allowing Utilities to purchase additional tons of
coal. Utilities estimates that it has the capability to purchase almost
50% of its 1997-1999 coal requirements under these contracts and will
meet the remainder of its requirementsmet from either future contracts or purchases in the spot
market.
Utilities believes that an ample supplyThe majority of the coal utilized by IEC is from the Wyoming Powder River Basin.
A majority of this coal is availabletransported by rail-car directly from Wyoming to
IEC's generating facilities, with the remainder transported from Wyoming to the
Mississippi River by rail-car and then via barges to the final destination. As
protection against interruptions in coal deliveries, IEC maintains average coal
inventories at its generating stations of 44 to 71 days.
IEC anticipates that its average fossil fuel costs will likely increase in the
spot marketfuture due to meet its needs.
Somecost escalation provisions in existing coal and transportation
contracts. In addition, fuel sulfur restrictions and other environmental
limitations have increased significantly and may increase further the difficulty
and cost of Utilities' contractedobtaining an adequate coal supply is provided by surface
mining operations which are regulated by the Federal Strip Mine Act.
Most of the surface mining coal contracts contain clauses which pass
reclamation and royalty costs through to the respective utility; such
costs billed to Utilities are recoverable through its Energy Adjustment
Clauses (EAC).supply. See Note 1(k) of Industries' Notesthe "Notes to
Consolidated Financial Statements for discussion of the EAC.
A contract for enrichment services and enriched uranium product was
signed with the United States Enrichment Corporation (USEC) in 1995,
which will reduce Utilities' enrichment and uranium costs. This
contract will be effective through 2001 and may extend beyond 2001 if
certain conditions occur. Fabrication of the nuclear fuel is being
performed by General Electric Company for fuel through the 2008
refueling of the DAEC. Utilities believes that an ample supply of
uranium and enrichment services will be available in the future and
intends to purchase such uranium and enrichment services as necessary on
the spot market and/or via medium length (less than five years)
contracts to supplement its current contracts and meet its generation
requirements. See Note 13(f) of Industries' Notes to Consolidated
Financial StatementsStatements" for a discussion of Utilities' assessment under the National Energy Policy Actutilities' rate
recovery of 1992 for the "Uranium Enrichment
Decontamination and Decommissioning Fund," which is based upon prior
nuclear fuel purchases.costs.
Refer to Note 12(b) in the "Notes to Consolidated Financial Statements" for
details relating to IEC's coal purchase commitments.
Purchased Power
During the year ended December 31, 1998, approximately 26.7%, 26.8% and 41.7% of
IESU's, WP&L's and IPC's total kilowatt-hour (KWH) requirements, respectively,
were met through purchased power. Refer to Note 12(b) in the "Notes to
Consolidated Financial Statements" for details relating to purchase power
commitments.
Nuclear
General
IEC owns interests in two nuclear facilities, Kewaunee and DAEC. Kewaunee, a
532-megawatt pressurized water reactor plant, is operated by Wisconsin Public
Service Corporation (WPSC) and is jointly owned by WPSC (41.2%), WP&L (41.0%)
and Madison Gas & Electric Company (MG&E) (17.8%). See Item 1. "Environmental Matters"7. MD&A "Liquidity
and Capital Resources - Nuclear Facilities" for a discussion of nuclear waste disposal issues.
Nuclearan agreement
between WPSC and MG&E regarding future ownership of Kewaunee. The Kewaunee
operating license expires in 2013. DAEC, a 535-megawatt boiling water reactor
plant, is operated by IESU which has a 70% ownership interest in the plant. The
DAEC operating license expires in 2014.
As an owner and the operatorco-owners of a nuclear generating unit at
the DAEC, Utilities isunits, IESU and WP&L are subject to the
jurisdiction of the NRC. The NRC has broad supervisory and regulatory
jurisdiction over the construction and operation of nuclear reactors,
particularly with regard to public health, safety and environmental
considerations.
Utilities' current NRC
license for DAEC expires in 2014.
The operation and design of nuclear power plants is under constant review by the
NRC. Utilities hasIESU and WP&L have complied with and isare currently complying with all NRC
requests for data relating to these reviews. As a result of such reviews,
further changes in operations or modifications of equipment may be required, the
cost of which cannot currently be estimated. Utilities'IESU's and WP&L's anticipated
nuclear-
relatednuclear-related construction expenditures for 1997-20011999-2003 are approximately $33
million.
The$46
million and $37 million, respectively. Refer to "Liquidity and Capital Resources
- - Capital Requirements" in Item 7. MD&A for a further discussion.
DAEC received the highest ratings in its history in the
NRC's last Systematic Assessment of Licensee Performance (SALP) report
by earning the highest score possible (1 on a 3-point scale) in the areas of
plant operations, engineering and plant support and a "good" rating (2) in the
area of maintenance. The SALP evaluation process is
being reviewed along with an overall rebaseliningmaintenance during the NRC's last Systematic Assessment of regulatory strategy
and initiatives byLicensee
Performance (SALP) report in 1997. Kewaunee received the NRC. The results of this NRC effort appear to
include an overall reduction in SALP scores across the nuclear industry.
The effect on the DAEC will be clearer after the current evaluation
period closeshighest score possible
(1) in the second quarterarea of 1997.
Utilities conducted an inspectionmaintenance and
9
a "good" rating (2) in the areas of plant operations, engineering and plant
support during the 1996 refueling outage
of the DAEC reactor core internals. No cracks were identified and no
related repairs were required. Utilities continues its efforts to
monitor and maintain the reactor core internals.
The large number of design documents, drawings, specifications,
license documents, analyses, evaluations, reports, procedures,
instructions and other documents related to nuclear plant design and
operation present a particular challenge to Utilities to make sure all
affected plant documents are updated when changes are made to
a nuclear plant's design or operating practice. The NRC is currently
applying new, and more exacting, interpretations to existing
regulations that resultNRC's last SALP report, which was also received in increased expectations relating to the
level of detail and the scope of the information to be documented.
Utilities has made significant efforts through its configuration
management and design basis programs, and expects to continue
such efforts in the future, to meet the NRC's expectations.1997.
Under the Price-Anderson Amendments Act of 1988 (1988 Act), UtilitiesIESU and WP&L
currently hashave the benefit of $8.9 billion of public liability coverage which would compensate
the public in the event of an accident at a commercial nuclear power plant. The
1988 Act permits such coverage to rise with increased availability of nuclear
insurance and the changing number of operating nuclear plants subject to
retroactive premium assessments. The 1988 Act provides for inflation indexing
(Consumer Price Index every fifth year) of the retroactive premium assessments.
As an outgrowth of the Three Mile Island Nuclear Power Plant (TMI)
experience, nuclear
plant owners have initiated a cooperative insurance program designed to help
cover business interruption expenses for participating utilities arising from a
possible nuclear plant event. Utilities is a participantIESU and WP&L are participants in this program.
This type of insurance is an industry response intended to lessen the cost
burden on customers in the event of a lengthy plant shutdown.
To provide this coverage, a nuclear utility mutual insurance
company known as Nuclear Electric Insurance Limited (NEIL) was formed.
Under Utilities' policy, following a 21 week waiting period from the
time of an accident, coverage of up to 100% of estimated replacement
power costs for an ensuing one year period is provided and up to 80% of
that amount will be provided for a second and third year. The annual
premium cost to Utilities is estimated to be less than the cost of
replacement power for one week.
Utilities currently carries primary property insurance coverage on
the DAEC facility of $500 million with Nuclear Mutual Limited (NML).
Following the TMI incident, it became apparent to nuclear plant owners
that the commercially available property insurance was inadequate
considering the cost of decontamination. Consequently, Utilities
obtained excess property insurance through NEIL, providing an additional
$1.4 billion of coverage after losses exceed $500 million. These
policies bring the total property coverage to $1.9 billion.
For information concerning the potential assessment of retroactive
premiums relating to the above described public liability, replacement
power and excess property insurance coverages, refer to Note 13(e) of
Industries' Notes to Consolidated Financial Statements. The NRC
established requirements with respect to guaranteeing the ability of
owners to make such retroactive payments on the public liability policy.
Of the various alternatives available, Utilities elected to submit
certified financial statements showing that sufficient cash flow could
be generated and would be available for payment of the required
assessments within a three month period. The maximum of the annual
retroactive premiums was approximately $7 million at December 31, 1996.
In the unlikely event of a catastrophic loss at Kewaunee or DAEC, the amount of
insurance available may not be adequate to cover property damage,
decontamination and premature decommissioning. Uninsured losses, to the extent
not recovered through rates, would be borne by UtilitiesWP&L or IESU and could have a
material adverse effect on Utilities'their financial position and results of operations.
Refer to Note 12(e) of the "Notes to Consolidated Financial Statements" for a
further discussion of the nuclear insurance issue.
Kewaunee
WPSC purchases uranium concentrates, conversion services, enrichment services,
and fabrication services for nuclear fuel assemblies at Kewaunee. New fuel
assemblies replace used assemblies that are removed from the reactor every 18
months and placed in storage at the plant site pending removal by the DOE.
Uranium concentrates, conversion services, and enrichment services are purchased
at spot market prices, through a bid process, or using existing contracts. Two
contracts are in place to provide conversion services for nuclear fuel reloads
in 2000 and 2001. A fixed quantity of enrichment services are contracted for
through the year 2004. Additional enrichment services will be acquired under a
contract which is in effect for the life of the plant or by purchases on the
spot market. Fuel fabrication services are contracted well into the next decade
and contain contractual clauses covering force majeure and termination
provisions. A uranium inventory policy requires that sufficient inventory exist
for up to two reactor reloads of fuel. As of December 31, 1998, 947,000 pounds
of yellowcake or its equivalent were held in inventory for the plant.
If, for any reason, the plant were forced to suspend operations permanently,
fuel-related obligations are as follows: 1) there are no financial penalties
associated with the present uranium supply, conversion service and enrichment
agreements, and 2) the fuel fabrication contract contains force majeure and
termination for convenience provisions. As of the end of 1998, WP&L's maximum
exposure would not be expected to exceed $273,000. It is expected that, in such
a case, uranium inventories could be sold on the spot market.
DAEC
A contract for enrichment services and enriched uranium product was signed with
the United States Enrichment Corporation (USEC) in 1995. This contract is
effective through 2003. Fabrication of the nuclear fuel is being performed by
General Electric Company for fuel through the 2011 refueling of DAEC. IESU
believes that an ample supply of uranium and enrichment services will be
available in the future and intends to purchase such uranium and enrichment
services as necessary on the spot market and/or via medium length (less than
five years) contracts to supplement its current contracts and meet its
generation requirements.
Additional discussions of various other nuclear issues relating to Kewaunee and
DAEC are included in Item 1. "Environmental Matters"7. MD&A and the "Notes to the Consolidated Financial
Statements."
10
Power Supply
Refer to "Other Matters - Power Supply" in Item 7. MD&A for a discussion of
nuclear waste disposal issuespower supply concerns.
Electric Environmental Matters
IEC is regulated in environmental protection matters by a number of federal,
state and local agencies. Such regulations are the result of a number of
environmental protection laws passed by the U.S. Congress, state legislatures
and local governments and enforced by federal, state and county agencies. The
laws impacting IEC's operations include the Clean Water Act; Clean Air Act, as
amended by the Clean Air Act Amendments of 1990; National Environmental Policy
Act; Toxic Substances Control Act; Emergency Planning and Community
Right-to-Know Act; Resource Conservation and Recovery Act; Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as
amended by the Superfund Amendments and Reauthorization Act of 1986; Nuclear
Waste Policy Act of 1982; Occupational Safety and Health Act; National Energy
Policy Act of 1992; and a number of others. IEC regularly secures and renews
federal, state and local permits to comply with the environmental protection
laws and regulations. Costs associated with such compliance have increased in
recent years and are expected to increase moderately in the future.
Refer to "Other Matters - Environmental" in Item 7. MD&A and Note 1(g)12 of Industries' Notesthe
"Notes to Consolidated Financial StatementsStatements" for a further discussion of
the
decommissioning of the DAEC.electric environmental matters.
11
ELECTRIC OPERATING COMPARISON
Interstate Energy Corporation
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993 1992 1986- -------------------------------------------------------------------------------------------------------------------------
Electric Operating Information (Utility Only)
- -------------------------------------------------------------------------------------------------------------------------
Operating Revenues (000s):
Operating revenues (000's):
Residential and rural $ 212,799 $ 216,270 $ 199,587 $ 203,870 $ 176,811 $ 160,267
General service 98,196 97,496 97,454 99,221 87,202 75,649
Large general service 213,223 199,840 191,601 184,657 140,496 127,034
Street lighting 8,778 8,810 8,521 8,404 7,241 7,194$519,687 $509,207 $494,649 $498,071 $469,217
Commercial 330,693 320,308 308,480 302,889 296,329
Industrial 477,241 455,912 428,726 412,711 401,097
-----------------------------------------------------------------
Total from ultimate consumers 532,996 522,416 497,163 496,152 411,750 370,144customers 1,327,621 1,285,427 1,231,855 1,213,671 1,166,643
Sales for resale 17,894 17,554 19,195 20,254 18,602 14,963
Off-system 19,490 17,802 18,077 29,400 28,304 34,397199,128 192,346 181,365 143,726 136,839
Other 3,893 2,699 2,892 4,715 4,343 2,091
$ 574,273 $ 560,471 $ 537,327 $ 550,521 $ 462,999 $ 421,595
Energy sales (000's Kwh)40,693 37,980 27,155 24,271 27,322
-----------------------------------------------------------------
Total $1,567,442 $1,515,753 $1,440,375 $1,381,668 $1,330,804
=================================================================
- -------------------------------------------------------------------------------------------------------------------------
Electric Sales (000s MWH) :
Residential and rural 2,633,704 2,680,340 2,484,089 2,518,580 2,146,079 2,122,204
General service 1,231,115 1,242,373 1,170,923 1,166,072 1,061,444 914,665
Large general service 5,500,606 5,283,694 4,990,890 4,581,590 3,320,439 2,629,046
Street lighting 73,381 77,388 77,952 78,004 75,957 78,7546,674 6,699 6,668 6,705 6,276
Commercial 5,095 4,996 4,878 4,816 4,578
Industrial 12,718 12,320 11,666 11,360 10,870
-----------------------------------------------------------------
Total tofrom ultimate consumers 9,438,806 9,283,795 8,723,854 8,344,246 6,603,919 5,744,669customers 24,487 24,015 23,212 22,881 21,724
Sales for resale 514,398 499,719 567,721 561,276 528,752 411,043
Sales7,189 6,768 7,459 5,001 4,757
Other 158 161 161 163 182
-----------------------------------------------------------------
Total 31,834 30,944 30,832 28,045 26,663
=================================================================
- -------------------------------------------------------------------------------------------------------------------------
Customers (End of electricity to customers 9,953,204 9,783,514 9,291,575 8,905,522 7,132,671 6,155,712
Off-system 1,231,298 1,086,121 1,137,219 2,068,015 2,275,616 2,349,985
11,184,502 10,869,635 10,428,794 10,973,537 9,408,287 8,505,697Period):
Residential 773,724 764,604 755,085 744,440 733,866
Commercial 128,430 126,959 125,426 123,786 122,217
Industrial 2,618 2,555 2,472 2,418 2,362
Other 3,267 3,281 3,207 2,749 2,734
-----------------------------------------------------------------
Total 908,039 897,399 886,190 873,393 861,179
=================================================================
- -------------------------------------------------------------------------------------------------------------------------
Other Selected Electric Data:
System capacity at time of peak demand (MW):
Company-owned 5,231 5,257 5,192 5,077 4,960
Firm purchases and sales (net) 618 660 583 547 603
-----------------------------------------------------------------
Total (1) 5,849 5,917 5,775 5,624 5,563
=================================================================
Maximum peak hour demand (MW) (1) 5,228 5,045 4,953 5,032 4,714
Sources of electric energy (000's Kwh)(000s MWH):
Generation:
Fossil, primarily coal 4,972,736 5,775,002 5,522,966 5,356,930 4,317,154 3,983,607Steam 19,119 17,423 17,014 17,606 16,739
Nuclear 4,201 3,874 4,054 4,166 4,501
Purchases 10,033 10,660 10,895 7,416 6,454
Other 504 565 392 349 289
-----------------------------------------------------------------
Total 33,857 32,522 32,355 29,537 27,983
=================================================================
Revenue per KWH from ultimate customers (in
cents) 5.42 5.35 5.31 5.30 5.37
- -------------------------------------------------------------------------------------------------------------------------
(1) 2,753,542 2,610,979 2,875,867 2,264,507 2,402,501 2,095,334
Hydro 7,081 7,690 8,205 7,201 7,579 5,595
7,733,359 8,393,671 8,407,038 7,628,638 6,727,234 6,084,536
Purchases 4,176,700 3,012,934 2,646,673 3,949,296 3,322,182 2,930,845
11,910,059 11,406,605 11,053,711 11,577,934 10,049,416 9,015,381
Net capabilityFigures represent a summation of the individual peak demands of IESU, WP&L
and IPC thus they do not represent the coincident peak of the entire IEC
system.
12
IES Utilities Inc.
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Electric Operating Information
- -----------------------------------------------------------------------------------------------------------------------
Operating Revenues (000s):
Residential $232,662 $227,496 $213,838 $217,351 $200,686
Commercial 168,672 162,626 153,163 150,722 146,119
Industrial 181,369 177,890 160,477 148,529 143,965
------------------------------------------------------------------
Total from ultimate customers 582,703 568,012 527,478 516,602 490,770
Sales for resale 45,453 25,719 37,384 35,356 37,271
Other 11,267 10,539 9,411 8,513 9,286
------------------------------------------------------------------
Total $639,423 $604,270 $574,273 $560,471 $537,327
==================================================================
- -----------------------------------------------------------------------------------------------------------------------
Electric Sales (000s MWH):
Residential 2,661 2,682 2,642 2,690 2,494
Commercial 2,465 2,378 2,315 2,296 2,148
Industrial 4,872 4,743 4,436 4,248 4,015
------------------------------------------------------------------
Total from ultimate customers 9,998 9,803 9,393 9,234 8,657
Sales for resale 1,763 794 1,746 1,586 1,705
Other 42 43 46 50 67
------------------------------------------------------------------
Total 11,803 10,640 11,185 10,870 10,429
==================================================================
- -----------------------------------------------------------------------------------------------------------------------
Customers (End of Period):
Residential 290,348 288,387 286,315 284,154 281,653
Commercial 49,489 48,962 48,593 48,196 47,595
Industrial 705 711 703 695 706
Other 479 442 437 444 451
------------------------------------------------------------------
Total 341,021 338,502 336,048 333,489 330,405
==================================================================
- -----------------------------------------------------------------------------------------------------------------------
Other Selected Electric Data:
System capacity at time of peak load (Kw)demand (MW):
Generating capability 1,864,390 1,873,300 1,741,100 1,733,700 1,718,600 1,626,600
Purchase capability 232,000 207,100 280,000 248,000 207,000 100,000
2,096,390 2,080,400 2,021,100 1,981,700 1,925,600 1,726,600
NetCompany-owned 1,858 1,892 1,864 1,873 1,741
Firm purchases and sales (net) 241 232 232 207 280
------------------------------------------------------------------
Total 2,099 2,124 2,096 2,080 2,021
==================================================================
Maximum peak load (Kw) (2) 1,833,203 1,824,100 1,779,627 1,716,380 1,425,441 1,380,391
Cooling degree days as
percentagehour demand (MW) 1,965 1,854 1,833 1,824 1,780
Sources of normal 89% 128% 99% 89% 72% 106%
Number of customers at year-end 336,048 333,489 330,405 327,265 325,172 299,506electric energy (000s MWH):
Steam 6,417 5,499 4,936 5,759 5,509
Nuclear 2,682 2,904 2,753 2,611 2,876
Purchases 3,385 2,789 4,177 3,013 2,647
Other 199 164 44 24 22
------------------------------------------------------------------
Total 12,683 11,356 11,910 11,407 11,054
==================================================================
Revenue per Kwh (excluding
off-system) in cents 5.57 5.55KWH from ultimate customers (in
cents) 5.83 5.79 5.62 5.59 5.85 6.09 6.29
(1) Represents IES Utilities' 70% undivided interest in the
Duane Arnold Energy Center, which is operated by IES Utilities Inc.
(2)5.67
- -----------------------------------------------------------------------------------------------------------------------
13
Wisconsin Power and Light Company
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Electric Operating Information
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (000s):
Residential $198,770 $199,633 $201,690 $199,850 $194,242
Commercial 108,724 107,132 105,319 102,129 101,382
Industrial 162,771 152,073 143,734 140,562 140,487
------------------------------------------------------------------
Total from ultimate customers 470,265 458,838 450,743 442,541 436,111
Sales for resale 128,536 160,917 131,836 97,350 86,400
Other 15,903 14,388 6,903 6,433 9,236
-----------------------------------------------------------------
Total 614,704 $634,143 $589,482 $546,324 $531,747
==================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Electric Sales (000s MWH) :
Residential 2,964 2,974 2,980 2,938 2,777
Commercial 1,898 1,878 1,814 1,773 1,688
Industrial 4,493 4,256 3,986 3,873 3,765
------------------------------------------------------------------
Total from ultimate customers 9,355 9,108 8,780 8,584 8,230
Sales for resale 4,492 5,824 5,246 3,109 2,574
Other 59 60 minutes integrated.57 54 55
------------------------------------------------------------------
Total 13,906 14,992 14,083 11,747 10,859
==================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Customers (End of Period):
Residential 350,334 343,637 336,933 329,643 322,924
Commercial 47,857 46,823 45,669 44,730 43,793
Industrial 909 855 815 795 776
Other 1,860 1,875 1,820 1,342 1,298
------------------------------------------------------------------
Total 400,960 393,190 385,237 376,510 368,791
==================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Other Selected Electric Data:
System capacity at time of peak demand (MW):
Company-owned 2,345 2,337 2,300 2,176 2,193
Firm purchases and sales (net) 181 145 68 57 40
------------------------------------------------------------------
Total 2,526 2,482 2,368 2,233 2,233
==================================================================
Maximum peak hour demand (MW) 2,292 2,253 2,124 2,197 2,002
Sources of electric energy (000s MWH):
Steam 8,916 8,587 8,687 8,323 7,821
Nuclear 1,519 970 1,301 1,555 1,625
Purchases 3,923 5,744 4,494 2,227 1,786
Other 288 355 303 308 252
-------------------------------------------------------------------
Total 14,646 15,656 14,785 12,413 11,484
==================================================================
Revenue per KWH from ultimate customers (in cents) 5.03 5.04 5.13 5.16 5.30
- -----------------------------------------------------------------------------------------------------------------------------
14
GAS OPERATIONS. With the adventUTILITY OPERATIONS
General
As of FERC Order 636 (Order 636),
issued in 1992, the nature of Utilities' gas supply portfolio has
changed. Order 636, among other things, eliminated the interstate
pipelines' obligation to serve and now requires Utilities to purchase
virtually 100% of its gas supply requirements from non-pipeline
suppliers. Utilities has enhanced access to competitively priced gas
supply and more flexible transportation services as a result of Order
636. However, under Order 636, Utilities is required to pay certain
transition costs incurred and billed by its pipeline suppliers.
Utilities began paying the transition costs in 1993 and at December 31, 1996, has recorded1998, IESU provided retail natural gas service to
approximately 179,000 customers in approximately 212 communities in Iowa. As of
December 31, 1998, WP&L provided retail natural gas service to approximately
159,000 customers in 233 communities in southern and central Wisconsin and one
county in northern Illinois. IPC provides natural gas service in 14 counties
located in northern and northeastern Iowa, southern Minnesota and northwestern
Illinois. As of December 31, 1998, IPC provided retail natural gas service to
approximately 50,000 customers in 41 communities.
The percentages of utility operating revenues and utility operating income from
gas utility operations for each individual company for the year ended December
31, 1998 were as follows:
Percent of Percent of
Operating Operating
Revenues Income
------------- -------------
IESU 17.5% 4.9%
WP&L 15.3 3.9
IPC 12.0 10.5
The gas sales of IESU, WP&L and IPC follow a liabilityseasonal pattern. There is an
annual base load of $4.2 milliongas used for those transition
costs that have been incurred, but not yet billed, by the pipelines to
date, including $2.1 million expected to be billed through 1997.
Utilities is currently recovering the transition costs from its
customers through its Purchased Gas Adjustment Clauses as such costs are
billed by the pipelines. Transition costs, in addition to the recorded
liability, that may ultimately be charged to Utilities could approximate
$3.8 million. The ultimate level of costs to be billed to Utilities
depends on the pipelines' future filings with the FERCheating, cooking, water heating and other
future
events, includingpurposes, with a large peak occurring during the market price of natural gas. However, Utilities
believes any transition costs that the FERC would allow the pipelines to
collect from Utilities would be recovered from its customers, based upon
regulatory treatment of these costs currently and similar past costs by
the IUB. Accordingly, regulatory assets, in amounts corresponding to
the recorded liabilities, have been recorded to reflect the anticipated
recovery.winter heating season.
IESU Gas Supplies
Contracts with the pipelines subsequent to FERC Order 636 are comprised
primarily of firm transportation, firm storage and no-notice service. Firm
transportation contracts grant UtilitiesIESU access to firm pipeline capacity which is
used to transport gas supplies from non-pipeline suppliers and from leased
storage on peak day.days. Firm storage service allows UtilitiesIESU to purchase gas during
off-peak periods and place this gas in an account with the pipelines. When the
gas is needed for peak day deliveries, UtilitiesIESU requests and the pipelines deliver
the gas back on a firm basis. No-notice service grants UtilitiesIESU the right to take
more or less gas than is actually scheduled up to the level of no-notice
service. No-notice service takes the form of transportation balancing or storage
service depending on the pipeline.
Utilities' portfolio ofIESU's firm transportation firm storage and no-
notice service from pipelines iscontract portfolio provides a maximum daily delivery
capability of 278,852 dekatherms (Dth) per day of natural gas as follows:
Firm Firm
Transportation Storage No-Notice
Northern:
Volume (Dekatherm/day) 142,996 48,218 10,000
Expiration date 10/31/97 10/31/97 10/31/97
Natural:
Volume (Dekatherm/day) 28,605 34,014 996
Expiration date 11/30/2000 11/30/98 11/30/98
ANR:
Volume (Dekatherm/day)Northern Natural Natural Gas Pipeline
Gas Company Co. of America
(NNG) (NGPL) ANR Pipeline (ANR)
---------------- -------------------- -----------------
143,996 Dth 74,119 Dth 60,737 19,180 5,000
Expiration date 10/31/2003 10/31/2003 10/31/2003
In addition to firm storage with pipelines, Utilities also
contracts for firm storage from Llano, Inc. This contract calls for peak
day deliveries of 18,667 Dekatherm(Dth)/day and expires May 31, 1997.Dth
Gas supply is purchased from a variety of non-pipeline suppliers located in the
United States and Canada having access to virtually all major natural gas
producing regions. For the calendar year 1996,
Utilities' maximum daily load occurred on February 2, 1996 with total
system flow of approximately 290,987 dekatherms, including transported
volumes, and a total contract availability of approximately 276,352
dekatherms.
As a result of Order 636, Utilities accepted assignment of certain
gas supply contracts previously held by Northern. Accepting assignment
of these contracts resulted in lower costs to Utilities than would have
been incurred had Northern bought out the agreements and billed
Utilities for its share of such costs.
Contracts assigned to Utilities from Northern have maximum delivery
requirements of 13,631 Dth, and minimum take requirements of 2,726 Dth.
AdditionalIESU has firm gas supply agreements were independently negotiated by
Utilities with various non-pipeline
suppliers. These gas supply
agreements have maximum and minimum obligations and will
be delivered through gas transmission pipelines as follows:
Maximum Minimum
Daily Quantity Daily Quantity
(Dth/day) (Dth/day)
Northern 57,569 28,358
Natural 26,575 18,575
ANR 41,000 25,500 These gas supply contracts have expiration dates ranging from a fewthree
months to almost seventhree years. Rates charged by Utilities' suppliers are subject to
regulation by the FERC. Utilities'IESU's tariffs provide for subsequent adjustments
to its natural gas rates for changes in the cost of natural gas purchased for
resale.
SeeRefer to Note 1(k)12(b) of Industries' NotesIESU's "Notes to Consolidated Financial StatementsStatements" for a
discussion of IESU's purchase gas commitments.
15
WP&L Gas Supplies
Prior to 1995, WP&L passed on its costs incurred from natural gas suppliers and
pipeline companies on a dollar-for-dollar basis to its customers. In 1995, the
PGA.PSCW approved implementation of a performance-based rate mechanism for Wisconsin
gas customers. Under this mechanism, fluctuations in the commodity cost of gas
above or below a prescribed commodity price index will increase or decrease
WP&L's margin on gas sales. Both benefits and exposures are subject to customer
sharing provisions. Effective with the UR-110 rate order on April 29, 1997, to
the extent WP&L purchases its gas supply below the index price, WP&L will retain
40% of the savings. The balance of the savings is returned to customers. The
same sharing mechanism exists for gas that is purchased at a cost above the
index price.
In providing gas commodity service to retail gas customers, WP&L administers a
diversified portfolio of transportation contracts with ANR and NNG allowing
access to gas supplies located in the United States and Canada. WP&L's
transportation contracts provide a maximum daily delivery capability of 242,580
Dth per day of natural gas as follows:
ANR NNG Non-Traditional
--- --- ---------------
122,124 Dth 75,056 Dth 45,400 Dth
Two non-traditional arrangements provide WP&L with gas delivered directly to its
"city gate" using the vendors' transportation contract with the interstate
pipelines serving WP&L.
WP&L's contracts also allow access to gas stored in underground storage fields
in the states of Michigan, New Mexico and Oklahoma. Gas purchased in the summer
and delivered in the winter comprise approximately 24% of WP&L's annual gas
requirements.
WP&L maintains purchase agreements with over 50 suppliers of natural gas from
all gas producing regions of the U.S. and Canada. These include six contracts
providing for long-term gas deliveries (i.e., with terms ranging from six months
to ten years). In addition to its direct purchase and sales of natural gas, WP&L
provided transportation service to 185 customers who purchased their own gas,
pursuant to WP&L's transportation tariffs. Refer to Note 12(b) of WP&L's "Notes
to Consolidated Financial Statements" for a discussion of WP&L's purchase gas
commitments.
IPC Gas Supplies
Contracts with the pipelines subsequent to FERC Order 636 are comprised
primarily of firm transportation, firm storage and firm no-notice service. IPC
purchases pipeline transportation capacity from NNG, NGPL and Northern Border
Pipeline Company (NBPL). During 1998, IPC purchased natural gas supplies from
non-pipeline suppliers at market responsive rates. FERC continues to approve the
tariffs of NNG, NGPL, and NBPL regarding transportation capacity and storage
rates, subject to change as rate cases are filed.
IPC's portfolio of firm transportation contracts provide a maximum daily
delivery capability of 79,745 Dth per day of natural gas as follows:
NNG NGPL
--- ----
51,995 Dth 27,750 Dth
IPC maintains gas supply agreements with various non-pipeline suppliers from all
gas producing areas of the U. S. and Canada. These include two long-term
contracts for gas deliveries up to two years. Gas is supplied by producers,
marketers and brokers, as well as from storage services, to meet the peak
heating season requirements.
IPC owns propane-air mix gas plants in Albert Lea, Minnesota and Clinton and
Mason City, Iowa. The daily output capacities are: 2,500 Dth, 4,000 Dth and
4,800 Dth, respectively.
16
IPC's tariffs provide for subsequent adjustments to its natural gas rates for
changes in the cost of natural gas purchased for resale.
IESU's, WP&L's and IPC's gas supply commitments are all index-based.
Gas Environmental Matters
Refer to Note 12 of the "Notes to Consolidated Financial Statements" for a
discussion of gas environmental matters.
17
GAS OPERATING COMPARISON
Interstate Energy Corporation
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993 1992 1986- ------------------------------------------------------------------------------------------------------------------------------
Gas Operating Information (Utility Only)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (000s):
Operating revenues (000's):
IES Utilities Inc.Residential $175,603 $225,542 $216,268 $179,761 $179,694
Commercial 85,842 115,858 108,187 87,951 92,082
Industrial 20,204 27,393 27,569 30,462 40,427
Transportation and other 13,941 25,114 23,931 21,952 12,396
------------------------------------------------------------------
Total $295,590 $393,907 $375,955 $320,126 $324,599
==================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Gas Sales (000s Dekatherms):
Residential $ 97,708 $ 84,562 $ 82,795 $ 90,462 $ 78,685 $ 79,17628,378 33,894 37,165 33,827 32,447
Commercial 46,966 40,390 40,912 45,528 39,780 42,60817,760 21,142 22,613 20,599 20,219
Industrial 12,256 8,790 12,515 15,593 18,649 39,485
156,930 133,742 136,222 151,583 137,114 161,269
Other 3,934 3,550 2,811 2,735 2,341 8815,507 6,217 6,856 6,381 8,709
Transportation and other 52,389 56,719 55,240 54,267 42,730
------------------------------------------------------------------
Total revenues 160,864 137,292 139,033 154,318 139,455 162,150
Industrial Energy Applications, Inc. 113,115 53,047 26,536 27,605 27,627 0
$ 273,979 $ 190,339 $ 165,569 $ 181,923 $ 167,082 $ 162,150
Energy sales (000's dekatherms):
IES Utilities Inc.104,034 117,972 121,874 115,074 104,105
==================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Customers at End of Period (Excluding Transportation and Other):
Residential 17,680 16,302 15,766 16,971 15,098 15,825342,586 337,956 331,919 326,005 319,628
Commercial 10,323 9,534 9,298 10,133 8,479 9,70743,825 43,316 42,658 42,095 41,496
Industrial 3,796 3,098 4,010 4,618 6,175 11,722
31,799 28,934 29,074 31,722 29,752 37,254
Industrial982 963 1,022 1,059 1,058
------------------------------------------------------------------
Total 387,393 382,235 375,599 369,159 362,182
==================================================================
- transported volumes * 10,341 10,871 8,901 7,284 7,283 1,031
Total volumes delivered 42,140 39,805 37,975 39,006 37,035 38,285
Industrial Energy Applications, Inc. * 43,055 31,916 14,443 12,493 14,830 0
85,195 71,721 52,418 51,499 51,865 38,285
*IEA energy sales that are also
included as transported volumes
of IES Utilities Inc. 4,383 4,232 3,134 2,883 2,955 0
Operating statistics for
IES Utilities Inc.:
Cost per dekatherm of gas
purchased for resale $ 3.29 $ 3.13 $ 3.31 $ 3.49 $ 3.36 $ 3.62
Peak daily sendout in dekatherms 290,987 269,545 288,352 268,419 254,989 282,956
Heating degree days as
percentage of normal 109% 101% 96% 103% 93% 94%
Number of customers at year-end 176,238 174,470 172,829 170,719 167,813 164,670------------------------------------------------------------------------------------------------------------------------------
Other Selected Gas Data:
Revenue per dekatherm sold
for(excluding transportation and other) $5.45 $6.02 $5.28 $4.90 $5.09
Purchased gas costs per dekatherm sold
(excluding transportation and other) $3.22 $4.23 $3.61 $3.31 $3.70
- ------------------------------------------------------------------------------------------------------------------------------
18
IES Utilities Inc.
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Gas Operating Information
- ----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (000s):
Residential $86,821 $110,663 $97,708 $84,562 $82,795
Commercial 39,928 54,383 46,966 40,390 40,912
Industrial 10,422 13,961 12,256 8,790 12,515
Transportation and other 4,108 4,510 3,934 3,550 2,811
------------------------------------------------------------------
Total $141,279 $183,517 $160,864 $137,292 $139,033
==================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Gas Sales (000s Dekatherms):
Residential 13,803 16,317 17,680 16,302 15,766
Commercial 8,272 9,602 10,323 9,534 9,298
Industrial 3,089 3,318 3,796 3,098 4,010
Transportation and other 11,316 10,321 10,341 10,871 8,901
------------------------------------------------------------------
Total 36,480 39,558 42,140 39,805 37,975
==================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Customers at End of Period (Excluding Transportation and Other):
Residential 157,135 155,859 154,457 152,873 151,367
Commercial 21,530 21,431 21,364 21,193 21,053
Industrial 398 399 417 404 409
------------------------------------------------------------------
Total 179,063 177,689 176,238 174,470 172,829
==================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Other Selected Gas Data:
Revenue per dekatherm sold
(excluding transported volumes) $ 4.94 $ 4.62 $ 4.69 $ 4.78 $ 4.61 $ 4.33transportation and other) $5.45 $6.12 $4.94 $4.62 $4.69
Purchased gas cost per dekatherm sold
(excluding transportation and other) $3.36 $4.33 $3.27 $3.15 $3.28
- ----------------------------------------------------------------------------------------------------------------------------
Item 2. Properties
Industries19
Wisconsin Power and Light Company
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Gas Operating Information
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (000s):
Residential $65,173 $84,513 $90,382 $70,382 $71,555
Commercial 33,898 45,456 46,703 35,411 38,516
Industrial 5,896 8,378 11,410 17,984 22,629
Transportation and other 6,770 17,536 17,132 15,388 6,946
------------------------------------------------------------------
Total $111,737 $155,883 $165,627 $139,165 $139,646
==================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Gas Sales (000s Dekatherms):
Residential 10,936 12,770 14,297 12,690 11,956
Commercial 7,285 8,592 9,167 8,245 8,128
Industrial 1,422 1,714 1,997 2,144 3,113
Transportation and other 12,948 17,595 18,567 16,870 9,279
------------------------------------------------------------------
Total 32,591 40,671 44,028 39,949 32,476
==================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Customers at End of Period (Excluding Transportation and Other):
Residential 141,065 137,827 133,580 129,576 124,938
Commercial 17,058 16,653 16,083 15,724 15,270
Industrial 506 488 529 566 561
------------------------------------------------------------------
Total 158,629 154,968 150,192 145,866 140,769
==================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Other Selected Gas Data:
Revenue per dekatherm sold
(excluding transportation and other) $5.34 $6.00 $5.83 $5.36 $5.72
Purchased gas cost per dekatherm sold
(excluding transportation and other) $3.13 $4.30 $4.12 $3.64 $3.82
- -----------------------------------------------------------------------------------------------------------------------------
20
D. INFORMATION RELATING TO NONREGULATED OPERATIONS
A description of Alliant Energy Resources' businesses is as follows:
Alliant Energy Resources is a holding company whose wholly-owned subsidiaries
include ISCO, International, Investments, Transportation, HPI and Capital
Square. Alliant Energy Resources also has noa 50% ownership interest in a joint
venture with Cargill Incorporated, named Cargill-Alliant, to market electricity
and risk management services to wholesale customers.
ISCO is a holding company for Alliant Energy Resources' industrial service
companies whose primary wholly-owned subsidiaries include Whiting Petroleum
Corporation (Whiting), Industrial Energy Applications, Inc. (IEA) and Heartland
Environmental Holding Company (HEHC). Whiting is organized to purchase, develop
and produce crude oil and natural gas. IEA offers commodities-based and
facilities-based energy services for customers, including supplying natural gas
and electricity, standby generation, cogeneration, steam production and propane
air systems. IEA also provides energy consulting services for customers and owns
a natural gas gathering system in Texas. HEHC is the holding company for
environmental and engineering services activities. HEHC's primary subsidiary is
RMT, Inc. (RMT). RMT is a Madison, Wisconsin based environmental and engineering
consulting company that serves clients nationwide in a variety of industrial
market segments. The most significant of these markets are chemical companies,
pulp and paper processors, oil and gas providers, foundries and other
manufacturers. RMT specializes in consulting on solid and hazardous waste
management, ground water quality protection, industrial design and hygiene
engineering, and air and water pollution control.
International is a holding company for Alliant Energy Resources' international
investments whose wholly-owned subsidiaries include Alliant International New
Zealand Limited (New Zealand), Grandelight Holding Ltd. (Grandelight),
Interstate Energy Corporation Pte Ltd. (IECP), Alliant Energy Brazil, Inc.
(Brazil) and Alliant Energy de Mexico L.L.C. (Mexico). New Zealand has equity
investments in several New Zealand utility entities. Grandelight has a 65%
equity investment in Peak Pacific Investment Company PTE Ltd. (Peak Pacific).
Peak Pacific has been formed to develop investment opportunities in generation
infrastructure projects in China. IECP has a 50% equity investment in two
individual cogeneration facilities in China. Brazil and Mexico have been formed
for the purposes of potential investments in these two respective countries.
Investments is a holding company whose primary wholly-owned subsidiaries include
Iowa Land and Building Company (Iowa Land) and Village Lakeshares, Inc.
(Lakeshares). Iowa Land is organized to pursue real estate and economic
development activities in IESU's service territory. Lakeshares is a holding
company for resort properties in Iowa. Investments also has direct and indirect
equity interests in various real estate ventures, primarily concentrated in
Cedar Rapids, and holds other than commonpassive investments including an equity interest
in McLeodUSA Inc. (McLeod). At December 31, 1998, IEC's investment in the stock
of affiliates, temporary cash investmentsMcLeod, a telecommunications company, was valued at $320.3 million (based on
a December 31, 1998 closing price of $31.25 per share and cash surrender valuecompared to a cost
basis of corporate life insurance policies.
Utilities'$29.1 million). Refer to Note 5 of the "Notes to Consolidated Financial
Statements" for a further discussion of the McLeod investment.
Transportation is a holding company whose wholly-owned subsidiaries include the
Cedar Rapids and Iowa City Railway Company (CRANDIC) and IES Transfer Services
Inc. (Transfer). CRANDIC is a short-line railway which renders freight service
between Cedar Rapids and Iowa City. Transfer's operations include transloading
and storage services. Transportation also has a 75% equity investment in IEI
Barge Services, Inc. (Barge) which provides barge terminal and hauling service
on the Mississippi River.
HPI, formed in 1988, is responsible for performing asset management,
facilitating the development of and financing of high quality, affordable
housing in Wisconsin and the Midwest. HPI has a majority ownership interest in
60 such properties.
Capital Square was incorporated in 1992 to provide mortgage banking services to
facilitate HPI's development and financing efforts in the affordable housing
market.
21
ITEM 2. PROPERTIES
WP&L
WP&L's principal electric generating stations at December 31, 1996, are1998, were as
follows:
Name and Location Major Fuel Minimum Net Kilowatts Accredited1998 Summer Capability
of Station Type in Kilowatts
- ----------------------------------------------------------- -------------- --------------------------------------
Kewaunee Nuclear Power Plant, Kewaunee, WI Nuclear 204,200 (1)
Rock River Generating Station, Janesville, WI Coal 164,000
Nelson Dewey Generating Station, Cassville, WI Coal 226,000
Edgewater Generating Station #3, Sheboygan, WI Coal 76,000
Edgewater Generating Station #4, Sheboygan, WI Coal 237,300 (2)
Edgewater Generating Station #5, Sheboygan, WI Coal 306,000 (3)
Columbia Energy Center, Portage, WI Coal 494,400 (4)
-------------
Total Coal 1,503,700
Blackhawk Generating Station, Beloit, WI Gas 58,000
Rock River Combustion Turbine, Janesville, WI Gas and Oil 148,000
South Fond du Lac Combustion Turbine
Units 2 and 3, Fond du Lac, WI Gas and Oil 169,000
Sheepskin Combustion Turbine, Edgerton, WI Gas and Oil 37,000
-------------
Total Gas and Oil 412,000
Kilbourn Hydro Plant, Wisconsin Dells, WI Hydro 9,000
Prairie du Sac Hydro Plant, Prairie du Sac, WI Hydro 30,000
Petenwell/Castle Rock Hydro Plants,
Wisconsin Rapids, WI Hydro 13,300 (5)
Shawano Hydro, Shawano, WI Hydro 409
-------------
Total Hydro 52,709
-------------
Total generating capability 2,172,609
=============
(1) Represents WP&L's 41% ownership interest in this 498,000 Kw
generating station. The plant is operated by WPSC.
(2) Represents WP&L's 68.2% ownership interest in this 348,000 Kw
generating station. The plant is operated by WP&L.
(3) Represents WP&L's 75% ownership interest in this 408,000 Kw
generating station. The plant is operated by WP&L.
(4) Represents WP&L's 46.2% ownership interest in this 1,070,000 Kw
generating station. The plant is operated by WP&L.
(5) Represents WP&L's 33.3% ownership interest in this 40,000 Kw hydro
plant. The plant is operated by Wisconsin River Power Company.
WP&L owns 2,771 miles of electric transmission lines and 375 substations located
adjacent to the communities served, of which substantially all are in Wisconsin.
Substantially all of WP&L's facilities are subject to the lien of its First
Mortgage Bond indenture and are suitable for their intended use.
22
IESU
IESU's principal electric generating stations at December 31, 1998, were as
follows:
Name and Location Major Fuel 1998 Summer Capability
of Station Type in Kilowatts
- ----------------------------------------------------------- ------------- --------------------------------------
Duane Arnold Energy Center, Palo, Iowa Nuclear 364,000 (1)
Ottumwa Generating Station, Ottumwa, Iowa Coal 343,440324,000 (2)
Prairie Creek Station, Cedar Rapids, Iowa Coal 205,500212,500
Sutherland Station, Marshalltown, Iowa Coal 143,000139,000
Sixth Street Station, Cedar Rapids, Iowa Coal 65,000
Burlington Generating Station, Burlington, Iowa Coal 211,800200,000
George Neal Unit 3, Sioux City, Iowa Coal 144,200 (3)
-------------
Total Coal 1,112,9401,084,700
Peaking Turbines, Marshalltown, Iowa Oil 162,500216,400
Centerville Combustion Turbines, Centerville, Iowa Oil 48,60062,000
Diesel Stations, all in Iowa Oil 12,2008,300
-------------
Total Oil 223,300286,700
Grinnell Station, Grinnell, Iowa Gas 45,30030,000
Agency Street Combustion Turbines,
West Burlington, Iowa Gas 57,70076,700
Burlington Combustion Turbines, Burlington, Iowa Gas 63,100 (4)68,000
Red Cedar Combustion Turbine, Cedar Rapids, IowaIA Gas 18,800 (5)22,700
-------------
Total Gas 184,900197,400
-------------
Total generating capability 1,885,1401,932,800
=============
(1) Represents IESU's 70% ownership interest in this 520,000 Kw
generating station. The plant is operated by IESU.
(2) Represents IESU's 48% ownership interest in this 675,000 Kw
generating station. The plant is operated by IESU.
(3) Represents IESU's 28% ownership interest in this 515,000 Kw
generating station which is operated by MidAmerican Energy Company.
(1) Represents Utilities' 70% ownership interest in this 520,000
Kw generating station. The plant is operated by Utilities.
(2) Represents Utilities' 48% ownership interest in this 715,500
Kw generating station. The plant is operated by Utilities.
(3) Represents Utilities' 28% ownership interest in this 515,000
Kw generating station which is operated by an unaffiliated
utility.
(4) Burlington Combustion Turbine Unit 3 became operational June
28, 1996.
(5) Red Cedar Cogeneration Station became operational December 13,
1996.
At December 31, 1996, the transmission lines of Utilities,IESU, operating from 34,000 to 345,000 volts,
approximated 4,4364,440 circuit miles (substantially all located in Iowa). UtilitiesIESU owned
108 transmission580 substations (all(substantially all located in Iowa) with a total installed capacity of
8,647 MVa and 468 distribution substations (all located in Iowa) with a
total installed capacity of 2,626 MVa.
Subsidiaries other than Utilities also own property which primarily
represents investments in transportation, energy-related, telecommunications
and real estate properties.
The Company's.
IESU's principal properties are suitable for their intended use. Utilities' principal propertiesuse and are held
subject to liens of indentures relating to its bonds.
Item23
IPC
IPC's principal electric generating stations at December 31, 1998, were as
follows:
Name and Location Major Fuel 1998 Summer Capability
of Station Type in Kilowatts
- ----------------------------------------------------------- -------------- --------------------------------------
Dubuque Units 2, 3 and 4, Dubuque, IA Coal 78,000
M. L. Kapp Plant Units 1 and 2, Clinton, IA Coal 235,000
Lansing Units 1, 2, 3 and 4, Lansing, IA Coal 320,000
Fox Lake Plant Units 1, 2 and 3, Sherburn, MN Coal 108,000
George Neal Unit 4, Sioux City, IA Coal 141,900 (1)
Louisa Unit 1, Louisa, IA Coal 28,400 (2)
-------------
Total Coal 911,300
Montgomery Unit 1, Montgomery, MN Gas 22,200
Fox Lake Plant Unit 4, Sherburn, MN Gas 21,300
Lime Creek Plant Units 1 and 2, Mason City, IA Gas 70,000
-------------
Total Gas 113,500
Dubuque Units 1 and 2, Dubuque, IA Oil 4,600
Hills Units 1 and 2, Hills, MN Oil 4,000
Lansing Units 1 and 2, Lansing, IA Oil 2,000
New Albin Unit 1, New Albin, IA Oil 700
-------------
Total Oil 11,300
-------------
Total generating capability 1,036,100
=============
(1) Represents IPC's 21.5% ownership interest in this 660,000 Kw
generating station. The plant is operated by MidAmerican Energy
Company.
(2) Represents IPC's 4% ownership interest in this 710,000 Kw generating
station. The plant is operated by MidAmerican Energy Company.
IPC owns 2,598 miles of electric transmission lines and 224 substations located
in Iowa, Illinois and Minnesota. Substantially all of IPC's facilities are
subject to the lien of its bond indenture securing IPC's outstanding First
Mortgage Bonds and are suitable for their intended use.
Alliant Energy Resources
Alliant Energy Resources owns property which primarily represents
transportation, energy-related, affordable housing project developments and real
estate properties.
24
ITEM 3. Legal ProceedingsLEGAL PROCEEDINGS
IEC
On April 30, 1996, Utilities filed suit, IES Utilities Inc. v. Home
Ins. Co., et al., No. 4-96-CV-10343 (S.D. Iowa filed Apr. 30, 1996),
against various insurers who had sold comprehensive general liability
policies to Iowa Southern Utilities Company (ISU)17, 1998, MG&E and Iowa Electric
Light and Power Company (IE) (Utilities was formed asCitizens Utility Board appealed the result of a
merger of ISU and IE). The suit seeks judicial determinationdecision of the
respective rights ofSecurities and Exchange Commission (SEC) approving the parties, a judgment that each defendant is
obligated under its respective insurance policiesMerger, Madison Gas and
Electric Company and Citizens Utility Board v. Securities and Exchange
Commission. On May 15, 1998, IEC moved to payintervene in full all
sums that Utilities has become or may become obligated to pay in
connection with its defense against allegations of liability for
property damage at and around FMGP sites, and indemnification for all
sums that it has or may become obligated to pay for the investigation,
mitigation, prevention, remediation and monitoring of damage to
property, including damage to natural resources like groundwater, at and
around the FMGP sites. Settlement discussions are proceeding between
Utilities and its insurance carriers regarding the recovery of these
FMGP-related costs. Settlement has been reached with two carriers and
an agreement in principle has been reached with three other carriers
thus far. Any amounts received from insurance carriers will be deferred
pending a determination of the regulatory treatment of such recoveries.
Industries, Diversified, IES Energy, MicroFuel Corporation (the
Corporation) now known as Ely, Inc. in which IES Energy has a 69.40%
equity ownership, and other parties have been sued in Linn County
District Court in Cedar Rapids, Iowa, by Allen C. Wiley. Mr. Wiley
claims money damages on various tort and contract theories arising out
of the 1992 sale of the assets of the Corporation, of which Mr. Wiley
was a director and shareholder. All of the defendants in Mr. Wiley's
suit answered the complaint and denied liability. Industries and
Diversified were dismissed from the suit in a motion for summary
judgment. In addition, a grant of summary judgment has reduced Mr.
Wiley's claims against the remaining parties to breach of fiduciary
duty. A separate motion for summary judgment, which was filed seeking
dismissal of the remaining claims against the remaining parties, was
overruled on September 20, 1996,this appeal and the
trial has been set for May 1998.
All of the defendants are vigorously contesting the claims.
The Corporation commenced a separate suit to determine the fair
value of Mr. Wiley's shares under Iowa Code section 490. A decision was
issued on August 31, 1994, by the Linn County District Court ruling that
the value of Mr. Wiley's shares was $377,600 based on a 40 cent per
share valuation. The Corporation contended that the value of Mr. Wiley's
shares was 2.5 cents per share. The Decision was appealed to the Iowa
Supreme Court by the Corporation on a number of issues, including the
Corporation's position that the trial court erred as a matter of law in
discounting the testimony of the Corporation's expert witness. The Iowa
Supreme Court assigned the case to the Iowa Court of Appeals. On
February 2, 1996, the IowaUnited States Court of Appeals reversedfor the District Court
ruling after determiningof Columbia District granted the
District Court erred in discountingmotion. Briefs were filed with the expert testimony.court and oral arguments were held on January
13, 1999. The case was remanded back to the District Court for
consideration of the expert testimony, but with no additional evidence
taken. The District Court re-affirmedcourt issued its original decision on August
28, 1996,March 16, 1999 upholding the SEC's
decision in approving the Merger and denying the Corporation has again appealed to the Iowa Supreme
Court.
On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda)
filed a request with the IUB that the IUB initiate formal complaint
proceedings against Utilities. Lambda alleges that Utilities is
discriminating against it by refusing to enter into contracts with itpetition for remote displacement service and by favoring IEA in such matters. On
October 17, 1996, Utilities filed a Response which denied the
allegations, and alleged, inter alia, that Lambda is unlawfully
attempting to provide retail electrical services in Utilities' exclusive
service territory. The IUB has set the matter for hearing on March 17,
1997. A decision is expected in the second quarter of 1997.review.
IESU
On October 9, 1996, the CompanyIES filed a civil suit in the Iowa District Court in and for
Linn County against Lambda Energy Marketing Company, L.C., Robert Latham, Louie
Ervin, and David Charles (collectively the "Defendants", including
three(three former employees of the CompanyIES and/or its
subsidiaries), collectively the "Defendants", alleging, inter alia, violations
of Iowa's trade secret act and interference with existing and prospective
business advantage. On November 1, 1996, the Defendants filed their Answer and
Counterclaims alleging, inter alia, violation of Iowa competition law, tortious
interference and commercial disparagement. The Defendants therewith also filed a
Third-Party Petition against Utilities,IESU, IEA and Lee Liu, then Chairman of the Board
&and Chief Executive Officer of IndustriesIES and Utilities,IESU, alleging, inter alia, tortious
interference and commercial disparagement. ReferenceThe case was dismissed by mutual
consent on December 31, 1998.
IESU is made to Notesin discussions with environmental regulators regarding certain
environmental permit issues. For a discussion of these matters, see Item 7.
MD&A, "Other Matters - Environmental," which information is incorporated herein
by reference.
IPC
IPC is in discussions with environmental regulators regarding various issues at
generating facilities in Clinton, Iowa, Dubuque, Iowa and Lansing, Iowa. For a
discussion of these matters, see Item 7. MD&A, "Other Matters Environmental,"
which information is incorporated herein by reference.
Environmental Matters
The information required by Item 3 and 13 of Industries' Notesis included in Item 8. "Notes to Consolidated
Financial Statements, for a discussion of Utilities' rate
proceedings" Note 12 and the Company's environmental matters, respectively. Also
see Item 1. "Business"Other Matters - Environmental Matters" andEnvironmental" in Item 7.
"Management's DiscussionMD&A, which information is incorporated herein by reference.
Rate Matters
The information required by Item 3 is included in "Liquidity and Analysis of the Results of OperationsCapital
Resources - Rates and Financial Condition - Environmental Matters."Regulatory Matters" in Item 7. MD&A, which information is
incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Security HoldersSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
PART II
ItemITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
IES Industries Inc.
(a) Price Range of Industries' Common Stock and Dividends
Declared
Industries' Common Stock is listedMARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
IEC's common stock trades on the New York Stock Exchange (NYSE) under the symbol "IES."LNT."
The table below sets forth, for the
calendar quarters indicated, the reported highQuarterly price ranges and low sales prices of
Industries' Common Stock as reported on the NYSE Composite Tape based on
published financial sources, and the dividends declared per share on
Industries' Common Stock.
Industries' Common stock
High Sale Low Sale Dividend (i)
1996
First Quarter $ 29 5/8 $ 26 1/2 $ .525
Second Quarter 30 1/8 25 1/2 .525
Third Quarter 34 3/4 29 .525
Fourth Quarter 31 1/2 29 .525
Year $ 34 3/4 $ 25 1/2 $ 2.10
1995
First Quarter $ 27 5/8 $ 24 5/8 $ .525
Second Quarter 26 3/8 20 3/8 .525
Third Quarter 26 3/4 21 3/8 .525
Fourth Quarter 28 1/2 25 7/8 .525
Year $ 28 1/2 $ 20 3/8 $ 2.10
The closing price of Industries'with respect to IEC's common stock onwere as
follows (amounts for periods prior to the consummation of the Merger represent
data for WPL Holdings, Inc.):
1998 1997
------------------------------------------ -------------------------------------------
Quarter High Low Dividend High Low Dividend
------- ---- --- -------- ---- --- --------
First $33 7/8 $31 1/2 $0.50 $28 7/8 $27 3/8 $0.50
Second 35 3/8 29 5/8 0.50 28 1/4 26 3/4 0.50
Third 32 1/8 28 0.50 29 27 0.50
Fourth 34 29 3/4 0.50 34 7/16 28 3/8 0.50
=========== =========== ============ =========== =========== ===========
Year $35 3/8 $28 $2.00 $34 7/16 $26 3/4 $2.00
=========== =========== ============ =========== =========== ===========
Stock price at December 31, 1996
was $29 7/8.
(i) Industries has paid regular quarterly dividends on its
common stock since April 1, 1950.1998: $32 1/4
Although Industries'IEC's practice has been to pay common stock dividends quarterly, the
timing of payment and amount of future dividends are necessarily dependent upon
earnings, financial requirements and other factors.
(b) Approximate Number of Equity Security Holders of Industries
Approximate Number of Record
Title of Class Holders (as ofAt December 31, 1996)1998, there were approximately 76,943 holders of record of IEC's
stock including underlying holders in IEC's Shareowner Direct Plan.
IEC is the sole common shareowner of all 13,370,788 shares of IESU Common Stock
no par value 27,468
(c) Restrictioncurrently outstanding. During 1998, 1997 and 1996, IESU declared dividends on
Payment of Dividends by Industries
Under provisions of the Merger Agreement, Industries' annual
dividend payment cannot exceed $2.10 per share, the current annual
payment level, pending the Proposed Merger.
See Item 1, "Proposed Merger of the Company" for a further
discussion of Industries' pending merger.
IES Utilities Inc.
(a) Price Range of Utilities' Common Stock and Dividends
Declared
All outstandingits common stock of Utilities is held by$19 million, $56 million and $44 million, respectively, to
its parent
(Industries), and is not traded.
(b) Approximate Number of Equity Security Holders of Utilities
All outstanding common stock of Utilities is held by its parent
(Industries).
(c) Restriction on Payment of Dividends by Utilities
Utilitiesparent. IESU has the right under the terms of theits Subordinated Deferrable
Interest Debentures, so long as an Event of Default (as defined therein) has not
occurred and is not continuing, to extend the interest payment period at any
time and from time to time on the Subordinated Deferrable Interest Debentures to
a period not exceeding 20 consecutive quarters. If UtilitiesIESU exercises its right to
extend the interest payment period, UtilitiesIESU may not, during any such extended
interest payment period, declare or pay dividends on, or redeem, purchase or
acquire, or make any liquidation payment with respect to, any of its capital
stock or make any guarantee payment with respect to the foregoing. UtilitiesIESU does not
intend to exercise its right to extend the interest payment period.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data,IEC is the sole common shareowner of all 13,236,601 shares of WP&L common stock
currently outstanding. During 1998, 1997 and 1996, WP&L paid dividends on its
common stock of $58 million, $58 million and $66 million, respectively, to its
parent. Under rate order UR-110, the PSCW ordered that it must approve the
payment of dividends by WP&L to IEC that are in excess of the level forecasted
in the opinionrate order ($58.3 million), if such dividends would reduce WP&L's average
common equity ratio below 52.00% of total capitalization. The dividends paid by
WP&L to IEC since the rate order was issued have not exceeded the level
forecasted in the rate order.
On December 29, 1998, IEC issued 260,039 shares of IEC common stock to Alan R.
Staab in exchange for all the issued and outstanding common stock of Golden Gas
Production Company. The common stock issued by IEC was issued in a transaction
exempt from registration pursuant to Section 4(2) of the Company, includes adjustments, which are normal and recurring in
nature, necessary for the fair presentationSecurities Act of the results of operations
and financial position. See Item 7. "Management's Discussion and
Analysis of the Results of Operations and Financial Condition" for a
discussion of transactions that affect the comparability of the years
1996-1994.
The 1996 results were affected by costs incurred relating to the
successful defense of the hostile takeover attempt mounted by
MidAmerican Energy Company. The 1995 results were affected by the
impact of the IUB price reduction order in Utilities' last electric rate
case and significantly warmer than normal weather. The 1993 results
were affected by the acquisition of the Iowa service territory from
Union Electric Company on December 31, 1992.
The Selected Consolidated Financial Data should be read in
conjunction with the Consolidated Financial Statements, the Notes to
Consolidated Financial Statements and Management's Discussion and
Analysis of the Results of Operations and Financial Condition contained
elsewhere in this report.
IES INDUSTRIES INC.1933,
as amended.
26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
1996 1995 1994 1993 1992Interstate Energy Corporation
- ----------------------------------------------------------------------------------------------------------------------------
1998* 1997** 1996** 1995** 1994**
- ----------------------------------------------------------------------------------------------------------------------------
Financial Information
(Dollars in thousands except for per share data)
- ----------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Income statement data (000's):
Operating revenues $ 973,912 $ 851,010 $ 785,864 $ 801,266 $ 678,296$2,130,874 $2,300,627 $2,232,840 $1,976,807 $1,889,231
Operating expenses 1,847,572 1,964,244 1,867,401 1,611,875 1,575,723
Operating income 164,308 151,712 147,933 151,269 109,024283,302 336,383 365,439 364,932 313,508
Income from continuing operations 96,675 144,578 157,088 159,157 147,064
Discontinued operations - - (1,297) (13,186) (1,174)
Net income 60,907 64,176 66,818 67,938 48,71196,675 144,578 155,791 145,971 145,890
- ----------------------------------------------------------------------------------------------------------------------------
Common stock data (per share
except percentages):
Earnings $ 2.04 $ 2.20 $ 2.34 $ 2.45 $ 1.92
Dividends declared 2.10 2.10 2.10 2.10 2.10Stock Data:
Weighted average common shares outstanding (000s) 76,912 76,210 75,481 74,680 73,751
Return on average common equity 9.9%(1) 6.0% 9.5% 11.0% 10.5% 10.7%
11.5% 12.4% 10.3%
Market price at year-end $ 29.88 $ 26.50 $ 25.25 $ 31.25 $ 29.50Per Share Data:
Income from continuing operations $1.26 $1.90 $2.08 $2.13 $1.99
Discontinued operations - - ($0.02) ($0.18) ($0.01)
Earnings per average common share (basic and
diluted) $1.26 $1.90 $2.06 $1.95 $1.98
Dividends declared per common share (2) $2.00 $2.00 $1.97 $1.94 $1.92
Book value at year-end 20.84 20.75 20.56 20.21 18.89
Ratio of market price to book(1) $20.69 $21.24 $18.91 $18.70 $18.60
Market value at year-end 143% 128% 123% 155% 156%
Capitalization:
Common equity 47% 49% 50% 51% 48%
Preferred and preference stock 1 2 2 2 2
Long-term debt 52 49 48 47 50
100% 100% 100% 100% 100%(2) $32.25 $33.13 $28.13 $30.63 $27.38
- ----------------------------------------------------------------------------------------------------------------------------
Other selected financial data:
Total assets (000's) $ 2,125,562 $ 1,985,591 $ 1,849,093 $ 1,699,819 $ 1,594,382
Non-utility assets (000's) (1) 352,824 282,433 206,411 153,853 153,491
Long-term obligations, net (000's) 744,298 654,090 623,359 574,488 551,335Selected Financial Data:
Construction and acquisition expenditures (000's) 238,378 218,099 206,548 169,017 192,520 (2)$372,058 $328,040 $412,274 $375,184 $390,875
Total assets at year-end (1) $4,959,337 $4,923,550 $4,639,826 $4,476,406 $4,269,637
Long-term obligations, net $1,713,649 $1,604,305 $1,444,355 $1,357,755 $1,358,258
Times interest earned before income taxes 2.99 3.12 3.38 3.38 2.63
Selected2.25X 2.90X 3.38X 3.36X 3.43X
Capitalization Ratios:
Common stock (1) 49% 51% 52% 51% 51%
Preferred and preference stock 4% 3% 4% 4% 4%
Long-term debt 47% 46% 44% 45% 45%
------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
==================================================================
- ----------------------------------------------------------------------------------------------------------------------------
* The 1998 financial results reflect the recording of $54 million of pre-tax
merger-related charges.
** Financial results have been restated to reflect a change in accounting
method for IEC's oil and gas properties implemented in the third quarter of
1998 from the full cost method to the successful efforts method. Refer to
IEC's Note 1(i) of the "Notes to Consolidated Financial Statements" for
additional information regarding the restatement.
(1) In the third quarter of 1997, IEC began adjusting the carrying value of its
investments in McLeodUSA Inc. to its estimated fair value, pursuant to the
applicable accounting rules. At December 31, 1998, the adjustment reflected
an an unrealized gain of approximately $291 million with a net of tax
increase to common equity of $170 million.
(2) Represents data for WPL Holdings, Inc. for periods prior to the consummation
of the Merger.
27
IES Utilities Inc.:
Utility plant in service (000's) $ 2,310,161 $ 2,172,378 $ 2,042,179 $ 1,932,558 $ 1,852,733
Accumulated depreciation of
utility plant in service (000's) 1,030,390 950,324 880,888 813,312 759,754
Construction and acquisition
expenditures (000's) (3) 143,648 129,444 148,103 113,212 171,013 (2)
Times interest earned before
income taxes 3.44 3.26 3.39 3.64 2.67
Electric Kwh sales
(excluding off-system) (000's) 9,953,204 9,783,514 9,291,575 8,905,522 7,132,671
Gas Dth sales (including
transported volumes) (000's) 42,140 39,805 37,975 39,006 37,035
(1) Includes non-utility assets of IES Utilities Inc.
(2) Includes $61 million for the acquisition of the Iowa
service territory from Union Electric Company.
(3) Includes acquisitions from affiliated companies and
Utilities' non-utility expenditures.
IES UTILITIES INC. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
1998 1997 1996 1995 1994
1993 1992
($ in--------------------------------------------------------------------------------
(in thousands)
Operating revenues $ 806,930 $ 813,978 $ 754,979 $ 709,826 $ 685,366
$ 713,750 $ 610,262
Operating income 153,725 142,265 135,591 143,329 100,361
Net income 63,729 59,278 61,210 67,970 45,291
Net incomeEarnings available for common stock 60,996 57,879 62,815 58,364 60,296 67,056 43,562
Cash dividends declared on common stock 18,840 56,000 44,000 43,000 52,000
31,300 24,721
Total assets 1,778,610 1,708,635 1,645,368 1,546,978 1,440,8911,788,978 1,768,929 1,765,044 1,697,803 1,634,733
Long-term obligations, net 677,804 688,719 560,199 517,538 530,275
531,979 490,251
Times interest earned before income taxes 3.44 3.26 3.39 3.64 2.67
Capitalization ratios:
Common equity 50% 51% 50% 50% 48%
PreferredThe 1998 financial results reflect the recording of $17 million of pre-tax
merger-related charges.
Wisconsin Power and preferenceLight Company
Year Ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
(in thousands)
Operating revenues $ 731,448 $ 794,717 $ 759,275 $ 689,672 $ 687,811
Earnings available for common stock 2 2 2 2 232,264 67,924 79,175 75,342 68,185
Cash dividends declared on common stock 58,341 58,343 66,087 56,778 55,911
Total assets 1,685,150 1,664,604 1,677,814 1,641,165 1,585,124
Long-term debt 48 47 48 48 50
100% 100% 100% 100% 100%obligations, net 471,554 420,414 370,634 375,574 393,513
The 1998 financial results reflect the recording of $17 million of pre-tax
merger-related charges.
Item28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THEFINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND FINANCIAL CONDITION(MD&A)
MERGER
On April 21, 1998, IES Industries Inc.'s Consolidated Financial Statements include (IES), WPL Holdings, Inc. (WPLH) and
Interstate Power Company (IPC) completed a three-way merger (Merger) forming
Interstate Energy Corporation (IEC). IEC is currently doing business as Alliant
Energy Corporation. As a result of the accountsMerger, the first tier subsidiaries of
IES Industries Inc. (Industries)IEC include: Wisconsin Power and its consolidated
subsidiaries (collectively the Company). Industries'
wholly-owned subsidiaries areLight Company (WP&L), IES Utilities Inc.
(Utilities)(IESU), IPC, Alliant Energy Resources, Inc. (Alliant Energy Resources) and
IES DiversifiedAlliant Energy Corporate Services, Inc. (Diversified)(Alliant Energy Corporate Services) (the
subsidiary formed to provide administrative services as required under the
Public Utility Holding Company Act of 1935 (PUHCA)). Among various other
regulatory constraints, IEC is operating as a registered public utility holding
company subject to the limitations imposed by PUHCA.
As part of the approval process for the Merger, IEC agreed to various rate
freezes and rate caps implemented in certain jurisdictions for periods not to
exceed four years commencing on the effective date of the Merger (see "Liquidity
and Capital Resources - Rates and Regulatory Matters" for a further discussion).
This MD&A includes information relating to IEC, IESU and WP&L (as well as IPC
and Alliant Energy Resources). Where appropriate, information relating to a
specific entity has been segregated and labeled as such. The information
presentedfinancial results
described below reflect the consummation of the Merger accounted for as a
pooling of interests.
FORWARD-LOOKING STATEMENTS
Statements contained in this management's discussionreport (including MD&A) that are not of historical
fact are forward-looking statements intended to qualify for the safe harbors
from liability established by the Private Securities Litigation Reform Act of
1995. From time to time, IEC, IESU or WP&L may make other forward-looking
statements within the meaning of the federal securities laws that involve
judgments, assumptions and analysis
addressesother uncertainties beyond the financialcontrol of such
companies. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes in the utility
industry, planned capital expenditures, financing needs and availability,
statements of Industriesexpectations, beliefs, future plans and Utilities as
presentedstrategies, anticipated
events or trends and similar comments concerning matters that are not historical
facts. Investors and other users of the forward-looking statements are cautioned
that such statements are not a guarantee of future performance and that such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in, this joint filing. Informationor implied
by, such statements. Some, but not all, of the risks and uncertainties include
weather effects on sales and revenues, competitive factors, general economic
conditions in the relevant service territory, federal and state regulatory or
government actions, unanticipated construction and acquisition expenditures,
issues related to Utilities also
relatesstranded costs and the recovery thereof, the operations of
IEC's nuclear facilities, unanticipated issues or costs associated with
achieving Year 2000 compliance, the ability of IEC to Industries' Consolidated Financial Statements.
Information related to Diversified does not pertainsuccessfully integrate the
operations of the parties to the discussionMerger and unanticipated costs associated
therewith, unanticipated difficulties in achieving expected synergies from the
Merger, unanticipated costs associated with certain environmental remediation
efforts being undertaken by IEC, technological developments, employee workforce
factors, including changes in key executives, collective bargaining agreements
or work stoppages, political, legal and economic conditions in foreign countries
IEC has investments in and changes in the rate of the financial condition and resultsinflation.
UTILITY INDUSTRY OUTLOOK
IEC competes in an ever-changing utility industry. Set forth below is an
overview of operations
of Utilities. The references to various Notes to Consolidated Financial
Statements are all to Industries' Notes to Consolidated Financial
Statements.
COMPETITION
Utilities and its predominant business, electricthis evolving marketplace.
Electric energy generation, transmission and distribution are in a period of
fundamental change in the manner in which customers obtain, and energy suppliers
provide, energy services. As legislative, regulatory, economic and technological
changes occur, electric utilities are faced with increasing pressure to
become more competitive.facing increased numbers of alternative
suppliers. Such
29
competitive pressures could result in loss of customers and an incurrence of
stranded costs (i.e., the cost of
assets and other costs rendered unrecoverable as the
result of competitive pricing). To the extent stranded costs cannot be recovered
from customers, they would be borne by security holders.
Legislation which would allow customers to choose their electric energy supplier
is expected to be introduced in Iowa and Minnesota in 1999. IEC does not
currently expect similar legislation to be introduced in Wisconsin this year.
Nationwide, 16 states (including Illinois and Michigan) have decided to provide
for customer choice.
IEC realized 56%, 39%, 3% and 2% of its electric utility revenues in 1998, in
Iowa, Wisconsin, Minnesota and Illinois, respectively. Approximately 87% of the
electric revenues were regulated by the respective state commissions while the
other 13% were regulated by the Federal Energy Regulatory Commission (FERC). IEC
realized 58%, 36%, 3% and 3% of its gas utility revenues in Iowa, Wisconsin,
Minnesota and Illinois, respectively, during the same period.
IESU realized 100% of its electric and gas utility retail revenues in 1998 in
Iowa. Approximately 93% of the electric revenues in 1998 were regulated by the
Iowa Utilities Board (IUB) while the other 7% were regulated by the FERC.
WP&L realized 98% of its electric utility revenues in 1998 in Wisconsin and 2%
in Illinois. Approximately 79% of the electric revenues in 1998 were regulated
by the Public Service Commission of Wisconsin (PSCW) or the Illinois Commerce
Commission (ICC) while the other 21% were regulated by the FERC. WP&L realized
96% of its gas utility revenues in 1998 in Wisconsin and 4% in Illinois.
Federal Regulation
WP&L, IESU and IPC are subject to regulation by the FERC. The National Energy
Policy Act of 1992 addresses several matters designed to promote competition in
the electric wholesale power generation market. In April 1996, the Federal Energy Regulatory
Commission (FERC)FERC issued final rules
(FERC Orders 888 and 889), largely
confirming earlier proposals, requiring electric utilities to open their
transmission lines to other wholesale buyers and sellers of electricity. The rules became effectiveIn
March 1997, FERC issued orders on July 9, 1996. Utilities filed conforming
pro-forma open access transmission tariffs with the FERC which became
effective October 1, 1995.rehearing for Orders 888 and 889 (Orders 888-A
and 889-A). In response to FERC Orders 888 and 888-A, Alliant Energy Corporate
Services, on behalf of WP&L, IESU and IPC, filed an Open Access Transmission
Tariff that complies with the orders. Upon receiving the final merger-related
regulatory order, a compliance tariff was filed by Alliant Energy Corporate
Services with the FERC. This filing was made to comply with the FERC's merger
order. In response to FERC Orders 889 and 889-A, WP&L, IESU and IPC are
participating in a regional Open Access Same-Time Information System.
FERC Order 888 Utilities
filed its final pro-forma tariffspermits utilities to seek recovery of legitimate, prudent and
verifiable stranded costs associated with FERC on July 9, 1996. The non-
rate provisions of the tariffs were approved on November 13, 1996. FERC
has not yet ruled on the rate provisions of the tariffs. The geographic
position of Utilities' transmission system could provide revenue
opportunities in theproviding open access environment. Industrial Energy
Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified,
received approval in the 1995 FERC proceeding to market electric power
at market based rates. The Company cannot predict the long-term
consequences of these rules on its results of operations or financial
condition.transmission
services. FERC does not have jurisdiction over the retail jurisdiction,distribution and,
thusconsequently, the final FERC rules do not provide for the recovery of stranded
costs resulting from retail competition. The various states retain jurisdiction
over the question of whether to permit retail competition, the terms of such
retail competition, and the recovery of any portion of stranded costs that are
ultimately determined by FERC and the states to have resulted from retail competition.
IEC and the utility subsidiaries cannot predict the long-term consequences of
these rules on their results of operations or financial condition.
In November 1998, IEC and Northern States Power Co. (NSP) announced plans to
develop an independent transmission company (ITC) to provide electric
transmission services to the Upper Midwest. The two companies are developing a
relationship by which NSP will create an independent transmission entity that,
in turn, will lease the transmission assets of IEC. The independent entity is
expected to be publicly traded and have its own board of directors, management
and employees. In February 1999, the Nebraska Public Power District signed an
agreement with IEC and NSP to share information and discuss how they might
participate in the proposed ITC.
30
IEC expects to file with the PSCW, FERC and Minnesota Public Utilities
Commission (MPUC) in the second quarter of 1999 for permission to lease its
transmission assets to the ITC. Filings will also be made at the IUB and ICC at
a later time. The first FERC filing will also include a tariff designed to allow
for open and economical delivery of electric power throughout the region. The
tariff will be available to non-ITC participants as well as ITC members.
Although no assurance can be given, IEC and NSP currently believe they can have
the ITC established in the year 2000.
IEC had originally filed to participate in the Midwest Independent System
Operator (Midwest ISO) which was conditionally approved by the FERC on September
16, 1998. However, as a result of the ITC announcement, IEC has withdrawn its
Midwest ISO membership.
State Regulation
Iowa
Utilities Board (IUB) initiatedIESU and IPC are subject to regulation by the IUB. The IUB has issued an order
covering unbundling of natural gas rates for all Iowa customers. In the first
quarter of 1999, the IUB conducted workshops concerning this unbundling as well
as allowing choice of the supplier of the natural gas for the small volume
natural gas customers. Inasmuch as gas is a Notice of Inquiry
(Docket No. NOI-95-1)flow-through cost item in early 1995Iowa, and
IEC would retain the margins on the subjectdelivery of "Emerging
Competition in the Electric Utility Industry"natural gas, the impact on
IEC of these potential changes is not expected to addressbe material.
The IUB has been reviewing all forms of competition in the electric utility
industry for several years. A group comprised of the IUB, IEC, MidAmerican
Energy Company (MAEC), the rural electric cooperatives, the municipal utilities
and Iowans for Choice in Electricity (a diverse group of industrial customers,
marketers, such as Enron, and a low income customer representative, among
others) has endorsed a bill that was agreed upon in February 1999. IEC expects
the bill to gather information
and perspectives on electric competition from all persons or entities
with an interest or stakebe introduced in the issues. InIowa Legislature in March 1999. The bill is
opposed by the Office of Consumer Advocate, which is charged by Iowa law with
representation of all consumers generally.
The bill would allow choice of electric suppliers for all customers on May 1,
2002. It would freeze IESU's and IPC's Iowa regulated prices at January 1996,1999
levels. The IUB could not order any rate reductions subsequent to the bill's
proposed effective date of June 1, 1999. It would allow, however, for
investor-owned utilities to propose increases due to exogenous factors (for
example, environmental compliance costs) in the generation cost component.
Assigned service territories would be maintained for the delivery function.
Delivery prices would be regulated, with the option available to propose
performance based rate making. Prices for generation and other retail services
would not be regulated, except for Standard Offer Service (SOS) pricing starting
May 2002 for all residential customers and non-residential customers with annual
usage of less than 25,000 kilowatt-hours (KWH). Pricing for SOS would initially
be at levels equivalent to prices as they exist today. SOS would continue until
at least December 31, 2005. The IUB would be able to terminate SOS if it were to
determine several conditions exist, including, most importantly, that effective
competition exists such that regulation is no longer necessary. If the IUB
createdcontinues SOS past December 31, 2005, then prices would be based upon
competitive bids. There are no price protections for non-residential customers
with usage greater than 25,000 KWH annually, with the exception of transitional
service. Transitional service would exist for no longer than one year, until May
1, 2003, at prices the IUB determines to be "just and reasonable." Currently
existing automatic fuel adjustment clauses for recovery of fuel costs would be
eliminated no later than May 2002. A "nuclear-only" fuel adjustment would be
permitted with increased prices effective immediately if an electric company's
nuclear plant is not operational due to exogenous factors.
Transition cost is the difference between the revenues that would have been
collected pursuant to an electric company's revenue requirement existing as of
January 1, 1999, and market prices for the period 2002 through 2005. These
differences would be afforded 80% recovery in 2002, 70% in 2003, 60% in 2004 and
50% in 2005. Effective January 1, 2006, transition cost recovery would end. In
lieu of accepting this transition cost recovery mechanism, an electric utility
may elect to divest itself of its own timelinegeneration assets, including power supply
contracts. In such case, the utility would be given an opportunity to be "made
whole" for evaluating industry restructuringrecovery of embedded costs with the possibility for shareowners to
retain the amount realized from the sale of the assets beyond the sum of
depreciated book value
31
and unfunded decommissioning. A divestiture plan would be filed with the IUB no
later than January 1, 2000, with IUB approval or modification by July 1, 2000.
The utility would have until September 30, 2000, to revoke its election.
Costs of start-up, including computer systems and employee transition costs,
would be recoverable over a ten-year period, as approved by the IUB. The
difference between regulatory assets and liabilities would be fully recoverable
as a delivery charge. Nuclear decommissioning costs would be fully recoverable.
IEC is unable to predict if this legislation will be enacted in Iowa.
Included1999 or what
modifications, if any, may be made to the proposed bill.
Wisconsin
WP&L is subject to regulation by the PSCW. The PSCW's inquiries into the future
structure of the natural gas and electric utility industries are ongoing. The
stated goal of the PSCW in the IUB'snatural gas docket is "to accommodate competition
but not create it." The PSCW has followed a measured approach to restructuring
the natural gas industry in Wisconsin. The PSCW has determined that customer
classes will be deregulated (i.e., the gas utility would no longer have an
obligation to procure gas commodity for customers, but would still have a
delivery obligation) in a step-wise manner, after each class has been
demonstrated to have a sufficient number of gas suppliers available. A number of
working groups have been established by the PSCW and these working groups are
addressing numerous issues which need to be resolved before deregulation may
proceed.
The short-term goals of the electric restructuring process wasare to ensure
reliability of the creationstate's electric system and development of a 22-member advisory
panel,robust wholesale
electric market. The longer-term goal is to establish prerequisite safeguards to
protect customers prior to allowing retail customer choice.
The PSCW has issued an order outlining its policies and principles for Public
Benefits (low-income assistance, energy efficiency, renewable generation and
environmental research and development) including funding levels, administration
of the funds and how funds should be collected from customers. The PSCW has
proposed increasing annual funding levels primarily through utility rates by $50
to $75 million statewide.
In May 1998, the PSCW reactivated Docket No. 05-BU-101, with the objective of
examining the degree of separation which Utilitiesshould be required as a matter of
policy between utility and non-utility activities involving the various state
utilities. Hearings were held in the fourth quarter of 1998 but a final decision
by the PSCW has not been issued yet. A future phase of the docket will
investigate the standards of conduct that should govern relationships and
transactions between a utility and its affiliates.
It is anticipated that there will be legislative proposals introduced in the
1999-2000 legislative session on issues dealing with restructuring, including
affiliated interest, public benefits, competition and others. It is impossible
to predict at this time the scope or the possibility of enactment of such
proposals.
Minnesota
IPC is subject to regulation by the MPUC. The MPUC established an Electric
Competition Working Group in April 1995. On October 28, 1997, the Working Group
issued a member.report and recommendations on retail competition. The IUB conducted public
information meetings aroundMPUC reviewed the
report and directed its staff to develop an electric utility restructuring plan
and timeline. It does not appear that any restructuring legislation will be
passed in 1999.
Illinois
IPC and WP&L are subject to regulation by the ICC. In December 1997, the State
of Iowa. A draft report was
created by the IUB staffIllinois passed electric deregulation legislation requiring customer choice
of electric suppliers for non-residential customers with loads of four megawatts
or larger and for approximately one-third of all other non-residential customers
starting October 1, 1999. All remaining non-residential customers will be
eligible for customer choice beginning December 31, 2000
32
and all residential customers will be eligible for customer choice beginning May
1, 2002. The new legislation is not expected to be finalized inhave a significant impact on
IEC's results of operations or financial condition given the first
quarterrelatively small
size of 1997. The draft report indicated that the IUB isIEC's Illinois operations.
Accounting Implications
Each of the opinion that there is no compelling reason to move quickly into
restructuring the electric utility industry in Iowa. However, they will
continue the analysis and debate on restructuring and retail competition
in Iowa.
As part of Utilities' strategy for the emerging and competitive
power markets, Utilities, Interstate Power Company (IPC) and Wisconsin
Power and Light Company (the utility subsidiary of WPL Holdings, Inc.
(WPLH)), and a number of other utilities have proposed the creation of
an independent system operator (ISO) for the companies' power
transmission grid. (The Company, WPLH and IPC have entered into a
merger agreement, as discussed later). The companies would retain
ownership and control of the facilities, but the ISO would set rates for
access and assure fair treatment for all companies seeking access. The
proposal requires approval from state regulators and the FERC. Various
other proposals for ISO's have been made by other companies and
Utilities is monitoring all such proposals. Membership in an ISO could
become a condition of merger approval by the various regulatory bodies.
Utilities is subject tocomplies with the provisions of Statement of Financial
Accounting Standards No.(SFAS) 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71).Regulation." SFAS 71 provides that rate-regulated public utilities record
certain costs and credits allowed in the rate making process in different
periods than for nonregulated entities. These are deferred as regulatory assets
or regulatory liabilities and are recognized in the consolidated statements of
income at the time they are reflected in rates. If a portion of Utilities'the utility
subsidiaries' operations becomebecomes no longer subject to the provisions of SFAS 71
as a result of competitive restructurings or otherwise, a write-down of related
regulatory assets and possibly other charges would be required, unless some form
of transition cost recovery is established by the appropriate regulatory body.body
that would meet the requirements under generally accepted accounting principles
for continued accounting as regulatory assets during such recovery period. In
addition, the Companyeach utility subsidiary would be required to determine any impairment
toof other assets and write-down suchany impaired assets to their fair value. Utilities
believes that it still meetsThe
utility subsidiaries believe they currently meet the requirements of SFAS 71.
The CompanyPositioning for a Competitive Environment
IEC and its subsidiaries cannot currently predict the long-term consequences of
thesethe competitive and restructuring issues described above on itstheir results of
operations or financial condition. The Company'smajor objective is to allow the company
to compete successfully in a competitive, deregulated utility industry. The
strategy for dealing with these emerging issues includes seeking growth
opportunities, forming strategic alliances with other energy-related businesses,
continuing to offer quality customer service, initiating ongoing cost reductions
and productivity enhancements and developing new products and services.
As competitive forces shape the major objectiveenergy-services industry, energy providers will
face challenges to continued growth. Since consumption of which is to allow Utilities to better prepare for a
competitive, deregulated electric utility industry. In this connection,
Utilities is in the final stages of a significant process improvement
program to improve its service levels, reduce its cost structure and
become more market-focused and customer oriented. (The Company's
continuous improvement efforts, in general, will be an ongoing effort,
however).
Examples of the process improvement changes being implemented are,
but are not limited to: managing the business in business unit form,
rather than functionally; formation of alliances with vendors of certain
types of material and/electricity or services rather than opening most purchases to
a bidding process; changing standards and construction practices in
transmission and distribution areas; changing certain work practices in
power plants; making investments in information technology upgrades; and
improving the method by which service is delivered to customers in all
customer classes. The specific changes range from simple improvements
in current operations to radical changes in the way work is performed
and service is delivered. Some of the changes are currently in the
pilot stage thus the results from this evaluation period or the
potential effects of the pending merger could prove that some of the
changes are not efficient or effective and must be revised or
eliminated. Subject to delays caused by implementing any such
revisions, implementation of the changes began in 1996 and will continue
into 1997; however, certain results will not be realized until 1997. In
addition, the Company must give consideration to the potential effects
of the pending merger as part of the implementation process so that
duplication of efforts are avoided.
PROPOSED MERGER OF THE COMPANY
The Company, WPLH and IPC have entered into an Agreement and Plan
of Merger, as amended (Merger Agreement), dated November 10, 1995. As a
result of the transactions contemplated by the Merger Agreement, the
combined company, Interstate Energy Corporation (Interstate Energy),
anticipates cost savings of approximately $749 million over a ten-year
period, net of transaction costs and costs to achieve the savings of
approximately $14 million and $64 million, respectively. The estimate
of potential cost savings constitutes a forward-looking statement and
actual results may differ materially from this estimate. The estimate
is necessarily based upon various assumptions that involve judgments
with respect to, among other things, future national and regional
economic and competitive conditions, technological developments,
inflation rates, regulatory treatments, weather conditions, financial
market conditions, future business decisions and other uncertainties.
No assurance can be given that the estimated cost savings will actually
be realized.
The merger, which is conditioned upon, among other things, receipt
of certain regulatory and governmental approvals,natural
gas is expected to close
bygrow only modestly within IEC's utility service territory,
IEC has entered several markets that provide opportunities for new sources of
earnings growth.
In addition to Alliant Energy Resources' existing businesses, IEC has launched
four distinct platforms designed to meet customer needs throughout the endMidwest,
the nation and the world. These platforms include:
Alliant Energy Industrial Services, a provider of energy and
environmental services designed to maximize productivity for industrial
and large commercial customers;
Alliant Energy International, a partner in developing energy generation
and infrastructure in growing markets throughout the world;
Alliant Energy Retail Services, encompassing a wide array of products
and services designed to meet the comfort, security and productivity
needs of residential and small commercial customers; and
Cargill-Alliant Energy, an energy-trading joint venture that combines
the superior risk-management and commodity trading expertise of Cargill
Incorporated (Cargill), one of the third quarterworld's largest and most established
commodity trading firms, with IEC's low-cost electric-generation and
transmission business experience.
IEC believes that each of 1997. As part ofthese four platforms provides unique prospects for
growth both individually and collectively as the approval
process, management has proposed retail and wholesale price freezes to
be implemented in certain jurisdictions. Refer to Notes 2 and 3 of the
Notes to Consolidated Financial Statements for additional information
regarding the proposed merger and the proposed price freezes.competitive energy-services
marketplace evolves.
33
IEC RESULTS OF OPERATIONS
OF THE COMPANY
The following discussion analyzes significant changes in the
components ofOverview
IEC's net income for each of the last three years was as follows:
1998 1997 1996
---- ---- ----
Earnings excluding merger-related charges -
Net income (in thousands) $131,264 $146,169 $159,250
Earnings per share $1.71 $1.92 $2.11
Pre-tax merger-related charges (in thousands) $54,045 $2,448 $5,670
Earnings as reported -
Net income (in thousands) $96,675 $144,578 $155,791
Earnings per share $1.26 $1.90 $2.06
The above financial information reflects the consummation of the Merger on April
21, 1998, as a pooling of interests. The merger-related charges were primarily
for employee retirements and financial condition fromseparations, the prior periods
for the Company.
The Company'sservices of IEC's advisors, costs
related to IEC's name change and other miscellaneous costs. IEC's utility
operations reported net income decreased ($3.3)of $109.5 million in 1998, $152.5 million for
1997 and $167.9 million in 1996. Excluding merger-related expenses, the utility
earnings were approximately $140.7 million, $153.8 million and ($2.6)$170.8 million duringin
1998, 1997 and 1996, and 1995, respectively. Earnings per average common
share declined to $2.04 in 1996 from $2.20 in 1995. The 1996 decrease in utility earnings (excluding
merger-related expenses) in 1998 resulted primarily from higher purchased-power
and transmission costs at WP&L, a 15.7 percent decrease in retail natural gas
sales largely due to milder weather conditions in 1998 compared to 1997, a $9
million regulatory asset write-off at IESU, increased expenses for Year 2000
readiness efforts, higher injuries and damages expenses and increased
depreciation expenses. These decreases were partially offset by a 2 percent
increase in retail electricity sales volumes, largely due to continued economic
growth within IEC's service territory, lower purchased-power capacity costs at
IESU and IPC, reduced employee pension and benefits costs, and lower costs in
1998 due to merger-related operating efficiencies. A loss incurred on the
disposition of an investment in 1997 at IESU also enhanced the 1998 earnings
compared to 1997.
IEC's nonregulated operations (Alliant Energy Resources) reported net losses of
approximately $8.9 million, $4.0 million and $3.1 million in 1998, 1997 and
1996, respectively. Excluding merger-related expenses, the nonregulated
operations net losses were approximately $6.3 million, $3.9 million and $2.6
million in 1998, 1997 and 1996, respectively. The decrease in 1998 earnings
(excluding merger-related expenses) was due to lower oil and gas prices at
Whiting Petroleum Corp. (Whiting), IEC's Denver-based oil and gas subsidiary,
continuing expenses for new business development in international and domestic
markets, higher interest expense to fund IEC's growth and the pursuit of other
business opportunities, and a modest loss from IEC's electricity trading joint
venture. A tax benefit realized in 1997 from a donation of securities to IEC's
charitable foundation also contributed to the lower earnings in 1998 compared to
1997. Increased earnings from IEC's industrial services businesses as well as
gains realized on asset sales partially offset these items.
The 1997 decrease in utility earnings was primarily due to increased operating
expenses, higher interest expense, rate decreases implemented at WP&L and IPC in
1997, the loss on the investment disposition at IESU in 1997 and the recognition
of a gain on the sale of a combustion turbine in 1996 at WP&L. Partially
offsetting this decrease were increased retail electric sales and costs incurred
in 1996 relating to the successful defense of thea hostile takeover attempt mountedof IES
by MidAmerican Energy Company (MAEC)MAEC.
The decrease in nonregulated earnings in 1997 was primarily due to lower
earnings at Whiting, business development expenses in international and preparing fordomestic
growth areas and a 1996 gain on the Company's
pending three-way merger. The Company estimates that the hostile
takeover defense and merger costs reduced 1996 earnings by $0.15 per
share and $0.11 per share, respectively. The 1996 earnings benefited
from increased electric, gas and steam sales at Utilities, the impactsale of a natural gas pricing increase implementedan investment in assisted living
properties. Partially offsetting these items were improved performance in the
fourth quarterenergy marketing businesses and the 1997 tax benefit resulting from the donation
of 1995
and increased earnings at the Company's oil and gas subsidiary, Whiting
Petroleum Corporation (Whiting). Increased operating expenses, higher
interest expense and a higher effective income tax rate also contributed
to the decrease in earnings in 1996. The 1995 results reflect the
impact of the IUB price reduction order in Utilities' latest electric
rate case. The effect of the lower electric prices, including the
required refund, reduced the 1995 net income by approximately $9.7
million ($0.33 per share). Warmer than normal weather conditions during
the summer months, which added $0.18 to earnings, and an aggressive cost
containment program partially offset the negative effects of the IUB
order. The 1994 results were affected by milder than normal weather,
particularly during the summer months.
The Company's operating income increased $12.6 million and $3.8
million during 1996 and 1995, respectively. The contrasting
relationship between the change in operating income and net income for
1996 was due to the hostile takeover defense costs of $7.8 million,
which are included in "Miscellaneous, net" in the Consolidated
Statements of Income, higher interest expense and a higher effective
income tax rate. The 1995 difference was also due to increased interest
expense and a higher effective income tax rate. Reasons for the changes
in the results of operations are explained in the following discussion.securities.
34
Electric Utility Operations
Electric margins and Kwhmegawatt-hour (MWH) sales for UtilitiesIEC for 1998 and 1997 were as
follows:
Revenues and Costs KwhsMWHs Sold
(In(in thousands) (In(in thousands)
1996 1995 1994 1996 1995 1994------------------------------ ----------------------------
1998 1997 Change 1998 1997 Change
--------------- ------------- --------- ------------- ------------- ---------
Residential and rural $ 212,799519,687 $ 216,270 $ 199,587 $ 2,633,704 $ 2,680,340 $ 2,484,089
General service 98,196 97,496 97,454 1,231,115 1,242,373 1,170,923
Large general service 213,223 199,840 191,601 5,500,606 5,283,694 4,990,890509,207 2% 6,674 6,699 -
Commercial 330,693 320,308 3% 5,095 4,996 2%
Industrial 477,241 455,912 5% 12,718 12,320 3%
--------------- ------------- ------------- -------------
Total from ultimate customers 1,327,621 1,285,427 3% 24,487 24,015 2%
Sales for resale and other 30,565 29,063 30,608 587,779 577,107 645,673199,128 192,346 4% 7,189 6,768 6%
Other 40,693 37,980 7% 158 161 (2%)
--------------- ------------- ------------- -------------
Total excluding off-
system sales 554,783 542,669 519,250 9,953,204 9,783,514 9,291,575
Off-system sales 19,490 17,802 18,077 1,231,298 1,086,121 1,137,219
Total 574,273 560,471 537,327 11,184,502 10,869,635 10,428,794
Fuel for1,567,442 1,515,753 3% 31,834 30,944 3%
============= ============= =========
Electric production (excluding steam) 74,608 90,558 81,567
Purchased power 88,350 66,874 68,794fuels 283,866 265,105 7%
Purchased-power 255,332 256,306 -
--------------- -------------
Margin $ 411,3151,028,244 $ 403,039994,342 3%
=============== ============= =========
Electric margins and MWH sales for IEC for 1997 and 1996 were as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
------------------------------ ----------------------------
1997 1996 Change 1997 1996 Change
--------------- ------------- --------- ------------- ------------- ---------
Residential $ 386,966509,207 $ 494,649 3% 6,699 6,668 -
Commercial 320,308 308,480 4% 4,996 4,878 2%
Industrial 455,912 428,726 6% 12,320 11,666 6%
--------------- ------------- ------------- -------------
Total from ultimate customers 1,285,427 1,231,855 4% 24,015 23,212 3%
Sales for resale 192,346 181,365 6% 6,768 7,459 (9%)
Other 37,980 27,155 40% 161 161 -
--------------- ------------- ------------- -------------
Total 1,515,753 1,440,375 5% 30,944 30,832 -
============= ============= =========
Electric production fuels 265,105 246,638 7%
Purchased-power 256,306 231,014 11%
--------------- -------------
Margin $ 994,342 $ 962,723 3%
=============== ============= =========
Electric marginsmargin increased $8.3$33.9 million, or 3%, and $16.1$31.6 million, during
1996or 3%, for
1998 and 1995,1997, respectively. The increase during 1996for both periods was primarily due
to higher sales relating to continuing sales growth in Utilities'
service territory, lower purchased power capacity costs and increased
revenues due to
the recovery of concurrent and previously deferred expenditures for
Iowa-mandated energy efficiency expenditures. These increasesprograms, reduced purchased-power capacity costs
at IESU and IPC and higher sales volumes to ultimate customers. The recovery for
energy efficiency programs in Iowa is in accordance with IUB orders (a portion
of these recoveries is also amortized to expense in other operation expenses).
Electric revenues included increased recoveries for energy efficiency program
costs in Iowa of $25.8 million and $16.8 million for 1998 and 1997,
respectively. The increased sales volumes were primarily due to continued
economic growth within the IEC service territory. Weather normalized sales
volumes (excluding off-system sales) increased approximately 2.4% in 1998
compared to an actual increase of 1.7%.
The 1998 increase in margin was partially offset by a true-up
adjustment to Utilities' unbilled sales recordedlower margin at WP&L and
rate decreases implemented at WP&L and IPC in 1995 and1997. The lower sales
to residential and rural customers during 1996, primarily due to cooler
weather conditions during the summer of 1996 as compared to the summer
of 1995. The 1995 electric margin increaseat WP&L,
which was primarily due to higher
sales due to a significantly warmer summer in 1995 as compared to 1994,
sales growth, the unbilled sales adjustment, lower purchased power
capacity costs and the recovery of energy efficiency costs. These
increases were partially offset by a reductionan increase in revenuesretail sales, was also due to:
a) Purchased-power and transmission costs - such costs have increased
significantly because of approximately $17 million as a resultstricter
35
reliability requirements and higher transmission costs due to system
constraints in Wisconsin. Recovery of such increased costs in Wisconsin
generally involves regulatory lag between the time of the IUB price reduction order,cost increase and
the time a rate increase is implemented. The PSCW granted WP&L an annual
rate increase of which approximately $3.5$15 million in July 1998 related to revenues collectedthese cost increases.
In addition, WP&L made a filing with the PSCW in November 1998 seeking
another rate increase for higher purchased-power and transmission costs.
(Refer to "Rates and Regulatory Matters" for a further discussion of this
filing). The effect of these 1998 cost increases was partially offset by
WP&L's reliance on more costly purchased-power in the fourth quarterfirst six months of
1994. Refer1997 due to Notes 3(a)various power plant outages, particularly the Kewaunee Nuclear
Power Plant (Kewaunee).
b) Lower off-system sales income - due to the transmission constraints,
increased native demand, a more active bulk power market, which resulted in
lower bulk power margins, and 3(b)the implementation of a merger-related joint
sales agreement (effective with the consummation of the NotesMerger, the margins
resulting from IEC's off-system sales are allocated among IESU, IPC and
WP&L). Pursuant to Consolidated Financial Statements for a discussionrate making provisions, bulk power margins at IESU and
IPC are returned to ratepayers through their fuel adjustment clauses.
An increase in off-system sales at WP&L in 1997 also contributed to the 1997
margin increase. The impact of merger-related
retail and wholesale electric price proposals that Utilities has
announcedthe power plant outages at WP&L in 1997 and the
energy efficiency cost recoveries, respectively.
Under historically normal weather conditions, total sales
(excluding off-system sales) during 1996rate decreases implemented at WP&L and 1995 would have increased
3.5%IPC in 1997 partially offset the 1997
margin increase.
IESU's and 3.6%, as compared to actual increases of 1.7% and 5.3%,
respectively.
Utilities'IPC's electric tariffs include energy adjustment clauses (EAC) that
are designed to currently recover the costs of fuel and the energy portion of
purchased powerpurchased-power billings to customers. See(see Note 1(k) of the Notes"Notes to Consolidated Financial
StatementsStatements" for discussion of the EAC).
Gas Utility Operations
Gas margins and dekatherm (Dth) sales for IEC for 1998 and 1997 were as follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 175,603 $ 225,542 (22%) 28,378 33,894 (16%)
Commercial 85,842 115,858 (26%) 17,760 21,142 (16%)
Industrial 20,204 27,393 (26%) 5,507 6,217 (11%)
Transportation and other 13,941 25,114 (44%) 52,389 56,719 (8%)
------------- ------------- ----------- -------------
Total 295,590 393,907 (25%) 104,034 117,972 (12%)
============ ============= =========
Cost of gas sold 166,453 259,222 (36%)
------------- -------------
Margin $ 129,137 $ 134,685 (4%)
============= ============= =========
Gas margins and Dth sales for IEC for 1997 and 1996 were as follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1997 1996 Change 1997 1996 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 225,542 $ 216,268 4% 33,894 37,165 (9%)
Commercial 115,858 108,187 7% 21,142 22,613 (7%)
Industrial 27,393 27,569 (1%) 6,217 6,856 (9%)
Transportation and other 25,114 23,931 5% 56,719 55,240 3%
------------- ------------- ---------------------------
Total 393,907 375,955 5% 117,972 121,874 (3%)
============ ============= =========
Cost of gas sold 259,222 240,324 8%
------------- -------------
Margin $ 134,685 $ 135,631 (1%)
============= ============= =========
36
Gas margin decreased $5.5 million, or 4%, and decreased $0.9 million, or 1%, for
1998 and 1997, respectively. Dth sales declined by 12% and 3% for 1998 and 1997,
respectively, largely due to milder weather. A rate reduction implemented in
April 1997 at WP&L also contributed to the decrease in margin for 1998 and 1997.
Partially offsetting the decline in margin for 1998 and 1997 were higher
revenues from the recovery of concurrent and previously deferred energy
efficiency expenditures for Iowa-mandated energy efficiency program costs in
accordance with IUB orders (a portion of these recoveries is also amortized to
expense in other operation expenses) and gas cost adjustments at IPC. Gas
revenues included increased recoveries for energy efficiency program costs in
Iowa of $6.3 million and $4.0 million for 1998 and 1997, respectively.
IESU's and IPC's gas tariffs include purchased gas adjustment (PGA) clauses that
are designed to currently recover the cost of utility gas sold (see Note 1(k) of
the "Notes to Consolidated Financial Statements" for a discussion of the PGA).
Nonregulated and Other Revenues
Nonregulated and other revenues for 1998, 1997 and 1996 were as follows (in
millions):
1998 1997 1996
------------- ----------- ------------
Environmental and engineering services $ 73 $ 78 $ 85
Oil and gas production 65 69 66
Transportation, rents and other 46 46 35
Nonregulated energy 40 151 192
Steam 27 29 24
Affordable housing 12 13 11
Water 5 5 4
------------- ----------- ------------
$268 $391 $417
============= =========== ============
The revenues for nonregulated energy declined significantly in 1998 primarily
due to decreased low-margin gas marketing activities and the transfer of the
electricity trading business to the Cargill joint venture in July 1997, which
markets electricity and risk management services to wholesale customers. IEC's
investment in the joint venture is accounted for under the equity method of
accounting. Oil and gas production revenues declined in 1998 primarily due to
significantly lower oil and gas prices, largely offset by a significant increase
in gas volumes sold.
In 1997, nonregulated energy revenues declined primarily due to the formation of
the joint venture with Cargill as described above. Transportation, rents and
other revenues increased primarily as a result of the acquisition of a gas
gathering system in Texas in 1997. Environmental and engineering services
revenues declined due to a softening market.
Operating Expenses
Other operation expenses for 1998, 1997 and 1996 were as follows (in millions):
1998 1997 1996
--------------------------------------
Utility-WP&L/IESU/IPC $421 $358 $340
Nonregulated and other 199 324 357
--------------------------------------
$620 $682 $697
======================================
Other operation expenses at the utility subsidiaries increased $63 million in
1998, including $34 million of merger-related expenses. The merger-related
expenses were primarily for employee retirements, separations and relocations.
In addition, increased energy efficiency expenses in Iowa, a write-off of $9
million of certain employee benefits related regulatory assets at IESU which
were deemed no longer probable of recovery, higher administrative and general
expenses at WP&L, higher injuries and damages expenses and increased expenses
for Year 2000 readiness efforts also contributed to the increase. The increase
was partially offset by reduced employee pension
37
and benefit expenses, reduced conservation expense at WP&L, lower costs
resulting from merger-related operating efficiencies and reduced nuclear
operation expenses at IESU. In 1997, other operation expenses at the utility
subsidiaries increased $18 million primarily due to increased amortization of
previously deferred energy efficiency expenditures in Iowa. These expenses were
partially offset by a reduction in conservation expense at WP&L in accordance
with an April 1997 rate order.
Other operation expenses at the nonregulated businesses decreased $125 million
in 1998 primarily due to the formation of the Cargill joint venture. These
reductions in other operation expenses were partially offset by $3 million of
merger-related costs and continuing expenses for new business development in
international and domestic markets. Other operation expenses decreased $33
million in 1997 primarily due to the joint venture with Cargill and also reduced
activity in the environmental and engineering services businesses and the energy
marketing business. These decreases were partially offset by higher operating
expenses at Whiting.
Maintenance expenses decreased slightly in 1998 primarily due to reduced
expenses at fossil-fueled plants, which was virtually offset by increased
maintenance at the nuclear plants. Maintenance expenses increased $11.5 million
in 1997 primarily due to increased nuclear maintenance expenses, higher
transmission and distribution expenses at IESU and increased maintenance at
fossil-fueled plants.
Depreciation and amortization expense increased $19.8 million and $27.3 million
in 1998 and 1997, respectively, primarily as a result of utility property
additions. The increase in 1998 was also due to a Kewaunee surcharge (which is
recorded in depreciation and amortization expense with a corresponding increase
in revenues resulting in no impact on earnings). Higher depreciation rates
implemented at WP&L in January 1997 and higher depreciation and amortization
expenses at Whiting also contributed to the 1997 increase.
Interest Expense and Other
Interest expense increased $6.8 million in 1998 due to higher utility and
nonregulated borrowings during 1998 and an adjustment to decrease interest
expense in 1997 relating to a tax audit settlement at WP&L. Interest expense
increased $9.2 million in 1997 primarily due to the change in the amount of debt
outstanding.
Miscellaneous, net income decreased $13.2 million in 1998 primarily due to $17
million of merger-related expenses, for the services of IEC's advisors and costs
related to IEC's name change, and a modest loss from IEC's electricity trading
joint venture. Gains realized on asset sales in 1998 partially offset these
items. The 1997 results included a loss incurred on the disposition of an
investment at IESU. The increase in income in 1997 was due to costs incurred in
1996 related to the successful defense of the hostile takeover attempt at IES.
This was partially offset by the investment disposition loss at IESU in 1997, a
gain on the sale of a combustion turbine at WP&L in 1996 and the gain on a sale
of an investment in assisted living properties in 1996.
Income Taxes
IEC's income tax expense decreased $23.6 million and $24.0 million in 1998 and
1997, respectively, primarily due to lower pre-tax income. See Note 6 of the
"Notes to Consolidated Financial Statements" for details on the effective tax
rate changes.
IESU RESULTS OF OPERATIONS
Overview
IESU's earnings available for common stock increased $3.1 million and decreased
$4.9 million in 1998 and 1997, respectively. The increased earnings for 1998
were primarily due to a 2 percent increase in retail electricity sales volumes,
largely due to continued economic growth in IESU's service territory, lower
purchased-power capacity costs, reduced employee pension and benefits costs and
lower costs in 1998 due to merger-related operating efficiencies. A loss
incurred on the disposition of an asset in 1997 also improved 1998 earnings
compared to 1997. Partially offsetting
38
the higher 1998 earnings were merger-related expenses, a $9 million write-off of
a regulatory asset, decreased gas sales resulting from milder weather, increased
depreciation and amortization expenses and increased expenses for Year 2000
readiness efforts. The decreased earnings for 1997 were primarily due to
increased operating expenses, higher interest expense and a loss on the
investment disposition in 1997. Such items were partially offset by increased
electric sales (excluding off-system sales) resulting from continuing growth in
IESU's service territory and the nonrecurrence of costs incurred in 1996 related
to the successful defense of a hostile takeover attempt of IES by MAEC.
Electric Utility Operations
- ---------------------------
Electric margins and MWH sales for IESU for 1998 and 1997 were as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $232,662 $ 227,496 2% 2,661 2,682 (1%)
Commercial 168,672 162,626 4% 2,465 2,378 4%
Industrial 181,369 177,890 2% 4,872 4,743 3%
------------- ------------- ------------ -------------
Total from ultimate customers 582,703 568,012 3% 9,998 9,803 2%
Sales for resale 45,453 25,719 77% 1,763 794 122%
Other 11,267 10,539 7% 42 43 (2%)
------------- ------------- ------------ -------------
Total 639,423 604,270 6% 11,803 10,640 11%
============ ============= =========
Electric production fuels 99,362 92,891 7%
Purchased-power 71,637 74,098 (3%)
------------- -------------
Margin $468,424 $ 437,281 7%
============= ============= =========
Electric margins and MWH sales for IESU for 1997 and 1996 were as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1997 1996 Change 1997 1996 Change
------------- ------------- --------- ------------ ------------- --------
Residential $ 227,496 $ 213,838 6% 2,682 2,642 2%
Commercial 162,626 153,163 6% 2,378 2,315 3%
Industrial 177,890 160,477 11% 4,743 4,436 7%
------------- ------------- ------------ -------------
Total from ultimate customers 568,012 527,478 8% 9,803 9,393 4%
Sales for resale 25,719 37,384 (31%) 794 1,746 (55%)
Other 10,539 9,411 12% 43 46 (7%)
------------- ------------- ------------ -------------
Total 604,270 574,273 5% 10,640 11,185 (5%)
============ ============= ========
Electric production fuels 92,891 74,608 25%
Purchased-power 74,098 88,350 (16%)
------------- -------------
Margin $ 437,281 $ 411,315 6%
============= ============= =========
Electric margin increased $31.1 million, or 7%, and $26.0 million, or 6%, for
1998 and 1997, respectively, primarily due to the recovery of concurrent and
previously deferred expenditures for Iowa-mandated energy efficiency programs,
increases in sales volumes to ultimate customers due to economic growth in the
service territory and reduced purchased-power capacity costs. The recovery for
energy efficiency programs in Iowa is in accordance with IUB orders (a portion
of these recoveries is also amortized to expense in other operation expense).
Electric revenues included increased recoveries for energy efficiency program
costs of approximately $15 million and $11 million for 1998 and 1997,
respectively. Sales for resale increased significantly for 1998 as a result of
the implementation of a
39
merger-related joint sales agreement during the second quarter of 1998
(off-system sales revenues are passed through IESU's energy adjustment clause
and therefore have no impact on electric margin). Refer to "Rates and Regulatory
Matters" for a further discussion. The decrease in sales for resale in 1997 was
primarily due to the implementation of FERC Orders 888 and 888-A.
Weather normalized sales volumes (excluding off-system sales) increased
approximately 3.0% and 3.1% in 1998 and 1997, respectively, compared to actual
increases of 2.2% and 3.8% for the same periods.
IESU's electric tariffs include EAC's that are designed to currently recover the
costs of fuel and the energy portion of purchased-power billings. Refer to Note
1(k) of IEC's "Notes to Consolidated Financial Statements" for discussion of the
EAC.
Gas Utility Operations
Gas margins and dekathermDth sales for UtilitiesIESU for 1998 and IEA1997 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1996 1995 1994 1996 1995 1994
Utilities -
Residential $ 97,708 $ 84,562 $ 82,795 17,680 16,302 15,766
Commercial 46,966 40,390 40,912 10,323 9,534 9,298
Industrial 12,256 8,790 12,515 3,796 3,098 4,010
Transportation
and other 3,934 3,550 2,811 10,341 10,871 8,901
Total Utilities 160,864 137,292 139,033 42,140 39,805 37,975
IEA 113,115 53,047 26,536 43,055 31,916 14,443
Total 273,979 190,339 165,569 85,195 71,721 52,418
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 86,821 $ 110,663 (22%) 13,803 16,317 (15%)
Commercial 39,928 54,383 (27%) 8,272 9,602 (14%)
Industrial 10,422 13,961 (25%) 3,089 3,318 (7%)
Transportation and other 4,108 4,510 (9%) 11,316 10,321 10%
------------- ------------- ------------ -------------
Total 141,279 183,517 (23%) 36,480 39,558 (8%)
============ ============= =========
Cost of gas sold 84,642 126,631 (33%)
------------- -------------
Margin $ 56,637 $ 56,886 -
============= ============= =========
Gas margins and Dth sales for IESU for 1997 and 1996 were as follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1997 1996 Change 1997 1996 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 110,663 $ 97,708 13% 16,317 17,680 (8%)
Commercial 54,383 46,966 16% 9,602 10,323 (7%)
Industrial 13,961 12,256 14% 3,318 3,796 (13%)
Transportation and other 4,510 3,934 15% 10,321 10,341 -
------------- ------------- ------------ -------------
Total 183,517 160,864 14% 39,558 42,140 (6%)
Cost of gas sold 126,631 103,877 22% ============ ============= =========
------------- -------------
Margin $ 56,886 $ 56,987 -
============= ============= =========
Gas purchased
for resale 217,351 141,716 120,795
Margin $ 56,628 $ 48,623 $ 44,774
Total gas margins increased $8.0margin decreased by $0.2 million and $3.8$0.1 million during
1996for 1998 and 1995, respectively. The 1996 increase was1997,
respectively, primarily due to an
annual increasefrom reduced sales as a result of $6.3 million in Utilities' gas rates that was
implemented inmilder weather which
were substantially offset by the fourth quarter of 1995, recovery of Utilities'concurrent and previously deferred
energy efficiency expenditures for Iowa-mandated energy efficiency program costs
in accordance with IUB orders (a portion of these recoveries is also amortized
to expense in other operation expenses). Gas revenues included increased
recoveries for energy efficient program costs of $4.2 million and the increased$2.4 million
for 1998 and 1997, respectively. Lower grain drying related sales largely the result of more favorable weather conditions in 1996.
While IEA's gas sales were up significantly in 1996, their margins
actually decreased due to fluctuations in gas prices and the
competitiveness of the gas marketing business. Therefore, this decrease
partially offset the increase in Utilities' margin. The 1995 margin
increase was primarily duealso
contributed to the price increase at Utilities mentioned
above, recovery of Utilities' previously deferred energy efficiency
expenditures and higher IEA gas margins resulting from increased volumes
sold due to heightened marketing efforts as well as expanding into
additional regional markets.
Under historically normal weather conditions, Utilities' gasdecrease in sales and transported volumes would have increased 1.9% and 3.5% in 1996 and
1995, as compared to actual increases of 5.9% and 4.8%, respectively.
Utilities'1997.
IESU's gas tariffs include purchased gas adjustmentPGA clauses
(PGA) that are designed to currently recover
the cost of gas sold. SeeRefer to IEC's Note 1(k) of the Notes"Notes to Consolidated
Financial StatementsStatements" for discussion of the PGA.
Other Revenues Other revenues40
Operating Expenses
IESU's other operation expenses increased $25.5$26.5 million and $17.2$13.4 million during 1996for
1998 and 1995, respectively, primarily because of
increased revenues at Whiting due to1997, respectively. The 1998 increases in oil and gas prices and
increased gas volumes sold during 1996, and increases in oil and gas
volumes sold in 1995. An increase in Utilities' steam revenues also
contributed to the increase in both years. The steam volumes sold
increased significantly during 1996 and 1995were primarily due to the
addition$10.5
million of a new industrial customer. The 1995 increase was partially
offset as a result of the sale of several of Diversified's subsidiaries
during 1995 and 1994. The operations of the subsidiaries that were sold
were not significant to the results of operations or financial position
of the Company.
Operating Expenses Other operatingmerger-related expenses, increased $13.4 million
and $24.5 million in 1996 and 1995, respectively. Contributing to the
increase in both periods were increased operating activities at Whiting
and IEA, increased labor and benefits costs at Utilities, increases in
the amortization of previously
deferred energy efficiency expenditures, at Utilities (which are currentlya $9 million regulatory asset write-off
and increased Year 2000 compliance costs. The merger-related expenses were
primarily for employee retirements, separations and relocations. The regulatory
asset write-off stemmed from management no longer being recovered through rates) andable to assert that rate
recovery of certain employee benefits costs relating towas probable given the pending merger. The 1996 increase was partially
offset by decreased operating expenses at the Duane Arnold Energy Center
(DAEC), Utilities' nuclear generating facility. The 1995 increase was
also due to costs relating to the Company's process improvement program,existing
merger-related price freeze in effect as well as other factors. These items were
partially offset by lower nuclear operatingoperation expenses, reduced employee pension
and insurancebenefit costs at
Utilities, decreasedand lower costs resulting from the sale of the Diversified
subsidiaries and a cost-cutting effort implemented after the receipt of
the IUB electric price reduction order earliermerger-related operating
efficiencies. The increase in 1995.
Maintenance expenses increased or (decreased) $2.9 million and
($6.7) million during 1996 and 1995, respectively. The 1996 increase1997 was primarily due to increased maintenance activities at Utilities' fossil-fueled
generating stations,amortization
of previously deferred energy efficiency expenditures and costs related to an
early retirement program, which were partially offset by lower maintenanceemployee labor
and benefit costs.
Maintenance expenses at
the DAEC.decreased $1.8 million and increased $8.0 million in 1998
and 1997, respectively. The 1995 decrease in 1998 was due to lowerreduced fossil-fueled
maintenance expenses, at
the DAEC and at Utilities' fossil-fueled generating stations as well as
the cost containment actions discussed above.
Depreciation and amortization increased $9.4 million and $11.6
million in 1996 and 1995, respectively, because of increases in utility
plant in service, the acquisition of oil and gas operating properties
and amortization costs relating to the future dismantlement and
abandonment of Whiting's offshore oil and gas properties. (See Note
13(f) of the Notes to Consolidated Financial Statements for a further
discussion of the dismantlement and abandonment costs). The 1995
increase waswhich were partially offset by lower depreciation rates implementedhigher nuclear maintenance
expenses. The increase in 1997 was primarily due to increased nuclear
maintenance expenses, higher transmission and distribution maintenance
expenditures and increased maintenance at Utilities as a result of the IUB electric price reduction order.fossil-fueled generating stations.
Depreciation and amortization expenses for all periods include a
provision for decommissioning the DAEC, which is collected through
rates. The current annual recovery level is $6.0 million.
During the first quarter of 1996, the Financial Accounting
Standards Board (FASB) issued an Exposure Draft on Accounting for
Liabilities Related to Closure and Removal of Long-Lived Assets which
deals with, among other issues, the accounting for decommissioning
costs. If current electric utility industry accounting practices for
such decommissioning are changed: (1) annual provisions for
decommissioning could increase relative to 1996 and, (2) the estimated
cost for decommissioning could be recorded as a liability, rather than
as accumulated depreciation, with recognition of an increase in the
recorded amount of the related DAEC plant. If such changes are
required, Utilities believes that there would not be an adverse effect
on its financial position or results of operations based on current rate
making practices. See Note 1(g) of the Notes to Consolidated Financial
Statements for a discussion of the recovery of decommissioning costs
allowed in Utilities' most recent rate case.
Taxes other than income taxes increased or (decreased)
($0.8)$4.2 million and $2.7$4.8 million
during 1996for 1998 and 1995,1997, respectively, largelyprimarily due to changes in property taxes at Utilities caused by
fluctuations in assessed property values. The 1996 decrease was
partially offset by an increase in production taxes at Whiting.additions.
Interest Expense and Other
Interest expense increased $4.1decreased $0.4 million and $4.7increased $9.1 million in 19961998 and
1995, respectively,1997, respectively. The 1997 increase was primarily because ofdue to increases in the
average amount of short-term debt outstanding at
Utilities and the average amount of borrowings under Diversified's
credit facility. Lower averagechanges in interest rates, partially attributableaccruals related to
refinancing long-term debt at lower ratesincome tax audits.
Miscellaneous, net expense increased $0.3 million and the mix of long-termdecreased $5.0 million for
1998 and short-term debt, partially offset the increases for both periods.1997, respectively. The increase in interest expense during 19961998 resulted primarily from $6.0
million of merger-related expenses which were substantially offset by the
write-off of an investment in 1997 and a gain on an asset sale in 1998. The
decrease in 1997 was also due to a higher
amount of long-term debt outstanding at Utilities, partially offset by
rate refund interest recorded in 1995 at Utilities and the effects of
the interest rate swap agreement discussed in Note 12(a) of the Notes to
Consolidated Financial Statements.
Miscellaneous, net reflects comparative decreases in income of
($5.5) million and ($0.3) million during 1996 and 1995, respectively.
The 1996 decrease was primarily due to approximately $7.8 million in
costs incurred relatingin 1996 related to the
successful defense of the hostile takeover attempt mountedof IES.
Income Taxes
The effective income tax rates were 40.1%, 41.8% and 40.3% in 1998, 1997 and
1996, respectively (see Note 6 of the "Notes to Consolidated Financial
Statements" for a discussion of the changes).
WP&L RESULTS OF OPERATIONS
Overview
WP&L's earnings available for common stock decreased $35.7 million and $11.3
million in 1998 and 1997, respectively. The decreased earnings for 1998 were
primarily due to merger-related expenses, higher purchased-power and
transmission costs, higher depreciation and amortization expenses, decreased
retail natural gas sales largely due to milder weather, higher injuries and
damages expenses, higher interest expense and a higher effective tax rate. These
decreases were partially offset by MAECa 3 percent increase in retail electricity
sales volumes, largely due to continued economic growth within WP&L's service
territory, reduced employee pension and certain property write-downs at
Diversified.benefit costs and lower costs in 1998
due to merger-related operating efficiencies. The decreasedecreased earnings for 1997
were primarily due to lower gas and electric margins, higher depreciation
expense, higher interest expense and the recognition of a gain on the sale of a
combustion turbine in 1996.
41
Electric Utility Operations
- ---------------------------
Electric margins and MWH sales for WP&L for 1998 and 1997 were as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $198,770 $ 199,633 - 2,964 2,974 -
Commercial 108,724 107,132 1% 1,898 1,878 1%
Industrial 162,771 152,073 7% 4,493 4,256 6%
------------- ------------- ------------ -------------
Total from ultimate customers 470,265 458,838 2% 9,355 9,108 3%
Sales for resale 128,536 160,917 (20%) 4,492 5,824 (23%)
Other 15,903 14,388 11% 59 60 (2%)
------------- ------------- ------------ -------------
Total 614,704 634,143 (3%) 13,906 14,992 (7%)
============ ============= =========
Electric production fuels 120,485 116,812 3%
Purchased-power 113,936 125,438 (9%)
------------- -------------
Margin $380,283 $ 391,893 (3%)
============= ============= =========
Electric margins and MWH sales for WP&L for 1997 and 1996 were as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1997 1996 Change 1997 1996 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 199,633 $ 201,690 (1%) 2,974 2,980 -
Commercial 107,132 105,319 2% 1,878 1,814 4%
Industrial 152,073 143,734 6% 4,256 3,986 7%
------------- ------------- ------------ -------------
Total from ultimate customers 458,838 450,743 2% 9,108 8,780 4%
Sales for resale 160,917 131,836 22% 5,824 5,246 11%
Other 14,388 6,903 108% 60 57 5%
------------- ------------- ------------ -------------
Total 634,143 589,482 8% 14,992 14,083 6%
============ ============= =========
Electric production fuels 116,812 114,470 2%
Purchased-power 125,438 81,108 55%
------------- -------------
Margin $ 391,893 $ 393,904 (1%)
============= ============= =========
Electric margin decreased $11.6 million, or 3%, and $2.0 million, or 1%, during
1998 and 1997, respectively. The 1998 decline in margin was due to:
a) Purchased-power and transmission costs - such costs have increased
significantly because of stricter reliability requirements and higher
transmission costs due to system constraints in Wisconsin. Recovery of such
increased costs in Wisconsin generally involves regulatory lag between the
time of the cost increase and the time a rate increase is implemented. The
PSCW granted WP&L an annual rate increase of $15 million in July 1998
related to these cost increases. In addition, WP&L made a filing with the
PSCW in November 1998 seeking another rate increase for higher
purchased-power and transmission costs. (Refer to "Rates and Regulatory
Matters" for a further discussion of this filing). The effect of these 1998
cost increases was partially offset by dividends receivedWP&L's reliance on more costly
purchased-power in the first six months of 1997 due to various power plant
outages, particularly Kewaunee.
b) Lower off-system sales income - due to the transmission constraints,
increased native demand, a more active bulk power market, which resulted in
lower bulk power margins, and the implementation of a merger-related
42
joint sales agreement (effective with the consummation of the Merger, the
margins resulting from IEC's off-system sales are allocated among IESU, IPC
and WP&L).
A 2.4% retail rate decrease implemented at WP&L in April 1997 also contributed
to the two New Zealand entitieslower electric margin in which1998. The increased sales to ultimate customers,
largely due to economic growth in WP&L's service territory, partially offset
these items. Weather normalized sales volumes (excluding off-system sales)
increased approximately 2.2% in 1998 compared to an actual increase of 1.3%.
The decrease in margin in 1997 was due to the company has equity
investmentsrate decrease, milder weather
conditions in 1997 as compared to 1996 and WP&L's reliance on more costly
purchased power in 1997 due to the various gains realizedpower plant outages. These items were
partially offset by the increased commercial and industrial sales, an increase
in off-system sales in 1997 and higher revenues from conservation services.
Gas Utility Operations
- ----------------------
Gas margins and Dth sales for WP&L for 1998 and 1997 were as follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- --------- ------------ ------------- -------
Residential $ 65,173 $ 84,513 (23%) 10,936 12,770 (14%)
Commercial 33,898 45,456 (25%) 7,285 8,592 (15%)
Industrial 5,896 8,378 (30%) 1,422 1,714 (17%)
Transportation and other 6,770 17,536 (61%) 12,948 17,595 (26%)
------------- ------------- ------------ -------------
Total 111,737 155,883 (28%) 32,591 40,671 (20%)
============ ============= =========
Cost of gas sold 61,409 99,267 (38%)
------------- -------------
Margin $ 50,328 $ 56,616 (11%)
============= ============= =========
Gas margins and Dth sales for WP&L for 1997 and 1996 were as follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1997 1996 Change 1997 1996 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 84,513 $ 90,382 (6%) 12,770 14,297 (11%)
Commercial 45,456 46,703 (3%) 8,592 9,167 (6%)
Industrial 8,378 11,410 (27%) 1,714 1,997 (14%)
Transportation and other 17,536 17,132 2% 17,595 18,567 (5%)
------------- ------------- ------------ ------------
Total 155,883 165,627 (6%) 40,671 44,028 (8%)
============ ============= =========
Cost of gas sold 99,267 104,830 (5%)
------------- -------------
Margin $ 56,616 $ 60,797 (7%)
============= ============= =========
Gas margin declined $6.3 million, or 11%, and $4.2 million, or 7%, during 1998
and 1997, respectively, due to a reduction in Dth sales resulting from milder
weather and an average retail rate reduction of 2.2% implemented in April 1997.
In 1998, the significant decline in transportation and other revenues and sales
reflects an accounting change for off-system sales as required by the PSCW
effective January 1, 1998. The accounting change requires that beginning in 1998
off-system gas sales be reported as a reduction of the cost of gas sold rather
than as gas revenue. In 1997, off-system gas revenues were $11.1 million.
Refer to "Rates and Regulatory Matters" for a discussion of a gas cost
adjustment mechanism in place at WP&L. The impact on the dispositionresults of assets.operations
from such mechanism was not significant in any of the periods presented.
43
Operating Expenses
Other operation expense increased $12.3 million and decreased $8.9 million for
1998 and 1997, respectively. The 19951998 increase was primarily due to $11.2
million of merger-related expenses for employee retirements, separations and
relocations. Higher injuries and damages expenses and an increase in other
administrative and general expenses also contributed to the increase. Such items
were partially offset by reduced employee pension and benefits expenses, reduced
conservation expense and lower costs from merger-related operating efficiencies.
The 1997 decrease was primarily because of higher feesdue to a reduction in conservation expense,
which was partially offset by costs associated with an early retirement program
in 1997 for eligible bargaining unit employees.
Depreciation and amortization expense increased $14.9 million and $19.4 million
for 1998 and 1997, respectively. The 1998 increase was due to property
additions, higher Kewaunee depreciation (refer to "Capital Requirements Nuclear
Facilities" for additional information) and a Kewaunee surcharge of $3.2 million
(which has been recorded in depreciation and amortization expense with a
corresponding increase in revenues resulting in no impact on earnings). The 1997
increase was due to higher depreciation rates approved by the average amountPSCW, effective
January 1, 1997, and property additions.
Interest Expense and Other
Interest expense increased $4.0 million in 1998 primarily due to unusually low
interest expense in the second quarter of utility accounts receivable sold,1997, resulting from an adjustment to
decrease interest expense relating to a tax audit settlement, and increased
borrowings during 1998.
Miscellaneous, net income decreased $2.7 million and $2.9 million in 1998 and
1997, respectively. The 1998 decrease was primarily due to $6.1 million of
merger-related expenses which was partially offset by various gains realizedhigher earnings on the
sale of several
investments by Diversified.
Federal and State Income Taxes Federal and state income taxes
increased $4.9 million and $0.9 million in 1996 and 1995, respectively.nuclear decommissioning trust fund. The increase for both periods was due to a higher effective tax rate
resulting from: 1) the effect of property related temporary differences
for which deferred taxes had not previously been provided in rates,
pursuant to rate making principles, that are now becoming payable and
are being recovered from ratepayers and 2) adjustments to tax reserves.
The 1996 increase in effective tax rate was also due to recording the
impacts of a tentative Internal Revenue Service audit settlement for tax
years 1991-1993 as well as the incurrence of certain merger-related
expenses, which are not tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily attributable to
Utilities' construction programs, its debt maturities and the level of
Diversified's business opportunities. The Company's pretax ratio of
times interest earned was 2.99, 3.12 and 3.38 in 1996-1994,
respectively. Cash flows from operating activities were $183 million,
$200 million and $217 million in 1996-1994, respectively. The 19961997 decrease was primarily due to the
timingrecognition of incomea gain on the sale of a combustion turbine in 1996.
Income Taxes
Income taxes decreased $17.2 million and $12.0 million in 1998 and 1997,
respectively, due to lower pre-tax income. See Note 6 of the "Notes to
Consolidated Financial Statements" for details on the effective tax paymentsrate
changes.
LIQUIDITY AND CAPITAL RESOURCES
Historical IEC Analysis
Cash flows from operating activities at IEC increased $4 million and other$12 million
for 1998 and 1997, respectively. The increases were primarily due to changes in
working capital and additional depreciation and amortization expense partially
offset by lower net income and lower deferred taxes and investment tax credits.
Cash flows used for financing activities decreased $39 million and increased $55
million in 1998 and 1997, respectively. The changes were primarily a result of
the net changes in the amount of debt outstanding. Cash flows used for investing
activities increased $43 million and decreased $44 million in 1998 and 1997,
respectively, primarily due to changes in the levels of construction and
acquisition expenditures. The decrease in 1997 was partially offset by higher
proceeds from the disposition of assets in 1996.
Historical IESU Analysis
Cash flows generated from operating activities increased $16 million and $20
million in 1998 and 1997, respectively. Cash flows used for financing activities
decreased $50 million and increased $84 million for 1998 and
44
1997, respectively. The decrease in 1998 was primarily a result of reduced
common stock dividends and the increase in 1997 was due to the net change in
borrowings in 1997. Cash flows used for investing activities decreased $3
million and $45 million in 1998 and 1997, respectively. The decrease in 1997 was
primarily a result of reduced construction expenditures.
Historical WP&L Analysis
Cash flows generated from operations increased $27 million and decreased $42
million in 1998 and 1997, respectively. The 1998 increase was primarily a result
of changes in working capital and higher depreciation and amortization expenses
partially offset by lower net income. The decrease in 1997 was mainly
attributable to the change in working capital. Cash flows used for financing
activities increased $14 million and decreased $75 million in 1998 and 1997,
respectively, primarily due to changes in the amount of debt outstanding. Cash
flows used for investing activities increased $12 million and $34 million in
1998 and 1997, respectively. The 1995 decreaseincrease in 1998 was primarily due to higher
shared savings expenditures relatedand the increase in 1997 was mainly due to the
1995 DAEC refueling outageproceeds from the sale of other property and other
changesequipment in working capital.1996.
Future Considerations
The Company anticipatescapital requirements of IEC are primarily attributable to its utility
subsidiaries' construction and acquisition programs, its debt maturities and
business opportunities of Alliant Energy Resources. It is anticipated that
future capital requirements of IEC will be met by cash generated from operations
and external financing. The level of cash generated from operations is partially
dependent upon economic conditions, legislative activities, environmental
matters and timely regulatory recovery of Utilities'utility costs. See Notes 3IEC's liquidity and
13capital resources will be affected by costs associated with environmental and
regulatory issues. Emerging competition in the utility industry could also
impact IEC's liquidity and capital resources, as discussed previously in the
"Utility Industry Outlook" section.
At December 31, 1998, Alliant Energy Resources had approximately $69 million of
investments in foreign entities. At December 31, 1998, IESU, WP&L and IPC did
not have any foreign investments. IEC continues to explore additional
international investment opportunities. Such investments may carry a higher
level of risk than IEC's traditional domestic utility investments or Alliant
Energy Resources' domestic investments. Such risks could include foreign
government actions, foreign economic and currency risks and others.
IEC is expected to pursue various potential business development opportunities,
including international as well as domestic investments, and is devoting
resources to such efforts. It is anticipated that IEC will strive to select
investments where the international and other risks are both understood and
manageable. Under PUHCA, IEC's investments in exempt wholesale generators
(EWG's) and foreign utility companies (FUCO's) is limited to 50% of IEC's
consolidated retained earnings. In addition, there are limitations on the amount
of non-utility investments IEC can make under the Wisconsin Utility Holding
Company Act (WUHCA) as well.
At December 31, 1998, IEC had an investment in the stock of McLeodUSA Inc.
(McLeod), a telecommunications company, valued at $320.3 million (based on a
December 31, 1998 closing price of $31.25 per share and compared to a cost basis
of $29.1 million). Pursuant to the applicable accounting rules, the carrying
value of the Notesinvestments are adjusted to the estimated fair value each quarter
based on the closing price at the end of the quarter. The adjustments do not
impact net income as the unrealized gains or losses, net of taxes, are recorded
directly to the common equity section of the balance sheet and are a component
of other comprehensive income. In addition, any such gains or losses are
reflected in current earnings only at the time they are realized through a sale.
IEC entered into an agreement in November 1998 with McLeod whereby IEC's ability
to sell the McLeod stock is subject to various restrictions.
IEC had certain off-balance sheet financial guarantees and commitments
outstanding at December 31, 1998. They generally consist of third-party
borrowing arrangements and lending commitments, guarantees of financial
performance of syndicated affordable housing properties and guarantees relating
to IEC's electricity trading joint venture. Refer to Note 12(d) of the "Notes to
the Consolidated Financial Statements.Statements" for additional details.
45
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets, and costs of
external financing, are dependent on the Company's
creditworthiness. The Company's debt ratings of IEC
and certain subsidiaries by Moody's and Standard & Poor's are as follows:
Moody's Standard & Poor's
Utilities - Long-term
Standard &
Moody's Poor's
----------------- -----------------
IESU - Secured long-term debt A2 A+
- Unsecured long-term debt A3 A
WP&L - Secured long-term debt Aa2 AA
- Unsecured long-term debt Aa3 A+
IPC - Secured long-term debt A1 A+
- Unsecured long-term debt A2 A
Alliant Energy Resources - Commercial paper P2 A1
IEC - Commercial paper (a) P1 A1
(a) IESU, WP&L and IPC participate in a utility money pool which is funded, as
needed, through the issuance of commercial paper by IEC. The PSCW has
restricted WP&L from lending money to non-utility affiliates and
non-Wisconsin utilities. As a result, WP&L is restricted from lending money
to the utility money pool but is able to borrow money from the utility money
pool.
Alliant Energy Resources is a party to a 3-Year Credit Agreement with various
banking institutions. The agreement extends through October 2000, with one-year
extensions available upon agreement by the parties. Unused borrowing
availability under this agreement is also used to support Alliant Energy
Resources' commercial paper program. A - Commercial paper P1 A1
Diversified - Commercial paper P2 A2
Utilities' credit ratings arecombined maximum of $450 million of
borrowings under review for potential upgrade
related to the pending merger.
The Company's liquidity and capital resources will be affected by
environmental, regulatory and competitive issues, including the ultimate
disposition of remediation issues surrounding the Company's
environmental liabilitiesthis agreement and the Clean Air Act as amended, as discussed
in Note 13commercial paper program may be
outstanding at any one time. Interest rates and maturities are set at the time
of borrowing. The rates are based upon quoted market prices and the Notes to Consolidated Financial Statements, and
emerging competition in the electric utility industry as discussed in
the Competition section. Consistent with rate making principles of the
IUB, management believes that the costs incurred for the above matters
will not have a material adverse effect on the financial position or
results of operations of the Company.maturities
are less than one year. At December 31, 1996, Utilities1998, Alliant Energy Resources had approximately $61$253
million of energy efficiency program costs recorded as regulatory assets. Seecommercial paper outstanding and backed by this facility with
interest rates ranging from 5.15%-5.85%. (See Note 3(b)11(a) of the Notes"Notes to the
Consolidated Financial StatementsStatements" for a discussion of interest rate swaps
Alliant Energy Resources has entered into relative to $200 million of short-term
borrowings under, or backed by, this agreement.) Alliant Energy Resources
intends to continue issuing commercial paper backed by this facility and no
conditions existed at December 31, 1998 that would prevent the timingissuance of
commercial paper or direct borrowings on its bank lines. Accordingly, this debt
is classified as long-term. In addition, Alliant Energy Resources has in place a
$150 million 364-Day Credit Agreement which is described below.
Other than periodic sinking fund requirements, which will not require additional
cash expenditures, the following long-term debt (in millions) will mature prior
to December 31, 2003:
IESU $187.5
IPC 3.3
WP&L 1.9
Alliant Energy Resources 279.2
-----------------
IEC $471.9
=================
Depending upon market conditions, it is currently anticipated that a majority of
the maturing debt will be refinanced with the issuance of long-term securities.
WP&L currently has no authority from the PSCW or the Securities and Exchange
Commission (SEC) to issue additional long-term debt. On November 25, 1998, IESU
and IPC received authority from the SEC under PUHCA to issue $200 million and
$80 million of long-term debt securities, respectively. The companies
continually evaluate their future financing needs and will make any necessary
regulatory filings as needed.
46
Under the most restrictive terms of their respective indentures, IESU, WP&L and
IPC could have issued at least $241 million, $309 million and $182 million of
long-term debt at December 31, 1998, respectively.
On October 30, 1998, WP&L issued $60 million of debentures at a coupon rate of
5.70% maturing on October 15, 2008. The net proceeds from the debt offering were
used to pay down short-term debt, including short-term debt used to retire
maturing long-term debt.
On November 30, 1998, IPC issued $2.65 million and $2.3 million of pollution
control revenue bonds due November 1, 2005 and November 1, 2008, respectively.
The proceeds were used to retire at maturity $5.85 million of 5.95% pollution
control revenue bonds. The bonds have a fixed interest rate of 4.30% for the
recoveryfirst five years. Thereafter, IPC will have the option to reset the interest
rate at one of these costs under IUB
rulesthree variable short-term interest rates or at a new long-term
interest rate, based on the then prevailing market conditions, provided the rate
does not exceed 12% per annum.
On November 30, 1998, IESU issued $10 million of pollution control revenue bonds
due November 1, 2023. The proceeds were used to refinance $10 million of 5.95%
pollution control revenue bonds that were due serially 2000 through 2007. The
bonds have a fixed rate of 4.25% for the first five years. Thereafter, IESU will
have the option to reset the interest rate at one of three variable short-term
interest rates or at a new long-term interest rate, based on the then prevailing
market conditions, provided the rate does not exceed 12% per annum.
The various charter provisions of the entities identified below authorize and
Iowa statutory changes recently enacted relating to these
programs.limit the aggregate amount of additional shares of Cumulative Preferred Stock
and Cumulative Preference Stock that may be issued. At December 31, 1996,1998, the
Companycompanies could have issued the following additional shares of Cumulative
Preferred or Preference Stock:
IESU WP&L IPC
Cumulative Preferred - 2,700,775 1,238,619
Cumulative Preference 700,000 - 2,000,000
For interim financing, IESU, WP&L and IPC were authorized by the applicable
federal or state regulatory agency to issue short-term debt as follows (in
millions) at December 31, 1998:
IESU WP&L IPC
Regulatory authorization $150 $128 $72
Short-term debt outstanding - external parties - $50 -
Short-term debt outstanding - money pool - $27 $22
In addition to the short-term debt outstanding at its utility subsidiaries, IEC
had a $20.0 million investment in
Class A common stock of McLeod, Inc. (McLeod), a $9.2 million investment
in Class B common stock and vested options that, if exercised, would
represent an additional investment$66 million of approximately $2.3 million.
McLeod provides local, long-distance and other telecommunications
services. See Notes 6(b) and 11 of the Notes to Consolidated Financial
Statements for further information on the Company's investment in
McLeod.
The Company has financial guarantees amounting to $22.9 millionshort-term debt outstanding at December 31,
1996, which are not reflected1998. In addition to providing for ongoing working capital needs, this
availability of short-term financing provides the companies flexibility in the
consolidated financial statements. Such guarantees are generally issuedissuance of long-term securities. The level of short-term borrowing fluctuates
based on seasonal corporate needs, the timing of long-term financing, and
capital market conditions. To maintain flexibility in its capital structure and
to take advantage of favorable short-term rates, IESU and WP&L also use proceeds
from the sale of accounts receivable and unbilled revenues to finance a portion
of their long-term cash needs. IEC anticipates that short-term debt will
continue to be available at reasonable costs due to current ratings by
independent utility analysts and rating services.
Alliant Energy Resources is also a party to a 364-Day Credit Agreement with
various banking institutions. The agreement extends through October 18, 1999,
with 364 day extensions available upon agreement by the parties. The unborrowed
portion of this agreement is also used to support third-partyAlliant Energy Resources'
commercial paper program. A combined maximum of $150 million of borrowings under
this agreement and commercial paper backed by this facility may be outstanding
at any one time. Interest rates and maturities are set at the time of borrowing.
The rates are based upon quoted market prices and the maturities are less than
one year. There were no borrowings under this facility at December 31, 1998.
47
In addition to the aforementioned borrowing arrangementscapability under Alliant Energy
Resources Credit Agreements, IEC has $150 million of bank lines of credit, of
which none was utilized at December 31, 1998, available for direct borrowing or
to support commercial paper. Commitment fees are paid to maintain these lines
and similar transactions.
The Company believes thatthere are no conditions which restrict the likelihoodunused lines of material cash payments by
the Companycredit.
From time to time, IEC may borrow from banks and other financial institutions on
"as-offered" credit lines in lieu of commercial paper, and has agreements with
several financial institutions for such borrowings. There are no commitment fees
associated with these agreements and there were no borrowings outstanding under
these agreements is remote.
The Company increased its investments in foreign entities by
approximately $20 million in 1996 (see Note 6(a) of the Notes to
Consolidated Financial Statements for a further discussion). The
Company also continues to explore other international investment
opportunities. Such investments carry a higher level of risk than the
Company's traditional utility investments or Diversified's domestic
investments. Such risks could include foreign government actions,
foreign economic and currency risks and others. The Company may also
incur business development expenses for potential projects pursued by
the Company that may never materialize. The Company is striving to
select international investments where these risks are both understood
and minimized.
The Resale Power Group of Iowa (RPGI), consisting of virtually all
of Utilities' wholesale customers, has notified Utilities that it will
not purchase its power supply from Utilities afterat December 31, 1998.
It is possible that certain RPGI customers will drop out of RPGIIEC made a filing with the SEC in orderFebruary 1999 under PUHCA to remain as Utilities' customers. RPGI will continueprovide IEC with,
among other things, broad authorization over the next three years to purchase
transmission services from Utilities after December 31, 1998. While the
Company cannot determine the outcome of this issue at this time, the
result will not have a material adverse effect on its financial position
or results of operations given 1) Utilities' wholesale sales only
accounted for approximately 5% of Utilities' total 1996 electric sales,
excluding off-system sales; 2) Utilities currently has to supplement its
generating capability with purchased power to meet its sales load; and
3) Utilities' annual electric sales growth rate continues to be strong.
Under provisions of the Merger Agreement, there are restrictions on
the amount of common stock
and long-term debt, provide guarantees, acquire energy-related assets and enter into
interest rate hedging transactions.
Given the Company can issue
pendingabove financing flexibility, including IEC's access to both the merger. The Company does not expectdebt
and equity securities markets, management believes it has the restrictionsnecessary
financing capabilities in place to have a material effect onadequately finance its ability to meet its future capital requirements.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program anticipates
expenditures of approximately $225 million for 1997, of which
approximately $147 million represents expenditures at Utilities and
approximately $78 million represents expenditures at Diversified. Of
the $147 million of Utilities' expenditures, 39% represents expenditures
for electric transmission and distribution facilities, 21% represents
electric generation expenditures, 21% represents information technology
expenditures and 5% represents gas expenditures. The remaining 14%
represents miscellaneous electric, steam and general expenditures.
Diversified's anticipated expenditures include approximately $75 million
for domestic and international energy-related construction and
acquisition expenditures.
The Company's levels of construction and acquisition expenditures
are projected to be $208 million in 1998, $212 million in 1999,
$182 million in 2000 and $198 million in 2001. It is estimated that
virtually all of Utilities' construction and acquisition expenditures
will be provided by cash from operating activities (after payment of
dividends)requirements
for the five-year period 1997-2001. Financing plans for
Diversified's construction and acquisition program will vary, depending
primarily on the level of energy-related acquisitions.foreseeable future.
Capital Requirements
General
Capital expenditure and investment and financing plans are subject to continual
review and change. The capital expenditure and investment programs may be
revised significantly as a result of many considerations, including changes in
economic conditions, variations in actual sales and load growth compared to
forecasts, requirements of environmental, nuclear and other regulatory
authorities, acquisition and business combination opportunities, the
availability of alternate energy and purchased powerpurchased-power sources, the ability to
obtain adequate and timely rate relief, escalations in construction costs and
conservation and energy efficiency programs.
Construction and acquisition expenditures for IEC for the year ended December
31, 1998 were $372 million, compared with $328 million for the year ended
December 31, 1997. IEC's anticipated construction and acquisition expenditures
for 1999 are estimated to be approximately $495 million, consisting of
approximately $275 million in its utility operations, $100 million for
energy-related international investments and $120 million for new business
development initiatives at Alliant Energy Resources. IEC's anticipated utility
construction and acquisition expenditures for 1999 is made up of 53% for
electric transmission and distribution, 18% for electric generation, 10% for
information technology and 19% for miscellaneous electric, gas, water and steam
projects. The level of 1999 domestic and international investments could vary
significantly from the estimates noted here depending on actual investment
opportunities, timing of the opportunities and the receipt of regulatory
approvals to exceed limitations in place under WUHCA and PUHCA on the amount of
IEC's non-utility investments. It is expected that IEC will spend approximately
$1.3 billion on utility construction and acquisition expenditures during
2000-2003, including expenditures to comply with nitrogen oxides (NOx) emissions
reductions in Wisconsin as discussed in "Other Matters - Environmental." It is
expected that Alliant Energy Resources will invest in energy products and
services in domestic and international markets, industrial services initiatives
and other strategic initiatives during 2000-2003.
IESU's construction and acquisition expenditures for the years ended December
31, 1998 and 1997 were $115 million and $109 million, respectively. IESU's
anticipated construction and acquisition expenditures for 1999 are estimated to
be approximately $109 million, of which 56% represents expenditures for electric
transmission and distribution facilities, 21% represents generation
expenditures, 8% represents information technology expenditures and the
remaining 15% represents miscellaneous electric, gas, steam and general
expenditures. IESU's levels of utility construction and acquisition expenditures
are projected to be $122 million in 2000, $119 million in 2001, $115 million in
2002 and $113 million in 2003.
48
WP&L's construction and acquisition expenditures for the years ended December
31, 1998 and 1997 were $117 and $119 million, respectively. WP&L's anticipated
construction and acquisition expenditures for 1999 are estimated to be
approximately $126 million, of which 50% represents expenditures for electric
transmission and distribution facilities, 17% represents generation
expenditures, 10% represents information technology expenditures and the
remaining 23% represents miscellaneous electric, gas, water and general
expenditures. WP&L's construction and acquisition expenditures are projected to
be $162 million in 2000, $130 million in 2001, $155 million in 2002 and $185
million in 2003 which include expenditures to comply with nitrogen oxides (NOx)
emissions reductions as discussed in "Other Matters-Environmental."
IEC anticipates financing utility construction expenditures during 1999-2003
through internally generated funds supplemented, when required, by outside
financing. Funding of a majority of the Alliant Energy Resources construction
and acquisition expenditures is expected to be completed with external
financings.
Nuclear Facilities
IEC owns interests in two nuclear facilities, Kewaunee and the Duane Arnold
Energy Center (DAEC). Set forth below is a discussion of certain matters
impacting these facilities.
Kewaunee, a 532-megawatt pressurized water reactor plant, is operated by
Wisconsin Public Service Corporation (WPSC) and is jointly owned by WPSC
(41.2%), WP&L (41.0%), and Madison Gas and Electric Company (MG&E) (17.8%).
The Kewaunee operating license expires in 2013.
On April 7, 1998, the PSCW approved WPSC's application for replacement of the
two steam generators at Kewaunee. The total cost of replacing the steam
generators would be approximately $90.7 million, with WP&L's share of the cost
being approximately $37.2 million. The replacement work is tentatively planned
for the spring of 2000 and will take approximately 60 days. On July 2, 1998, the
PSCW approved an agreement between the owners of Kewaunee which provides for
WPSC to assume the 17.8% Kewaunee ownership share currently held by MG&E prior
to work beginning on the replacement of steam generators. On September 29, 1998,
WPSC and MG&E finalized an arrangement in which WPSC will acquire MG&E's 17.8%
share of Kewaunee. This agreement, the closing of which is contingent upon the
steam generator replacement, will give WPSC 59.0% ownership in Kewaunee. After
the change in ownership, WPSC and WP&L will be responsible for the
decommissioning of the plant. WPSC and WP&L are discussing revisions to the
joint power supply agreement which will govern operation of the plant after the
ownership change takes place.
On October 17, 1998, Kewaunee was shut down for a planned maintenance and
refueling outage. Inspection of the plant's two steam generators shows that the
repairs made in 1997 are holding up well and few additional repairs were needed.
In addition to the inspection and repairs of the steam generator, a major
overhaul was performed on the main turbine generator. The plant was back in
operation on November 27, 1998.
Prior to the July 2, 1998 PSCW decision, the PSCW had directed the owners of
Kewaunee to record depreciation and decommissioning cost levels based on an
expected plant end-of-life of 2002 versus a license end-of-life of 2013. This
was prompted by the uncertainty regarding the expected useful life of the plant
without steam generator replacement. The revised end-of life of 2002 resulted in
higher depreciation and decommissioning expense at WP&L beginning in May 1997,
in accordance with the PSCW rate order UR-110. This level of depreciation will
remain in effect until the steam generator replacement is completed at which
time the entire plant will be depreciated over 8.5 years using an accelerated
method. At December 31, 1998, the net carrying amount of WP&L's investment in
Kewaunee was approximately $44.9 million. WP&L's retail customers in Wisconsin
are responsible for approximately 80% of WP&L's share of Kewaunee costs (see
Note 12 (h) of the "Notes to Consolidated Financial Statements" for additional
information).
DAEC, a 535-megawatt boiling water reactor plant, is operated by IESU which has
a 70% ownership interest in the plant. The DAEC operating license expires in
2014. Pursuant to the most recent electric rate case order, the IUB allows IESU
to currently recover $6.0 million annually for IESU's 70% share of the cost to
decommission DAEC. The current recovery figures are based on an assumed cost to
decommission DAEC of $252.8 million, which is
49
IESU's 70% portion in 1993 dollars, based on the Nuclear Regulatory Commission
(NRC) minimum formula (which exceeds the amount in the site-specific study
completed in 1994). At December 31, 1998, IESU had $91.7 million invested in
external decommissioning trust funds and also had an internal decommissioning
reserve of $21.7 million recorded as accumulated depreciation.
IESU's 70% share of the estimated cost to decommission DAEC based on the most
recent site-specific study completed in 1998 is $334.2 million, in 1998 dollars.
This study includes the costs to terminate DAEC's NRC license and to return the
site to a greenfield condition. IESU's 70% share of the estimated cost to
decommission DAEC based on the most recent NRC minimum formula is $347.0 in 1997
dollars. The NRC minimum formula is intended to apply only to the cost of
terminating DAEC's NRC license. The additional decommissioning expense funding
requirements which should result from these updated studies are not reflected in
IESU's rates.
In February 1999, IEC, NSP, WPSC and Wisconsin Electric Power Co. announced the
formation of a nuclear management company (NMC) to sustain long-term safety,
optimize reliability and improve the operational performance of their nuclear
generating plants. Combined, the four utilities operate seven nuclear generating
plants at five locations. IEC's participation in the NMC is contingent on
approval from the SEC under PUHCA. Each utility will be required to obtain
various other state or federal regulatory approvals prior to its participation
in the NMC. In addition, NRC approval is required if any utilities choose to
transfer their operating license to the new company. As presently proposed, the
utilities would continue to own their plants, be entitled to energy generated at
the plants and retain the financial obligations for their safe operation,
maintenance and decommissioning.
Refer to the "Other Matters - Environmental" section for a discussion of various
issues impacting IEC's future capital requirements.
Rates and Regulatory Matters
In November 1997, as part of its Merger approval, FERC accepted a proposal by
IESU, WP&L, and IPC, which provides for a four-year freeze on wholesale electric
prices beginning with the effective date of the Merger.
In association with the Merger, IESU, WP&L and IPC entered into a System
Coordination and Operating Agreement which became effective with the
consummation of the Merger. The agreement, which has been approved by the FERC,
provides a contractual basis for coordinated planning, construction, operation
and maintenance of the interconnected electric generation and transmission
systems of the three utility companies. In addition, the agreement allows the
interconnected system to be operated as a single control area with off-system
capacity sales and purchases made to market excess system capability or to meet
system capability deficiencies. Such sales and purchases are allocated among the
three utility companies based on procedures included in the agreement. The
procedures were approved by both the FERC and all state regulatory bodies having
jurisdiction over these sales.
IESU
In September 1997, IESU agreed with the IUB to provide Iowa customers a
four-year retail electric and gas price freeze commencing on the effective date
of the Merger. The agreement excluded price changes due to government-mandated
programs (such as energy efficiency cost recovery), the electric fuel adjustment
clause and PGA clause and unforeseen dramatic changes in operations. In
addition, the price freeze does not preclude a review by either the IUB or
Office of Consumer Advocate (OCA) into whether IESU is exceeding a reasonable
return on common equity. Refer to the "Utility Industry Outlook" section for a
discussion of possible legislation to be introduced in Iowa regarding
restructuring the electric utility industry.
Under provisions of the IUB rules, IESU is currently recovering the costs it has
incurred for its energy efficiency programs. Generally, the costs incurred
through July 1997 are being recovered over various four-year periods. Statutory
changes implemented by the IUB in 1997 allowed IESU to begin concurrent recovery
of its prospective expenditures on August 1, 1997. The implementation of these
changes will gradually eliminate the regulatory asset that was created under the
prior rate making mechanism as these costs are recovered.
50
WP&L
In connection with its approval of the Merger, Agreement, therethe PSCW accepted a WP&L proposal
to freeze rates for four years following the date of the Merger. A re-opening of
an investigation into WP&L's rates during the rate freeze period, for both cost
increases and decreases, may occur only for single events that are restrictions on
the amount of constructionnot
merger-related and acquisition expenditures the Company can
make pending the merger. The Company does not expect the restrictions
to have a material effect on its abilityrevenue requirement impact of $4.5 million or more. In
addition, the electric fuel adjustment clause and PGA clause are not affected by
the rate freezes.
In rate order UR-110, the PSCW approved new rates effective April 29, 1997. On
average, WP&L's retail electric rates under the new rate order declined by 2.4%
and retail gas rates declined by 2.2%. In addition, the PSCW ordered that it
must approve the payment of dividends by WP&L to implement its anticipated
construction and acquisition program.
LONG-TERM FINANCING
Other than Utilities' periodic sinking fund requirements, which
Utilities intends to meet by pledging additional property, the following
long-term debt will mature prior to December 31, 2001:
(in millions)
Utilities $ 207.2
Diversified's credit facility 172.1
Other subsidiaries' debt 11.2
$ 390.5
The Company intends to refinance the majorityIEC that are in excess of the
debt
maturitieslevel forecasted in the rate order ($58.3 million), if such dividends would
reduce WP&L's average common equity ratio below 52.00% of total capitalization.
The dividends paid by WP&L to IEC since the rate order was issued have not
exceeded the level forecasted in the rate order.
The retail electric rates are based in part on forecasted fuel and
purchased-power costs. Under PSCW rules, Wisconsin utilities can seek emergency
rate increases if the annual costs are more than 3% higher than the estimated
costs used to establish rates. In March 1998, WP&L requested an electric rate
increase to cover purchased-power and transmission costs that have increased due
to transmission constraints and electric reliability concerns in the Midwest. On
July 14, 1998, the PSCW granted a retail electric rate increase of $14.8 million
annually that was effective on July 16, 1998. In November 1998, WP&L requested
another electric rate increase to cover additional increases in purchased-power
and transmission costs. In early March 1999, the PSCW granted a retail electric
rate increase of $14.5 million. The additional revenues collected are subject to
refund if WP&L's earnings exceed its authorized return on equity.
The gas performance incentive includes a sharing mechanism, whereby 40% of all
gains and losses relative to current commodity prices as well as other
benchmarks are retained by WP&L rather than refunded to or recovered from
customers.
Rate order UR-110 also provided for the recovery of costs associated with long-term securities.WP&L's
energy efficiency programs, including the recovery of the cost of capital
associated with advances made to customers to install energy-efficient
equipment.
In September 1996, Utilities repaid at maturity $15 millionMay 1998, the PSCW approved the deferral of Series J, 6.25% First Mortgage Bondscertain costs associated with the
Year 2000 issue and in a separate transaction,
issued $60November 1998, WP&L filed for rate recovery of $16.1
million related to the Wisconsin retail portion of Collateral Trust Bonds, 7.25%, due 2006.
Utilities has entered intoYear 2000 costs. A
pre-hearing conference was held in January 1999 and hearings are scheduled for
May 1999. Management anticipates receiving an Indenture of Mortgage and Deed of
Trust dated September 1, 1993 (New Mortgage). The New Mortgage provides
for, among other things,order by the issuance of Collateral Trust Bonds upon the
basis of First Mortgage Bonds being issued by Utilities. The lienend of the New Mortgage is subordinatesecond
quarter of 1999.
In January 1999, WP&L made a filing with the PSCW proposing to begin deferring,
on January 1, 1999, all costs associated with the United States Environmental
Protection Agency's (EPA) required NOx emission reductions. WP&L has requested
recovery of all the NOx reduction costs through a surcharge mechanism. WP&L
anticipates receiving a final order in this proceeding in late 1999 or early
2000. Refer to the lien of Utilities' first
mortgages until such time as all bonds issued under the first mortgages
have been retired and such mortgages satisfied. Accordingly, to the
extent that Utilities issues Collateral Trust Bonds on the basis of
First Mortgage Bonds, it must comply with the requirements for the
issuance of First Mortgage Bonds under Utilities' first mortgages.
Under the terms of the New Mortgage, Utilities has covenanted not to
issue any additional First Mortgage Bonds under its first mortgages
except to provide the basis for issuance of Collateral Trust Bonds.
The indentures pursuant to which Utilities issues First Mortgage
Bonds constitute direct first mortgage liens upon substantially all
tangible public utility property and contain covenants which restrict
the amount of additional bonds which may be issued. At
December 31, 1996, such restrictions would have allowed Utilities to
issue at least $241 million of additional First Mortgage Bonds.
In order to provide an instrument for the issuance of unsecured
subordinated debt securities, Utilities entered into an Indenture dated
December 1, 1995 (Subordinated Indenture). The Subordinated Indenture
provides for, among other things, the issuance of unsecured subordinated
debt securities. Any debt securities issued under the Subordinated
Indenture are subordinate to all senior indebtedness of Utilities,
including First Mortgage Bonds and Collateral Trust Bonds.
Utilities has received authority from the FERC and the SEC to issue
up to $250 million of long-term debt, and has $190 million of remaining
authority under the current FERC docket through April 1998, and $140
million of remaining authority under the current SEC shelf registration.
Diversified has a variable rate credit facility that extends
through November 20, 1999, with two one-year extensions potentially
available to Diversified. Refer to Note 10(a) of the Notes to
Consolidated Financial Statements"Other Matters - Environmental" section for a further
discussion of this
credit facility.the NOx issue.
Refer to "Nuclear Facilities" for a discussion of several PSCW rulings regarding
Kewaunee.
IPC
In September 1997, IPC agreed with the IUB to provide Iowa customers a four-year
retail electric and gas price freeze commencing on the effective date of the
Merger. The Articles of Incorporation of Utilities authorizeagreement excluded price changes due to government-mandated programs
(such as energy efficiency cost recovery), the electric fuel adjustment clause
and limit the
aggregate amount of additional shares of Cumulative Preference StockPGA clause and Cumulative Preferred Stock that may be issued. At December 31, 1996,
Utilities could have issued an additional 700,000 shares of Cumulative
Preference Stock and 100,000 additional shares of Cumulative Preferred
Stock.unforeseen dramatic changes in operations. In addition, Industries had 5,000,000 shares of Cumulative
Preferred Stock, no par value, authorized for issuance, none of which
were outstanding at December 31, 1996.
The Company's capitalization ratios at year-end were as follows:
1996 1995
Long-term debt 52% 49%
Preferred stock 1 2
Common equity 47 49
100% 100%
Under provisionsthe
price freeze does not preclude a review by either the IUB or OCA into whether
IPC is exceeding a reasonable return on common equity. IPC also agreed with the
MPUC and ICC to four-year and three-year rate freezes, respectively, commencing
on the effective date of the
Merger Agreement, there are restrictions51
Merger. Refer to the "Utility Industry Outlook" section for a discussion of
possible legislation to be introduced in Iowa regarding restructuring the
electric utility industry.
On September 30, 1997, the IUB approved a settlement between IPC and the OCA
which provided for an electric rate reduction in annual revenues of
approximately $3.2 million. The reduction applied to all bills rendered on and
after October 7, 1997.
IPC is also recovering its energy efficiency costs in Iowa in a similar manner
as IESU and began its concurrent cost recovery in October 1997.
Assuming capture of the amount of common stockmerger-related synergies and long-term debt the Company can issue
pending the merger. The Companyno significant legislative
or regulatory changes negatively affecting its utility subsidiaries, IEC does
not expect the restrictionsmerger-related electric and gas price freezes to
have a material effect on its ability to meet its future capital
requirements.
SHORT-TERM FINANCING
For interim financing, Utilities is authorized by the FERC to
issue, through 1998, up to $200 million of short-term notes. In
addition to providing for ongoing working capital needs, this
availability of short-term financing provides Utilities flexibility in
the issuance of long-term securities. At December 31, 1996, Utilities
had outstanding short-term borrowings of $135 million.
Utilities has an agreement, which expires in 1999, with a financial
institution to sell, with limited recourse, an undivided fractional
interest of up to $65 million in its pool of utility accounts
receivable. At December 31, 1996, Utilities had sold $65 million under
the agreement. Refer to Note 5 of the Notes to Consolidated Financial
Statements for a further discussion of this agreement, including the
issuance of a new accounting standard which impacts the accounting for
the sales.
At December 31, 1996, the Company had bank lines of credit
aggregating $136.1 million. Utilities was using $110 million to support
commercial paper (weighted average interest rate of 5.70%) and
$11.1 million to support certain pollution control obligations.
Commitment fees are paid to maintain these lines and there are no
conditions which restrict the unused lines of credit. In addition to
the above, Utilities has an uncommitted credit facility with a financial
institution whereby it can borrow up to $40 million. Rates are set at
the time of borrowing and no fees are paid to maintain this facility. At
December 31, 1996, there was $25 million outstanding under this facility
(weighted average interest rate of 6.28%).
ENVIRONMENTAL MATTERS
Utilities has been named as a Potentially Responsible Party (PRP)
by various federal and state environmental agencies for 28 Former
Manufactured Gas Plant (FMGP) sites. Utilities has recorded
environmental liabilities related to the FMGP sites of approximately $36
million (including $4.7 million as current liabilities) at December 31,
1996. Regulatory assets of approximately $36 million, which reflect the
future recovery that is being provided through Utilities' rates, have
been recorded in the Consolidated Balance Sheets. Considering the
current rate treatment allowed by the IUB, management believes that the
clean-up costs incurred by Utilities for these FMGP sites will not have a material
adverse effect on its financial position or results of operations.
ReferOTHER MATTERS
Year 2000
Overview IEC utilizes software, embedded systems and related technologies
throughout its business that will be affected by the date change in the Year
2000. The Year 2000 problem exists because many computerized operating systems,
applications, databases and embedded systems use a standard two digit year field
instead of four digits to Note 13(f)reference a given year. For example, "00" in the date
field would actually represent 1900. As a result, information technology and
embedded systems may not properly recognize the Year 2000 or process data
correctly, potentially causing data inaccuracies, operational malfunctions or
operational failures.
Following up on earlier work, IEC formally established a company-wide project
team in 1997 to assess, remediate and communicate its Year 2000 issues as well
as develop the necessary contingency plans. Expertise on the team has been drawn
from various areas, including, but not limited to, information technology,
engineering, communications, internal audits, legal, facilities, supply chain,
finance, and project management. A full-time project manager heads up a team of
approximately 50 employees who are dedicated to the team full-time and another
475 employees are working on the project on a part-time basis. In addition,
there are approximately 135 individuals from external consulting firms who are
also providing various Year 2000-related services for the project team. Status
reports are provided to senior management monthly and at every meeting of IEC's
Board of Directors. Auditing of the NotesYear 2000 inventory, remediation efforts and
contingency planning is being done by the Internal Audits Department. IEC has
also retained an outside third party to assess and evaluate its Year 2000
project.
The various phases of and other matters relating to the Year 2000 project are
described below.
Assessment A company-wide inventory has been completed for information
technology (hardware, software, databases, network infrastructure operating
systems) and embedded systems (computers or microprocessors that run specialized
software). Inventoried devices and systems have been assessed and prioritized
into three categories based on the relative critical nature of their business
function: safety-related; critical-business-continuity-related; and
non-critical.
Remediation and Testing IEC's approach to remediation is to repair, replace or
retire the affected devices and systems. Remediation and testing of
safety-related and critical-business-continuity-related devices and systems is
underway in all business units. In some cases IEC's ability to meet its target
date for remediation is dependent upon the timely provision of necessary
upgrades and modifications by its software vendors. As of December 31, 1998, IEC
was expecting upgrades from 48 embedded system vendors and 14 information
technology vendors. Should these upgrades be delayed it would impact IEC's
ability to meet its target date. At this time, IEC does not expect that these
upgrades will be delayed. As part of the testing process, client/server
applications are being tested in an isolated test lab on Year 2000 compliant
hardware and software. Also, IEC intends to implement a process to protect the
integrity of the data once it is year 2000 compliant.
52
A. Embedded Systems -
The project team is using testing standards and procedures based on those
developed in the national electric utility industry effort led by the Electric
Power Research Institute (EPRI). The team is also using information and testing
guidance received from IEC's vendors. IEC is participating in EPRI's Year 2000
collaborative effort to share information about test procedures, test results
and vendor information. The project team is also working with equipment vendors
to ascertain Year 2000 compliance with systems and devices. Testing methodology
includes a power on/off test and testing for 13 critical dates including
12/31/99, 1/1/2000 and 2/29/2000. All testing for assessing Year 2000 compliance
has been completed. The only testing remaining is post-remediation testing. The
goal is to complete remediation/testing work for the embedded systems by March
31, 1999; approximately 85% of this remediation/testing work has been completed
as of the end of 1998.
Experience to date suggests that Year 2000 problems in embedded systems are
occurring at a lower rate than originally anticipated. For IEC, 1-2% of embedded
systems have been identified as Year 2000 problematic. This rate is generally
consistent in both volume and by type of device with other similar sized
electric utilities participating in EPRI's Year 2000 Embedded System Program.
B. Information Technology -
IEC's information technology Year 2000 readiness project consists of both
application and operating systems, and infrastructure (PC, servers, printers,
etc.) components. The inventory and assessment of both the systems and the
infrastructure has been completed. IEC's goal is to complete the remediation and
testing of the systems by March 31, 1999 and the infrastructure components by
June 30, 1999. At the end of 1998, approximately 65% of the systems and 40% of
the infrastructure components have been remediated and tested.
IEC's customer information systems and financial systems make up the majority of
the remediation and testing effort remaining. The remediation and testing of the
customer information systems was 70% complete at the end of 1998 with an
anticipated completion date of May 31, 1999. The financial systems have been
remediated with final roll-forward-testing scheduled to be completed by mid-year
1999. Therefore, it is anticipated that IEC will have its information technology
remediation and testing efforts 90% complete by March 31, 1999 with work
completed and into production by mid-year 1999.
Costs to Address Year 2000 Compliance IEC's historical Year 2000 project
expenditures as well as CURRENT ESTIMATES for the remaining costs to be incurred
on the project are as follows (incremental costs, in millions):
Description Total IESU WP&L Other
----------- ----- ---- ---- -----
Costs incurred from 1/1/98 - 12/31/98 $8.7 $4.8 $3.2 $0.7
Current estimate of remaining modifications $32 $10 $14 $8
In addition, the company estimates it incurred $3 million in costs for internal
labor and associated overheads in 1998 and anticipates expenditures of $8
million in 1999.
While work was done on the Year 2000 project prior to 1998, IEC did not begin
tracking the costs separately until 1998. In accordance with an order received
from the PSCW, WP&L began deferring its Year 2000 project costs, other than
internal labor and associated overheads, in May 1998 (approximately $2.7 million
of the expenditures incurred at WP&L for the 12 months ended December 31, 1998
have been deferred.) (Refer to "Liquidity and Capital Resources - Rates and
Regulatory Matters" for a further discussion.) IEC expects to fund its Year 2000
expenditures through internal sources. Other than the costs being deferred by
WP&L pursuant to the PSCW order, IEC is expensing all the Year 2000 costs noted
above.
Communications / Third Party Assessment IEC is heavily dependent on other
utilities (including electric, gas, telecommunications and water utilities) and
its suppliers. An effort is underway to communicate with such parties to
increase their awareness of Year 2000 issues and monitor and assess, to the
extent possible, their Year 2000 readiness. IEC has sought written assurance
that third parties with significant relationships with IEC will be Year
53
2000 ready. As part of an extensive awareness effort, IEC is also communicating
with its utility customers, regulatory agencies, elected and appointed
government officials, and industry groups. IEC executives and account managers
are also having discussions with IEC's largest customers to review their
initiatives for Year 2000 readiness. IEC is also working closely with the North
American Electric Reliability Council (NERC) and the Natural Gas Council to
assist their efforts to make certain all system interconnections across regional
areas are Year 2000 compliant.
Risks and Contingency Planning The systems which pose the greatest Year 2000
risks for IEC if the Year 2000 project is not successful are the
telecommunications facilities and network systems as well as the information
technology systems. The potential problems related to these systems include
service interruptions, service order and billing delays and the resulting
customer relations and cash flow issues. IEC is currently unable to quantify the
financial impact of such contingencies if in fact they were to occur.
Even though IEC intends to complete the bulk of its Year 2000 remediation and
testing activities by the end of March 1999 and has initiated Year 2000
communications with significant customers, key vendors, suppliers, and other
parties material to IEC's operation, failures or delay in achieving Year 2000
compliance could significantly disrupt IEC's business. Therefore, IEC has
initiated contingency planning to address alternatives in the event of a Year
2000 failure that occurs within IEC or where IEC is impacted by an external Year
2000 failure. The plan will address mission-critical processes, devices and
systems and will include training, testing and rehearsal of procedures, and the
need for installation of backup equipment as necessary. The goal is to have the
contingency plan completed by mid-year 1999. As a member of Mid-America
Interconnected Network, Inc. (MAIN), IEC is also working with the Operating
Committee Y2K Task Force which will expand existing emergency operating
strategies for member company control centers to ensure rapid responses to any
Year 2000-related electric system disturbances and will coordinate those
strategies with other reliability organizations. MAIN is one of the 10 regional
coordinating councils that make up NERC. IEC also belongs to the Mid-Continent
Area Power Pool (MAPP), another one of the 10 NERC councils, and will be
coordinating Year 2000 contingency planning with MAPP as well.
As part of its contingency planning process, NERC has scheduled two nation-wide
electric utility industry drills in April 1999 and September 1999. These drills
will focus on safe and reliable electrical system operations with the partial
loss of telecommunications. In addition to these NERC drills, IEC will be
conducting three additional internal drills. These will include a March 1999
table-top drill, a June 1999 functional drill and an August 1999 full-scale
development drill where key employees will test and critique IEC's contingency
plans.
Since early 1998, IEC has devoted a significant portion of its information
technology resources to the Year 2000 project given the importance of such
project to the continued operations of IEC. As a result, there have been some
delays in implementing other information technology projects. The delays are
simply a matter of timing and IEC does not currently believe that such delays
will have a material adverse impact on its results of operations or financial
position.
Summary Based on IEC's current schedule for completion of its Year 2000 tasks,
IEC believes its plan is adequate to secure Year 2000 readiness of its critical
systems. Nevertheless, achieving Year 2000 readiness is subject to many risks
and uncertainties, as described above. If IEC, or third parties, fail to achieve
Year 2000 readiness with respect to critical systems and, as such, there are
systematic problems, there could be a material adverse effect on IEC's results
of operations and financial condition.
Labor Issues
The status of the collective bargaining agreements at each of the utilities is
as follows at December 31, 1998:
IESU WP&L IPC
Number of collective bargaining agreements 6 1 3
Percentage of workforce covered by agreements 61 92 81
54
Eight agreements are scheduled to expire in 1999 and represent substantially all
employees covered under collective bargaining agreements. These employees
represent approximately 50% of all IEC employees. IEC has not experienced any
significant work stoppage problems in the past. While negotiations have
commenced, IEC is currently unable to predict the outcome of these negotiations.
Market Risk Sensitive Instruments and Positions
IEC, through its consolidated subsidiaries, has historically had only limited
involvement with derivative financial instruments and has not used them for
speculative purposes. They have been used to manage well-defined interest rate
and commodity price risks.
WP&L and Alliant Energy Resources have historically entered into interest rate
swap agreements to reduce the impact of changes in interest rates on its
variable-rate debt. The total notional amount of interest rate swaps outstanding
at WP&L and Alliant Energy Resources at December 31, 1998, was $30 million and
$200 million, respectively. See Note 11(a) of the "Notes to Consolidated
Financial StatementsStatements" for additional information.
Whiting is exposed to market risk in the pricing of its oil and gas production.
Historically, prices received for oil and gas production have been volatile
because of seasonal weather patterns, supply and demand factors, transportation
availability and price, and general economic conditions. Worldwide political
developments have historically also had an impact on oil prices. In the past,
IEC generally has not utilized derivative instruments designed to reduce its
exposure to these price fluctuations and no such positions were outstanding at
December 31, 1998. However, during 1999, IEC has entered into a limited amount
of transactions involving a collar strategy for a further discussion, including a discussionportion of Whiting's gas
production.
As discussed in Note 11(a) of the "Notes to Consolidated Financial Statements,"
from time to time WP&L utilizes gas commodity swap arrangements to mitigate the
impact of price fluctuations on gas purchased and injected into storage during
the summer months and withdrawn and sold at current prices during the winter
months. While it is not WP&L's intent to terminate the contracts currently in
place, the impact of a lawsuit
filedtermination of all the agreements outstanding at December
31, 1998, would have been an estimated gain of $0.8 million.
WP&L has entered into a weather insurance agreement which terminates March 31,
1999, for the purpose of hedging a portion of the risk associated with the
changes in weather from normal conditions. Under this agreement, a payment will
be made or received if the heating degree days from November 1, 1998 to March
31, 1999, fall outside certain pre-determined heating degree levels. The payment
is limited to a maximum of $5 million. At December 31, 1998, the fair value of
this agreement if it were terminated would have resulted in a payment to WP&L of
an estimated $1.8 million.
In the course of Alliant Energy Resource's gas marketing activities, it enters
into fixed-price sales commitments to customers and purchases the corresponding
physical supplies at fixed prices from a third party provider to lock in the
related margin on the sale. The risk associated with gas price fluctuations is
managed by Utilities seeking recoveryclosely matching purchases from suppliers with the sales commitments
to the customers. There were no derivative positions outstanding at December 31,
1998.
While IEC is exposed to credit risk when it enters into a hedging transaction,
it has established procedures and policies designed to mitigate such risks due
to a counterparty default. IEC utilizes a listing of FMGP-relatedapproved counterparties and
monitors the creditworthiness on an ongoing basis.
IEC's investments in China and New Zealand are valued in renminbi (RMB) and in
New Zealand (NZ) dollars, respectively. As a result, these investments are
subject to currency exchange risk when the investments are translated into U.S.
dollars. During 1998, the RMB remained stable as compared to the U.S. dollar,
however, the NZ dollar decreased in value in relation to the U.S. dollar. At
December 31, 1998, IEC had a cumulative $7.9 million foreign currency
translation loss recorded in "Accumulated other comprehensive income" on its
Consolidated Balance Sheets which primarily related to decreases in the NZ
dollar in relation to the U.S. dollar.
55
At December 31, 1998, IEC had an investment in the stock of McLeod, a
telecommunications company, valued at $320.3 million (based on a December 31,
1998 closing price of $31.25 per share and compared to a cost basis of $29.1
million). Pursuant to the applicable accounting rules, the carrying value of the
investments are adjusted to the estimated fair value each quarter based on the
closing price at the end of the quarter. IEC entered into an agreement in
November 1998 with McLeod whereby IEC's ability to sell the McLeod stock is
subject to various restrictions.
IEC has a 50% interest in an electricity trading joint venture with Cargill
which is accounted for under the equity method of accounting. The joint
venture's trading activities principally consist of marketing and trading
over-the-counter contracts for the purchase and sale of electricity. The
majority of the forward contracts represent commitments to purchase or sell
electricity at fixed prices in the future and require settlement by physical
delivery of electricity or are netted out in accordance with industry trading
standards. The market risk exposure of the joint venture for its forward
contracts outstanding at December 31, 1998, was not significant. In addition,
Cargill has made guarantees to certain counterparties regarding the performance
of contracts entered into by the joint venture. Guarantees of approximately $50
million have been issued of which approximately $5 million were outstanding at
December 31, 1998. Under the terms of the joint venture agreement, any payments
required under the guarantees would be shared by IEC and Cargill on a 50/50
basis to the extent the joint venture is not able to reimburse the guarantor for
payments made under the guarantee.
Accounting Pronouncements
In February 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 addresses, among
other things, expensing versus capitalization of costs, accounting for the costs
incurred in the upgrading of the software and amortizing the capitalized cost of
software. This statement is effective for fiscal years beginning after December
15, 1998. IEC adopted the requirements of this statement in 1999 and such
adoption did not have any significant impact on its financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs. Costs of start-up activities and organization
costs are required to be expensed as incurred. The statement is effective for
periods beginning after December 15, 1998. IEC adopted the requirements of this
statement in 1999 and such adoption did not have any significant impact on its
financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997. IEC has not yet quantified the
impacts of SFAS 133 on the financial statements and has not determined the
timing of or method of adoption of SFAS 133. However, the Statement could
increase volatility in earnings and other comprehensive income.
In December 1998, the Emerging Issues Task Force reached consensus on Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF Issue 98-10). EITF Issue 98-10 is effective for fiscal years
beginning after December 15, 1998 and requires energy trading contracts to be
recorded at fair value on the balance sheet, with the changes in fair value
included in earnings. IEC anticipates that the adoption of EITF Issue 98-10 will
not have a significant impact on IEC's financial statements based on its current
operations.
56
Accounting for Obligations Associated with the Retirement of Long-Lived Assets
The staff of the SEC has questioned certain of the current accounting practices
of the electric utility industry, including IESU and WP&L, regarding the
recognition, measurement and classification of decommissioning costs for nuclear
generating stations in financial statements of electric utilities. In response
to these questions, the FASB is reviewing the accounting for closure and removal
costs, including decommissioning of nuclear power plants. If current electric
utility industry accounting practices for nuclear power plant decommissioning
are changed, the annual provision for decommissioning could increase relative to
1998, and the estimated cost for decommissioning could be recorded as a
liability (rather than as accumulated depreciation), with recognition of an
increase in the cost of the related nuclear power plant. Assuming no significant
change in regulatory treatment, IESU and WP&L do not believe that such changes,
if required, would have an adverse effect on their financial position or results
of operations due to their ability to recover decommissioning costs through
rates.
Inflation
IEC, IESU and WP&L do not expect the effects of inflation at current levels to
have a significant effect on their financial position or results of operations.
Environmental
The pollution abatement programs of IESU, WP&L, IPC and Alliant Energy Resources
are subject to continuing review and are revised from its
insurance carriers.time to time due to
changes in environmental regulations, changes in construction plans and
escalation of construction costs. While management cannot precisely forecast the
effect of future environmental regulations on IEC's operations, it has taken
steps to anticipate the future while also meeting the requirements of current
environmental regulations.
The Clean Air Act Amendments of 1990 (Act) requiresrequire emission reductions of sulfur
dioxide (SO2), NOx and nitrogen oxides (NOx)other air pollutants to achieve reductions of atmospheric
chemicals believed to cause acid rain. IESU, WP&L and IPC have met the
provisions of Phase I of the Act and are in the process of meeting the
requirements of Phase II of the Act (effective in the year 2000). The
acid rain program under the Act also
governs SO2 allowances.allowances, which are defined as an authorization for an owner to
emit one ton of SO2 into the atmosphere. The companies are reviewing their
options to ensure they will have sufficient allowances to offset their emissions
in the future. The companies believe that the potential costs of complying with
these provisions of Title IV of the Act will not have a material adverse impact
on their financial position or results of operations.
The Act and other federal laws also require the United States Environmental
Protection Agency (EPA)EPA to study and regulate, if
necessary, additional issues that potentially affect the electric utility
industry, including emissions relating to NOx, ozone transport, mercury and
particulate control; toxic release inventories andcontrol as well as modifications to the PCBpolychlorinated biphenyl
(PCB) rules. In 1995,July 1997, the EPA published the Sulfur Dioxide Network Design Review
for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-
case modeling method suggestsissued final rules that the Cedar Rapids area could be
classified as "nonattainment" forwould tighten the
National Ambient Air Quality Standards established for SO2.ozone and particulate matter
emissions and in June 1998, the EPA modified the PCB rules. IEC cannot predict
the long-term consequences of these rules on its results of operations or
financial condition.
In October 1998, the EPA issued a final rule requiring 22 states, including
Wisconsin, to modify their State Implementation Plans (SIPs) to address the
ozone transport issue. The worst-case modeling study suggestedimplementation of the rule will likely require WP&L
to reduce its NOx emissions at all of its plants to .15 lbs/mmbtu by 2003. WP&L
is currently evaluating various options to meet the emission levels. These
options include fuel switching, operational modifications and capital
investments. Based on existing technology, the preliminary estimates indicate
that two of Utilities' generating facilities contributecapital investments will be approximately $150 million. Refer to the modeled
exceedences."Rates
and Regulatory Matters" section for a discussion of a filing WP&L made with the
PSCW regarding rate recovery of these costs.
Revisions to the Wisconsin Administrative Code have been proposed that could
have a significant impact on WP&L's operation of the Rock River Generating
Station in Beloit, Wisconsin. The proposed revisions will affect
57
the amount of heat that the Generating Station can discharge into the Rock
River. WP&L cannot presently predict the final outcome of the rule, but believes
that, as the rule is currently proposed, the capital investments and/or
modifications required to meet the proposed discharge limits could be
significant.
Pursuant to a routine internal review of operations, Utilitiesdocuments, IESU determined that certain
changes undertaken during the previous three years at one of its power plantsgenerating facilities may
have required a federal Preventionprevention of Significant Deteriorationsignificant deterioration (PSD) permit.
ReferIESU initiated discussions with its regulators on the matter, resulting in the
submittal of a PSD permit application in February 1997. IESU received the permit
in the second quarter of 1998. IESU may be subject to Note 13(g)a penalty for not having
obtained the permit previously; however, IESU believes that any likely actions
resulting from this matter will not have a material adverse effect on its
financial position or results of operation.
Pursuant to a separate routine internal review of plant operations, IESU
determined that certain permit limits were exceeded in 1997 at one of its
generating facilities in Cedar Rapids, Iowa. IESU has initiated discussions with
its regulators on the matter and has proposed a compliance plan which includes
equipment modifications and contemplates operational changes. On May 13, 1998,
IESU received a citation from the Linn County Health Department alleging
violations at the facility. IESU has negotiated a settlement agreement with the
Linn County Health Department, resolving the matter for $30,000. The settlement
was reviewed and approved by a local court with appropriate jurisdiction during
the third quarter of 1998. On February 16, 1999, IESU received a letter from the
Iowa Department of Natural Resources (IDNR) stating that IDNR will require the
IESU customer served by this facility to obtain a PSD permit for the facility.
IESU is currently evaluating the ramifications of this IDNR decision, and
formulating a response. However, management believes that any likely actions
resulting from this matter will not have a material adverse effect on IESU's
financial position or results of operations.
In March 1998 and January 1999, IPC received Notices of Intent to Sue from an
environmental group alleging certain violations of effluent limits, established
pursuant to the Clean Water Act, at IPC's generating facility in Clinton, Iowa.
On May 14, 1998, IPC received from the IDNR an inspection report and notice of
violation addressing the same and other concerns as were raised by the
environmental group. IPC responded to the environmental group on May 19, 1998,
providing an evaluation of the Notesalleged violations. IPC responded to Consolidated Financial Statements forthe IDNR on
June 26, 1998 with a further discussionplan of action addressing the IDNR's concerns. IPC
responded to the environmental group again on February 22, 1999, stating that
all of the above mentioned air quality issues.
The National Energy Policyalleged violations were either already resolved or invalid. While IPC
believes that it has satisfied IDNR's concerns, it may be subject to a penalty
for exceeding permit limits established for this facility, however, management
believes that any likely actions resulting from this matter will not have a
material adverse effect on IPC's financial position or results of operations.
Pursuant to an internal review of operations, IPC discovered that Unit No. 6 at
its generating facility in Dubuque, Iowa, may require a Clean Air Act of 1992 requires owners of nuclear
power plants to pay a special assessment into a "Uranium Enrichment
DecontaminationAcid Rain
permit and Decommissioning Fund." Refer to Note 13(f)continuous emissions monitoring system (CEMS). IPC has initiated
discussions with the regulators, has discontinued operation of the Notes to Consolidated Financial Statements for a further discussion.
The Nuclear Waste Policy Act of 1982 assigned responsibility to the
U.S. Department of Energy (DOE) to establish a facility for the ultimate
disposition of high level waste and spent nuclear fuel and authorized
the DOE to enter into contracts with parties for the disposal of such
material beginning in January 1998. Utilities entered into such a
contract and has made the agreed payments to the Nuclear Waste Fund
(NWF) held by the U.S. Treasury. The DOE, however, has experienced
significant delays in its efforts and material acceptance is now
expected to occur no earlier than 2010 with the possibility of further
delay being likely. Utilities has been storing spent nuclear fuel on-
site since plant operations began in 1974 and has current on-site
capability to store spent fuel until 2001. Utilities is aggressively
reviewing options for expanding on-site storage. Utilities has been
formally notified by the DOE that they anticipate being unable to begin
acceptance of spent nuclear fuel by January 31, 1998. Utilities is
evaluating courses of action to protect the interests of its customers
and its rights under the DOE contract. Utilities is also evaluating
legislation proposed to the Congress addressing this issue. In July
1996, the IUB initiated a Notice of Inquiry (NOI) on spent nuclear fuel.
One purposeunit pending
resolution of the NOI wasissues, and will be installing a CEMS on the unit and will be
applying for an Acid Rain permit. Pursuant to evaluate whether the current collection of
money from Utilities' customersits internal review, IPC also
identified and disclosed to regulators a potentially similar situation at its
Lansing, Iowa generating facility, and will potentially be installing CEMS and
applying for payment to the NWF should be placed
in an escrow account in lieu of being paid to the NWF. Utilities
believes that the issue of using an escrow account should be decided at
the federal level rather than the state level. Utilities cannot predictAcid Rain permits for these units as well, pending the outcome of
regulatory review. IPC may be subject to a penalty for not having installed the
CEMS and for not having obtained the permit previously. However, IPC believes
that any likely actions resulting from this NOI.matter will not have a material
adverse effect on its financial position or results of operations.
A global treaty has been negotiated that could require reductions of greenhouse
gas emissions from utility plants. In November 1998, the United States signed
the treaty and agreed with the other countries to resolve all remaining issues
by the end of 2000. At this time, management is unable to predict whether the
United States Congress will ratify the treaty. Given the uncertainty of the
treaty ratification and the ultimate terms of the final regulations, management
cannot currently estimate the impact the implementation of the treaty would have
on IEC's operations.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandatedmandates that each
state must take responsibility for the storage of low-
levellow-level radioactive waste
produced within its borders. The StateStates of Iowa has joinedand Wisconsin are members of the
six-state Midwest Interstate Low-Level Radioactive Waste Compact Commission (Compact), which
is planning a storage facility to be located
in Ohio to store waste generated byresponsible for development of any new disposal capability within the Compact's sixCompact
member states. At
December 31, 1996, Utilities has prepaid costs of approximately
$1.1 million toIn June
58
1997, the Compact forcommissioners voted to discontinue work on a proposed waste
disposal facility in the buildingState of Ohio because the expected cost of such a
facility.facility was comparably higher than other options currently available. Dwindling
waste volumes and continued access to existing disposal facilities were also
reasons cited for the decision. A
Compact disposal facility is anticipated to be in operation in
approximately ten years after approval of new enabling legislation by
the member states. Such legislation was approved in 1996 by all six
states that are members of the Compact. Final approval by the U.S.
Congress is now required. On-site storage capability currently exists
for low-level radioactive waste expected to be generated until the
Compact facility is able to accept waste materials. In addition, thelocated near Barnwell, South
Carolina disposal facility has reopened for an
indefinite time period and Utilities is in the process of shippingcontinues to Barnwell the majority ofaccept the low-level radioactive waste it has
accumulated on-site, and IESU and WP&L currently intends to
ship the waste iteach produces in the future as long as the Barnwellto such site, remains open, thereby minimizing the amount of
low-level waste stored on-site. However,
managementIn addition, given technological advances, waste
compaction and the reduction in the amount of waste generated, DAEC and Kewaunee
each have on-site storage capability sufficient to store low-level waste
expected to be generated over at least the next ten years, with continuing
access to the Barnwell disposal facility extending that on-site storage
capability indefinitely.
See Notes 12(f) and 12(g) of the Barnwell site has modified its fee schedule"Notes to emphasize total radioactivity content and weight, insteadConsolidated Financial Statements"
for a further discussion of IEC's environmental issues.
Power Supply
The power supply concerns of 1997 have raised awareness of the historical volume related fees. Utilities is evaluatingelectric system
reliability challenges facing Wisconsin and the outcomeMidwest region. As a result,
Wisconsin enacted electric reliability legislation in April 1998 (Wisconsin
Reliability Act). The legislation has the goal of these changes on its potential future disposal costs at the Barnwell
site; such changes could result inassuring reliable electric
energy for Wisconsin. The new law, effective May 12, 1998, requires Wisconsin
utilities to join a revision to Utilities' future
disposal plans.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric
sources may result in adverse health effects has been the subject of
increased public, governmental, industry and media attention. A recent
study completedregional independent system operator for transmission by the
National Research Council concludedyear 2000, allows the construction of merchant power plants in the state and
streamlines the regulatory approval process for building new generation and
transmission facilities. As a requirement of the legislation, the PSCW completed
a regional transmission constraint study. The PSCW is authorized to order
construction of new transmission facilities, based on the findings of its
constraint study, through December 31, 2004.
On September 24, 1997, the PSCW ordered WP&L and two other Wisconsin utilities
to arrange for additional electric capacity to help maintain reliable service
for their customers. In July 1998, IEC and Polsky Energy Corp. (Polsky)
announced an agreement whereby Polsky would build, own and operate a power plant
in southeastern Wisconsin capable of producing up to 450 megawatts (MW) of
electricity (reduced from earlier estimates of 525 MW due to NOx emissions
limitations imposed by the Wisconsin Department of Natural Resources (WDNR)).
Under the agreement, IEC will purchase the capacity to meet the electric needs
of its utility customers, as outlined by the Wisconsin Reliability Act. It is
expected that this new power plant will be operational in June 2000. The PSCW
issued an order dated December 18, 1998 approving the current bodyproject.
Utility officials noted that it will take time for new transmission and power
plant projects to be approved and built. While utility officials fully expect to
meet customer demands in 1999, problems still could arise if there are
unexpected power plant outages, transmission system outages or extended periods
of evidence does not supportextremely hot weather.
59
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk are reported under
Item 7. MD&A "Other Matters - Market Risk Sensitive Instruments and Positions"
and in the notion that exposure"Notes to these fields may resultConsolidated Financial Statements" under Notes 1(p), 10, 11
and 12(d).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Interstate Energy Corporation Page Number
Report of Management 62
Report of Independent Public Accountants 63
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 64
Consolidated Balance Sheets, December 31, 1998 and 1997 65
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 67
Consolidated Statements of Capitalization, December 31,
1998 and 1997 68
Consolidated Statements of Changes in adverse health effects. Utilities will
continue to monitorCommon Equity for the
events in this area, including future scientific
research.
Whiting is responsible for certain dismantlementYears Ended December 31, 1998, 1997 and abandonment
costs related to various off-shore oil and gas properties. Refer to
Note 13(f) of the1996 70
Notes to Consolidated Financial Statements 71
IES Utilities Inc.
Report of Independent Public Accountants 95
Consolidated Statements of Income and Retained Earnings
for a
further discussion.
OTHER MATTERS
Labor Issues Utilities has six collective bargaining agreements,
covering approximately 54% of its workforce. None of the agreements
expires in 1997.
Financial Derivatives The Company has a policy that financial
derivatives are to be used only to mitigate business risks and not for
speculative purposes. Derivatives have been used by the Company on a
very limited basis. AtYears Ended December 31, 1998, 1997 and 1996 the only material financial
derivatives outstanding96
Consolidated Balance Sheets, December 31, 1998 and 1997 97
Consolidated Statements of Cash Flows for the Company were the interest rate swap
agreementYears Ended
December 31, 1998, 1997 and gas futures contracts described in Note 121996 99
Consolidated Statements of theCapitalization, December 31,
1998 and 1997 100
Notes to Consolidated Financial Statements.
Inflation TheStatements 101
Wisconsin Power and Light Company
does not expectReport of Independent Public Accountants 109
Consolidated Statements of Income and Retained Earnings for
the effectsYears Ended December 31, 1998, 1997 and 1996 110
Consolidated Balance Sheets, December 31, 1998 and 1997 111
Consolidated Statements of inflation at
current levelsCash Flows for the Years Ended
December 31, 1998, 1997 and 1996 113
Consolidated Statements of Capitalization, December 31, 1998
and 1997 114
Notes to have a significant effect on itsConsolidated Financial Statements 115
Refer to Note 16 of IEC's, IESU's and WP&L's "Notes to Consolidated Financial
Statements" for the quarterly financial position or
results of operations.
Selected Consolidated Quarterly Financial Data (unaudited)
The following unaudited consolidated quarterly data required by this Item.
60
INTERSTATE ENERGY CORPORATION
FINANCIAL SECTION
61
INTERSTATE ENERGY CORPORATION REPORT ON THE FINANCIAL INFORMATION
Interstate Energy Corporation management is responsible for the information and
representations contained in the opinionfinancial statements and in certain other
sections of this Annual Report. The consolidated financial statements that
follow have been prepared in accordance with generally accepted accounting
principles. In addition to selecting appropriate accounting principles,
management is responsible for the manner of presentation and for the reliability
of the Company, includes adjustments, which are normal and recurring in
nature,financial information. In fulfilling that responsibility, it is necessary
for management to make estimates based on currently available information and
judgments of current conditions and circumstances.
Through a well-developed system of internal controls, management seeks to ensure
the fair presentationintegrity and objectivity of the resultsfinancial information presented in this
report. This system of operations
and financial position. Utilities' results of operations are a
significant portion of Industries' consolidated results. The quarterly
amounts were affected by, among other items, Utilities' rate activities,
seasonal weather conditions, changes in sales and operating expenses and
costs incurred relatinginternal controls is designed to provide reasonable
assurance that the successful defenseassets of the hostile
takeover attempt mounted by MidAmericancompany are safeguarded and that the
transactions are executed according to management's authorizations and are
recorded in accordance with the appropriate accounting principles.
The Board of Directors participates in the financial information reporting
process through its Audit Committee.
Erroll B. Davis Jr.
President and Chief Executive Officer
Interstate Energy Company. Refer to
Management's DiscussionCorporation
Thomas M. Walker
Executive Vice President and Analysis of the Results of Operations andChief Financial Condition for a discussion of these items. The fourth quarter
of 1996 net income benefited from lower than anticipated costs for a
refueling outage at Utilities' nuclear power plant.
IES INDUSTRIES INC.
Quarter Ended
March 31 June 30 September 30 December 31
(in thousands, except per share amounts)
1996
Operating revenues $ 243,197 $ 210,648 $ 233,907 $ 286,160
Operating income 36,995 26,770 55,701 44,842
Net income 14,095 8,056 20,889 17,867
Earnings per average
common share 0.48 0.27 0.70 0.59
1995
Operating revenues $ 206,392 $ 189,447 $ 238,467 $ 216,704
Operating income 22,115 33,456 63,710 32,431
Net income 6,740 12,508 31,120 13,808
Earnings per average
common share 0.23 0.43 1.06 0.48
IES UTILITIES INC.
Quarter Ended
March 31 June 30 September 30 December 31
(in thousands)
1996
Operating revenues $ 198,768 $ 164,240 $ 190,170 $ 201,801
Operating income 34,204 23,009 53,253 43,259
Net income 14,128 7,230 20,013 22,358
Net income available
for common stock 13,899 7,001 19,784 22,131
1995
Operating revenues $ 172,839 $ 157,671 $ 200,448 $ 178,868
Operating income 19,896 30,444 61,360 30,565
Net income 6,161 11,067 29,842 12,208
Net income available
for common stock 5,932 10,838 29,613 11,981
Item 8. Financial Statements and Supplementary Data
Information required by Item 8. begins on page 44 for Industries
and page 73 for Utilities.Officer
Interstate Energy Corporation
John E. Ebright
Vice President - Controller
Interstate Energy Corporation
January 29, 1999
62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the BoardShareowners of Directors of
IES Industries Inc.:Interstate Energy Corporation:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of IES Industries Inc. (an Iowa
corporation)Interstate Energy Corporation (a Wisconsin Corporation) and
subsidiary companiessubsidiaries as of December 31, 19961998 and 1995,1997, and the related consolidated
statements of income, retained earningscash flows and cash flowschanges in common equity for each of the
three years in the period ended December 31, 1996.1998. These financial statements
and the financial
statementsupplemental schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and supplemental schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IES
Industries Inc.Interstate Energy Corporation
and subsidiary companiessubsidiaries as of December 31, 19961998 and 1995,1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996,31,1998, in conformity with generally accepted accounting principles.
Our audits wereaudit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedule listed in Item 14(a)2(2) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the auditsaudit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, IllinoisMilwaukee, Wisconsin,
January 31, 199729, 1999
63
IES INDUSTRIES INC.
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1998 1997 1996
1995 1994- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Operating revenues:
Operating revenues:
Electric utility $ 574,2731,567,442 $ 560,4711,515,753 $ 537,3271,440,375
Gas 273,979 190,339 165,569
Other 125,660 100,200 82,968
973,912 851,010 785,864utility 295,590 393,907 375,955
Nonregulated and other 267,842 390,967 416,510
----------------- ----------------- ----------------
2,130,874 2,300,627 2,232,840
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Operating expenses:
Fuel forElectric and steam production 84,579 96,256 85,952fuels 297,685 280,558 256,609
Purchased power 88,350 66,874 68,794
Gas purchased for resale 217,351 141,716 120,795255,332 256,306 231,014
Cost of utility gas sold 166,453 259,222 240,324
Other operating expenses 214,759 201,390 176,863operation 620,234 681,977 696,596
Maintenance 49,001 46,093 52,841122,737 123,121 111,657
Depreciation and amortization 107,393 97,958 86,378279,505 259,663 232,363
Taxes other than income taxes 48,171 49,011 46,308
809,604 699,298 637,931105,626 103,397 98,838
----------------- ----------------- ----------------
1,847,572 1,964,244 1,867,401
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Operating income 164,308 151,712 147,933283,302 336,383 365,439
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Interest expense and other:
Interest expense 54,822 50,727 46,010129,363 122,563 113,321
Allowance for funds used during construction -2,103 -3,424 -3,910(6,812) (5,274) (5,574)
Preferred dividend requirements of IES Utilities Inc. 914 914 914subsidiaries 6,699 6,693 6,687
Miscellaneous, net 2,333 -3,170 -3,472
55,966 45,047 39,542(736) (13,910) (11,843)
----------------- ----------------- ----------------
128,514 110,072 102,591
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 108,342 106,665 108,391
Federal and state income154,788 226,311 262,848
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Income taxes 47,435 42,489 41,57358,113 81,733 105,760
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations 96,675 144,578 157,088
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss on disposal of subsidiary, net of applicable
tax benefit of $575 - - (1,297)
----------------- ----------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
Net income $ 60,90796,675 $ 64,176144,578 $ 66,818155,791
================= ================= ================
- --------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding 29,861 29,202 28,56076,912 76,210 75,481
================= ================= ================
- --------------------------------------------------------------------------------------------------------------------
Earnings per average common share (basic and diluted):
Income from continuing operations $ 2.041.26 $ 2.201.90 $ 2.34
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31
1996 1995 1994
(in thousands)
Balance at beginning of year $ 221,077 $ 218,293 $ 211,7502.08
Discontinued operations - - (0.02)
----------------- ----------------- ----------------
Net income 60,907 64,176 66,818
Cash dividends declared on common stock, at a per
share rate of $2.10 for all years -62,738 -61,392 -60,065
Other 0 0 -210
Balance at end of year $ 219,2461.26 $ 221,0771.90 $ 218,2932.06
================= ================= ================
- --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
64
IES INDUSTRIES INC.
INTERSTATE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,007,8394,866,152 $ 1,900,1574,733,222
Gas 175,472 165,825515,074 495,155
Other 126,850 106,396
2,310,161 2,172,378409,711 366,395
----------------- -----------------
5,790,937 5,594,772
Less - Accumulated depreciation 1,030,390 950,324
1,279,771 1,222,054
Leased nuclear2,852,605 2,631,582
----------------- -----------------
2,938,332 2,963,190
Construction work in progress 119,032 86,511
Nuclear fuel, net of amortization 34,725 36,935
Construction work in progress 43,719 52,772
1,358,215 1,311,76144,316 55,777
----------------- -----------------
3,101,680 3,105,478
Other property, plant and equipment, net of accumulated
depreciation and amortization of $70,031$178,248 and $53,026,$139,920, respectively 223,805 193,215
1,582,020 1,504,976355,100 329,264
----------------- -----------------
3,456,780 3,434,742
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 8,675 6,94231,827 27,329
Accounts receivable -receivable:
Customer, less allowance for doubtful accounts
of $1,087$2,518 and $1,145,$2,400, respectively 50,821 37,214102,966 123,545
Other, 12,040 10,493
Income tax refundsless allowance for doubtful accounts
of $490 and $224, respectively 26,054 20,824
Notes receivable 8,890 98213,392 23,410
Production fuel, at average cost 13,323 12,15554,140 40,656
Materials and supplies, at average cost 22,842 28,354
Adjustment clause balances 10,752 053,490 49,845
Gas stored underground, at average cost 26,013 32,364
Regulatory assets 26,539 22,791
Oil and gas properties held for resale 0 9,843
Prepayments and other 24,169 23,099
178,051 151,87327,089 36,330
Prepaid gross receipts tax 22,222 22,153
Other 30,767 35,786
----------------- -----------------
387,960 412,242
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------
Investments:
Investment in McLeodUSA Inc. 320,280 328,022
Nuclear decommissioning trust funds 59,325 47,028225,803 190,238
Investment in foreign entities 44,946 24,770
Investment in McLeod, Inc. 29,200 9,200
Cash surrender value of life insurance policies 11,217 9,83868,882 57,072
Other 4,903 3,897
149,591 94,73354,776 49,319
----------------- -----------------
669,741 624,651
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------
Other assets:
Regulatory assets 201,129 207,202341,684 352,365
Deferred charges and other 14,771 26,807
215,900 234,009103,172 99,550
----------------- -----------------
444,856 451,915
----------------- -----------------
Total assets $ 2,125,5624,959,337 $ 1,985,591
December 31
CAPITALIZATION AND LIABILITIES (in thousands) 1996 1995
Capitalization (See Consolidated Statements of Capitalization):
Common stock $ 407,635 $ 391,269
Retained earnings 219,246 221,077
Total common equity 626,881 612,346
Cumulative preferred stock of IES Utilities Inc. 18,320 18,320
Long-term debt (excluding current portion) 701,100 601,708
1,346,301 1,232,374
Current liabilities:
Short-term borrowings 135,000 101,000
Capital lease obligations 15,125 15,717
Maturities and sinking funds 8,473 15,447
Accounts payable 99,861 80,089
Dividends payable 16,431 16,244
Accrued interest 8,985 8,051
Accrued taxes 43,926 53,983
Accumulated refueling outage provision 1,316 7,690
Adjustment clause balances 0 3,148
Environmental liabilities 5,679 5,634
Other 22,087 21,800
356,883 328,803
Long-term liabilities:
Pension and other benefit obligations 39,643 52,677
Capital lease obligations 19,600 21,218
Environmental liabilities 47,502 43,087
Other 18,488 13,039
125,233 130,021
Deferred credits:
Accumulated deferred income taxes 262,675 257,278
Accumulated deferred investment tax credits 34,470 37,115
297,145 294,393
Commitments and contingencies (Note 13)
$ 2,125,562 $ 1,985,5914,923,550
================= =================
- -----------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
65
IES INDUSTRIES INC.
INTERSTATE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31,
CAPITALIZATION AND LIABILITIES 1998 1997
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Capitalization (See Consolidated Statements of Capitalization):
Common stock $ 776 $ 765
Additional paid-in capital 905,130 868,903
Retained earnings 537,372 581,376
Accumulated other comprehensive income 163,017 173,512
------------------ ------------------
Total common equity 1,606,295 1,624,556
------------------ ------------------
Cumulative preferred stock of subsidiaries, net 113,498 113,369
Long-term debt (excluding current portion) 1,543,131 1,467,903
------------------ ------------------
3,262,924 3,205,828
------------------ ------------------
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities and sinking funds 63,414 18,329
Variable rate demand bonds 56,975 56,975
Commercial paper 64,500 114,500
Notes payable 51,784 42,000
Capital lease obligations 11,978 13,197
Accounts payable 204,297 192,634
Accrued taxes 84,921 78,923
Other 111,685 133,233
------------------ ------------------
649,554 649,791
------------------ ------------------
- -----------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 691,624 719,899
Accumulated deferred investment tax credits 77,313 82,862
Environmental liabilities 68,399 70,955
Customer advances 37,171 36,619
Capital lease obligations 13,755 23,634
Other 158,597 133,962
------------------ ------------------
1,046,859 1,067,931
------------------ ------------------
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- -----------------------------------------------------------------------------------------------------------
Total capitalization and liabilities $ 4,959,337 $ 4,923,550
================== ==================
- -----------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
66
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 96,675 $ 144,578 $ 155,791
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 279,505 259,663 232,363
Amortization of nuclear fuel 17,869 18,308 21,336
Amortization of deferred energy efficiency expenditures 27,083 15,786 6,669
Deferred taxes and investment tax credits (27,720) (11,661) 14,715
Refueling outage provision (4,001) 9,290 (6,374)
Impairment of oil and gas properties 9,678 9,902 -
Impairment of regulatory assets 8,969 - -
Other (3,616) 5,468 (6,777)
Other changes in assets and liabilities:
Accounts receivable 15,349 18,638 (13,935)
Notes receivable 10,018 (3,621) 14,663
Production fuel (13,484) 2,814 271
Materials and supplies (3,645) (874) 5,615
Gas stored underground 6,351 (6,603) (4,170)
Accounts payable 11,663 (27,726) 33,505
Accrued taxes 5,998 13,375 (11,676)
Benefit obligations and other 31,070 16,152 9,280
--------------- -------------- --------------
Net cash flows from operating activities 467,762 463,489 451,276
--------------- -------------- --------------
- --------------------------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends declared (140,679) (145,631) (143,344)
Dividends payable (15,458) 285 310
Proceeds from issuance of common stock 33,832 15,535 17,393
Net change in Alliant Energy Resources, Inc. credit
facility 70,492 9,908 47,860
Proceeds from issuance of other long-term debt 77,544 295,000 61,370
Reductions in other long-term debt (27,663) (146,590) (20,679)
Net change in short-term borrowings (40,216) (109,884) 16,654
Principal payments under capital lease obligations (13,250) (12,964) (19,108)
Other (2,333) (2,410) (2,336)
--------------- -------------- --------------
Net cash flows used for financing activities (57,731) (96,751) (41,880)
--------------- -------------- --------------
- --------------------------------------------------------------------------------------------------------------
Cashflows used for investing activities:
Construction and acquisition
expenditures:
Utility (269,133) (256,760) (297,196)
Other (102,925) (71,280) (115,078)
Deferred energy efficiency expenditures - (13,344) (24,792)
Nuclear decommissioning trust funds (20,305) (17,435) (15,994)
Proceeds from disposition of assets 16,677 15,993 69,838
Shared savings expenditures (27,780) (17,610) (5,196)
Other (2,067) (1,790) (18,026)
--------------- -------------- --------------
Net cash flows used for investing activities (405,533) (362,226) (406,444)
--------------- -------------- --------------
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and temporary cash investments 4,498 4,512 2,952
--------------- -------------- --------------
- --------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 27,329 22,817 19,865
--------------- -------------- --------------
- --------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 31,827 $ 27,329 $ 22,817
=============== ============== ==============
- --------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 126,376 $ 117,255 $ 107,970
=============== ============== ==============
Income taxes $ 84,916 $ 69,272 $ 111,006
=============== ============== ==============
Noncash investing and financing activities:
Capital lease obligations incurred $ 1,426 $ 16,781 $ 14,281
=============== ============== ==============
- --------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
67
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1996 19951998 1997
- ---------------------------------------------------------------------------------------------------------------
(in thousands)thousands, except share amounts)
Common equity:
Common stock - no$.01 par value - authorized 48,000,000200,000,000 shares;
outstanding 30,077,21277,630,043 and 29,508,41576,481,102 shares, respectively $ 407,635776 $ 391,269765
Additional paid-in capital 905,130 868,903
Retained earnings 219,246 221,077
626,881 612,346537,372 581,376
Accumulated other comprehensive income 163,017 173,512
---------------- ----------------
1,606,295 1,624,556
---------------- ----------------
- ---------------------------------------------------------------------------------------------------------------
Cumulative preferred stock of IES Utilities Inc.subsidiaries:
Par/Stated Authorized Shares Mandatory
Value Shares Outstanding Series Redemption
$ 100 * 449,765 4.40% - 6.20% No 44,977 44,977
$ 25 * 599,460 6.50% No 14,986 14,986
$ 50 466,406 366,406 4.30% - 6.10% No 18,320 18,320
$ 50 ** 216,381 4.36% - 7.76% No 10,819 10,819
$ 50 ** 545,000 6.40% Yes *** 27,250 27,250
---------------- ----------------
116,352 116,352
Less: unamortized expenses (2,854) (2,983)
---------------- ----------------
113,498 113,369
---------------- ----------------
* 3,750,000 authorized shares in total
** 2,000,000 authorized shares in total
*** $53.20 mandatory redemption price
- ---------------------------------------------------------------------------------------------------------------
Long-term debt:
IES Utilities Inc. -
Collateral Trust Bonds -Bonds:
7.65% series, due 2000 50,000 50,000
7.25% series, due 2006 60,000 060,000
6-7/8% series, due 2007 55,000 55,000
6% series, due 2008 50,000 50,000
7% series, due 2023 50,000 50,000
5.5% series, due 2023 19,400 19,400
229,400 169,400---------------- ----------------
284,400 284,400
First Mortgage Bonds -
Series J, 6-1/4%, retired in 1996 0 15,000
Series L, 7-7/8%, due 2000 15,000 15,000
Series M, 7-5/8%, due 2002 30,000 30,000Bonds:
Series Y, 8-5/8%, due 2001 60,000 60,000
Series Z, 7.60%7.6%, due 1999 50,000 50,000
6-1/8% series, due 1997 8,000 8,000
9-1/8% series, due 2001 21,000 21,000
7-3/8% series, due 2003 10,000 10,000
7-1/4% series, due 2007 30,000 30,000
224,000 239,000---------------- ----------------
161,000 161,000
Pollution control obligations -obligations:
5.75%, due serially 19971999 to 2003 3,416 3,5563,136 3,276
5.95%, due serially 2000 to 2007, secured by First
Mortgage Bonds 10,000retired in 1998 - 10,000
Variable rate (4.25% - 4.35%(4.20% at December 31, 1996)1998), due 2000 to 2010 11,100 11,100
24,516 24,656Variable/fixed rate series 1998 (4.25% through 2003), due 2023 10,000 -
---------------- ----------------
24,236 24,376
Subordinated Deferrable Interest Debentures, 7-7/8%, due 2025 50,000 50,000
Senior Debentures, 6-5/8%, due 2009 135,000 135,000
---------------- ----------------
Total IES Utilities Inc. 527,916 483,056
IES Diversified654,636 654,776
---------------- ----------------
68
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
December 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
Wisconsin Power and Light Company -
First Mortgage Bonds:
Series L, 6.25%, retired in 1998 $ - $ 8,899
1984 Series A, variable rate (3.85% at December 31, 1998), due 2014 8,500 8,500
1988 Series A, variable rate (4.20% at December 31, 1998), due 2015 14,600 14,600
1990 Series V, 9.3%, due 2025 27,000 27,000
1991 Series A-D, variable rate (5.15% at December 31, 1998),
due 2000 to 2015 33,875 33,875
1992 Series W, 8.6%, due 2027 90,000 90,000
1992 Series X, 7.75%, due 2004 62,000 62,000
1992 Series Y, 7.6%, due 2005 72,000 72,000
---------------- ----------------
307,975 316,874
Unsecured Debt:
Debentures, 7%, due 2007 105,000 105,000
Debentures, 5.7%, due 2008 60,000 -
---------------- ----------------
Total Wisconsin Power and Light Company 472,975 421,874
---------------- ----------------
Interstate Power Company -
First Mortgage Bonds:
8% series, due 2007 25,000 25,000
8-5/8% series, due 2021 25,000 25,000
7-5/8% series, due 2023 94,000 94,000
---------------- ----------------
144,000 144,000
Pollution Control Revenue Bonds:
5.95%, retired in 1998 - 5,850
6-3/8%, due serially 1999 to 2007 10,950 11,400
5.75%, due 2003 1,000 1,000
6.25%, due 2009 1,000 1,000
6.30%, due 2010 5,600 5,600
6.35%, due 2012 5,650 5,650
Variable/fixed rate series 1998 (4.30% through 2003),
due 2005 to 2008 4,950 -
---------------- ----------------
29,150 30,500
---------------- ----------------
Total Interstate Power Company 173,150 174,500
---------------- ----------------
Alliant Energy Resources, Inc. -
Credit facility 172,105 124,245(5.15% - 5.85% at December 31, 1998) 252,505 182,013
Multifamily Housing Revenue Bonds issued by various housing and
community development authorities, 4.20% - 7.55%, due 2004 to 2024 35,494 36,503
Other subsidiaries' debt, maturing through 2013 11,994 12,307
712,015 619,6080% - 10.75%, due 1999 to 2042 57,579 56,795
---------------- ----------------
Total Alliant Energy Resources, Inc. 345,578 275,311
---------------- ----------------
Interstate Energy Corporation -
8.59% Senior notes, due 2004 24,000 24,000
---------------- ----------------
1,670,339 1,550,461
---------------- ----------------
Less:
Current maturities (63,414) (18,329)
Variable rate demand bonds (56,975) (56,975)
Unamortized debt premium and (discount), net -2,442 -2,453
709,573 617,155
Less(6,819) (7,254)
---------------- ----------------
Total long-term debt 1,543,131 1,467,903
---------------- ----------------
- Amount due within one year 8,473 15,447
701,100 601,708---------------------------------------------------------------------------------------------------------------
Total capitalization $ 1,346,3013,262,924 $ 1,232,3743,205,828
================ ================
- ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
69
IES INDUSTRIES INC.
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1996 1995 1994CHANGES IN COMMON EQUITY
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Common
Stock Capital Earnings Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1996:
Cash flows from operating activities:
Beginning balance $ 750 $ 832,670 $ 569,982 $ - $ 1,403,402
Comprehensive income:
Net income 155,791 155,791
Other comprehensive loss net of tax:
Minimum pension liability adjustment (a) (809) (809)
-------------
Total comprehensive income 154,982
Common stock dividends (143,344) (143,344)
Common stock issued 8 18,447 18,455
Treasury stock (269) (269)
-------------- ------------- -------------- --------------- -------------
Ending balance 758 850,848 582,429 (809) 1,433,226
1997: Comprehensive income:
Net income 144,578 144,578
Other comprehensive income (loss):
Unrealized gain on securities, net of tax (b) 174,688 174,688
Foreign currency translation adjustment (20) (20)
Minimum pension liability adjustment, net of tax (a) (347) (347)
-------------
Total comprehensive income 318,899
Common stock dividends (145,631) (145,631)
Common stock issued 7 18,138 18,145
Treasury stock (83) (83)
-------------- ------------- -------------- --------------- -------------
Ending balance 765 868,903 581,376 173,512 1,624,556
1998: Comprehensive income:
Net income 96,675 96,675
Other comprehensive income (loss):
Unrealized loss on securities, net of tax (b) (4,589) (4,589)
Foreign currency translation adjustment (7,062) (7,062)
Minimum pension liability adjustment, net of tax (a) 1,156 1,156
-------------
Total comprehensive income 86,180
Common stock dividends (140,679) (140,679)
Common stock issued 11 36,263 36,274
Treasury stock (36) (36)
-------------- ------------- -------------- --------------- -------------
Ending balance $ 60,907776 $ 64,176905,130 $ 66,818
Adjustments to reconcile net income to net cash flows
from operating activities537,372 $ 163,017 $ 1,606,295
============== ============= ============== =============== =============
- Depreciation----------------------------------------------------------------------------------------------------------------------------------
(a) Net of tax expense (benefit) of $(565), $(243) and amortization 107,393 97,958 86,378
Amortization$808 in 1996, 1997 and
1998, respectively.
(b) Net of principal under capital lease obligations 16,491 15,714 16,246
Deferred taxestax expense (benefit) of $124,271 and investment tax credits 9,189 7,757 4,050
Refueling outage provision -6,374 -7,506 12,536
Amortization of other assets 9,828 7,391 2,228
Other 856 712 387
Other changes$(3,218) in assets1997 and liabilities -
Accounts receivable -22,154 -15,221 6,777
Sale of utility accounts receivable 7,000 4,000 800
Production fuel, materials and supplies 650 4,050 -1,184
Accounts payable 20,934 2,902 21,871
Accrued taxes -17,965 9,434 4,575
Provision for rate refunds -106 106 -8,670
Adjustment clause balances -13,900 4,581 -6,582
Gas in storage -1,154 3,245 1,135
Other 11,764 532 9,340
Net cash flows from operating activities 183,359 199,831 216,705
Cash flows from financing activities:
Dividends declared on common stock -62,738 -61,392 -60,065
Proceeds from issuance of common stock 14,164 15,616 16,426
Purchase of treasury stock -269 0 -6,233
Net change in IES Diversified Inc. credit facility 47,860 43,745 48,500
Proceeds from issuance of other long-term debt 60,000 100,007 11,640
Reductions in other long-term debt -15,454 -100,424 -9,790
Net change in short-term borrowings 34,000 64,000 13,000
Principal payments under capital lease obligations -19,108 -14,463 -16,304
Other -458 -1,438 -46
Net cash flows from financing activities 57,997 45,651 -2,872
Cash flows from investing activities:
Construction and acquisition expenditures -
Utility -142,259 -125,558 -138,829
Other -96,119 -92,541 -67,719
Oil and gas properties held for resale 9,843 -9,843 0
Deferred energy efficiency expenditures -16,857 -18,029 -16,157
Nuclear decommissioning trust funds -6,008 -6,100 -5,532
Proceeds from disposition of assets 8,295 14,271 8,803
Other 3,482 -5,733 3,129
Net cash flows from investing activities -239,623 -243,533 -216,305
Net increase (decrease) in cash and temporary cash investments 1,733 1,949 -2,472
Cash and temporary cash investments at beginning of year 6,942 4,993 7,465
Cash and temporary cash investments at end of year $ 8,675 $ 6,942 $ 4,993
Supplemental cash flow information:
Cash paid during the year for -
Interest $ 53,046 $ 50,877 $ 44,421
Income taxes $ 54,881 $ 26,478 $ 36,097
Noncash investing and financing activities -
Capital lease obligations incurred $ 14,281 $ 2,918 $ 14,2971998,
respectively.
The accompanying Notes to ConsolidatedCondolidated Financial Statements are an integralintergral
part of these statements.
IES INDUSTRIES INC.70
INTERSTATE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of ConsolidationGeneral -
The Consolidated Financial Statements include the accounts of Interstate Energy
Corporation (IEC) and its consolidated subsidiaries. IEC resulted from the April
1998 merger between WPL Holdings, Inc. (WPLH), IES Industries Inc. (Industries)(IES) and
its consolidated subsidiaries
(collectivelyInterstate Power Company (IPC) (refer to Note 2 for a discussion of the Company)merger).
IndustriesIEC is an investor-owned holding company currently doing business as Alliant
Energy Corporation whose primary operating company,subsidiaries are IES Utilities Inc. (Utilities)(IESU), isWisconsin
Power and Light Company (WP&L), IPC, Alliant Energy Resources, Inc. (Alliant
Energy Resources) and Alliant Energy Corporate Services, Inc. (Alliant Energy
Corporate Services). IESU, WP&L and IPC are engaged principally in the
generation, transmission, distribution and sale of electric energy andenergy; the
purchase, distribution, transportation and sale of natural gas.gas; and water and
steam services in selective markets. The Company's principal markets of IESU, WP&L and IPC
are located in Iowa, Wisconsin, Minnesota and Illinois. Alliant Energy Resources
(through its numerous direct and indirect subsidiaries) provides energy products
and services to domestic and international markets; provides industrial services
including environmental, engineering and transportation services; invests in
affordable housing initiatives; and invests in various other strategic
initiatives. Alliant Energy Corporate Services is the statesubsidiary formed to
provide administrative services to IEC and its subsidiaries as required under
the Public Utility Holding Company Act of Iowa.1935 (PUHCA).
The Company also has various non-utilityconsolidated financial statements reflect investments in controlled
subsidiaries which are primarily engaged in the energy-related,
transportation and real estate development businesses.
All subsidiaries for which Industries owns directly or indirectly
more than 50% of the voting stock are included ason a consolidated subsidiaries. Industries' wholly-owned subsidiaries are Utilities and
IES Diversified Inc. (Diversified).basis. All significant intercompany balances and
transactions, other than certain energy-related transactions affecting Utilities,IESU,
WP&L and IPC, have been eliminated from the Consolidated Financial Statements.
Such energy-related transactions are made at prices that approximate market
value and the associated costs are recoverable from Utilities' customers through the rate
making process. InvestmentsThe financial statements are prepared in conformity with
generally accepted accounting principles, which give recognition to the rate
making and accounting practices of the Federal Energy Regulatory Commission
(FERC) and state commissions having regulatory jurisdiction.
Unconsolidated investments for which the CompanyIEC has at least a 20% voting interest are
generally accounted for under the equity method of accounting. These investments
are stated at acquisition cost, increased or decreased for the Company'sIEC's equity in undistributed net
income or loss, which is included in "Miscellaneous, net" in the Consolidated
Statements of Income.Income and decreased for any dividends received. Investments that
do not meet the criteria for consolidation or the consolidating or equity methodsmethod of accounting
are accounted for under the cost method.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect: 1) the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and 2) the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain prior period amounts have been reclassified on a basis consistent with
the 1996current year presentation.
(b) Regulation -
Because of its ownership of Utilities, IndustriesIEC is a registered public utility holding company under the Public Utility Holding Company Act of 1935, but claims
an exemption from all provisions thereof except Section 9(a)(2), which
applies to the purchase of stock of other utility companies. Utilities
is subject to regulation by the
IowaSecurities and Exchange Commission (SEC) under the PUHCA. IESU, WP&L and IPC are
subject to regulation by the FERC and their respective state regulatory
commissions (Iowa Utilities Board (IUB), Public Service Commission of Wisconsin
(PSCW), Minnesota Public Utilities Commission (MPUC) and the
Federal Energy RegulatoryIllinois Commerce
Commission (FERC)(ICC)).
Refer to Note 2 for a discussion of the proposed merger of the
Company.
(c) Regulatory Assets -
Utilities isIESU, WP&L and IPC are subject to the provisions of Statement of Financial
Accounting Standards, No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). The regulatory assets represent
probable future revenue to Utilities associated withSFAS 71 provides that rate-regulated public utilities
record certain incurred
costs as these costs are recovered throughand credits allowed in the rate making process.process in different
periods than for unregulated entities. These are
71
deferred as regulatory assets or regulatory liabilities and are recognized in
the Consolidated Statements of Income at the time they are reflected in rates.
At December 31, 1998 and 1997, regulatory assets as reflected in the Consolidated Balance
Sheetsof $368.8 million and $388.7
million, respectively, were comprised of the following items:
1996 1995items (in millions)
Deferred income taxes (Note 1(d)) $ 84.7 $ 91.1
Energy efficiency program costs (Note 3(b)) 61.1 49.7
Environmental liabilities (Note 13(f)) 46.3 46.9
Employee pension and benefit costs (Note 8) 22.9 27.5
Other 12.7 14.8
227.7 230.0
Classified as "Current assets - regulatory assets" 26.6 22.8
Classified as "Other assets - regulatory assets" $ 201.1 $ 207.2:
IESU WP&L IPC
-------------------- --------------------- ------------------
1998 1997 1998 1997 1998 1997
---------- --------- ---------- ---------- -------- ---------
Tax-related (Note 1(d)) $81.4 $80.3 $49.3 $55.5 $29.8 $29.7
Energy efficiency program costs 39.8 59.4 53.5 29.5 25.9 30.0
Environmental liabilities (Note 12(f)) 35.2 42.9 19.5 22.2 17.5 6.2
Other 5.0 17.0 11.2 13.6 0.7 2.4
---------- --------- ---------- ---------- -------- ---------
Total $161.4 $199.6 $133.5 $120.8 $73.9 $68.3
========== ========= ========== ========== ======== =========
Refer to the individual notes referenced above for a further discussion of
certain items reflected in regulatory assets. Regulators allow IESU and IPC to
earn a return on energy efficiency program costs but not on the other regulatory
assets. In Wisconsin, WP&L is allowed to earn a return on all regulatory assets
other than those associated with manufactured gas plants (MGP).
If a portion of Utilities'IESU's, WP&L's or IPC's operations become no longer subject to
the provisions of SFAS 71 as a write-offresult of competitive restructuring or otherwise,
a write-down of related regulatory assets would be required, unless some form of
transition cost recovery is established by the appropriate regulatory body.body that
would meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period. In
addition, the
CompanyIESU, WP&L or IPC would be required to determine any impairment to
other assets and write-down such assets to their fair value.
Effective January 1,
1996, the Company adopted SFAS 121 which established accounting
standards for the impairment of long-lived assets. This standard also
requires that regulatory assets that are no longer probable of recovery
through future revenues be charged to earnings. There was no impact on
the Company's financial position or results of operations upon adoption
of SFAS 121.
(d) Income Taxes -
The CompanyIEC follows the liability method of accounting for deferred income taxes, which
requires the establishment of deferred tax liabilitiesassets and assets,liabilities, as
appropriate, for all temporary differences between the tax basis of assets and
liabilities and the amounts reported in the financial statements. Deferred taxes
are recorded using currently enacted tax rates.rates as shown in Note 6.
Except as noted below, income tax expense includes provisions for deferred taxes
to reflect the tax effects of temporary differences between the time when
certain costs are recorded in the accounts and when they are deducted for tax
return purposes. As temporary differences reverse, the related accumulated
deferred income taxes are reversed to income. Investment tax credits for Utilities have been
deferred and are subsequently credited to income over the average lives of the
related property. As part of the affordable housing business, IEC is eligible to
claim affordable housing credits. These tax credits reduce current federal taxes
to the extent IEC has consolidated taxes payable.
Consistent with Iowa rate making practices for Utilities,IESU and IPC, deferred tax
expense is not recorded for certain temporary differences (primarily related to
utility property, plant and equipment). As the deferred taxes become payable
over(over periods exceeding 30 years for some generating plant differences,differences) they are
recovered through rates. Accordingly, Utilities hasIESU and IPC have recorded deferred tax
liabilities and regulatory assets for certain temporary differences, as
identified in Note 1(c). In Wisconsin, the PSCW has allowed rate recovery of
deferred taxes on all temporary differences since August 1991. WP&L established
a regulatory asset associated with temporary differences occurring prior to
August 1991, which is recovered through rates.
(e) Common Shares Outstanding -
The weighted average common shares outstanding used in the calculation of basic
earnings per share for IEC were 76,912,219; 76,209,935 and 75,480,539 for 1998,
1997 and 1996, respectively. The common stock shares used for calculating
diluted earnings per share for IEC were 76,928,631; 76,212,073 and 75,484,281
for 1998, 1997 and 1996, respectively.
72
(f) Temporary Cash Investments -
Temporary cash investments are stated at cost, which approximates market value,
and are considered cash equivalents for the Consolidated Statements of Cash
Flows. These investments consist of short-term liquid investments that have
maturities of less than 90 days from the date of acquisition.
(f)(g) Depreciation of Utility Property, Plant and Equipment -
Utilities uses theIESU, WP&L and IPC use a combination of remaining life methodand straight-line
depreciation methods as approved by their respective regulatory commissions. The
remaining life of depreciation for its
nuclear generating facility, the Duane Arnold Energy Center (DAEC), and
the straight-line method for all other utility property. The remaining
life of the DAECIESU's nuclear
generating facility, is based on the Nuclear Regulatory Commission (NRC) license
life of 2014. The remaining life of the Kewaunee Nuclear Power Plant (Kewaunee),
of which WP&L is a co-owner, is based on the PSCW approved revised end-of-life
of 2002 (prior to May 1997 the calculation was based on the NRC license life of
2013). Depreciation expense related to the decommissioning of DAEC and Kewaunee
is discussed in Note 12(h). WP&L implemented higher depreciation rates effective
January 1, 1997. The average rates of depreciation for electric and gas
properties of Utilities,IESU, WP&L and IPC, consistent with current rate making practices,
were as follows:
1996 1995 1994
IESU WP&L IPC
---------------------------------- ---------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------
Electric 3.5% 3.5% 3.5% 3.6% 3.6% 3.3% 3.6% 3.6% 3.6%
Gas 3.5% 3.5% 3.5% 3.8% 3.8% 3.7% 3.4% 3.4% 3.4%
3.6%
Gas 3.5% 3.5% 3.8%
The electric and gas depreciation rates declined in 1995 from 1994
because of revised depreciation rates approved in rate proceedings of
Utilities.
(g) Decommissioning of the DAEC -
Pursuant to the most recent electric rate case order, the IUB
allows Utilities to recover $6.0 million annually for the cost to
decommission the DAEC. Decommissioning expense is included in
"Depreciation and amortization" in the Consolidated Statements of Income
and the cumulative amount is included in "Accumulated depreciation" in
the Consolidated Balance Sheets to the extent recovered through rates.
The current recovery figures are based on the following assumptions: 1)
cost to decommission the DAEC of $252.8 million, which is Utilities' 70%
portion in 1993 dollars, based on the NRC minimum formula (which exceeds
the amount in the current site-specific study completed in 1994); 2)
inflation of 4.91% annually through 1997; 3) the prompt dismantling and
removal method of decommissioning, which is assumed to begin in the year
2014; 4) monthly funding of all future collections into external trust
funds and funded on a tax-qualified basis to the extent possible; and 5)
an average after-tax return of 6.82% for all external investments. All
of these assumptions are subject to change in future regulatory
proceedings. At December 31, 1996, Utilities had $59.3 million invested
in external decommissioning trust funds as indicated in the Consolidated
Balance Sheets, and also had an internal decommissioning reserve of
$21.7 million recorded as accumulated depreciation. Earnings on the
external trust funds, which were $2.2 million in 1996, are recorded as
interest income and a corresponding interest expense payable to the
funds is recorded. The earnings accumulate in the external trust fund
balances and in accumulated depreciation on utility plant.
See "Management's Discussion and Analysis of the Results of
Operations and Financial Condition" for a discussion of the Exposure
Draft on Accounting for Liabilities Related to Closure and Removal of
Long-Lived Assets, issued by the Financial Accounting Standards Board
(FASB) in the first quarter of 1996, which deals with, among other
issues, the accounting for decommissioning costs.
(h) Property, Plant and Equipment -
Utility plant (other than acquisition adjustments at IESU of $29.4$26.8 million, net
of accumulated amortization, recorded at cost) is recorded at original cost,
which includes overhead and administrative costs and an allowance for funds used
during construction (AFC)(AFUDC). The AFC,AFUDC, which represents the cost during the
construction period of funds used for construction purposes, is capitalized by Utilities as a
component of the cost of utility plant. The amount of AFCAFUDC applicable to debt
funds and to other (equity) funds, a non-cash item, is computed in accordance
with the prescribed FERC formula. The aggregate gross rates used by
Utilities for 1996-1994 were 5.5%, 6.5% and 9.3%, respectively. These capitalized costs are recovered by Utilities in rates
as the cost of the utility plant is depreciated. The aggregate gross rates used
were as follows:
1998 1997 1996
------------------- ------------------ -------------------
IESU 8.9% 6.7% 5.5%
WP&L 5.2% 6.2% 10.2%
IPC 7.0% 6.0% 5.8%
Other property, plant and equipment is recorded at original cost. Upon
retirement or sale of other property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in "Miscellaneous, net" in the Consolidated Statements of Income.
Normal repairs, maintenance and minor items of utility plant and other property,
plant and equipment are expensed. Ordinary retirements of utility plant,
including removal costs less salvage value, are charged to accumulated
depreciation upon removal from utility plant accounts and no gain or loss is
recognized.
(i) Restatement of Consolidated Financial Statements / Oil and Gas
Properties -
During the third quarter of 1998, IEC's oil and gas subsidiary, Whiting
Petroleum Corporation (Whiting), a wholly-owned subsidiary
under Diversified, useschanged its accounting method for oil and gas
properties from the full cost method to the successful efforts method. While
both methods are acceptable under generally accepted accounting principles,
successful efforts is the preferred method. Management believes that the
successful efforts method more accurately presents the results of accounting for itsWhiting's
exploration, development and production activities and minimizes asset
impairments caused by temporary declines in oil and gas prices, which may not be
representative of overall or long-term markets or management's estimate of fair
market value. As a result, impairments will only be recognized under the
successful efforts method when there has been a permanent decline in the fair
value of the oil and gas properties. Accordingly,As required by generally accepted
accounting principles, all prior period financial statements of IEC presented
herein have been restated to reflect the change in accounting method.
73
Under the successful efforts method of accounting, Whiting capitalizes all costs
related to property acquisitions and successful exploratory wells, all
development costs and the costs of acquisition,support equipment and facilities. Unproved
leasehold costs are capitalized and are reviewed periodically for impairment.
All costs related to unsuccessful exploratory wells are expensed when such wells
are determined to be non-productive and other exploration costs, including
geological and development of propertiesgeophysical costs, are capitalized. Amortizationexpensed as incurred. Depreciation,
depletion and amortization of proved oil and gas properties is calculateddetermined on a
field-by-field basis using the unitsunit-of-production method over the life of production
method. At December 31, 1996, capitalizedthe
remaining proved reserves. Estimated costs less related
accumulated amortization did not exceed the sum(net of 1) the present valuesalvage value) of future net revenue from estimated production of proved oil and gas
reserves (calculated using current prices); plus 2) the cost of
properties not being amortized, if any; plus 3) the lower of cost or
estimated fair value of unproved propertiessite
remediation, including offshore platform dismantlement, are included in the
costs being
amortized, if any; less 4) income tax effects related to differences in
the bookdepreciation and tax basis of oil and gas properties. The Company had $9.8
million on its Consolidated Balance Sheet at December 31, 1995, relating
to specificdepletion calculation. Proved oil and gas properties purchased by Whitingare
reviewed on a field-by-field basis whenever events or circumstances indicate
that the carrying value of such properties may be impaired.
The cumulative effect of the restatement at January 1, 1994, was an after-tax
reduction in the fourth
quarterretained earnings of 1995 that it intended to sell during 1996.$2.7 million. The Company
subsequently decided not to sell these properties and, accordingly, the
balance at December 31, 1996 is included in "Other property, plant and
equipment" on the Consolidated Balance Sheet.restated net income amounts
for 1994 through 1997 are as follows (in thousands):
1997 1996 1995 1994
------------ ------------ ------------ ------------
Net income prior to restatement $ 154,290 $ 158,675 $ 147,806 $ 150,281
Adjustment for change in accounting method for
oil and gas properties from the full cost method
to the successful efforts method
(9,712) (2,884) (1,835) (4,391)
------------ ------------ ------------ ------------
Restated net income $ 144,578 $ 155,791 $ 145,971 $ 145,890
============ ============ ============ ============
The restated earnings per average common share (basic and diluted) for 1994
through 1997 are as follows:
1997 1996 1995 1994
------------ ------------ ------------ ------------
Earnings per average common share prior
to restatement (basic and diluted) $ 2.02 $ 2.10 $ 1.97 $ 2.04
Adjustment for change in accounting method for
oil and gas properties from the full cost method
to the successful efforts method (0.12) (0.04) (0.02) (0.06)
------------ ------------ ------------ ------------
Restated earnings per average common
share (basic and diluted) $ 1.90 $ 2.06 $ 1.95 $ 1.98
============ ============ ============ ============
(j) Operating Revenues -
The CompanyIEC accrues revenues for services rendered but unbilled at month-end in order to
more properly match revenues with expenses.
In accordance with an order from the PSCW, effective January 1, 1998, off-system
gas sales for WP&L are included in the Consolidated Statements of Income as a
reduction of the cost of gas sold rather than as gas revenues. In 1997,
off-system gas sales were included in the Consolidated Statements of Income as
gas revenue.
(k) Adjustment ClausesUtility Fuel Cost Recovery -
Utilities'IESU's and IPC's tariffs provide for subsequent adjustments to its electric and
natural gas rates for changes in the cost of fuel and purchased energy and in
the cost of natural gas purchased for resale. Changes in the under/over
collection of these costs are reflected in "Fuel for production""Electric and "Gas purchased for resale"steam production fuels"
and "Cost of utility gas sold" in the Consolidated Statements of Income. The
cumulative effects are reflected inon the Consolidated Balance Sheets as a current
asset or current liability, pending automatic reflection in future billings to
customers. At IESU and IPC, purchased capacity costs are not recovered from
electric customers through energy adjustment clauses. Recovery of these costs
must be addressed in base rates in a formal rate proceeding.
WP&L's retail electric rates are based in part on forecasted fuel and
purchased-power costs. Under PSCW rules,
74
Wisconsin utilities can seek emergency rate increases if the annual costs are
more than 3% higher than the estimated costs used to establish rates. WP&L has a
gas performance incentive which includes a sharing mechanism whereby 40% of all
gains and losses relative to current commodity prices, as well as other
benchmarks, are retained by WP&L rather than refunded to or recovered from
customers.
(l) AccumulatedNuclear Refueling Outage ProvisionCosts -
The IUB allows UtilitiesIESU to collect, as part of its base revenues, funds to offset
other operating and maintenance expenditures incurred during refueling outages
at the DAEC. As these revenues are collected, an equivalent amount is charged to
other operating and maintenance expenses with a corresponding credit to a
reserve. During a refueling outage, the reserve is reversed to offset the
refueling outage expenditures. Operating expenses incurred during refueling
outages at Kewaunee are expensed by WP&L as incurred.
(m) Nuclear Fuel -
Nuclear fuel for DAEC is leased. Annual nuclear fuel lease expenses include the
cost of fuel, based on the quantity of heat produced for the generation of
electric energy, plus the lessor's interest costs related to fuel in the reactor
and administrative expenses. Nuclear fuel for Kewaunee is recorded at its
original cost and is amortized to expense based upon the quantity of heat
produced for the generation of electricity. This accumulated amortization
assumes spent nuclear fuel will have no residual value. Estimated future
disposal costs of such fuel are expensed based on kilowatt-hours generated.
(n) Translation of Foreign Currency -
Assets and liabilities of international investments where the local currency is
the functional currency have been translated at year-end exchange rates and
related income statement results have been translated using average exchange
rates prevailing during the year. Adjustments resulting from translation have
been recorded in other comprehensive income.
(o) Comprehensive Income -
On January 1, 1998, IEC adopted SFAS 130, "Reporting Comprehensive Income." SFAS
130 establishes standards for reporting of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires reporting a total for comprehensive income which includes, in addition
to net income: (1) unrealized holding gains/losses on securities classified as
available-for-sale under SFAS 115; (2) PROPOSED MERGER OF THE COMPANY:foreign currency translation adjustments
accounted for under SFAS 52; and (3) minimum pension liability adjustments made
pursuant to SFAS 87. Refer to the "Consolidated Statements of Changes in Common
Equity" for additional information regarding comprehensive income.
(p) Derivative Financial Instruments -
From time to time, IEC enters into interest rate swaps to reduce exposure to
interest rate fluctuations in connection with short and variable rate long-term
debt issues. The swap's cash flows correspond with those of the underlying
exposures. The related costs associated with these agreements are amortized over
their respective lives as components of interest expense.
IEC, through its consolidated subsidiaries, currently utilizes derivative
financial and commodity instruments to reduce price risk inherent in its gas and
electric activities on a very limited basis and such instruments may not be used
for trading purposes. The costs or benefits associated with any such hedging
activities are recognized when the related purchase or sale transactions are
completed.
(2) MERGER:
On November 10, 1995, Industries, WPL Holdings, Inc. (WPLH) and
Interstate Power Company (IPC) entered into an Agreement and Plan of
Merger, as amended (Merger Agreement), providing for: a) IPC becoming a
wholly-owned subsidiary ofApril 21, 1998, IES, WPLH and b) theIPC completed a three-way merger (Merger)
forming IEC. Each outstanding share of Industries withcommon stock of IES, WPLH and into WPLH, which merger will resultIPC was
exchanged for 1.14, 1.0 and 1.11 shares, respectively, of IEC
75
common stock resulting in the combinationissuance of Industriesapproximately 77 million shares of IEC
common stock, $.01 par value per share. The outstanding debt and WPLH as a single holding company (collectively,preferred stock
securities of IEC and its subsidiaries were not affected by the Proposed
Merger).Merger. In
connection with the Merger, the number of authorized shares of IEC common stock
was increased to 200,000,000.
The new holding company will be named Interstate Energy
Corporation (Interstate Energy) and Industries will cease to exist. The
Proposed Merger which will bewas accounted for as a pooling of interests and is intended to be tax-free for federal income tax purposes, has been
approved by the respective Boards of Directors and shareholders. It is
still subject to approval by several federal and state regulatory
agencies. Theaccompanying
Consolidated Financial Statements, along with the related notes, are presented
as if the companies expect to receive such regulatory approvals by
the endwere combined as of the third quarterearliest period presented. As part
of 1997.
The summary below contains selected unaudited pro forma financial
datathe pooling, the accrued pension liability (and offsetting regulatory asset),
of IES was recomputed using the method used by WPLH and IPC to recognize
deferred asset gains. In addition, IPC adopted unbilled revenues as part of the
pooling to conform to the revenue accounting method used by WPLH and IES.
Neither of these adjustments had any income statement impact for the yearperiods
presented in this report.
Operating revenues and net income for the three months ended March 31, 1998, and
for the years ended December 31, 1996. The financial data should be
read in conjunction with the historical consolidated financial
statements1997, and related notes of the Company, WPLH, and IPC and in
conjunction with the unaudited pro forma combined financial statements
and related notes of Interstate Energy included in Item 14. The pro
forma combined earnings per share reflect the issuance of shares
associated with the exchange ratios discussed below.
PRO FORMA
IES COMBINED
INDUSTRIES WPLH IPC (Unaudited)
(in thousands, except per share amounts)
Operating revenues $ 973,912 $ 932,844 $ 326,084 $ 2,232,840
Net income from
continuing operations 60,907 73,205 25,860 159,972
Earnings per share from
continuing operations 2.04 2.38 2.69 2.12
Assets at December 31, 1996, 2,125,562 1,900,531 639,200 4,665,293
Long-term obligations at
December 31, 1996 744,298 430,190 188,731 1,363,219
Under the termswere as follows
(in millions):
WPLH IES IPC IEC
------------ ------------ ------------ -------------
Three months ended March 31, 1998
Operating revenues $229.5 $241.7 $85.1 $556.3
Net income $15.8 $8.1 $5.0 $28.9
Year ended December 31, 1997
Operating revenues $978.7 $990.1 $331.8 $2,300.6
Net income $61.3 $56.6 $26.7 $144.6
Year ended December 31, 1996
Operating revenues $932.8 $973.9 $326.1 $2,232.8
Net income $71.9 $58.0 $25.9 $155.8
The financial results of the Merger Agreement, the outstanding shares of
WPLH's common stock will remain unchanged and outstanding as shares of
Interstate Energy. Each outstanding share of the Company's common stock
will be convertedIES have been restated for all periods presented to
1.14 shares of Interstate Energy's common stock.
Each share of IPC's common stock will be converted to 1.11 shares of
Interstate Energy's common stock. It is anticipated that Interstate
Energy will retain WPLH's common share dividend payment level as of the
effective time of the merger. On January 22, 1997, the Board of
Directors of WPLH declaredreflect a quarterly dividend of $0.50 per share.
This represents an equivalent annual rate of $2.00 per share.
WPLH is a holding company headquarteredchange in Madison, Wisconsin, and
is the parent company of Wisconsin Power and Light Company (WP&L) and
Heartland Development Corporation (HDC). WP&L supplies electricaccounting method for Whiting's oil and gas service to approximately 385,000 and 150,000 customers, respectively, in
south and central Wisconsin. HDC and its principal subsidiaries are
engaged in businesses in three major areas: environmental engineering
and consulting, affordable housing and energy services. IPC, an
operating public utility headquartered in Dubuque, Iowa, supplies
electric and gas service to approximately 165,000 and 49,000 customers,
respectively, in northeast Iowa, northwest Illinois and southern
Minnesota.
Interstate Energy will be the parent company of Utilities, WP&L and
IPC and will be registered under the Public Utility Holding Company Act
of 1935, as amended (1935 Act). The Merger Agreement provides that
these operating utility companies will continue to operate as separate
entities for a minimum of three years beyond the effective date of the
merger. In addition, the non-utility operations of the Company and WPLH
will be combined shortly after the effective date of the merger under
one entity to manage the diversified operations of Interstate Energy.
The corporate headquarters of Interstate Energy will be in Madison.
The SEC historically has interpreted the 1935 Act to preclude
registered holding companies, with limited exceptions, from owning both
electric and gas utility systems. Although the SEC has recommended that
registered holding companies be allowed to hold both gas and electric
utility operations if the affected states agree, it remains possible
that the SEC may require as a condition to its approval of the Proposed
Merger that the Company, WPLH and IPC divest their gas utility
properties
and possibly certain non-utility ventures of the Company and
WPLH, within a reasonable time after the effective date of the Proposed
Merger.
(3) RATE MATTERS:
(a) Electric Price Announcements -
Utilities and its Iowa-based proposed merger partner, IPC,
announced in 1996 their intentions to hold retail electric prices to
their current levels until at least January 1, 2000. The companies made
the proposal as part of their testimony in the merger-related
application filed with the IUB; the application was later withdrawn and
was resubmitted in January 1997 and the companies included the same
proposal in the resubmittal of the filing. The proposal excludes price
changes due to government-mandated programs, such as energy efficiency
cost recovery, or unforeseen dramatic changes in operations.
Utilities, WP&L and IPC also proposed to freeze their wholesale
electric prices for four years from the effective date of the merger as
part of their merger filing with the FERC. The Company does not expect
the merger-related electric price proposals to have a material adverse
effect on its financial position or results of operations.
(b) Energy Efficiency Cost Recovery -
Current IUB rules mandate Utilities to spend 2% of electric and
1.5% of gas gross retail operating revenues for energy efficiency
programs. Under provisions of the IUB rules, Utilities is currently
recovering the energy efficiency costs incurred through 1993 for such
programs, including its direct expenditures, carrying costs, a return on
its expenditures and a reward. These costs are being recovered over a
four-year period and the recovery began on June 1, 1995.
In December 1996, under provisions of the IUB rules, the Company
filed for recovery of the costs relating to its 1994 and 1995 programs.
Utilities' proposed recovery was for approximately $53 million ($42
million electric and $11 million gas) and was composed of $34 million
for direct expenditures and carrying costs, $10 million for a return on
the expenditures over the recovery period and $9 million for a reward
based on a sharing of the benefits of such programs. The Company
expects to receive the final order in the proceeding in June 1997 with
recovery of the allowed costs to commenceimplemented in the third quarter of 1997.
Iowa statutory changes enacted in 1996,1998 from the full cost method to the
successful efforts method. See Note 1(i) for additional information. In
addition, the operating revenues of WPLH and applicableIES for the 1998 and 1997 periods
presented have been adjusted to future
programs oncereflect the legislation is implemented by the IUB, have
eliminated: 1) the 2% and 1.5% spending requirements described above in
favor of IUB-determined energy savings targets, 2) the delay in
recovery of energy efficiency costs by allowing recovery which is
concurrent with spending and 3) the recoveryfinancial results of a sharing reward. The
IUB commencedjoint venture
between the two companies as a rulemaking in January 1997 to implement the statutory
change and a final order in this proceeding is expected in the second
quarter of 1997. The proposed rules provide that the Company would
begin to recover its 1996 expenditures, and the 1997 expenditures
incurred at such time, during the summer of 1997 over a likely four-year
recovery period. The Company would also begin concurrent recovery of
its prospective expenditures at such time. The implementation of these
changes will gradually eliminate the regulatory asset which exists under
the current rate making mechanism as these costs are recovered.
The Company has the following amounts of energy efficiency costs
included in regulatory assets on its Consolidated Balance Sheets at
December 31 (in thousands):
1996 1995
Costs incurred through 1993 $ 12,834 $ 18,287
Costs incurred in 1994-1995 33,161 31,393
Costs incurred in 1996 15,087 -
$ 61,082 $ 49,680
The above amounts include the direct expenditures and carrying
costs incurred by the Company but do not include any amounts for a
return on its expenditures over the recovery period or for a reward.
(4)consolidated subsidiary.
(3) LEASES:
UtilitiesIESU has a capital lease covering its 70% undivided interest in nuclear fuel
purchased for the DAEC. Future purchases of fuel may also be added to the fuel
lease. This lease provides for annual one-year extensions and UtilitiesIESU intends to
continue exercising such extensions. Interest costs under the lease are based on
commercial paper costs incurred by the lessor. UtilitiesIESU is responsible for the
payment of taxes, maintenance, operating cost, risk of loss and insurance
relating to the leased fuel. The lessor has a $45 million credit agreement with
a bank supporting the nuclear fuel lease. The agreement continues on a
year-to-
yearyear-to-year basis, unless either party provides at least a three-year notice of
termination; no such notice of termination has been provided by either party.
Annual nuclear fuel lease expenses include the cost of fuel, based
on the quantity of heat produced for the generation of electric energy,
plus the lessor's interest costs related to fuel in the reactor and
administrative expenses. These expenses (included in "Fuel for
production""Electric and steam production
fuels" in the Consolidated Statements of Income) for 1996-19941998, 1997 and 1996 were
$14.2 million, $16.6 million and $18.2 million, $18.0 million and $17.8 million, respectively.
The Company'sIEC's operating lease rental expenses for 1996-19941998, 1997 and 1996 were $8.3$21.6
million, $10.4$20.3 million and $11.1$20.0 million, respectively. The Company'sIEC's future minimum
lease payments by year are as follows:follows (in thousands):
76
Capital Operating
Year Lease Leases (in thousands)
1997Leases
------------------------------------- --------------- ---------------
1999 $ 16,80812,293 $ 6,891
1998 9,889 6,565
1999 6,969 4,74123,075
2000 3,004 2,5108,051 19,743
2001 861 1,3704,338 14,183
2002 2,674 9,649
2003 561 7,333
Thereafter 307 197
37,838141 29,961
---------------
---------------
28,058 $ 22,274103,944
===============
Less: Amount representing interest 3,1132,325
---------------
Present value of net minimum
capital lease payments $ 34,725
(5)25,733
===============
(4) UTILITY ACCOUNTS RECEIVABLE:
CustomerUtility customer accounts receivable, including unbilled revenues, arise
primarily from the sale of electricity and natural gas. At December 31, 1996, Utilities1998,
IEC was serving a diversified base of residential, commercial and industrial
customers consisting of approximately 336,000
electric and 176,000 gas customers and did not have any significant concentrations of credit risk.
Utilities hasSeparate accounts receivable financing arrangements exist for two of IEC's
utility subsidiaries, IESU and WP&L, which are similar in most important
aspects. In both cases, the utility subsidiaries sell up to a pre-determined
maximum amount of accounts receivable to a financial institution on a limited
recourse basis, including sales to customers and to other public, municipal and
cooperative utilities, as well as billings to the co-owners of the jointly-owned
electric generating plants that the utility subsidiaries operate. The amounts
are discounted at the then-prevailing market rate and additional administrative
fees are payable according to the activity levels undertaken. All billing and
collection functions remain the responsibility of the respective utilities.
Specifics of the two agreements include (dollars in millions):
IESU WP&L
-------------- -----------
Year agreement expires 1999 1999
Maximum amount of receivables that can be sold $65 $150
Effective 1998 all-in cost 6.02% 5.95%
Average monthly sale of receivables - 1998 $63 $83
- 1997 $65 $92
Receivables sold at December 31, 1998 $55 $75
(5) INVESTMENTS:
(a) McLeodUSA Inc. (McLeod) -
At December 31, 1998, IEC had the following investment in McLeod, a
telecommunications company (in millions):
Shares Cost Fair Market Value
----------- ---------- -------------------
Class A common stock 9.0 $ 29.1 $ 282.0
Unexercised vested options,
net of cost to exercise 1.3 - 38.3
----------- ---------- -------------------
10.3 $ 29.1 $ 320.3
=========== ========== ===================
Pursuant to the provisions of SFAS 115, IEC's investment in McLeod is considered
an available-for-sale security thus the carrying value of the investment is
adjusted to the estimated fair value each quarter based on the closing price at
the end of the quarter. The adjustment does not impact earnings as the
unrealized gains or losses, net of taxes, are recorded directly to the common
equity section of the Consolidated Balance Sheets. In addition, any such gains
or losses are reflected in current earnings only at the time they are realized
through a sale. IEC entered into an agreement which expires in 1999,November 1998 with a financial institutionMcLeod
whereby IEC's ability to sell with limited recourse, an
undivided fractional interest of upthe McLeod stock is subject to $65 million in its pool of
utility accounts receivable. Expenses related to the sale of
receivables are paid to the financial organization under this contract
and approximated a 5.86% annual rate during 1996. During 1996 and 1995,
the monthly proceeds from the sale of accounts receivable averaged
$62.9 million and $61.9 million, respectively. At December 31, 1996,
$65 million was sold under the agreement.
SFAS 125, issued by the FASB in 1996 and effective for 1997,
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The accounting
for Utilities' sale of accounts receivable agreement is impacted by this
standard. As a result, the agreement is being modified to comply with
the SFAS 125 requirements and thus the accounting and reporting for the
sale of Utilities' receivables will remain unchanged.
(6) INVESTMENTS:
(a)various
restrictions.
77
(b) Foreign Entities -
At December 31, 1996, the Company1998, IEC had $44.9$68.9 million of investments in foreign entities
on its Consolidated Balance SheetSheets that includedincluded: 1) investments in twoseveral
generation facilities in China; 2) investments in several New Zealand electric distribution entities, 2) a loan
to a New Zealand company,utility
entities; and 3) an investment in a cogeneration facility in
China, and 4) an investment in an international venture capital fund. The CompanyIEC
accounts for the China investmentinvestments under the equity method and the other
investments under the cost method. The geographic concentration of the Company'sIEC's
investments in foreign entities at December 31, 1996,1998, included investments of
approximately $30.9$36.1 million in China, $32.3 million in New Zealand $13.6 in China and $0.4$0.5
million in other countries.
(b) McLeod, Inc. (McLeod) -
At December 31, 1996, the Company had a $20.0 million investment in
Class A common stock of McLeod, a $9.2 million investment in Class B
common stock and vested options that, if exercised, would represent an
additional investment of approximately $2.3 million. McLeod provides
local, long-distance and other telecommunications services.
McLeod completed an Initial Public Offering (IPO) of its Class A
common stock in June 1996 and a secondary offering in November 1996. As
of December 31, 1996, the Company is the beneficial owner of
approximately 10.6 million total shares on a fully diluted basis. Class
B shares are convertible at the option of the Company into Class A
shares at any time on a one-for-one basis. The rights of McLeod Class A
common stock and Class B common stock are substantially identical except
that Class A common stock has 1 vote per share and Class B common stock
has 0.40 vote per share. The Company currently accounts for this
investment under the cost method.
The Company has entered into an agreement with McLeod which
provides that for two years commencing on June 10, 1996, the Company
cannot sell or otherwise dispose of any of its securities of McLeod
without the consent of the McLeod Board of Directors. This contractual
sale restriction results in restricted stock under the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
Accounting for Certain Investments in Debt and Equity Securities, until
such time as the restrictions lapse and such shares became qualified for
sale within a one year period. As a result, the Company currently
carries this investment at cost.
The closing price of the McLeod Class A common stock on December
31, 1996, on the Nasdaq National Market, was $25.50 per share. The
current market value of the shares the Company beneficially owns
(approximately 10.6 million shares) is currently impacted by, among
other things, the fact that the shares cannot be sold for a period of
time and it is not possible to estimate what the market value of the
shares will be at the point in time such sale restrictions are lifted.
In addition, any gain upon an eventual sale of this investment would
likely be subject to a tax.
Under the provisions of SFAS No. 115, the carrying value of the
McLeod investment will be adjusted to estimated fair value at the time
such shares become qualified for sale within a one year period; this
will occur on June 10, 1997, which is one year before the contractual
restrictions on sale are lifted. At that time, the adjustment to
reflect the estimated fair value of this investment will be reflected as
an increase in the investment carrying value with the unrealized gain
reported as a net of tax amount in other common shareholders equity
until realized (i.e., sold by the Company).
(7)(6) INCOME TAXES:
The components of federal and state income taxes for IEC for the years ended
December 31 were as follows:
1996 1995 1994follows (in millions)
Current tax expense $ 38.2 $ 34.7 $ 37.5
Deferred tax expense 11.8 10.5 6.7
Amortization and adjustment
of investment tax credits (2.6) (2.7) (2.6)
$ 47.4 $ 42.5 $ 41.6:
1998 1997 1996
--------------- -------------- ---------------
Current tax expense $ 92.5 $ 99.6 $ 96.9
Deferred tax expense (22.2) (6.1) 20.3
Amortization of investment tax credits (5.6) (5.6) (5.6)
Affordable housing tax credits (6.6) (6.2) (5.8)
--------------- -------------- ---------------
$ 58.1 $ 81.7 $ 105.8
=============== ============== ===============
The overall effective income tax rates shown below for the years ended December
31 were computed by dividing total income tax expense by income before income
taxes.
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes netand preferred dividend requirements of federal benefits 6.6 5.5 5.9
Effect of rate making on property
related differences 2.8 2.6 1.6
Amortization of investment tax credits (2.4) (2.5) (2.5)
Adjustment of prior period taxes 1.4 (0.4) (1.6)
Other items, net 0.4 (0.4) -
Overall effective income tax rate 43.8% 39.8% 38.4%subsidiaries.
1998 1997 1996
-------------- -------------- -------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefits 8.0 6.4 6.5
Affordable housing tax credits (4.1) (2.7) (2.2)
Amortization of investment tax credits (3.4) (2.4) (2.1)
Adjustment of prior period taxes (0.4) (2.2) 1.0
Merger expenses 2.4 0.5 1.2
Oil and gas production credits (1.6) (0.6) (0.5)
Other items, net 0.1 1.1 0.3
-------------- -------------- -------------
Overall effective income tax rate 36.0% 35.1% 39.2%
============== ============== =============
The accumulated deferred income taxes (assets) and liabilities as set forth
below inon the Consolidated Balance Sheets at December 31 arise from the following
temporary differences:
1996 1995differences (in millions):
1998 1997
--------------- --------------
Property related $ 293677.7 $ 296654.7
McLeod investment 121.1 124.3
Investment tax credit related (24) (26)(43.0) (46.1)
Decommissioning related (15) (14)(33.4) (31.7)
Other 9 1(30.8) 18.7
--------------- --------------
$ 263691.6 $ 257
(8)719.9
=============== ==============
(7) BENEFIT PLANS:
(a) Pension Plans and Other Postretirement Benefits -
The CompanyIEC adopted SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" in 1998. IEC has twoseveral non-contributory defined
benefit pension plans that
collectively, cover substantially all of its employees.employees who are
subject to a collective bargaining agreement. Plan benefits are generally based
on years of service and compensation during the employees' latter years of
employment. Payments made fromEligible employees of IEC that are not subject to a collective
bargaining agreement are covered by the Alliant Energy Cash Balance Pension
Plan, a non-contributory defined benefit pension
funds78
plan. During each year of service, IEC credits each participant's account with a
benefit credit equal to retired employees5% of base pay as well as a guaranteed minimum interest
credit equal to 4%. The projected unit credit actuarial cost method was used to
compute pension cost and beneficiaries during 1996 totaled
$10.7 million.
The Company'sthe accumulated and projected benefit obligations.
IEC's policy is to fund all of the pension costplans at an amount that is at least
equal to the minimum funding requirements mandated by the Employee Retirement
Income Security Act of 1974, as amended (ERISA), and that does not exceed the
maximum tax deductible amount for the year.
IEC also provides certain other postretirement benefits to retirees, including
medical benefits for retirees and their spouses (and Medicare Part B
reimbursement for certain retirees) and, in some cases, retiree life insurance.
IESU's and IPC's funding of other postretirement benefits generally approximates
the annual rate recovery of such costs, while WP&L's funding generally
approximates the maximum tax deductible amount on an annual basis.
The Company has an
investment policy governing asset allocation guidelines for its pension
plans. The target rangesweighted-average assumptions as of the measurement date of September 30 are
as follows:
1) 37%-43% in large
Qualified Pension Benefits Other Postretirement Benefits
----------------------------------- --------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- --------------
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets 9% 8-9% 8-9% 9% 8-9% 8-9%
Rate of compensation increase 3.5-4.5% 3.5-5.0% 3.5-5.0% 3.5% 3.5% 3.5%-4.5%
Medical cost trend on covered charges:
Initial trend range N/A N/A N/A 8% 8% 8-9%
Ultimate trend range N/A N/A N/A 5.0-6.0% 5.0-6.5% 5.0-6.5%
The components of IEC's qualified pension benefits and other postretirement
benefits costs are as follows (in millions):
Qualified Pension Benefits Other Postretirement Benefits
------------------------------------ ---------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- --------- ------- -------- ---------
Service cost $ 13.8 $ 13.1 $ 13.4 $ 5.1 $ 4.7 $ 4.9
Interest cost 35.4 32.2 30.0 9.7 9.8 9.6
Expected return on plan assets (47.2) (39.0) (36.8) (3.7) (2.6) (1.9)
Amortization of:
Transition obligation (asset) (2.4) (2.4) (2.4) 4.7 4.9 5.0
Prior service cost 2.8 2.5 1.7 (0.3) (0.3) (0.3)
Actuarial (gain) / loss (0.9) - 0.4 (1.2) (0.2) (0.1)
---------- ----------- --------- ------- -------- ---------
Total $ 1.5 $ 6.4 $ 6.3 $ 14.3 $ 16.3 $ 17.2
========== ========== ========= ======= ======== =========
During 1998, 1997 and mid-
sized domestic company equity securities, 2) 7%-13% in foreign equity
securities, 3) 7%-13% in small domestic company equity securities, 4) 0-
5% in real estate,1996, IEC recognized an additional $10.3 million, $5.1
million and 5) the remainder in fixed income securities. As
of December 31, 1996, the plan's investment mix was consistent with the
policy guidelines.
Pursuant to the provisions of SFAS 71, certain adjustments to
Utilities' pension provision are necessary to reflect the accounting for
pension costs allowed in its most recent rate cases.
The components of the pension provision for the years ended
December 31, were as follows:
1996 1995 1994
(in thousands)
Service cost $ 5,997 $ 5,215 $ 5,863
Interest cost on projected benefit
obligation 12,711 11,811 11,431
Assumed return on plans' assets (14,976) (12,567) (12,593)
Early retirement benefits 4,713 - -
Net amortization 906 268 841
Pension cost 9,351 4,727 5,542
Adjustment to funding level (9,351) (4,727) (5,431)
Total pension costs paid to the Trustee $ - $ - $ 111
Actual return on plans' assets $ 26,297 $ 36,614 $ (97)
During 1996, the Company incurred a one-time charge of $4.7 million, relatedrespectively, of costs in accordance with SFAS 88. The
charges were for severance and early retirement programs in the respective
years. In addition, during 1998 and 1997, IEC recognized $10.2 million and $1.7
million, respectively, of curtailment charges relating to anIEC's other
postretirement benefits. The amounts include a December 1998 early retirement
program.
Of such costs, $0.2 million was
charged to expense and the remaining amount was deferredThe measurement date for future
recovery through the regulatory process.
A reconciliation of the funded status of the plansaccounting purposes is September 30 for IEC as
disclosed above. Prior to the amounts
recognized in the Consolidated Balance Sheets atMerger, WPLH, IPC and IES used December 31,
is
presented below:
1996 1995
(in thousands)
Fair market value of plans' assets $ 212,394 $ 195,329
Actuarial present value of benefits rendered to date -
Accumulated benefits based on compensation to date,
including vested benefits of $130,334,000November 1 and $119,996,000, respectively 142,515 131,274
Additional benefits based on estimated future
salary levels 42,940 41,581
Projected benefit obligation 185,455 172,855
Plans' assets in excess of projected
benefit obligation 26,939 22,474
Remaining unrecognized net asset existing at
January 1, 1987, being amortized over 20 years (3,179) (3,511)
Unrecognized prior service cost 15,523 16,905
Unrecognized net gain (54,442) (41,795)
Accrued pension cost recognized in the
Consolidated Balance Sheets $ (15,159) $ (5,927)
Assumed rate of return, all plans 9.00% 8.00%
Weighted average discount rate of projected benefit
obligation, all plans 7.50% 7.50%
Assumed rate of increase in future compensation
levels for the plans 4.75% 4.75%
The assumed rate of return was increased to 9.00% in 1996 based on
actual historical performance of the previously stated investment mix.
The Company also sponsors defined contribution pension plans
(401(k) plans) covering substantially all employees. The Company's
contributions to the plans, which are based on the participants' level
of contribution and cannot exceed 2.8% of the participants' salaries or
wages, were $1.7 million, $1.5 million and $1.8 million in 1996, 1995
and 1994,September 30 measurement dates, respectively.
(b) Other Postemployment Benefit Plans -
The Company provides certain benefits to retirees (primarily health
care benefits). The IUB adopted rules stating that postretirement
benefits other than pensions will be included in Utilities' rates
pursuant to the provisions of SFAS 106. The rules permit Utilities to
amortize the transition obligation as of January 1, 1993, over 20 years
and require that all amounts collected are to be funded into an external
trust to pay benefits as they become due. The gas and electric portions
of these costs are being recovered through rates beginning in 1993 and
1995, respectively, including amounts that were deferred by the Company,
pursuant to IUB rules, between when SFAS 106 was adopted and when
recovery through rates began. The amounts deferred are being amortized
as they are collected through rates over a three-year period.
Utilities' unamortized balance of these deferred costs was $1.5 million
at December 31, 1996.
Pursuant to the provisions of SFAS 71, certain adjustments to
Utilities' other postretirement benefit provisions are necessary to
reflect the accounting for other postretirement benefit costs allowed in
its most recent rate cases.
The components of postretirement benefit costs for the years ended
December 31, were as follows:
1996 1995 1994
(in thousands)
Service cost $ 1,888 $ 1,387 $ 1,838
Interest cost on accumulated
postretirement benefit obligation 3,726 3,175 3,275
Assumed return on plans' assets (388) (56) (60)
Net amortization of transition
obligation and other 1,970 1,813 2,037
Amortized/(deferred) postretirement
benefit costs 1,863 2,220 (2,732)
Regulatory recognition of incurred cost 49 1,162 -
Net postretirement benefit costs $ 9,108 $ 9,701 $ 4,358
Actual return on plans' assets $ 945 $ 273 $ 47
A reconciliation of the funded status of the plans to the amounts
recognized in the Consolidated Balance Sheets at December 31, is
presented below:
1996 1995
(in thousands)
Fair market value of plans' assets $ 12,312 $ 6,515
Accumulated postretirement benefit obligation -
Active employees not yet eligible 19,056 22,254
Active employees eligible 4,866 6,282
Retirees 25,992 22,575
Total accumulated postretirement benefit
obligation 49,914 51,111
Accumulated postretirement benefit obligation
in excess of plans' assets (37,602) (44,596)
Unrecognized transition obligation 31,020 34,415
Unrecognized net (gain)/loss (2,505) 349
Unrecognized prior service cost (427) 151
Accrued postretirement benefit cost in the
Consolidated Balance Sheets $ (9,514) $ (9,681)
Assumed rate of return 9.00% 8.00%
Weighted average discount rate of accumulated
postretirement benefit obligation 7.50% 7.50%
Medical trend on paid charges:
Initial trend rate 9.00% 10.00%
Ultimate trend rate 6.50% 6.50%
The assumed rate of return was increased to 9.00% in 1996 based on
actual historical performance of investments of a similar nature.
The assumed medical trend rates are critical assumptions in determining the
service and interest cost and accumulated postretirement benefit obligation
related to postretirement benefit costs. A 1%one percent change in the medical
trend rates for 1998, holding all other assumptions constant, would have changed the
1996 service and interest cost by $1.2 million (21%) and the
accumulatedfollowing effects (in millions):
1 Percent Increase 1 Percent Decrease
--------------------- ---------------------
Effect on total of service and interest cost components $2.3 ($1.8)
Effect on postretirement benefit obligation $15.6 ($13.0)
79
A reconciliation of the funded status of IEC's plans to the amounts recognized
on IEC's Consolidated Balance Sheets at December 31 is presented below (in
millions):
Qualified Pension Benefits Other Postretirement Benefits
---------------------------- --------------------------------
1998 1997 1998 1997
----------- ------------ ------------ --------------
Change in benefit obligation:
Net benefit obligation at beginning of year $ 474.2 $ 426.6 $ 146.4 $ 136.5
Service cost 13.8 13.1 5.1 4.7
Interest cost 35.4 32.2 9.7 9.8
Plan participants' contributions - - 1.3 1.4
Plan amendments (2.5) 11.8 - -
Actuarial (gain) / loss 24.8 13.7 (3.6) 1.0
Curtailments (3.0) 2.5 1.9 0.7
Special termination benefits 10.7 5.1 - -
Gross benefits paid (25.0) (30.8) (7.5) (7.7)
----------- ------------ ------------ --------------
Net benefit obligation at end of year 528.4 474.2 153.3 146.4
----------- ------------ ------------ --------------
Change in plan assets:
Fair value of plan assets at beginning of year 529.1 482.6 50.7 37.2
Actual return on plan assets 2.2 72.5 2.5 3.7
Employer contributions - 4.8 7.0 16.1
Plan participants' contributions - - 1.3 1.4
401(h) assets recognized - - 1.1 -
Gross benefits paid (25.0) (30.8) (7.5) (7.7)
----------- ------------ ------------ --------------
Fair value of plan assets at end of year 506.3 529.1 55.1 50.7
----------- ------------ ------------ --------------
Funded status at end of year (22.1) 54.9 (98.2) (95.7)
Unrecognized net actuarial (gain) / loss 30.3 (56.9) (7.5) (4.0)
Unrecognized prior service cost 25.8 32.1 (1.7) (2.3)
Unrecognized net transition obligation (asset) (10.6) (13.0) 60.6 73.2
----------- ------------ ------------ --------------
Net amount recognized at end of year $ 23.4 $ 17.1 $ (46.8) $ (28.8)
=========== ============ ============ ==============
Amounts recognized on the Consolidated
Balance Sheets consist of:
Prepaid benefit cost $ 38.9 $ 42.7 $ 0.9 $ 0.9
Accrued benefit cost (15.5) (25.6) (47.7) (29.7)
Additional minimum liability (7.7) - - -
Intangible asset 7.7 - - -
----------- ------------ ------------ --------------
Net amount recognized at measurement date 23.4 17.1 (46.8) (28.8)
----------- ------------ ------------ --------------
Contributions paid after 9/30 and prior to 12/31 - - 6.8 -
----------- ------------ ------------ --------------
Net amount recognized at 12/31/98 $ 23.4 $ 17.1 $ (40.0) $ (28.8)
=========== ============ ============ ==============
The benefit obligation and fair value of plan assets for the postretirement
welfare plans with benefit obligations in excess of plan assets were $146.5
million and $45.3 million, respectively, as of September 30, 1998 and $139.8
million and $46.3 million, respectively, as of the prior measurement date. The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets for the pension plans with benefit obligations in excess of plan
assets were $250.5 million, $241.1 million and $217.9 million, respectively, as
of September 30, 1998.
IEC also sponsors several non-qualified pension plans which cover certain
current and former officers. Funding of such plans at December 31, 1998, totaled
approximately $4 million. IEC's pension benefit obligation under these plans was
$25.8 million and $18.7 million at December 31, 1998 and 1997, respectively.
IEC's pension expense under these plans was $4.5 million, $3.7 million, and $2.0
million in 1998, 1997 and 1996, respectively.
80
A significant number of IEC employees also participate in defined contribution
pension plans (401(k) plans). IEC's contributions to the plans, which are based
on the participants' level of contribution, were $7.7 million, $5.5 million and
$4.9 million in 1998, 1997 and 1996, respectively.
(b) Long-Term Equity Incentive Plan -
IEC has a long-term equity incentive plan which permits the grant of
non-qualified stock options, incentive stock options, restricted stock,
performance shares and performance units to key employees. As of December 31,
1998, only non-qualified stock options and performance units had been granted to
key employees. The maximum number of shares of IEC common stock that may be
issued under the plan may not exceed one million. Options are granted at the
fair market value of the shares on the date of grant and vest over three years.
Options outstanding will expire no later than 10 years after the grant date. The
first options were granted in 1995 and became exercisable in January 1998. All
options granted prior to the consummation of the Merger were issued by $8.5 million (17%).
(9)WPLH. A
summary of the stock option activity for 1998, 1997 and 1996 is as follows:
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------- ----------------------- -----------------------
Outstanding at beginning of year 191,800 $28.98 114,150 $29.56 41,900 $27.50
Options granted 636,451 31.32 77,650 28.12 72,250 30.75
Options exercised (8,900) 28.59 - - - -
Options forfeited (68,267) 30.49 - - - -
----------------------- ----------------------- -----------------------
Outstanding at end of year 751,084 $30.83 191,800 $28.98 114,150 $29.56
======================= ======================= =======================
Exercisable at end of year 38,250 $27.50 - -
The range of exercise prices for the options outstanding at December 31, 1998
was $27.50 to $31.56.
The value of the options at the grant date using the Black-Scholes pricing
method is as follows:
1998 1997 1996
------------ ------------ ------------
Value of options based on Black-Scholes model $4.93 $3.30 $3.47
Volatility 21% 15% 16%
Risk free interest rate 5.75% 6.43% 5.56%
Expected life 10 years 10 years 10 years
Expected dividend yield 7.0% 7.0% 7.0%
IEC follows Accounting Principles Board (APB) Opinion 25, "Accounting for Stock
Issued to Employees," to account for stock options. No compensation cost is
recognized because the option exercise price is equal to the market price of the
underlying stock on the date of grant. Had compensation cost for the plan been
determined based on the Black-Scholes value at the grant dates for awards as
prescribed by SFAS 123 "Accounting for Stock-Based Compensation," pro forma net
income and earnings per share would have been:
1998 1997 1996
----------- ----------- -----------
Net income (in millions) $93.5 $144.3 $155.5
Earnings per share (basic and diluted) $1.22 $1.89 $2.06
The performance units represent accumulated dividends on the shares underlying
the non-qualified stock options and are expensed over a three-year vesting
period based on the annual dividend rate at the grant date. The performance unit
payout is contingent upon three-year performance criteria. The cost of this
program in 1998, 1997 and 1996 was not significant.
81
(8) COMMON, PREFERRED AND PREFERENCE STOCK:
(a) Common Stock -
The following table presents information relatingDuring 1998, 1997 and 1996, IEC issued 890,035; 687,962 and 777,649 shares of
common stock under its various stock plans, respectively. Shares issued prior to
the changes in
common stock.
Common Stock
Number of Shares
Outstanding Amount
(in thousands)
Balance, December 31, 1993 28,304,188 $ 360,301
SharesMerger consummation by IES and IPC have been adjusted for the applicable
conversion ratios. In addition, 260,039 shares were issued in 1998 in connection
with the acquisition of oil and gas companies 139,102 4,027
Purchases of treasury stock (213,300) (6,233)
Stock plan issuances* 547,056 15,395
Balance,properties. At December 31, 1994 28,777,046 373,490
Shares issued in connection with
acquisition1998, IEC had a
total of oil and gas companies 75,638 1,925
Stock plan issuances* 655,731 15,854
Balance, December 31, 1995 29,508,415 391,269
Purchases of treasury stock (9,448) (269)
Stock plan issuances* 578,245 16,635
Balance, December 31, 1996 30,077,212 $ 407,635
Shares reserved4.0 million shares available for issuance pursuant to the
Company's stock plans at December 31, 1996* 1,632,869
* Dividend Reinvestment and Stock Purchase Plan,
Employee Stock Purchase Plan, Employee Savingsits Shareowner
Direct Plan, Long-Term Equity Incentive Plan IES Bonus Stock Ownership
Plan and Whiting Stock Option Plans401(k) Savings Plan. IEC has
declared a quarterly dividend of 50 cents per share each quarter since the
consummation of the Merger.
During 1998, 1997 and 1996, IndustriesIEC reacquired 9,4481,133 shares, 3,278 shares and 10,771
shares, respectively, of its common stock on the open market, at an average pricemarket. Such shares were
reacquired by IES prior to the consummation of $28.44 per share, whichthe Merger and have been adjusted
for the IES conversion ratio. These shares were subsequently issued to various
Company DirectorsIEC directors and employees. During
1994, Industries reacquired 213,300 shares of its common stock on the
open market, at an average price of $29.22 per share, which were
subsequently issued to the Dividend Reinvestment Plan and certain of its
benefit plans. At December 31, 1996,1998, no shares remained held as
treasury stock.
In October 1998, the Board of Directors of IEC adopted a new Shareowner Rights
Plan (new plan) to replace IEC's former plan that expired on February 22, 1999.
The new plan was approved on January 15, 1999 by the SEC. On January 20, 1999,
the Board of Directors declared a dividend of one common share purchase right
(right) on each outstanding share of IEC's common stock which was issued on
February 22, 1999 to coincide with the expiration of the former plan. Rights
under the new plan will be exercisable only if a person or group acquires, or
announces a tender offer to acquire, 15% or more of IEC's common stock. Each
right will initially entitle shareowners to buy one-half of one share of IEC's
common stock. The rights will only be exercisable in multiples of two at an
initial price of $95.00 per full share, subject to adjustment. If any shareowner
acquires 15% or more of the outstanding common stock of IEC, each right (subject
to limitations) will entitle its holder to purchase, at the right's then current
exercise price, a number of common shares of IEC or of the acquirer having a
market value at the time of twice the right's per full share exercise price. The
Board of Directors is also authorized to reduce the 15% thresholds to not less
than 10%.
In rate order UR-110, the PSCW ordered that it must approve the payment of
dividends by WP&L to IEC that are in excess of the level forecasted in the rate
order ($58.3 million), if such dividends would reduce WP&L's average common
equity ratio below 52.00% of total capitalization. The dividends paid by WP&L to
IEC since the rate order was issued have not exceeded the level forecasted in
the rate order.
(b) Preferred and Preference Stock:
Utilities has 466,406Stock -
In 1993, IPC issued 545,000 shares of Cumulative Preferred Stock,6.40%, $50 par value authorizedpreferred stock with
a final redemption date of May 1, 2022. Under the provisions of the mandatory
sinking fund, beginning in 2003, IPC is required to redeem annually $1.4 million
of 6.40% preferred stock (27,250 shares).
(9) DEBT:
(a) Short-Term Debt
IEC maintains committed bank lines of credit, most of which are at the bank
prime rates, to obtain short-term borrowing flexibility, including pledging
lines of credit as security for issuance atany commercial paper outstanding. Amounts
available under these lines of credit totaled $150 million as of December 31,
1996,1998. Commitment fees are paid to maintain these lines and there are no
conditions which restrict the unused lines of which the 6.10%,
4.80% and 4.30% Series had 100,000, 146,406 and 120,000 shares,
respectively, outstanding at bothcredit. Alliant Energy Resources
also maintains a credit agreement with various banking institutions. The
unborrowed portion of this agreement is also used to support Alliant Energy
Resources' commercial paper program. The amount available under this agreement
as of December 31, 19961998, was $150 million. Information regarding short-term debt
and 1995. These
shares are redeemable at the optionlines of Utilities upon 30 days notice at
$51.00, $50.25 and $51.00 per share, respectively, plus accrued
dividends.
There are 5,000,000 shares of Industries Cumulative Preferred Stock
(no par value) and 700,000 shares of Utilities Cumulative Preference
Stock ($100 par value) authorized for issuance, of which none were
outstanding at December 31, 1996.
(10) DEBT:
(a)credit is as follows (in millions):
82
1998 1997 1996
---------------- --------------- ---------------
As of year end--
Commercial paper outstanding $64.5 $114.5 $198.2
Notes payable outstanding $51.8 $42.0 $68.3
Discount rates on commercial paper 5.10-6.55% 5.82-5.90% 5.35-6.05%
Interest rates on notes payable 5.44-7.00% 5.00-5.90% 5.28-6.59%
For the year ended--
Average amount of short-term debt
(based on daily outstanding balances) $126.6 $211.0 $207.9
Average interest rate on short-term debt 5.55% 5.61% 5.57%
(b) Long-Term Debt
-
In September 1996, Utilities repaid at maturity $15 million of
Series J, 6.25% First Mortgage Bonds and, in a separate transaction,
issued $60 million of Collateral Trust Bonds, 7.25%, due 2006.
Utilities'IESU's Indentures and Deeds of Trust securing its First Mortgage Bonds
constitute direct first mortgage liens upon substantially all tangible public
utility property. Utilities'IESU's Indenture and Deed of Trust securing its Collateral
Trust Bonds constitutes a second lien on substantially all tangible public
utility property while First Mortgage Bonds remain outstanding. Diversified hasSubstantially
all of WP&L's and IPC's utility plant is secured by its First Mortgage Bonds.
WP&L also maintains an unsecured indenture relating to the issuance of debt
securities. In addition, IEC's long-term debt includes unsecured debentures,
notes payable and revenue bonds related to its affordable housing properties.
Alliant Energy Resources is a variable rate credit facility thatparty to a 3-Year Credit Agreement with various
banking institutions. The agreement extends through November 20, 1999,October 2000, with two one-year
extensions potentially
available to Diversified. The unborrowed portion ofupon agreement by the parties. Unused borrowing
availability under this agreement is also used to support Diversified'sAlliant Energy
Resources' commercial paper program. A combined maximum of $300$450 million of
borrowings under thethis agreement and the commercial paper program may be
outstanding at any one time. Interest rates and maturities are set at the time
of borrowing for direct borrowings under
the agreement and for issuances of commercial paper.borrowing. The interest rate
optionsrates are based upon quoted market ratesprices and the maturities
are less than one year. At December 31, 1996, $23 million was borrowed under
this facility, bearing an interest rate of 5.75%, maturing in the first
quarter of 1997. Diversified1998, Alliant Energy Resources had $149.1$253
million of commercial paper outstanding at December 31, 1996,backed by this facility with interest
rates ranging from 5.50%5.15%-5.85%. (See Note 11(a) for a discussion of several
interest rate swaps Alliant Energy Resources has entered into relative to 7.10% and maturity dates in the first quarter$200
million of 1997. Diversifiedshort-term borrowings under, or backed by, this agreement). Alliant
Energy Resources intends to continue borrowing under the renewal options of theissuing commercial paper backed by this
facility and no conditions existexisted at December 31, 1996,1998 that would prevent such
borrowings.the
issuance of commercial paper or direct borrowings on its bank lines.
Accordingly, this debt is classified as long-term in the
Consolidated Balance Sheets. Refer to Note 12(a) for a discussion of an
interest rate swap agreement Diversified entered into relating to this
facility.
Totallong-term.
Debt maturities (excluding periodic sinking fund requirements, which Utilities intendswill not
require additional cash expenditures) for 1999 to meet by
pledging additional property under the terms of its Indentures and Deeds
of Trust, and debt maturities for 1997-20012003 are $9$318.1 million, $1$56.0
million, $61$84.7 million, $67$3.8 million and $255$9.3 million, respectively. The Company
intends to refinance theDepending
upon market conditions, it is currently anticipated that a majority of the
maturing debt maturitieswill be refinanced with the issuance of long-term securities.
(b) Short-Term Debt -
At December 31, 1996, the Company had bank linesRefer to "Management's Discussion and Analysis of credit
aggregating $136.1 million. Utilities was using $110 million to support
commercial paperFinancial Condition and
$11.1 million to support certain pollution control
obligations. Commitment fees are paid to maintain these lines and there
are no conditions which restrict the unused linesResults of credit. In
addition to the above, Utilities has an uncommitted credit facility withOperations" (MD&A) for a financial institution whereby it can borrow up to $40 million. Rates
are set at the timefurther discussion of borrowing and no fees are paid to maintain this
facility. Information regarding short-term debt (all issued by
Utilities) is as follows (dollars in thousands):
1996 1995 1994
As of end of year -
Commercial paper outstanding $ 110,000 $ 101,000 $ 37,000
Notes payable outstanding 25,000 - -
Weighted average interest rate
on commercial paper 5.70% 5.81% 6.13%
Weighted average interest rate
on notes payable 6.28% - -
For the year ended -
Maximum month-end amount
of short-term debt $ 145,000 $ 132,000 $ 37,000
Average daily amount outstanding 120,112 79,159 5,269
Weighted average interest rate 5.52% 5.97% 5.31%
(11)IEC's debt.
(10) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
o Current Assets and Current Liabilities - The carrying amount approximates
fair value because of the short maturity of such financial instruments.
o Nuclear Decommissioning Trust Funds - The carrying amount represents the
fair value of these trust funds, as reported by the trustee. The balance of
the "Nuclear decommissioning trust funds" as shown inon the Consolidated
Balance Sheets included $9.4$43.0 million and $35.7 million of net unrealized
gains at December 31, 1996,1998 and $5.3 million of unrealized
gains at December 31, 1995,1997, respectively, on the
investments held in the trust funds. The accumulated reserve for
decommissioning costs was adjusted by a corresponding amount.
o Cumulative Preferred Stock of Utilities - Based upon the market yield of similar
securities and quoted market prices.
83
o Long-Term Debt - Based upon the market yield of similar securities and
quoted market prices.
Investments carried at costo Investment in McLeod - FairPursuant to the provisions of SFAS 115, the carrying
value of the McLeod investment is based on quoted market prices at December 31, 1996 (including an
assumed exercise of the Company's options at the December 31, 1996
market price less the exercise price); the 1995adjusted to estimated fair value is based on
the carrying value as there was no quoted marketclosing price prior toat the 1996
IPO.end of the quarter.
o Investments in New Zealand - Fair value of the New Zealand investments isare
generally based on quoted market prices; while the market is not of a breadth and scope comparable
to a U.S. market as required for SFAS 115 accounting purposes, the
Company does believe it produces a reasonable representation of the fair
market value of the investment. Fair value of the other investments is
based on quoted market prices where available, and cost when not
available as the Company believes the carrying value approximates fair
value for such investments.prices.
The following table presents the carrying amount and estimated fair value of
certain financial instruments for IEC as of December 31 (in millions):
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Cumulative preferred stock
of Utilities $ 18 $ 12 $ 18 $ 11
Long-term debt, including
current portion 712 722 620 644
Investments carried at cost -
Investment in McLeod, Inc. (Note 6(b)) 29 267 9 9
Investments in New Zealand (Note 6(a)) 31 45 25 22
Other 3 4 3 5
1998 1997
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ------------ -----------
Nuclear decommissioning trust funds $ 226 $ 226 $ 190 $ 190
Cumulative preferred stock 113 109 113 105
Long-term debt, including current portion 1,664 1,753 1,543 1,600
Investment in McLeod (Note 5(a)) 320 320 328 328
Investments in New Zealand (Note 5(b)) 32 44 34 33
Since Utilities isIESU, WP&L and IPC are subject to regulation, any gains or losses related
to the difference between the carrying amount and the fair value of its
financial instruments may not be realized by the Company's
shareholders.
(12)IEC's shareowners.
(11) DERIVATIVE FINANCIAL INSTRUMENTS:
The CompanyIEC, through its consolidated subsidiaries, has a policy thathistorically had only limited
involvement with derivative financial derivatives are to beinstruments and has not used only to mitigate business risks and notthem for
speculative purposes. DerivativesThey have been used by the Company on a very limited basis.to manage well-defined interest rate
and commodity price risks.
(a) Interest Rate Swap AgreementSwaps and Forward Contracts -
In February 1996, DiversifiedAt December 31, 1998, Alliant Energy Resources had two interest rate swap
agreements outstanding (both expiring in April 2000 with the bank having a
1-year extension option for one of the agreements) each with a notional amount
of $100 million. WP&L also had two interest rate swap agreements outstanding
(both expiring in 2000) at December 31, 1998, and the combined notional amount
of the two agreements was $30 million. These agreements were entered into in
order to reduce the impact of changes in variable interest rates by converting
variable rate borrowings into fixed rate borrowings thus all agreements require
Alliant Energy Resources and WP&L to pay a fixed rate and receive a variable
rate. Had Alliant Energy Resources and WP&L terminated the agreements at
December 31, 1998, they would have had to make payments of $2.9 million and $0.3
million, respectively.
On September 14, 1998, WP&L entered into an interest rate swap
agreement on a variable rate borrowing of $100 million converting this
debt into a fixed-rate borrowing at a rate of 4.7 percent. The swap
period is for two years with an additional one-year option availableforward contract
related to the counterpartyanticipated issuance of $60 million of debentures. The securities
were issued on October 30, 1998, and the agreement includes quarterly settlement dates.
Diversified realized approximately $0.7forward contract was settled, which
resulted in a cash payment of $1.5 million in interest expense
savings in 1996 under the agreement. The fair value of this financial
instrument is based on the amounts estimated to terminate or settle the
agreement. At December 31, 1996, the agreement, if settled on that
date, would have required the counterparty to pay the Company
approximately $1.2 million. Such value is based on the difference in
the interest rates as well as the amount of time remaining in the
agreement. The Company has no intention of terminating the agreement at
this time.by WP&L.
(b) Gas Futures ContractsCommodities Instruments -
Industrial Energy Applications, Inc. (IEA), a wholly-owned
subsidiary under Diversified, has enteredWP&L uses gas commodity swaps to reduce the impact of price fluctuations on gas
purchased and injected into natural gas contracts onstorage during the New York Mercantile Exchange (NYMEX) insummer months and withdrawn and
sold at current market prices during the winter months. The notional amount of
$6.4gas commodity swaps outstanding as of December 31, 1998, was 5.8 million
dekatherms. Had WP&L terminated all of the agreements existing at December 31,
1996.1998, it would have realized an estimated gain of $0.8 million.
(c) Electricity Trading Joint Venture -
IEC has a 50% interest in an electricity trading joint venture with Cargill
Incorporated (Cargill) which is accounted for under the equity method of
accounting. The original contract terms range from
onejoint venture's trading activities principally consist of
marketing
84
and trading over-the-counter contracts for the purchase and sale of electricity.
The majority of the forward contracts represent commitments to seventeen months. The contracts are intended to mitigate risk
from fluctuationspurchase or sell
electricity at fixed prices in the pricefuture and require settlement by physical
delivery of natural gas that will be required to
satisfy sales commitmentselectricity or are netted out in accordance with industry trading
standards. The value-at-risk of the joint venture for future deliveries to customers and for
sales from storage. Gains and losses on these hedgingits forward contracts
are
deferred and recognized in income when the transactions being hedged are
finalized.
(13)outstanding at December 31, 1998, was not significant.
(12) COMMITMENTS AND CONTINGENCIES:
(a) Construction and Acquisition Program -
The Company'sPlans for IEC's construction and acquisition program anticipates
expenditurescan be found elsewhere in
this report in the "Liquidity and Capital Resources - Capital Requirements"
section of approximately $225 million for 1997, which includes $147
million at Utilities and $78 million at Diversified. Substantial
commitments have been made in connection with these expenditures.MD&A.
(b) Purchased Power,Purchased-Power, Coal and Natural Gas Contracts
-
UtilitiesIEC has entered into purchased powerpurchased-power capacity and coal contracts and its minimum
commitments are as follows (dollars in millions, megawatt-hours (MWHs) and tons
in thousands):
Purchased Power Coal
(including transportation
Purchased-Power costs)
--------------------------- --------------------------------
Dollars Mw'sMWHs Dollars Tons
1997----------- ------------ ------------- ---------------
1999 $ 11,175 69 - 144104.0 1,691 $ 68,323 4,472
1998 3,415 9 - 109 17,250 886
1999 3,283 1 - 101 17,509 87449.2 11,560
2000 283 1 15,696 762102.4 1,571 24.6 4,457
2001 283 1 15,913 751
The Company has71.0 925 15.7 2,695
2002 43.5 280 5.4 1,036
2003 36.2 280 0.3 95
IEC is in the process of negotiating several purchased power contracts for the annual
six-month summer season and thus the minimum and maximum of the noted
range represent the power purchased during the winter and summer
seasons, respectively. The Companynew coal contracts. In addition, it
expects to supplement its coal contracts with spot market purchases to fulfill
its future fossil fuel needs.
UtilitiesIEC also has various natural gas supply, transportation and storage contracts
outstanding. The minimum dekatherm commitments, in millions, for 1999-2003 are
194.8, 162.8, 146.8, 122.3 and 95.1, respectively. The minimum dollar
commitments for 1999-2003, in millions, are $158.7, $95.9, $83.5, $58.8 and
$46.1, respectively. The gas supply commitments are all index
based and the minimum dekatherm commitments, in thousands, for 1997-2001
are 10,699, 5,074, 5,074, 3,574 and 3,574, respectively. The minimum
transportation and storage commitments for 1997-2001, in thousands, are
$32,080, $31,842, $29,220, $27,050 and $24,008, respectively. The
Companyindex-based. IEC expects
to supplement its natural gas supply with spot market purchases as needed.
(c) Information Technology Services -
The CompanyIn May 1998, IEC entered into an agreement, expiring in 2004, with Electronic
Data Systems Corporation (EDS) for information technology services. The contract is subject to declining termination fees. The
Company'sIEC's
anticipated operating and capital expenditures under the agreement for 19971999 are
estimated to total approximately $12.5$21 million. Future costs under the agreement
are variable and are dependent upon the
Company'sIEC's level of usage of technological
services from EDS.
(d) Financial Guarantees -
The Companyand Commitments
IEC has financial guarantees, amounting to $22.9 million
outstanding at December 31, 1996, which are not reflected in the
consolidated financial statements. Such guarantees arewere generally issued to support third-party
borrowing arrangements and similar transactions.
The Companytransactions, amounting to $18.1 million
outstanding at December 31, 1998. Such guarantees are not reflected in the
consolidated financial statements. Management believes that the likelihood of
IEC having to make any material cash payments by
the Company under these agreements is remote.
In addition, as part of IEC's electricity trading joint venture with Cargill,
Cargill has made guarantees to certain counterparties regarding the performance
of contracts entered into by the joint venture. Guarantees of approximately $50
million have been issued of which approximately $5 million were outstanding at
December 31, 1998. Under the terms of the joint venture agreement, any payments
required under the guarantees would be shared by IEC and Cargill on a 50/50
basis to the extent the joint venture is not able to reimburse the guarantor for
payments made under the guarantee.
85
As of December 31, 1998, Alliant Energy Resources had extended commitments to
provide $7.2 million in nonrecourse, fixed rate, permanent financing to
developers which are secured by affordable housing properties. IEC anticipates
other lenders will ultimately finance these properties.
(e) Nuclear Insurance Programs -Programs-
Public liability for nuclear accidents is governed by the Price Anderson Act of
1988, which sets a statutory limit of $8.9$9.8 billion for liability to the public
for a single nuclear power plant incident and requires nuclear power plant
operators to provide financial protection for this amount. As required, UtilitiesIESU
provides this financial protection for a nuclear incident at the DAEC through a
combination of liability insurance ($200 million) and industry-wide
retrospective payment plans ($8.79.6 billion). Under the industry-wide plan, each
operating licensed nuclear reactor in the United States is subject to an
assessment in the event of a nuclear incident at any nuclear plant in the United
States. Based on its ownershipThe owners of the DAEC Utilities could be assessed a maximum of $79.3$88.1 million per
nuclear incident, with a maximum of $10 million per incident per year (of which
Utilities' 70%IESU's 70 % ownership portion would be approximately $55$61.7 million and $7
million, respectively) if losses relating to the incident exceeded $200 million.
These limits are subject to adjustments for changes in the number of
participants and inflation in future years. UtilitiesOn a similar note, WP&L, as a 41%
owner of Kewaunee, is a membersubject to an overall assessment of Nuclear Mutual Limited (NML)approximately $36.1
million per incident, not to exceed $4.1 million payable in any given year.
IESU and WP&L are members of Nuclear Electric Insurance Limited (NEIL). These companies provideNEIL
provides $1.9 billion of insurance coverage for IESU and $1.8 billion for WP&L
on certain property losses at DAEC for property damage, decontamination and premature
decommissioning. The proceeds from such insurance, however, must first be used
for reactor stabilization and site decontamination before they can be used for
plant repair and premature decommissioning. NEIL also provides separate coverage
for the cost of replacement poweradditional expense incurred during certain outages. Owners of nuclear
generating stations insured through NML and NEIL are subject to retroactive premium
adjustments if losses exceed accumulated reserve funds. NML and NEIL's accumulated
reserve funds are currently sufficient to more than cover its exposure in the
event of a single incident under the primary and excess property damage or
replacement
poweradditional expense coverages. However, UtilitiesIESU could be assessed annually a maximum
of $3.0 million under NML, $6.4$1.9 million for NEIL primary property, $3.5 million for NEIL excess property
and $0.7 million for NEIL replacement poweradditional expenses if losses exceed the accumulated
reserve funds. Utilities isWP&L could be assessed annually a maximum of $1.1 million for
NEIL primary property, $2.0 million for NEIL excess property and $0.6 million
for NEIL additional expense coverage. IESU and WP&L are not aware of any losses
that it believesthey believe are likely to result in an assessment.
In the unlikely event of a catastrophic loss at Kewaunee or DAEC, the amount of
insurance available may not be adequate to cover property damage,
decontamination and premature decommissioning. Uninsured losses, to the extent
not recovered through rates, would be borne by UtilitiesIEC and could have a material
adverse effect on Utilities'IEC's financial position and results of operations.
(f) Environmental Liabilities -
The CompanyIEC has recorded environmental liabilities of approximately $53$78.4 million inon its
Consolidated Balance Sheets at December 31, 1996. The
Company's1998. IEC's significant
environmental liabilities are discussed below.
Former Manufactured Gas Plant (FMGP) Sites
Utilities has been named as a Potentially Responsible Party (PRP)
by various federalIESU, WP&L and state environmental agencies for 28 FMGPIPC all have current or previous ownership interests in
properties previously associated with the production of gas at MGP sites
but believes it is not responsible for two of these sites based on
extensive reviews of the ownership records and historical information
available for the two sites. Utilities has notified the appropriate
regulatory agency that it believes it does not have any responsibility
as relates to these two sites, but no response has been received from
the agency on this issue. Utilities is also aware of six other sites
that it may have owned or operated in the past and for
which as a
result, itthey may be designatedliable for investigation, remediation and monitoring costs
relating to the sites.
A summary of information relating to the sites is as a PRP in the future in the event that
environmental concerns arise at these sites. Utilities isfollows:
IESU WP&L IPC
Number of known sites for which liability may exist 34 14 9
Liability recorded at December 31, 1998 (millions) $26.6 $7.7 $17.5
Regulatory asset recorded at December 31, 1998 (millions) $26.6 $14.1 $17.5
86
The companies are working pursuant to the requirements of the various federal and
state agencies to investigate, mitigate, prevent and remediate, where necessary,
damagethe environmental impacts to property, including damage to natural resources, at and
around the sites in order to protect public health and the environment. Utilities believes it hasThe
companies each believe that they have completed the remediation of tenat various
sites, although it isthey are still in the process of obtaining final approval from
the applicable environmental agencies on
this issue for each site. Utilities is in various stagessome of the
investigation and/or remediation processes for the remaining 16 sites
and estimates the range of additional costs to be incurred for
investigation, remediation and monitoring of the sites to be
approximately $24 million to $54 million.
Utilities has recordedthese sites.
Each company records environmental liabilities based upon periodic studies, most
recently updated in the fourth quarter of 1998, related to the FMGP sites of approximately $36 million (including $4.7 million as
current liabilities) at December 31, 1996. TheseMGP sites. Such
amounts are based upon
Utilities'on the best current estimate of the remaining amount to be
incurred for investigation, remediation and monitoring costs for those sites
where the investigation process has been or is substantially completed, and the
minimum of the estimated cost range for those sites where the investigation is
in its earlier stages. It is possible that future cost estimates will be greater
than the current estimates as the investigation process proceeds and as additional
facts become known. RegulatoryThe amounts recognized as liabilities are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not discounted to
their fair value.
Management currently estimates the range of remaining costs to be incurred for
the investigation, remediation and monitoring of all IEC sites to be
approximately $35 million to $66 million. IESU, WP&L and IPC currently estimate
their share of the remaining costs to be incurred to be approximately $17
million to $36 million, $5 million to $9 million and $13 million to $21 million,
respectively.
Under the current rate making treatment approved by the PSCW, the MGP
expenditures of WP&L, net of any insurance proceeds, are deferred and collected
from gas customers over a five-year period after new rates are implemented. The
MPUC also allows the deferral of MGP-related costs applicable to the Minnesota
sites and IPC has been successful in obtaining approval to recover such costs in
rates in Minnesota. While the IUB does not allow for the deferral of MGP-related
costs, it has permitted utilities to recover prudently incurred costs. As a
result, regulatory assets of approximately $36 million,have been recorded by each company which reflect the
probable future rate recovery, that is being provided through Utilities' rates, have been
recorded in the Consolidated Balance Sheets.where applicable. Considering the current rate
treatment, allowed by the IUB, management believesand assuming no material change therein, IESU, WP&L and IPC believe
that the clean-up costs incurred by Utilities for these FMGPMGP sites will not have a material
adverse effect on itstheir respective financial positionpositions or results of operations.
In April 1996, UtilitiesIESU filed a lawsuit against certain of its insurance carriers
seeking reimbursement for investigation, mitigation,
prevention, remediation and monitoring costs associated with the FMGP
sites. Settlement discussions are proceeding between Utilities and its insurance carriers regarding the recovery of these FMGP-relatedMGP-related costs. Settlement has been reached
with twoall its carriers and an agreement in
principle hasall issues have been resolved. In 1994, IPC filed a
lawsuit against certain of its insurance carriers to recover its MGP-related
costs. Settlements have been reached with three other carriers thus far. Any
amountseight carriers. IPC is continuing its
pursuit of additional recoveries but is unable to predict the amount of any
additional recoveries they may realize. Amounts received from insurance carriers
will beare being deferred by IESU and IPC pending a determination of the regulatory
treatment of such recoveries. WP&L has settled with all of its carriers.
National Energy Policy Act of 1992
The National Energy Policy Act of 1992 requires owners of nuclear power plants
to pay a special assessment into a "Uranium Enrichment Decontamination and
Decommissioning Fund." The assessment is based upon prior nuclear fuel
purchases and, for the DAEC, averages $1.4 million
annually through 2007, of which Utilities' 70% share is $1.0 million.
Utilitiespurchases. IESU is recovering the costs associated with this assessment through
its electric fuel adjustment clauses over the period the costs are assessed.
Utilities'IESU's 70% share of the future assessment $9.9at December 31, 1998 was $7.8 million
payable through 2007,and has been recorded as a liability in the
Consolidated Balance Sheets, including $0.9 million included in "Current
liabilities - Environmental liabilities," with a related regulatory asset for the
unrecovered amount. WP&L had a regulatory asset and a liability of $5.4 million
and $4.6 million recorded at December 31, 1998, respectively. IEC continues to
pursue relief from this assessment through litigation.
Oil and Gas Properties Dismantlement and Abandonment Costs
Whiting is responsible for certain dismantlement and abandonment costs related
to various off-shore oil and gas properties,platforms (and related on-shore plants and
equipment), the most significant of which is located off the coast of
California. The
CompanyWhiting estimates the total costs for these properties to be
approximately $16$13 million and the most
87
significant expenditures are not expected to be incurred for approximately five years.until 2004. In
accordance with applicable accounting requirements, Whiting accrueshas accrued these
costs as
reserves are extracted and such costs are included in "Depreciation and
amortization" in the Consolidated Statements of Income, resulting in a recorded liability of $7.0$13 million at December 31, 1996, in the Consolidated
Balance Sheets.
The Company adopted the provisions of Statement of Position 96-1
(SOP-96-1), Environmental Remediation Liabilities, in 1996. This
statement provides authoritative guidance for recognition, measurement
and disclosure of environmental remediation liabilities in financial
statements. Upon adoption of SOP-96-1, the Company's estimated
liability increased by approximately $2.2 million, primarily resulting
from the recording of Utilities' anticipated FMGP postremediation
monitoring costs, and a related increase to regulatory assets was also
recorded.1998.
(g) Air Quality Issues -
The Clean Air Act Amendments of 1990 (Act) requires emission
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve
reductions of atmospheric chemicals believed to cause acid rain. The
provisions of the Act are being implemented in two phases; the Phase I
requirements have been met and the Phase II requirements affect eleven
other fossil units beginning in the year 2000. Utilities expects to
meet the requirements of Phase II by switching to lower sulfur fuels,
capital expenditures primarily related to fuel burning equipment and
boiler modifications, and the possible purchase of SO2 allowances.
Utilities estimates capital expenditures at approximately $12.9 million,
including $0.6 million in 1997, in order to meet the acid rain
requirements of the Act.
The acid rain program under the Act also governs SO2 allowances.
An allowance is defined as an authorization for an owner to emit one ton
of SO2 into the atmosphere. Currently, Utilities receives a sufficient
number of allowances annually to offset its emissions of SO2 from its
Phase I units. It is anticipated that in the year 2000, Utilities may
have an insufficient number of allowances annually to offset its
estimated emissions and may have to purchase additional allowances, or
make modifications to the plants or limit operations to reduce
emissions. Utilities is reviewing its options to ensure that it will
have sufficient allowances to offset its emissions in the future.
Utilities believes that the potential cost of ensuring sufficient
allowances will not have a material adverse effect on its financial
position or results of operations.
The Act and other federal laws also require the United States
Environmental Protection Agency (EPA) to study and regulate, if
necessary, additional issues that potentially affect the electric
utility industry, including emissions relating to NOx, ozone transport,
mercury and particulate control; toxic release inventories and
modifications to the PCB rules. In December 1996, the EPA issued
proposed rules that would tighten the National Ambient Air Quality
Standards (NAAQS) for ozone and particulate matter emissions. Also in
the fourth quarter of 1996, the EPA announced that it would issue a
notice in March 1997 requiring the 37 states in the Ozone Transport
Assessment Group (OTAG), which includes Iowa, to implement further
controls on NOx. These proposals could result in the Company having to
incur additional capital expenditures to further reduce its emissions of
NOx, ozone and particulate matter. Currently, the impacts of these
potential regulations are too speculative to quantify.
In 1995, the EPA published the Sulfur Dioxide Network Design Review
for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-
case modeling method suggests that the Cedar Rapids area could be
classified as "nonattainment" for the NAAQS established for SO2. The
worst-case modeling study suggested that two of Utilities' generating
facilities contribute to the modeled exceedences and recommended that
additional monitors be located near Utilities' sources to assess actual
ambient air quality. As a result of these exceedences, Utilities is
entering into a Consent Agreement with the Iowa Department of Natural
Resources. The intent of this agreement, as currently proposed, is to
develop a three-year plan for a process to explore and implement options
to modify one of Utilities fossil generating facilities to reduce SO2
emissions. In addition, Utilities is proposing to resolve the remainder
of EPA's nonattainment concerns by either modifying the current stack or
installing a new stack at the other generating facility contributing to
the modeled exceedences at a potential aggregate capital cost of up to
$4.5 million over the next two years.
Pursuant to a routine internal review of operations, Utilities
determined that certain changes undertaken during the previous three
years at one of its power plants may have required a federal Prevention
of Significant Deterioration (PSD) permit. Utilities initiated
discussions with its regulators on the matter and is preparing the PSD
permit application for filing in the first quarter of 1997. Utilities
may be required to accept operational limits or to install additional
controls and may be subject to liability for not having obtained the
permit previously; however, Utilities believes that any likely actions
resulting from this matter will not have a material adverse effect on
its financial position or results of operations.
(h) Spent Nuclear Fuel -
The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S.
Department of Energy (DOE) to establish a facility for the ultimate disposition
of high level waste and spent nuclear fuel and authorized the DOE to enter into
contracts with parties for the disposal of such material beginning in January
1998. UtilitiesIESU and WP&L entered into such a
contractcontracts and hashave made the agreed
payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The companies were
subsequently notified by the DOE however,that it was not able to begin acceptance of
spent nuclear fuel by the January 31, 1998 deadline. Furthermore, the DOE has
experienced significant delays in its efforts and material acceptance is now
expected to occur no earlier than 2010 with the possibility of further delay
being likely. UtilitiesIEC has participated in several litigation proceedings against the
DOE on this issue and the respective courts have affirmed the DOE's
responsibility for spent nuclear fuel acceptance. IEC is evaluating its options
for recovery of damages due to the DOE's delay in accepting spent nuclear fuel.
The Nuclear Waste Policy Act of 1982 assigns responsibility for interim storage
of spent nuclear fuel to generators of such spent nuclear fuel, such as IESU and
WP&L. In accordance with this responsibility, IESU and WP&L have been storing
spent nuclear fuel on-on site at DAEC and Kewaunee, respectively, since plant
operations began in 1974 and has current on-site
capabilitybegan. IESU will have to increase its spent fuel storage capacity at
DAEC to store all of the spent fuel until 2001. Utilitiesthat will be produced before the current
license expires in 2014. To provide assurance that both the operating and
post-shutdown storage needs are satisfied, construction of a dry cask modular
facility is aggressively
reviewing optionsbeing contemplated. With minor modifications, Kewaunee would have
sufficient fuel storage capacity to store all of the fuel it will generate
through the end of the license life in 2013. No decisions have been made
concerning post-shutdown storage needs. Legislation is being considered on the
federal level that would, among other provisions, expand the DOE's permanent
spent nuclear fuel storage to include interim storage for expanding on-site storage. Utilitiesspent nuclear fuel as
early as 2002. This legislation has been formally notifiedsubmitted in the U.S. House. The
prospects for passage by the U.S. Congress, and subsequent successful
implementation by the DOE, that they anticipate being unable to begin
acceptanceare uncertain at this time.
(h) Decommissioning of spent nuclear fuel by January 31, 1998. Utilities is
evaluating courses of action to protect the interests of its customersDAEC and its rights under the DOE contract. Utilities is also evaluating
legislation proposedKewaunee -
Pursuant to the Congress addressing this issue.most recent electric rate case order, the IUB and PSCW allow
IESU and WP&L to recover $6 million and $16 million annually for their share of
the cost to decommission DAEC and Kewaunee, respectively. Decommissioning
expense is included in "Depreciation and amortization" in the Consolidated
Statements of Income and the cumulative amount is included in "Accumulated
depreciation" on the Consolidated Balance Sheets to the extent recovered through
rates.
Additional information relating to the decommissioning of DAEC and Kewaunee
includes (dollars in millions):
DAEC Kewaunee
------------------------- --------------------------
Assumptions relating to current rate recovery figures:
IEC's share of estimated decommissioning cost $252.8 $189.7
Year dollars in 1993 1998
Method to develop estimate NRC minimum formula Site-specific study
Annual inflation rate 4.91% 5.83%
Decommissioning method Prompt dismantling and Prompt dismantling and
removal removal
Year decommissioning to commence 2014 2013
Average after-tax return on external investments 6.82% 6.21%
External trust fund balance at December 31, 1998 $91.7 $134.1
Internal reserve at December 31, 1998 $21.7 -
After-tax earnings on external trust funds in 1998 $2.7 $5.2
The rate recovery figures for DAEC only included an inflation estimate through
1997. Both IESU and WP&L are funding all rate recoveries for decommissioning
into external trust funds and funding on a tax-qualified basis to the
88
extent possible. All of the rate recovery assumptions are subject to change in
future regulatory proceedings. In accordance with their respective regulatory
requirements, IESU and WP&L record the earnings on the external trust funds as
interest income with a corresponding entry to interest expense at IESU and to
depreciation expense at WP&L. The earnings accumulate in the external trust fund
balances and in accumulated depreciation on utility plant.
IESU's 70% share of the estimated cost to decommission DAEC based on the most
recent site-specific study completed in 1998 is $334.2 million, in 1998 dollars.
This study includes the costs to terminate DAEC's NRC license and to return the
site to a greenfield condition. IESU's 70% share of the estimated cost to
decommission DAEC based on the most recent NRC minimum formula is $347.0 in 1997
dollars. The NRC minimum formula is intended to apply only to the cost of
terminating DAEC's NRC license. The additional decommissioning expense funding
requirements which should result from these updated studies are not reflected in
IESU's rates.
(i) Legal Proceedings -
The CompanyIEC is involved in other legal and administrative proceedings before various courts
and agencies with respect to matters arising in the ordinary course of business.
Although unable to predict the outcome of these matters, the CompanyIEC believes that
appropriate liabilitiesreserves have been established and final disposition of these
actions will not have a material adverse effect on its financial position or
results of operations.
(14)(13) JOINTLY-OWNED ELECTRIC UTILITY PLANT:
Under joint ownership agreements with other Iowa and Wisconsin utilities, Utilities hasIESU,
WP&L and IPC have undivided ownership interests in jointly-owned electric
generating stations and related transmission facilities. Each of the respective
owners is responsible for the financing of its portion of the construction
costs. Kilowatt-hour generation and operating expenses are divided on the same
basis as ownership with each owner reflecting its respective costs in its
Consolidated Statements of Income. Information relative to Utilities'IESU's, WP&L's and
IPC's ownership interest in these facilities at December 31, 19961998 is as follows:
Ottumwa Neal
DAEC Unit 1 Unit 3
(Nuclear) (Coal) (Coal)
($follows
(dollars in millions)
Utility plant in service $ 501.0 $ 190.2 $ 60.7
Accumulated depreciation $ 217.2 $ 91.0 $ 28.8
Construction work in progress $ 1.2 $ 0.1 $ 0.1
Plant capacity - Mw 520 716 515
Percent ownership 70% 48% 28%
In-service date 1974 1981 1975
(15):
89
1998 1997
--------- ------------- -------- -------- ------------- -------
Accumulated Accumulated
In-service Plant Provision Plant Provision
Ownership Date MW Plant in for in for
Interest % Capacity Service Depreciation CWIP Service Depreciation CWIP
- -------------------- ----------- --------- --------- -- --------- ------------- -------- -- -------- ------------- -------
IESU
Coal:
Ottumwa Unit 1 48.0 1981 716 $193.1 $102.7 $0.8 $191.6 $96.6 $ -
Neal Unit 3 28.0 1975 515 59.0 32.4 0.1 60.8 30.6 0.1
Nuclear:
DAEC 70.0 1974 520 507.1 247.2 1.4 500.6 230.8 2.8
--------- ------------- -------- -------- ------------- -------
Total IESU $759.2 $382.3 $2.3 $753.0 $358.0 $2.9
WP&L
Coal:
Columbia Energy 1975 &
Center 46.2 1978 1,023 $161.5 $93.8 $1.4 $161.4 $89.2 $0.8
Edgewater Unit 4 68.2 1969 330 52.4 30.8 0.4 51.5 29.5 1.0
Edgewater Unit 5 75.0 1985 380 229.0 85.9 0.2 229.4 79.8 0.1
Nuclear:
Kewaunee Nuclear
Power Plant 41.0 1974 535 132.2 93.7 6.4 132.0 86.6 0.3
--------- ------------- ------- --------- ------------ -------
Total WP&L $575.1 $304.2 $8.4 $574.3 $285.1 $2.2
IPC
Coal:
Neal Unit 4 21.5 1979 640 $82.1 $48.4 $1.5 $82.2 $45.8 $ -
Louisa Unit 1 4.0 1983 738 24.7 11.7 - 24.7 10.9 -
--------- ------------- ------- --------- ------------ -------
Total IPC $106.8 $60.1 $1.5 $106.9 $56.7 $ -
--------- ------------- ------- --------- ------------ -------
Total IEC $1,441.1 $746.6 $12.2 $1,434.2 $699.8 $5.1
========= ============= ======= ========= ============ =======
(14) SEGMENTS OF BUSINESS:
TheIn 1998, IEC adopted SFAS 131, "Disclosures About Segments of an Enterprise and
Related Information." IEC's principal business segments are:
o Regulated domestic utilities - consists of Industries areIEC's three regulated utility
operating companies (IESU, WP&L, and IPC) serving customers in Iowa,
Wisconsin, Minnesota and Illinois. The regulated domestic utility business
is broken down into three segments which are: 1) electric operations; 2)
gas operations; and 3) other, which includes the generation,
transmission, distributionwater and salesteam businesses
as well as the unallocated portions of electricthe utility business.
o Nonregulated businesses - represents the operations of Alliant Energy
Resources and its subsidiaries. This includes the company's domestic and
international energy products and services businesses; industrial services,
which includes environmental, engineering and transportation services;
investments in affordable housing initiatives; and investments in various
other strategic initiatives.
o Other - includes the operations of IEC's parent company and Alliant Energy
Corporate Services, as well as any reconciling/eliminating entries.
Intersegment revenues were not material to IEC's operations and there was no
single customer whose revenues exceeded 10% or more of IEC's consolidated
revenues. Refer to Note 5(b) for a breakdown of IEC's international investments
by Utilities and
the purchase, distribution, transportation and sale of natural gas by
Utilities and IEA.country.
90
Certain financial information relating to Industries'IEC's significant business segments
of businessand products and services is presented below:
Year Ended December 31
Regulated Domestic Utilities
----------------------------------------------- Nonregulated IEC
Electric Gas Other Total Businesses Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1998
Operating revenues $1,567,442 $295,590 $31,235 $1,894,267 $238,676 ($2,069) $2,130,874
Depreciation and
amortization expense 219,364 23,683 2,623 245,670 33,835 - 279,505
Operating income (loss) 271,511 16,027 5,598 293,136 (8,608) (1,226) 283,302
Interest expense, net 96,951 96,951 23,298 2,302 122,551
Preferred and preference 6,699 6,699 - - 6,699
dividends
Net (income) loss from equity (858) (858) 2,197 - 1,339
method subsidiaries
Miscellaneous, net (other than
equity income/loss) 3,545 3,545 (7,973) 2,353 (2,075)
Income tax expense (benefit) 77,257 77,257 (17,232) (1,912) 58,113
Net income (loss) 109,542 109,542 (8,898) (3,969) 96,675
Total assets 3,202,837 458,832 469,822 4,131,491 869,261 (41,415) 4,959,337
Investments in equity method
subsidiaries 5,189 5,189 49,446 - 54,635
Construction and acquisition
expenditures 233,638 33,200 2,295 269,133 102,925 - 372,058
- -------------------------------------------------------------------------------------------------------------------------------
1997
- ----
Operating revenues $1,515,753 $393,907 $30,882 $1,940,542 $361,961 ($1,876) $2,300,627
Depreciation and amortization
expense 201,742 21,553 2,432 225,727 33,936 - 259,663
Operating income (loss) 316,880 29,330 2,169 348,379 (6,818) (5,178) 336,383
Interest expense, net 95,734 95,734 23,197 (1,642) 117,289
Preferred and preference
dividends 6,693 6,693 - - 6,693
Net (income) loss from equity
method subsidiaries (32) (32) 849 - 817
Miscellaneous, net (other than
equity income/loss) (8,257) (8,257) (8,282) 1,812 (14,727)
Income tax expense (benefit) 101,739 101,739 (18,616) (1,390) 81,733
Net income (loss) 152,502 152,502 (3,966) (3,958) 144,578
Total assets 3,142,910 448,845 485,225 4,076,980 838,504 8,066 4,923,550
Investments in equity method
subsidiaries 5,694 5,694 39,175 - 44,869
Construction and acquisition
expenditures 217,023 33,984 5,753 256,760 71,280 - 328,040
91
Regulated Domestic Utilities
----------------------------------------------- Nonregulated IEC
Electric Gas Other Total Businesses Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1996
- ----
Operating revenues $1,440,375 $375,955 $24,008 $1,840,338 $393,963 ($1,461) $2,232,840
Depreciation and amortization
expense 180,989 18,124 1,891 201,004 31,359 - 232,363
Operating income (loss) 326,370 40,521 7,001 373,892 (6,666) (1,787) 365,439
Interest expense, net 86,084 86,084 17,859 3,804 107,747
Preferred and preference
dividends 6,687 6,687 - - 6,687
Net (income) loss from equity
method subsidiaries (372) (372) 18 - (354)
Miscellaneous, net (other than
equity income/loss) (1,390) (1,390) (9,968) (131) (11,489)
Income tax expense (benefit) 115,033 115,033 (12,724) 3,451 105,760
Net income (loss) from
continuing operations 167,850 167,850 (1,851) (8,911) 157,088
Discontinued operations - - (1,297) - (1,297)
Net income (loss) 167,850 167,850 (3,148) (8,911) 155,791
Total assets 3,122,761 511,110 452,885 4,086,756 546,690 6,380 4,639,826
Investments in equity method
subsidiaries 6,110 6,110 11,163 - 17,273
Construction and acquisition
expenditures 247,323 34,738 15,135 297,196 115,078 - 412,274
Products and Services
- ---------------------
Revenues
----------------------------------------------------------------------------------------------------------------------
Regulated Domestic Utilities Nonregulated Businesses
------------------------------------ ---------------------------------------------------------------------------------
Environmental Total
Transportation,
and Engineering Oil and Nonregulated Rents and Nonregulated
Gas
Year Electric Gas Other Services Production Energy Other Businesses
- -------------------------------------------- ---------------------------------------------------------------------------------
(in thousands)
1998 $1,567,442 $295,590 $31,235 $72,616 $64,622 $40,536 $60,902 $238,676
1997 1,515,753 393,907 30,882 78,105 68,922 151,128 63,806 361,961
1996 1,440,375 375,955 24,008 84,859 65,724 192,217 51,163 393,963
(15) DISCONTINUED OPERATIONS:
IEC's financial statements reflect the discontinuance of operations of its
utility energy and marketing consulting business in 1995. During 1996, 1995 1994
(in thousands)
Operating results:
Revenues -
Electric $ 574,273 $ 560,471 $ 537,327
Gas 273,979 190,339 165,569
OperatingIEC
recognized a loss of $1.3 million, net of applicable income -
Electric 132,278 130,390 125,487
Gas 14,978 11,056 8,762
Other information:
Depreciation and amortization -
Electric 77,578 72,487 68,640
Gas 6,200 6,176 6,214
Construction and acquisition expenditures - *
Electric 115,810 108,356 112,773
Gas 20,980 9,368 10,066
Assets -
Identifiable assets -
Electric 1,438,370 1,395,666 1,347,024
Gas 228,780 199,050 192,397
1,667,150 1,594,716 1,539,421
Other corporate assets 458,412 390,875 309,672
Total consolidated assets $ 2,125,562 $ 1,985,591 $ 1,849,093
* Excludes intercompany acquisitions which are eliminated for consolidated
financial statement purposes.tax benefit,
associated with the final disposition of the business.
92
(16) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited):
Quarter Ended *
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- ---------------- ------------------ -----------------
(in thousands, except per share data)
1998**
- ------
Operating revenues $556,283 $491,012 $555,313 $528,266
Operating income 73,880 32,627 122,196 54,599
Net income (loss) 28,875 (9,098) 51,704 25,194
Earnings per average common
share (basic and diluted) 0.38 (0.12) 0.67 0.33
1997
- ----
Operating revenues $663,650 $493,842 $556,858 $586,277
Operating income 92,319 56,987 120,297 66,780
Net income 40,688 19,799 54,969 29,122
Earnings per average common
share (basic and diluted) 0.54 0.26 0.72 0.38
* Financial results have been restated for all quarters presented with the
exception of the third and fourth quarter of 1998 to reflect a change in
accounting method for IEC's oil and gas properties implemented in the third
quarter of 1998 from the full cost method to the successful efforts method. See
Note 1(i) for additional information.
**Net income for 1998 was impacted by the recording of approximately $10
million, $35 million, $6 million and $3 million of pre-tax merger-related
expenses in the first, second, third and fourth quarters, respectively.
93
IES UTILITIES INC.
FINANCIAL SECTION
94
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of DirectorsShareowners of IES Utilities Inc.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of IES Utilities Inc. (an Iowa corporation) and subsidiary companiessubsidiaries as
of December 31, 19961998 and 1995,1997, and the related consolidated statements of
income, retained earnings and cash flows for each of the three years in the
period ended December 31, 1996.1998. These financial statements and the financial statementsupplemental
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
supplemental schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IES Utilities Inc. and
subsidiary companiessubsidiaries as of December 31, 19961998 and 1995,1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996,1998, in conformity with generally accepted accounting principles.
Our audits wereaudit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedule listed in Item 14(a)2(2) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the auditsaudit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, IllinoisMilwaukee, Wisconsin
January 31, 199729, 1999
95
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1998 1997 1996
1995 1994- --------------------------------------------------------------------------------------------------------
(in thousands)
Operating revenues:
Operating revenues:
Electric utility $ 639,423 $ 604,270 $ 574,273
$ 560,471 $ 537,327
Gas utility 141,279 183,517 160,864
137,292 139,033
OtherSteam and other 26,228 26,191 19,842
12,063 9,006---------------- ---------------- ----------------
806,930 813,978 754,979
709,826 685,366---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Operating expenses:
Fuel forElectric and steam production fuels 113,181 108,344 84,579 96,256 85,952
Purchased power 71,637 74,098 88,350
66,874 68,794
Gas purchased for resaleCost of gas sold 84,642 126,631 103,877
91,198 95,340
Other operating expenses 150,001 145,250 132,281operation 187,932 161,418 148,051
Maintenance 52,040 53,833 45,869 43,586 49,542
Depreciation and amortization 93,965 89,754 84,975 79,384 75,316
Taxes other than income taxes 48,537 46,130 43,603
45,013 42,550
601,254 567,561 549,775---------------- ---------------- ----------------
651,934 660,208 599,304
---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Operating income 153,725 142,265 135,591154,996 153,770 155,675
---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Interest expense and other:
Interest expense 52,354 52,791 43,714 44,460 41,572
Allowance for funds used during construction -2,103 -3,424 -3,910(3,351) (2,309) (2,103)
Miscellaneous, net 5,293 856 -1,247
46,904 41,892 36,4152,589 2,279 7,243
---------------- ---------------- ----------------
51,592 52,761 48,854
---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Income before income taxes 103,404 101,009 106,821
100,373 99,176
Federal and state income---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Income taxes 41,494 42,216 43,092
41,095 37,966---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Net income 61,910 58,793 63,729
59,278 61,210---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Preferred dividend requirements 914 914 914
Net income---------------- ---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Earnings available for common stock $ 60,996 $ 57,879 $ 62,815
$ 58,364 $ 60,296
================ ================ ================
- --------------------------------------------------------------------------------------------------------
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
1998 1997 1996
1995 1994- --------------------------------------------------------------------------------------------------------
(in thousands)
Balance at beginning of year $ 212,522233,216 $ 197,158231,337 $ 188,862212,522
Net income 61,910 58,793 63,729 59,278 61,210
Cash dividends declared -
Commonon common stock -44,000 -43,000 -52,000
Preferred(18,840) (56,000) (44,000)
Cash dividends declared on preferred stock at stated rates -914 -914 -914(914) (914) (914)
---------------- ---------------- ----------------
Balance at end of year $ 275,372 $ 233,216 $ 231,337
$ 212,522 $ 197,158================ ================ ================
- --------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
96
IES UTILITIES INC.
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,007,839 $ 1,900,1572,140,322 $2,072,866
Gas 175,472 165,825
Other 126,850 106,396
2,310,161 2,172,378198,488 187,098
Steam 55,797 55,374
Common 106,940 90,342
----------------- -----------------
2,501,547 2,405,680
Less - Accumulated depreciation 1,030,390 950,324
1,279,771 1,222,0541,209,204 1,115,261
----------------- -----------------
1,292,343 1,290,419
Construction work in progress 48,991 38,923
Leased nuclear fuel, net of amortization 34,725 36,935
Construction work in progress 43,719 52,772
1,358,215 1,311,76125,644 36,731
----------------- -----------------
1,366,978 1,366,073
Other property, plant and equipment, net of accumulated
depreciation and amortization of $1,438$1,948 and $1,166,$1,709, respectively 5,872 5,477
1,364,087 1,317,2385,623 5,762
----------------- -----------------
1,372,601 1,371,835
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 11,608 2,7344,175 230
Temporary cash investments with associated companies 53,729 -
Accounts receivable -receivable:
Customer, less allowance for doubtful accounts
of $546$1,058 and $676,$630, respectively 22,461 18,61916,703 29,259
Associated companies 2,662 907
Other, 11,270 8,912
Income tax refunds receivable 2,664 846less allowance for doubtful accounts
of $357 and $224, respectively 10,346 9,235
Production fuel, at average cost 13,323 12,15511,863 10,579
Materials and supplies, at average cost 21,716 27,229
Adjustment clause balances 10,752 025,591 22,976
Gas stored underground, at average cost 12,284 17,192
Regulatory assets 26,539 22,79123,487 36,330
Prepayments and other 18,705 18,556
139,038 111,8424,185 11,680
----------------- -----------------
165,025 138,388
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------
Investments:
Nuclear decommissioning trust funds 59,325 47,028
Cash surrender value of life insurance policies 4,281 3,58291,691 77,882
Other 313 475
63,919 51,0856,019 5,167
----------------- -----------------
97,710 83,049
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------
Other assets:
Regulatory assets 201,129 207,202137,908 163,264
Deferred charges and other 10,437 21,268
211,566 228,47015,734 12,393
----------------- -----------------
153,642 175,657
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------
$ 1,778,610 $ 1,708,635
December 31
CAPITALIZATION AND LIABILITIES (in thousands) 1996 1995
Capitalization (See Consolidated Statements of Capitalization):
Common stock $ 33,427 $ 33,427
Paid-in surplus 279,042 279,042
Retained earnings 231,337 212,522
Total common equity 543,806 524,991
Cumulative preferred stock 18,320 18,320
Long-term debt (excluding current portion) 517,334 465,463
1,079,460 1,008,774
Current liabilities:
Notes payable to associated companies 0 8,888
Other short-term borrowings 135,000 101,000
Capital lease obligations 15,125 15,717
Maturities and sinking funds 8,140 15,140
Accounts payable 76,287 64,564
Accrued interest 8,839 8,038
Accrued taxes 40,953 50,369
Accumulated refueling outage provision 1,316 7,690
Adjustment clause balances 0 3,148
Environmental liabilities 5,517 5,521
Other 17,114 17,300
308,291 297,375
Long-term liabilities:
Pension and other benefit obligations 25,826 41,866
Capital lease obligations 19,600 21,218
Environmental liabilities 40,299 40,905
Other 14,030 8,719
99,755 112,708
Deferred credits:
Accumulated deferred income taxes 256,634 252,663
Accumulated deferred investment tax credits 34,470 37,115
291,104 289,778
Commitments and contingencies (Note 13)
$ 1,778,610 $ 1,708,6351,788,978 $1,768,929
================= =================
- -----------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
97
IES UTILITIES INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31,
CAPITALIZATION AND LIABILITIES 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Capitalization (See Consolidated Statements of Capitalization):
Common stock $ 33,427 $ 33,427
Additional paid-in capital 279,042 279,042
Retained earnings 275,372 233,216
------------------ -----------------
Total common equity 587,841 545,685
Cumulative preferred stock, not mandatorily redeemable 18,320 18,320
Long-term debt (excluding current portion) 602,020 651,848
------------------ -----------------
1,208,181 1,215,853
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities and sinking funds 50,140 140
Capital lease obligations 11,965 13,183
Accounts payable 43,953 60,546
Accounts payable to associated companies 22,487 2,736
Accrued payroll and vacations 6,365 7,615
Accrued interest 12,045 12,230
Accrued taxes 55,295 58,996
Accumulated refueling outage provision 6,605 10,606
Environmental liabilities 5,660 4,054
Other 17,617 11,533
------------------ -----------------
232,132 181,639
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 224,510 238,829
Accumulated deferred investment tax credits 29,243 31,838
Environmental liabilities 29,195 38,256
Pension and other benefit obligations 25,655 17,334
Capital lease obligations 13,679 23,548
Other 26,383 21,632
------------------ -----------------
348,665 371,437
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
- --------------------------------------------------------------------------------------------------------------------
$ 1,788,978 $ 1,768,929
================== =================
- --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
98
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 61,910 $ 58,793 $ 63,729
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 93,965 89,754 84,975
Amortization of leased nuclear fuel 12,513 14,774 16,491
Amortization of deferred energy efficiency expenditures 18,707 10,987 5,453
Deferred taxes and investment tax credits (17,921) (16,059) 7,763
Refueling outage provision (4,001) 9,290 (6,374)
Impairment of regulatory assets 8,969 - -
Other (346) 3,952 4,602
Other changes in assets and liabilities:
Accounts receivable 9,690 (5,670) (6,200)
Production fuel (1,284) 2,743 (1,168)
Materials and supplies (2,615) (1,261) 4,811
Gas stored underground 4,908 (3,740) (551)
Accounts payable 3,158 (11,198) 12,147
Accrued taxes (3,701) 18,043 (9,416)
Adjustment clause balances 8,829 5,354 (13,900)
Benefit obligations and other 13,332 14,538 8,293
----------------- ----------------- -----------------
Net cash flows from operating activities 206,113 190,300 170,655
----------------- ----------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used for) financing activities:
Common stock dividends declared (18,840) (56,000) (44,000)
Dividends payable 4,840 - -
Preferred stock dividends (914) (914) (914)
Proceeds from issuance of long-term debt 10,000 190,000 60,000
Reductions in long-term debt (10,140) (63,140) (15,140)
Net change in short-term borrowings - (135,000) 25,112
Principal payments under capital lease obligations (13,250) (12,964) (19,108)
Other (137) (871) (420)
----------------- ----------------- -----------------
Net cash flows from (used for) financing activities (28,441) (78,889) 5,530
----------------- ----------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Construction expenditures (115,371) (108,966) (143,648)
Deferred energy efficiency expenditures - (8,450) (16,857)
Nuclear decommissioning trust funds (6,008) (6,008) (6,008)
Other 1,381 635 (798)
----------------- ----------------- -----------------
Net cash flows used for investing activities (119,998) (122,789) (167,311)
----------------- ----------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and temporary cash investments 57,674 (11,378) 8,874
----------------- ----------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 230 11,608 2,734
----------------- ----------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 57,904 $ 230 $ 11,608
================= ================= =================
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information: Cash paid during
the period for:
Interest $ 50,177 $ 46,377 $ 44,275
================= ================= =================
Income taxes $ 41,017 $ 41,422 $ 45,383
================= ================= =================
Noncash investing and financing activities -
Capital lease obligations incurred $ 1,426 $ 16,781 $ 14,281
================= ================= =================
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
99
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1996 19951998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
thousands, except share amounts)
Common equity:
Common stock - $2.50 par value $2.50 per share - authorized 24,000,000 shares;
outstanding
13,370,788 shares outstanding $ 33,427 $ 33,427
Paid-in surplusAdditional paid-in capital 279,042 279,042
Retained earnings 231,337 212,522
543,806 524,991275,372 233,216
------------------ ------------------
587,841 545,685
------------------ ------------------
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative preferred stockstock:
Cumulative, par value $50 per share, not mandatorily redeemable - authorized
466,406 shares; 366,406 shares outstanding:
6.10% series, 100,000 shares outstanding 5,000 5,000
4.80% series, 146,406 shares outstanding 7,320 7,320
4.30% series, 120,000 shares outstanding 6,000 6,000
------------------ ------------------
18,320 18,320
------------------ ------------------
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt:
Collateral Trust Bonds -Bonds:
7.65% series, due 2000 50,000 50,000
7.25% series, due 2006 60,000 060,000
6-7/8% series, due 2007 55,000 55,000
6% series, due 2008 50,000 50,000
7% series, due 2023 50,000 50,000
5.5% series, due 2023 19,400 19,400
229,400 169,400------------------ ------------------
284,400 284,400
First Mortgage Bonds -
Series J, 6-1/4%, retired in 1996 0 15,000
Series L, 7-7/8%, due 2000 15,000 15,000
Series M, 7-5/8%, due 2002 30,000 30,000Bonds:
Series Y, 8-5/8%, due 2001 60,000 60,000
Series Z, 7.60%7.6%, due 1999 50,000 50,000
6-1/8% series, due 1997 8,000 8,000
9-1/8% series, due 2001 21,000 21,000
7-3/8% series, due 2003 10,000 10,000
7-1/4% series, due 2007 30,000 30,000
224,000 239,000------------------ ------------------
161,000 161,000
Pollution control obligations -obligations:
5.75%, due serially 19971999 to 2003 3,416 3,5563,136 3,276
5.95%, due serially 2000 to 2007, secured by
First Mortgage Bonds 10,000retired in 1998 - 10,000
Variable rate (4.25%-4.35%(4.20% at December 31, 1996)1998), due 2000 to 2010 11,100 11,100
24,516 24,656Variable/fixed rate series 1998 (4.25% through 2003), due 2023 10,000 -
------------------ ------------------
24,236 24,376
Subordinated Deferrable Interest Debentures, 7-7/8%, due 2025 50,000 50,000
Senior Debentures, 6-5/8%, due 2009 135,000 135,000
------------------ ------------------
654,636 654,776
------------------ ------------------
Less:
Current maturities (50,140) (140)
Unamortized debt premium and (discount), net -2,442 -2,453
525,474 480,603
Less(2,476) (2,788)
------------------ ------------------
602,020 651,848
------------------ ------------------
- Amount due within one year 8,140 15,140
517,334 465,463----------------------------------------------------------------------------------------------------------------------------
$ 1,079,4601,208,181 $ 1,008,7741,215,853
================== ==================
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1996 1995 1994
(in thousands)
Cash flows from operating activities:
Net income $ 63,729 $ 59,278 $ 61,210
Adjustments to reconcile net income to net cash
flows from operating activities -
Depreciation and amortization 84,975 79,384 75,316
Amortization of principal under capital
lease obligations 16,491 15,714 16,246
Deferred taxes and investment tax credits 7,763 7,628 -410
Refueling outage provision -6,374 -7,506 12,536
Amortization of other assets 9,776 7,391 2,228
Other 279 184 -1,232
Other changes in assets and liabilities -
Accounts receivable -13,200 -9,717 10,395
Sale of utility accounts receivable 7,000 4,000 800
Production fuel, materials and supplies 651 1,658 404
Accounts payable 12,885 -4,395 20,444
Accrued taxes -11,234 5,785 7,057
Provision for rate refunds -106 106 -8,670
Adjustment clause balances -13,900 4,581 -6,582
Gas in storage -551 2,429 1,919
Other 7,322 -1,085 4,171
Net cash flows from operating activities 165,506 165,435 195,832
Cash flows from financing activities:
Dividends declared on common stock -44,000 -43,000 -52,000
Dividends declared on preferred stock -914 -914 -914
Proceeds from issuance of long-term debt 60,000 100,000 0
Reductions in long-term debt -15,140 -100,140 -224
Net change in short-term borrowings 25,112 54,393 31,495
Principal payments under capital lease obligations -19,108 -14,463 -16,304
Other -420 -1,831 -5,144
Net cash flows from financing activities 5,530 -5,955 -43,091
Cash flows from investing activities:
Construction and acquisition expenditures -
Utility -142,381 -126,104 -146,240
Other -1,267 -3,340 -1,863
Deferred energy efficiency expenditures -16,857 -18,029 -16,157
Nuclear decommissioning trust funds -6,008 -6,100 -5,532
Other 4,351 -5,308 873
Net cash flows from investing activities -162,162 -158,881 -168,919
Net increase (decrease) in cash and
temporary cash investments 8,874 599 -16,178
Cash and temporary cash investments at
beginning of year 2,734 2,135 18,313
Cash and temporary cash investments at
end of year $ 11,608 $ 2,734 $ 2,135
Supplemental cash flow information:
Cash paid during the year for -
Interest $ 42,072 $ 44,569 $ 40,005
Income taxes $ 45,383 $ 29,083 $ 34,479
Noncash investing and financing activities -
Capital lease obligations incurred $ 14,281 $ 2,918 $ 14,297
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
100
IES UTILITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as modified below, the IES Industries Inc. (Industries)Interstate Energy Corporation (IEC) Notes to
Consolidated Financial Statements are incorporated by reference insofar as they
relate to IES Utilities Inc. (Utilities)(IESU). Industries'IEC Notes 1(e), 1(i), 6, 9(a)1(n), 5, 8, 11 and 1215
do not relate to UtilitiesIESU and, therefore, are not incorporated by reference.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of ConsolidationGeneral -
Utilities is a wholly-owned subsidiary of
Industries.
The Consolidated Financial Statements include the accounts of UtilitiesIESU and its
consolidated subsidiaries. UtilitiesIESU is a subsidiary of IEC. IEC is currently doing
business as Alliant Energy Corporation. IESU is engaged principally in the
generation, transmission, distribution and sale of electric energy,energy; the
purchase, distribution, transportation and sale of natural gasgas; and to provide steam
for
industrial and heating purposes. Utilities' marketsservices. All of IESU's retail customers are located in the
state of Iowa. All subsidiaries for which Utilities owns directly or indirectly
more than 50% of the voting stock are included asIESU's principal
consolidated subsidiaries. Utilities' only wholly-owned subsidiary at December 31,
1996 wasis IES Ventures Inc.
(Ventures). Ventures' wholly-owned
subsidiary at December 31, 1996 was IES Midland Development Inc. All
significant intercompany balances and transactions have been eliminated
from(o) Comprehensive Income -
IESU had no other comprehensive income in the Consolidated Financial Statements.
(4)periods presented.
(3) LEASES:
Utilities'IESU's operating lease rental expenses for 1996-19941998, 1997 and 1996 were $7.1
million, $9.0
million, $8.3 million and $9.8$9.0 million, respectively. Utilities'IESU's future minimum
lease payments by year are as follows:follows (in thousands):
Capital Operating
Year Lease Leases (in thousands)
1997Leases
------------------------------------ --------------- ----------------
1999 $ 16,80812,278 $ 5,601
1998 9,889 5,374
1999 6,969 3,6589,053
2000 3,004 1,6548,037 7,750
2001 861 1,3294,324 4,852
2002 2,660 2,511
2003 547 1,868
Thereafter 307 19
37,838108 2,325
--------------- ----------------
27,954 $ 17,63528,359
================
Less: Amount representing interest 3,1132,310
Present value of net minimum ---------------
capital lease payments $ 34,725
(7)25,644
===============
(6) INCOME TAXES:
The components of federal and state income taxes for IESU for the years ended
December 31 were as follows:
1996 1995 1994follows (in millions)
Current tax expense $ 35.3 $ 33.5 $ 38.4
Deferred tax expense 10.4 10.3 2.2
Amortization and adjustment
of investment tax credits (2.6) (2.7) (2.6)
$ 43.1 $ 41.1 $ 38.0
Utilities':
1998 1997 1996
---------------- -------------- ---------------
Current tax expense $ 59.4 $ 58.3 $ 35.3
Deferred tax expense (15.3) (13.5) 10.4
Amortization of investment tax credits (2.6) (2.6) (2.6)
---------------- -------------- ---------------
$ 41.5 $ 42.2 $ 43.1
================ ============== ===============
101
The overall effective income tax rates shown below for the years ended December
31 were computed by dividing total income tax expense by income before income
taxes.
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefits 6.9 5.9 6.1
Effect of rate making on property
related differences 2.9 2.8 1.7
Amortization of investment tax credits (2.5) (2.7) (2.7)
Adjustment of prior period taxes (3.3) (0.1) (1.9)
Other items, net 1.3 - 0.1
Overall effective income tax rate 40.3% 40.9% 38.3%
Utilities'
1998 1997 1996
------------- ------------- ------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefits 6.6 7.0 6.9
Effect of ratemaking on property related differences 1.5 3.5 2.9
Amortization of investment tax credits (2.5) (2.6) (2.5)
Adjustment of prior period taxes (1.4) (1.4) (3.3)
Other items, net 0.9 0.3 1.3
------------- ------------- ------------
Overall effective income tax rate 40.1% 41.8% 40.3%
============= ============= ============
The accumulated deferred income taxes (assets) and liabilities as set forth
below inon the Consolidated Balance Sheets at December 31 arise from the following
temporary differences:
1996 1995differences (in millions):
1998 1997
--------------- --------------
Property related $ 275275.7 $ 282269.9
Investment tax credit related (24) (26)(20.8) (22.7)
Decommissioning related (15) (14)(15.9) (15.7)
Other 21 11(14.5) 7.3
--------------- --------------
$ 257224.5 $ 253
(8)238.8
=============== ==============
(7) BENEFIT PLANS:
(a) Pension Plans -
Payments made fromand Other Postretirement Benefits
IESU adopted Statement of Financial Accounting Standards (SFAS) 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" in 1998. IESU has
a non-contributory defined benefit pension plan that covers substantially all of
its employees who are subject to a collective bargaining agreement. Plan
benefits are generally based on years of service and compensation during the
employees' latter years of employment. Effective in 1998, eligible employees of
IESU that are not subject to a collective bargaining agreement are covered by
the Alliant Energy Cash Balance Pension Plan, a non-contributory defined benefit
pension plan. The projected unit credit actuarial cost method was used to
compute pension cost and the accumulated and projected benefit obligations.
IESU's policy is to fund the pension fundsplan at an amount that is at least equal to
retired employeesthe minimum funding requirements mandated by the Employee Retirement Income
Security Act of 1974 (ERISA) and beneficiaries during 1996 totaled $10.4 millionthat does not exceed the maximum tax deductible
amount for Utilities.the year.
IESU also provides certain other postretirement benefits to retirees, including
medical benefits for retirees and their spouses (and Medicare Part B
reimbursement for certain retirees) and, in some cases, retiree life insurance.
IESU's funding of other postretirement benefits generally approximates the
annual rate recovery of such costs.
The weighted-average assumptions as of the measurement date of September 30 are
as follows:
Qualified Pension Benefits Other Postretirement Benefits
------------------------------------ ---------------------------------------
1998 1997 1996 1998 1997 1996
----------- ------------------------ ----------- ---------------------------
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets 9% 9% 9% 9% 9% 9%
Rate of compensation increase 3.5% 4.75% 4.75% N/A N/A N/A
Medical cost trend on covered charges:
Initial trend range N/A N/A N/A 8% 8% 9%
Ultimate trend range N/A N/A N/A 6.0% 6.5% 6.5%
102
The components of theIESU's qualified pension provision for the years ended
December 31, werebenefits and other postretirement
benefits costs are as follows:follows (in millions):
Qualified Pension Benefits Other Postretirement Benefits
------------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- --------- -------- -------- ---------
Service cost $ 2.9 $ 5.4 $ 5.4 $ 1.5 $ 1.5 $ 1.7
Interest cost 8.0 14.1 12.4 4.2 3.5 3.6
Expected return on plan assets (11.3) (15.1) (14.6) (1.1) (0.7) (0.4)
Amortization of:
Transition obligation (asset) (0.2) (0.3) (0.3) 1.9 1.9 2.0
Prior service cost 0.9 1.8 1.3 - - -
Actuarial gain (0.4) - (0.1) - - -
---------- ---------- --------- -------- -------- ---------
Total $ (0.1) $ 5.9 $ 4.1 $ 6.5 $ 6.2 $ 6.9
========== ========== ========= ======== ======== =========
During 1997 and 1996, 1995 1994
(in thousands)
Service cost $ 5,439 $ 4,721 $ 5,786
Interest cost on projected benefit
obligation 12,435 11,577 11,265
Assumed return on plans' assets (14,653) (12,340) (12,426)
Early retirement benefits 4,498 - -
Net amortization 885 260 826
Pension cost 8,604 4,218 5,451
Adjustment to funding level (8,604) (4,218) (5,340)
Total pension costs paid to the Trustee $ - $ - $ 111
Actual return on plans' assets $ 25,727 $ 35,947 $ (101)
During 1996, Utilities incurred a one-time charge ofIESU recognized an additional $3.8 million and $4.5
million, relatedrespectively, of costs in accordance with SFAS 88. The charges were for
severance and early retirement programs in the respective years. In addition,
during 1998, IESU recognized $1.2 million of curtailment charges relating to
anIESU's other postretirement benefits. The amounts include a December 1998 early
retirement program.
These costs were deferred for
future recovery through the regulatory process.
A reconciliation of the funded status of the plans to the amounts
recognized in Utilities' Consolidated Balance Sheets at December 31, is
presented below:
1996 1995
(in thousands)
Fair market value of plans' assets $ 205,699 $ 191,782
Actuarial present value of benefits
rendered to date -
Accumulated benefits based on compensation
to date, including vested benefits of
$125,983,000 and $117,624,000, respectively 137,772 128,674
Additional benefits based on estimated future
salary levels 41,589 40,790
ProjectedThe pension benefit obligation 179,361 169,464
Plans' assets in excess of projected benefit
obligation 26,338 22,318
Remaining unrecognized net asset existing at
January 1, 1987, being amortized over 20 years (3,124) (3,451)
Unrecognized prior service cost 15,195 16,564
Unrecognized net gain (50,818) (40,707)
Accrued pension cost recognizedshown above (and in the Consolidated Balance Sheets $ (12,409) $ (5,276)
Assumed ratefollowing tables) for 1998
represents only the pension benefit cost for bargaining unit employees of return, allIESU
covered under the bargaining unit pension plan that is sponsored by IESU. The
pension benefit cost for IESU's non-bargaining employees who are now
participants in other IEC plans 9.00% 8.00%
Weighted average discount ratewas $2.7 million for 1998, including a special
charge of projected
benefit obligation, all plans 7.50% 7.50%
Assumed rate of increase in future compensation
levels$1.9 million for the plans 4.75% 4.75%
Utilities' employees also participate in defined contributionseverance and early retirement window programs. In
addition, Alliant Energy Corporate Services, Inc. (Alliant Energy Corporate
Services) provides services to IESU. The allocated pension plans (401(k) plans) covering substantially all employees.
Utilities' contributions to the plans, which are based on the
participants' level of contribution and cannot exceed 2.8% of the
participants' salaries or wages, were $1.5 million, $1.4 million and
$1.6 million in 1996, 1995 and 1994, respectively.
(b) Other Postemployment Benefit Plans -
The components of postretirement benefit costs
associated with these services was $0.5 million for the years ended
December 31, were as follows:
1996 1995 1994
(in thousands)
Service cost $ 1,714 $ 1,227 $ 1,785
Interest cost on accumulated postretirement
benefit obligation 3,577 3,049 3,175
Assumed return on plans' assets (388) (56) (60)
Net amortization of transition obligation
and1998. The other 1,987 1,822 2,039
Amortized/(deferred) postretirement
benefit costs 1,863 2,220 (2,732)
Costs billed to affiliate - (265) -
Regulatory recognition of incurred cost 49 1,162 -
Net postretirement benefit costs $ 8,802 $ 9,159 $ 4,207
Actual return on plans' assets $ 945 $ 273 $ 47
A reconciliation of the funded status of the plans to the amounts
recognized in Utilities' Consolidated Balance Sheets at December 31, is
presented below:
1996 1995
(in thousands)
Fair market value of plans' assets $ 12,312 $ 6,515
Accumulated postretirement benefit obligation -
Active employees not yet eligible 17,990 20,936
Active employees eligible 4,675 6,148
Retirees 25,300 21,846
Total accumulated postretirement benefit
obligation 47,965 48,930
Accumulated postretirement benefit obligation
in excess of plans' assets (35,653) (42,415)
Unrecognized transition obligation 31,020 34,415
Unrecognized net (gain)/loss (2,571) 268
Unrecognized prior service cost - 151
Accrued
postretirement benefit cost shown above for each period (and in the Consolidated Balance Sheets $ (7,204) $ (7,581)
Assumed rate of return 9.00% 8.00%
Weighted average discount rate of accumulatedfollowing
tables) represents the other postretirement benefit obligation 7.50% 7.50%
Medical trend on paid charges:
Initial trend rate 9.00% 10.00%
Ultimate trend rate 6.50% 6.50%cost for all IESU employees.
The allocated other postretirement benefit cost associated with Alliant Energy
Corporate Services for IESU was $0.2 million for 1998.
The assumed medical trend rates are critical assumptions in determining the
service and interest cost and accumulated postretirement benefit obligation
related to postretirement benefit costs. A 1%one percent change in the medical
trend rates for 1998, holding all other assumptions constant, would have changed the
1996following effects (in millions):
1 Percent 1 Percent
Increase Decrease
--------------- ---------------
Effect on total of service and interest cost for Utilities by
$1.1 million (21%) and interest cost components $1.2 ($0.9)
Effect on postretirement benefit obligation $9.2 ($7.4)
103
A reconciliation of the accumulated postretirement benefit obligation
for Utilitiesfunded status of IESU's plans to the amounts recognized
on IESU's Consolidated Balance Sheets at December 31 is presented below (in
millions):
Qualified Pension Benefits Other Postretirement Benefits
----------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
Change in benefit obligation:
Net benefit obligation at beginning of year $ 206.1 $ 179.4 $ 50.8 $ 48.0
Transfer of obligation (to)/from other IEC plans (99.1) - 2.3 -
Service cost 2.9 5.4 1.5 1.5
Interest cost 8.0 14.1 4.2 3.5
Plan participants' contributions - - 0.4 0.3
Plan amendments - 7.4 - -
Actuarial (gain) / loss 2.2 6.2 8.2 -
Curtailments - 2.5 0.4 -
Special termination benefits - 3.8 - -
Gross benefits paid (7.0) (12.7) (2.6) (2.5)
------------ ------------ ------------- -------------
Net benefit obligation at end of year 113.1 206.1 65.2 50.8
------------ ------------ ------------- -------------
Change in plan assets:
Fair value of plan assets at beginning of year 225.7 205.7 19.9 12.3
Transfer of assets to other IEC plans (97.5) - - -
Actual return on plan assets (2.5) 32.7 0.1 2.4
Employer contributions - - 2.7 7.4
Plan participants' contributions - - 0.4 0.3
401(h) assets recognized - - 1.2 -
Gross benefits paid (7.0) (12.7) (2.6) (2.5)
------------ ------------ ------------- -------------
Fair value of plan assets at end of year 118.7 225.7 21.7 19.9
------------ ------------ ------------- -------------
Funded status at end of year 5.6 19.6 (43.5) (30.9)
Unrecognized net actuarial (gain) / loss (7.3) (41.7) 5.7 (4.3)
Unrecognized prior service cost 9.8 20.1 (0.3) -
Unrecognized net transition obligation (asset) (1.6) (2.6) 25.9 29.1
------------ ------------ ------------- -------------
Net amount recognized at end of year $ 6.5 $ (4.6) $ (12.2) $ (6.1)
============ ============ ============= =============
Amounts recognized on the Consolidated Balance
Sheets consist of:
Prepaid benefit cost $ 6.5 $ - $ - $ -
Accrued benefit cost - (4.6) (12.2) (6.1)
------------ ------------ ------------- -------------
Net amount recognized at measurement date 6.5 (4.6) (12.2) (6.1)
------------ ------------ ------------- -------------
Contributions paid after 9/30 and prior to 12/31 - - 3.6 -
------------ ------------ ------------- -------------
Net amount recognized at 12/31/98 $ 6.5 $ (4.6) $ (8.6) $ (6.1)
============ ============ ============= =============
IEC sponsors a non-qualified pension plan which covers certain current and
former officers. The pension expense allocated to IESU for this plan was $1.4
million, $2.3 million and $0.8 million in 1998, 1997 and 1996, by $8.1respectively.
IESU employees also participate in defined contribution pension plans (401(k)
plans) covering substantially all employees. IESU's contributions to the plans,
which are based on the participants' level of contribution, were $2.8 million,
(17%).
(11)$1.2 million and $1.5 million in 1998, 1997 and 1996, respectively.
104
(9) DEBT:
(a) Short-Term Debt -
Information regarding short-term debt is as follows (dollars in millions):
1998 1997 1996
--------------- --------------- ---------------
As of end of year -
Commercial paper outstanding - - $ 110.0
Notes payable outstanding - - $ 25.0
Discount rates on commercial paper N/A N/A 5.37-6.05%
Interest rates on notes payable N/A N/A 6.20-6.59%
For the year ended -
Average amount of short-term debt
(based on daily outstanding balances) - $ 88.4 $ 120.1
Average interest rate on short-term debt N/A 5.58% 5.52%
(b) Long-Term Debt -
Debt maturities (excluding periodic sinking fund requirements, which will not
require additional cash expenditures) for 1999 to 2003 are $50.1 million, $51.2
million, $81.5 million, $0.6 million and $4.1 million, respectively. Depending
upon market conditions, it is currently anticipated that a majority of the
maturing debt will be refinanced with the issuance of long-term securities.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (MD&A) for a further discussion of IESU's debt.
(10) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
Long-Term DebtThe following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
o Current Assets and Current Liabilities - The estimatedcarrying amount approximates
fair value is basedbecause of the short maturity of such financial instruments.
o Nuclear Decommissioning Trust Funds - The carrying amount represents the
fair value of these trust funds, as reported by the trustee. The balance of
the "Nuclear decommissioning trust funds" as shown on the Consolidated
Balance Sheets included $24.3 million and $19.3 million of net unrealized
gains at December 31, 1998 and December 31, 1997, respectively, on the
investments held in the trust funds. The accumulated reserve for
decommissioning costs was adjusted by a corresponding amount.
o Cumulative Preferred Stock - Based upon the market yield of similar
securities and quoted market prices.
At December 31,
1996,o Long-Term Debt - Based upon the market yield of similar securities and
December 31, 1995,quoted market prices.
The following table presents the carrying amount of Utilities' long-term
debt was $528 million and $483 million, compared to estimated fair valuesvalue of
$538 millioncertain financial instruments for IESU as of December 31 (in millions):
1998 1997
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ------------ -----------
Nuclear decommissioning trust funds $ 92 $ 92 $ 78 $ 78
Cumulative preferred stock 18 15 18 13
Long-term debt, including current portion 652 687 652 678
105
Since IESU is subject to regulation, any gains or losses related to the
difference between the carrying amount and $507 million, respectively.
(13)the fair value of its financial
instruments may not be realized by IESU's parent.
(12) COMMITMENTS AND CONTINGENCIES:
(b) Purchased-Power, Coal and Natural Gas Contracts
IESU has entered into purchased-power capacity and coal contracts and its
minimum commitments are as follows (dollars in millions, megawatt-hours (MWHs)
and tons in thousands):
Coal
Purchased-Power (including transportation
costs)
--------------------------- --------------------------------
Dollars MWHs Dollars Tons
----------- ------------ ------------- ---------------
1999 $ 6.9 220 $ 14.1 2,028
2000 4.8 - 9.9 1,162
2001 5.0 - 6.4 885
2002 2.8 - 0.5 135
2003 2.9 - 0.2 45
IESU is in the process of negotiating several new coal contracts. In addition,
it expects to supplement its coal contracts with spot market purchases to
fulfill its future fossil fuel needs.
IESU also has various natural gas supply, transportation and storage contracts
outstanding. The minimum dekatherm commitments, in millions, for 1999-2003 are
90.0, 79.5, 78.8, 75.0 and 70.0, respectively. The minimum dollar commitments
for 1999-2003, in millions, are $56.4, $35.9, $33.6, $27.6 and $26.2,
respectively. The gas supply commitments are all index-based. IESU expects to
supplement its natural gas supply with spot market purchases as needed.
(c) Information Technology Services -
IndustriesIn May 1998, IEC entered into an agreement, expiring in 2004, with Electronic
Data Systems Corporation (EDS) for information technology services. The contract is subject to declining termination fees.
Utilities'IESU's
anticipated operating and capital expenditures under the agreement for 19971999 are
estimated to total approximately $12.1$17.6 million. Future costs under the agreement
are variable and are dependent upon Utilities'IESU's level of usage of technological
services from EDS.
(d) Financial Guarantees -
Utilities'and Commitments
IESU has financial guarantees, amounting to $22.6 million
outstanding at December 31, 1996, which are not reflected in Utilities'
consolidated financial statements. Such guarantees arewere generally issued to support
third-party borrowing arrangements and similar transactions.
Utilitiestransactions, amounting to $17.9
million outstanding at December 31, 1998. Such guarantees are not reflected in
the consolidated financial statements. Management believes that the likelihood
of IESU having to make any material cash payments by
Utilities under these agreements is
remote.
(15) SEGMENTS106
(16) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited):
Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- --------------- ----------------- ------------------
(in thousands)
1998 *
Operating revenues $208,278 $174,733 $222,190 $201,729
Operating income 34,289 21,756 69,940 29,011
Net income 11,660 2,961 30,637 16,652
Earnings available for common stock 11,431 2,732 30,408 16,425
1997
Operating revenues $226,398 $169,623 $205,711 $212,246
Operating income 32,588 26,574 63,987 30,621
Net income 11,851 6,891 28,636 11,415
Earnings available for common stock 11,622 6,662 28,407 11,188
* Earnings in 1998 were impacted by the recording of approximately $2 million,
$10 million, $3 million and $2 million of pre-tax merger-related expenses in the
first, second, third and fourth quarters, respectively.
107
WISCONSIN POWER AND LIGHT COMPANY
FINANCIAL SECTION
108
REPORT OF BUSINESS:INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowners of Wisconsin Power and Light Company:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Wisconsin Power and Light Company (a Wisconsin corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements and the
supplemental schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and supplemental schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wisconsin Power and Light
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The principalschedule listed in Item 14(a)(2) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1999
109
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(in thousands)
Operating revenues:
Electric utility $ 614,704 $ 634,143 $ 589,482
Gas utility 111,737 155,883 165,627
Water 5,007 4,691 4,166
---------------- ---------------- ----------------
731,448 794,717 759,275
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Operating expenses:
Electric production fuels 120,485 116,812 114,470
Purchased power 113,936 125,438 81,108
Cost of gas sold 61,409 99,267 104,830
Other operation 143,666 131,398 140,339
Maintenance 49,912 48,058 46,492
Depreciation and amortization 119,221 104,297 84,942
Taxes other than income taxes 30,169 30,338 29,206
---------------- ---------------- ----------------
638,798 655,608 601,387
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Operating income 92,650 139,109 157,888
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Interest expense and other:
Interest expense 36,584 32,607 31,472
Allowance for funds used during construction (3,049) (2,775) (3,208)
Miscellaneous, net (1,129) (3,796) (6,669)
---------------- ---------------- ----------------
32,406 26,036 21,595
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 60,244 113,073 136,293
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Income taxes 24,670 41,839 53,808
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Net income 35,574 71,234 82,485
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Preferred dividend requirements 3,310 3,310 3,310
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------
Earnings available for common stock $ 32,264 $ 67,924 $ 79,175
================ ================ ================
- ---------------------------------------------------------------------------------------------------------
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(in thousands)
Balance at beginning of year $ 320,386 $ 310,805 $ 297,717
Net income 35,574 71,234 82,485
Cash dividends declared on common stock (58,341) (58,343) (66,087)
Cash dividends declared on preferred stock (3,310) (3,310) (3,310)
---------------- ---------------- ----------------
Balance at end of year $ 294,309 $ 320,386 $ 310,805
================ ================ ================
- ---------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
110
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 1,839,545 $ 1,790,641
Gas 244,518 237,856
Water 26,567 24,864
Common 219,268 195,815
---------------- ----------------
2,329,898 2,249,176
Less - Accumulated depreciation 1,168,830 1,065,726
---------------- ----------------
1,161,068 1,183,450
Construction work in progress 56,994 42,312
Nuclear fuel, net of amortization 18,671 19,046
---------------- ----------------
1,236,733 1,244,808
Other property, plant and equipment, net of accumulated
depreciation and amortization of $44 for both years 630 684
---------------- ----------------
1,237,363 1,245,492
---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 1,811 2,492
Accounts receivable:
Customer 13,372 20,928
Associated companies 3,019 5,017
Other 8,298 11,589
Production fuel, at average cost 20,105 18,857
Materials and supplies, at average cost 20,025 19,274
Gas stored underground, at average cost 10,738 12,504
Prepaid gross receipts tax 22,222 22,153
Other 6,987 4,824
---------------- ----------------
106,577 117,638
---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Investments:
Nuclear decommissioning trust funds 134,112 112,356
Other 15,960 14,877
---------------- ----------------
150,072 127,233
---------------- ----------------
- --------------------------------------------------------------------------------------------------------
Other assets:
Regulatory assets 133,501 120,826
Deferred charges and other 57,637 53,415
---------------- ----------------
191,138 174,241
---------------- ----------------
- --------------------------------------------------------------------------------------------------------
$ 1,685,150 $ 1,664,604
================ ================
- --------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
111
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31,
CAPITALIZATION AND LIABILITIES 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Capitalization (See Consolidated Statements of Capitalization):
Common stock $ 66,183 $ 66,183
Additional paid-in capital 199,438 199,170
Retained earnings 294,309 320,386
------------------ -----------------
Total common equity 559,930 585,739
------------------ -----------------
Cumulative preferred stock, not mandatorily redeemable 59,963 59,963
Long-term debt (excluding current portion) 414,579 354,540
------------------ -----------------
1,034,472 1,000,242
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities - 8,899
Variable rate demand bonds 56,975 56,975
Commercial paper - 81,000
Notes payable 50,000 -
Notes payable to associated companies 26,799 -
Accounts payable 84,754 85,617
Accounts payable to associated companies 20,315 -
Accrued payroll and vacations 5,276 12,221
Accrued interest 6,863 6,317
Other 14,600 25,162
------------------ -----------------
265,582 276,191
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 245,489 251,709
Accumulated deferred investment tax credits 33,170 35,039
Customer advances 34,367 34,240
Environmental liabilities 11,683 13,738
Other 60,387 53,445
------------------ -----------------
385,096 388,171
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
- --------------------------------------------------------------------------------------------------------------------
$ 1,685,150 $ 1,664,604
================== =================
- --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
112
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 35,574 $ 71,234 $ 82,485
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 119,221 104,297 84,942
Amortization of nuclear fuel 5,356 3,534 4,845
Deferred taxes and investment tax credits (7,529) 3,065 6,306
(Gain) loss on disposition of other property and equipment 38 710 (5,676)
Other (2,127) (2,033) (2,270)
Other changes in assets and liabilities:
Accounts receivable 12,845 (3,314) (250)
Production fuel (1,248) (3,016) (1,216)
Materials and supplies (751) 641 696
Gas stored underground 1,766 (2,512) (3,673)
Prepaid gross receipts tax (69) (2,764) (1,087)
Accounts payable 19,452 (7,102) 10,291
Benefit obligations and other (5,207) (12,809) 16,834
---------------- ---------------- ----------------
Net cash flows from operating activities 177,321 149,931 192,227
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends (58,341) (58,343) (66,087)
Preferred stock dividends (3,310) (3,310) (3,310)
Proceeds from issuance of long-term debt 60,000 105,000 -
Reductions in long-term debt (8,899) (55,000) (5,000)
Net change in short-term borrowings (4,201) 11,500 (3,000)
Other (1,966) (2,601) -
---------------- ---------------- ----------------
Net cash flows used for financing activities (16,717) (2,754) (77,397)
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Construction expenditures (117,143) (119,232) (123,942)
Nuclear decommissioning trust funds (14,297) (11,427) (9,986)
Additions to nuclear fuel (4,981) (3,212) (5,344)
Proceeds from sale of other property and equipment 53 4 36,613
Shared savings expenditures (24,355) (17,610) (5,196)
Other (562) 2,625 (7,479)
---------------- ---------------- ----------------
Net cash flows used for investing activities (161,285) (148,852) (115,334)
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and temporary cash investments (681) (1,675) (504)
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 2,492 4,167 4,671
---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 1,811 $ 2,492 $ 4,167
================ ================ ================
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information: Cash paid during the period for:
Interest $ 33,368 $ 32,955 $ 29,092
================ ================ ================
Income taxes $ 31,951 $ 37,407 $ 48,622
================ ================ ================
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
113
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
Common equity:
Common stock - $5.00 par value - authorized 18,000,000 shares;
13,236,601 shares outstanding $ 66,183 $ 66,183
Additional paid-in capital 199,438 199,170
Retained earnings 294,309 320,386
------------------ ------------------
559,930 585,739
------------------ ------------------
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative preferred stock:
Cumulative, without par value, not mandatorily redeemable - authorized
3,750,000 shares, maximum aggregate stated value $150,000,000:
$100 stated value - 4.50% series, 99,970 shares outstanding 9,997 9,997
$100 stated value - 4.80% series, 74,912 shares outstanding 7,491 7,491
$100 stated value - 4.96% series, 64,979 shares outstanding 6,498 6,498
$100 stated value - 4.40% series, 29,957 shares outstanding 2,996 2,996
$100 stated value - 4.76% series, 29,947 shares outstanding 2,995 2,995
$100 stated value - 6.20% series, 150,000 shares outstanding 15,000 15,000
$25 stated value - 6.50% series, 599,460 shares outstanding 14,986 14,986
------------------ ------------------
59,963 59,963
------------------ ------------------
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt:
First Mortgage Bonds:
Series L, 6.25%, retired in 1998 - 8,899
1984 Series A, variable rate (3.85% at December 31, 1998), due 2014 8,500 8,500
1988 Series A, variable rate (4.20% at December 31, 1998), due 2015 14,600 14,600
1990 Series V, 9.3%, due 2025 27,000 27,000
1991 Series A, variable rate (5.15% at December 31, 1998), due 2015 16,000 16,000
1991 Series B, variable rate (5.15% at December 31, 1998), due 2005 16,000 16,000
1991 Series C, variable rate (5.15% at December 31, 1998), due 2000 1,000 1,000
1991 Series D, variable rate (5.15% at December 31, 1998), due 2000 875 875
1992 Series W, 8.6%, due 2027 90,000 90,000
1992 Series X, 7.75%, due 2004 62,000 62,000
1992 Series Y, 7.6%, due 2005 72,000 72,000
------------------ ------------------
307,975 316,874
Debentures, 7%, due 2007 105,000 105,000
Debentures, 5.7%, due 2008 60,000 -
------------------ ------------------
472,975 421,874
------------------ ------------------
Less:
Current maturities - (8,899)
Variable rate demand bonds (56,975) (56,975)
Unamortized debt premium and (discount), net (1,421) (1,460)
------------------ ------------------
414,579 354,540
------------------ ------------------
- ----------------------------------------------------------------------------------------------------------------------------
$ 1,034,472 $ 1,000,242
================== ==================
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
114
WISCONSIN POWER AND LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as modified below, the Interstate Energy Corporation (IEC) Notes to
Consolidated Financial Statements are incorporated by reference insofar as they
relate to Wisconsin Power and Light Company (WP&L). IEC Notes 1(e), 1(i), 1(n),
5, 8(b), 11(c), and 15 do not relate to WP&L and, therefore, are not
incorporated by reference.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) General -
The Consolidated Financial Statements include the accounts of WP&L and its
consolidated subsidiaries. WP&L is a subsidiary of IEC. IEC is currently doing
business segments of Utilities areas Alliant Energy Corporation. WP&L is engaged principally in the
generation, transmission, distribution and sale of electric energy andenergy; the
purchase, distribution, transportation and sale of natural gas. Certain financial
informationgas; and water
services. Nearly all of WP&L's retail customers are located in south and central
Wisconsin. WP&L's principal consolidated subsidiary is South Beloit Water, Gas
and Electric Company.
(o) Comprehensive Income -
WP&L had no other comprehensive income in the periods presented.
(3) LEASES:
WP&L's operating lease rental expenses for 1998, 1997 and 1996 were $6.4
million, $5.5 million and $5.3 million, respectively. WP&L's future minimum
lease payments by year are as follows (in thousands):
Operating
Year Leases
---------------------- ------------------
1999 $ 7,772
2000 6,948
2001 5,925
2002 5,303
2003 4,146
Thereafter 26,042
------------------
$ 56,136
==================
(6) INCOME TAXES:
The components of federal and state income taxes for WP&L for the years ended
December 31 were as follows (in millions):
1998 1997 1996
---------------- -------------- ---------------
Current tax expense $ 32.2 $ 38.8 $ 47.5
Deferred tax expense (5.6) 4.9 8.2
Amortization of investment tax credits (1.9) (1.9) (1.9)
---------------- -------------- ---------------
$ 24.7 $ 41.8 $ 53.8
================ ============== ===============
115
The overall effective income tax rates shown below for the years ended December
31 were computed by dividing total income tax expense by income before income
taxes.
1998 1997 1996
-------------- -------------- -------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefits 7.8 5.7 6.1
Amortization of investment tax credits (3.1) (1.7) (1.4)
Adjustment of prior period taxes - (2.1) 0.4
Merger expenses 2.5 0.3 0.4
Amortization of excess deferred taxes (2.5) (1.3) (1.3)
Other items, net 1.3 1.1 0.3
-------------- -------------- -------------
Overall effective income tax rate 41.0% 37.0% 39.5%
============== ============== =============
The accumulated deferred income taxes (assets) and liabilities as set forth
below on the Consolidated Balance Sheets at December 31 arise from the following
temporary differences (in millions):
1998 1997
--------------- --------------
Property related $ 282.7 $ 287.2
Investment tax credit related (22.2) (23.5)
Decommissioning related (17.5) (16.0)
Other 2.5 4.0
--------------- --------------
$ 245.5 $ 251.7
=============== ==============
(7) BENEFIT PLANS:
(a) Pension Plans and Other Postretirement Benefits
WP&L adopted Statement of Financial Accounting Standard (SFAS) 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" in 1998. WP&L has
a noncontributory, defined benefit pension plan covering substantially all
employees who are subject to a collective bargaining agreement. The benefits are
based upon years of service and levels of compensation. Effective in 1998,
eligible employees of WP&L that are not subject to a collective bargaining
agreement are covered by the Alliant Energy Cash Balance Pension Plan, a
non-contributory defined benefit pension plan. The projected unit credit
actuarial cost method was used to compute pension cost and the accumulated and
projected benefit obligations. WP&L's policy is to fund the pension cost in an
amount that is at least equal to the minimum funding requirements mandated by
the Employee Retirement Income Security Act of 1974 (ERISA), and that does not
exceed the maximum tax deductible amount for the year.
WP&L also provides certain other postretirement benefits to retirees, including
medical benefits for retirees and their spouses (and Medicare Part B
reimbursement for certain retirees) and, in some cases, retiree life insurance.
WP&L's funding of other postretirement benefits generally approximates the
maximum tax deductible amount on an annual basis.
The weighted-average assumptions as of the measurement date of September 30 are
as follows:
Qualified Pension Benefits Other Postretirement Benefits
------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996
------------ ----------- ------------ ------------------------ ---------------
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets 9% 9% 9% 9% 9% 9%
Rate of compensation increase 3.5% 3.5-4.5% 3.5-4.5% 3.5% 3.5% 3.5-4.5%
Medical cost trend on covered charges:
Initial trend range N/A N/A N/A 8% 8% 9%
Ultimate trend range N/A N/A N/A 5% 5% 5%
116
The components of WP&L's qualified pension benefits and other postretirement
benefits costs are as follows (in millions):
Qualified Pension Benefits Other Postretirement Benefits
------------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996
---------- ----------- --------- -------- -------- ---------
Service cost $ 3.2 $ 4.8 $ 5.1 $ 1.7 $ 1.8 $ 1.8
Interest cost 8.5 13.9 13.6 2.6 3.3 3.4
Expected return on plan assets (12.8) (19.2) (17.9) (1.5) (1.1) (1.0)
Amortization of:
Transition obligation (asset) (2.1) (2.4) (2.4) 1.3 1.5 1.5
Prior service cost 0.5 0.4 0.3 - - -
Actuarial (gain)/loss - - 0.5 (1.1) (0.3) -
---------- ----------- --------- -------- -------- ---------
Total $ (2.7) $ (2.5) $ (0.8) $ 3.0 $ 5.2 $ 5.7
========== =========== ========= ======== ======== =========
During 1998 and 1997, WP&L recognized an additional $0.6 million and $1.3
million, respectively, of costs in accordance with SFAS 88. The charges were for
severance and early retirement programs in the respective years. In addition,
during 1998 and 1997, WP&L recognized $3.6 million and $1.7 million,
respectively, of curtailment charges relating to Utilities' significant segmentsWP&L's other postretirement
benefits. The amounts include a December 1998 early retirement program.
The pension benefit cost shown above (and in the following table) for 1998
represents only the pension benefit cost for bargaining unit employees of businessWP&L
covered under the bargaining unit pension plan that is sponsored by WP&L. The
pension benefit cost for WP&L's non-bargaining employees who are now
participants in other IEC plans was $3.0 million for 1998, including a special
charge of $3.6 for severance and early retirement window programs. In addition,
Alliant Energy Corporate Services, Inc. (Alliant Energy Corporate Services)
provides services to WP&L. The allocated pension benefit costs associated with
these services was $0.6 million for 1998. The other postretirement benefit cost
shown above for each period (and in the following tables) represents the other
postretirement benefit cost for all WP&L employees. The allocated other
postretirement benefit cost associated with Alliant Energy Corporate Services
for WP&L was $0.2 million for 1998.
The assumed medical trend rates are critical assumptions in determining the
service and interest cost and accumulated postretirement benefit obligation
related to postretirement benefit costs. A one percent change in the medical
trend rates for 1998, holding all other assumptions constant, would have the
following effects (in millions):
1 Percent 1 Percent Decrease
Increase
------------------- ----------------------
Effect on total of service and interest cost components $0.3 ($0.3)
Effect on postretirement benefit obligation $1.7 ($1.7)
117
A reconciliation of the funded status of WP&L's plans to the amounts recognized
on WP&L's Consolidated Balance Sheets at December 31 is presented below:
Year Endedbelow (in
millions):
Qualified Pension Benefits Other Postretirement Benefits
---------------------------- -------------------------------
1998 1997 1998 1997
----------- ------------ -------------- ------------
Change in benefit obligation:
Net benefit obligation at beginning of year $ 205.1 $ 189.6 $ 47.1 $ 46.6
Transfer of obligations to other IEC plans (91.9) - - -
Service cost 3.2 4.8 1.7 1.8
Interest cost 8.5 13.9 2.6 3.3
Plan participants' contributions - - 0.8 1.0
Plan amendments - 4.4 - -
Actuarial (gain) / loss 12.2 2.9 (9.7) (2.7)
Curtailments - - 0.7 0.6
Special termination benefits 0.6 1.3 - -
Gross benefits paid (5.4) (11.8) (2.9) (3.5)
----------- ------------ -------------- ------------
Net benefit obligation at end of year 132.3 205.1 40.3 47.1
----------- ------------ -------------- ------------
Change in plan assets:
Fair value of plan assets at beginning of year 244.4 218.9 16.1 13.8
Transfer of assets to other IEC plans (100.2) - - -
Actual return on plan assets (1.3) 36.2 1.1 1.9
Employer contributions - 1.1 - 2.9
Plan participants' contributions - - 0.8 1.0
Gross benefits paid (5.4) (11.8) (2.9) (3.5)
----------- ------------ -------------- ------------
Fair value of plan assets at end of year 137.5 244.4 15.1 16.1
----------- ------------ -------------- ------------
Funded status at end of year 5.2 39.3 (25.2) (31.0)
Unrecognized net actuarial (gain) / loss 26.0 0.8 (17.0) (8.3)
Unrecognized prior service cost 5.1 7.8 (0.2) (0.3)
Unrecognized net transition obligation (asset) (7.9) (12.0) 17.2 21.0
----------- ------------ -------------- ------------
Net amount recognized at end of year $ 28.4 $ 35.9 $ (25.2) $ (18.6)
=========== ============ ============== ============
Amounts recognized on the Consolidated Balance
Sheets consist of:
Prepaid benefit cost $ 28.4 $ 35.9 $ 0.4 $ 0.3
Accrued benefit cost - - (25.6) (18.9)
----------- ------------ -------------- ------------
Net amount recognized at measurement date 28.4 35.9 (25.2) (18.6)
----------- ------------ -------------- ------------
Contributions paid after 9/30 and prior to 12/31 - - 2.1 -
----------- ------------ -------------- ------------
Net amount recognized at 12/31/98 $ 28.4 $ 35.9 $ (23.1) $ (18.6)
=========== ============ ============== ============
IEC sponsors a non-qualified pension plan which covers certain current and
former officers. The pension expense allocated to WP&L for this plan was $0.8
million, $0.5 million and $0.5 million in 1998, 1997 and 1996, respectively.
WP&L employees also participate in defined contribution pension plans (401(k)
plans) covering substantially all employees. WP&L's contributions to the plans,
which are based on the participants' level of contribution, were $2.4 million,
$2.8 million and $1.8 million in 1998, 1997 and 1996, respectively.
The benefit obligation and fair value of plan assets for the postretirement
welfare plans with benefit obligations in excess of plan assets were $33.4
million and $6.2 million as of September 31, 1998 and $40.6 million and $7.7
million, respectively, as of the prior measurement date.
118
(9) DEBT:
(a) Short-Term Debt -
Information regarding short-term debt is as follows (in millions):
1998 1997 1996
-------------- -------------- --------------
As of year end--
Commercial paper outstanding - $81.0 $59.5
Notes payable outstanding $50.0 - $10.0
Money pool borrowings $26.8 - -
Discount rates on commercial paper N/A 5.82-5.90% 5.35-5.65%
Interest rates on notes payable 5.44% N/A 5.95%
Interest rate on money pool borrowings 5.17% N/A N/A
For the year ended--
Average amount of short-term debt
(based on daily outstanding balances) $48.4 $49.2 $33.9
Average interest rate on short-term debt 5.55% 5.64% 5.86%
(b) Long-Term Debt -
Debt maturities (excluding periodic sinking fund requirements, which will not
require additional cash expenditures) for 1999 to 2003 are $0, $1.9 million, $0,
$0 and $0, respectively.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (MD&A) for a further discussion of WP&L's debt.
(10) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
o Current Assets and Current Liabilities - The carrying amount approximates
fair value because of the short maturity of such financial instruments.
o Nuclear Decommissioning Trust Funds - The carrying amount represents the
fair value of these trust funds, as reported by the trustee. The balance of
the "Nuclear decommissioning trust funds" as shown on the Consolidated
Balance Sheets included $18.7 million and $16.4 million of net unrealized
gains at December 31, 1996 1995 19941998 and December 31, 1997, respectively, on the
investments held in the trust funds. The accumulated reserve for
decommissioning costs was adjusted by a corresponding amount.
o Cumulative Preferred Stock - Based upon the market yield of similar
securities and quoted market prices.
o Long-Term Debt - Based upon the market yield of similar securities and
quoted market prices.
The following table presents the carrying amount and estimated fair value of
certain financial instruments for WP&L as of December 31 (in millions):
1998 1997
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ------------ -----------
Nuclear decommissioning trust funds $ 134 $ 134 $ 112 $ 112
Cumulative preferred stock 60 55 60 52
Long-term debt, including current portion 472 513 420 449
Since WP&L is subject to regulation, any gains or losses related to the
difference between the carrying amount and the fair value of its financial
instruments may not be realized by WP&L's parent.
119
(12) COMMITMENTS AND CONTINGENCIES:
(b) Purchased-Power, Coal and Natural Gas Contracts
WP&L has entered into purchased-power capacity and coal contracts and its
minimum commitments are as follows (dollars in millions, megawatt-hours (MWHs)
and tons in thousands)
Operating results:
Revenues:
Coal
Purchased-Power (including transportation
costs)
--------------------------- --------------------------------
Dollars MWHs Dollars Tons
----------- ------------ ------------- ---------------
1999 $ 62.3 1,290 $ 22.2 6,124
2000 66.0 1,509 10.1 2,986
2001 52.4 864 8.4 1,600
2002 31.8 219 4.4 750
2003 24.3 219 - Electric $ 574,273 $ 560,471 $ 537,327
Gas 160,864 137,292 139,033
Operating income -
Electric 132,278 130,390 125,487
Gas 17,088 9,208 8,135
Other information:
DepreciationWP&L is in the process of negotiating several new coal contracts. In addition,
it expects to supplement its coal contracts with spot market purchases to
fulfill its future fossil fuel needs.
WP&L also has various natural gas supply, transportation and amortizationstorage contracts
outstanding. The minimum dekatherm commitments, in millions, for 1999-2003 are
70.3, 59.7, 45.4, 31.5 and 24.5, respectively. The minimum dollar commitments
for 1999-2003, in millions, are $42.8, $32.5, $27.1, $24.7 and $17.0,
respectively. The gas supply commitments are all index-based. WP&L expects to
supplement its natural gas supply with spot market purchases as needed.
(c) Information Technology Services -
Electric 77,578 72,487 68,640
Gas 6,200 6,176 6,214
ConstructionIn May 1998, IEC entered into an agreement, expiring in 2004, with Electronic
Data Systems Corporation (EDS) for information technology services. WP&L's
anticipated operating and acquisitioncapital expenditures -
Electric 115,929 108,902 120,180
Gas 12,981 9,368 10,066
Assets -
Identifiable assets -
Electric 1,438,370 1,395,666 1,347,024
Gas 205,680 192,045 186,911
1,644,050 1,587,711 1,533,935
Other corporate assets 134,560 120,924 111,433
Total consolidated assets $ 1,778,610 $ 1,708,635 $ 1,645,368
Itemunder the agreement for 1999 are
estimated to total approximately $2.8 million. Future costs under the agreement
are variable and are dependent upon WP&L's level of usage of technological
services from EDS.
120
(16) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited):
------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- --------------- ----------------- ------------------
(in thousands)
1998*
Operating revenues $202,803 $172,509 $176,130 $180,006
Operating income 33,651 10,828 29,696 18,475
Net income (loss) 17,598 (1,233) 12,677 6,532
Earnings available for common stock 16,770 (2,061) 11,850 5,705
1997
Operating revenues $231,005 $176,065 $180,192 $207,455
Operating income 45,413 20,882 34,158 38,656
Net income 23,351 11,044 15,236 21,603
Earnings available for common stock 22,523 10,216 14,409 20,776
*Earnings for 1998 were impacted by the recording of approximately $3 million,
$11 million, $2 million and $1 million of pre-tax merger-related expenses in the
first, second, third and fourth quarters, respectively.
121
ITEM 9. Changes and Disagreements with Accountants on Accounting and
Financial DisclosureCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
IEC
The information required by Item 10. Directors, Executive Officers, Promoters10 relating to directors and Control Persons
of the Registrant
Information regarding the identificationnominees for
election of directors at the 1999 Annual Meeting of IES
Industries Inc. and IES Utilities Inc. and complianceShareowners is incorporated
herein by reference to the relevant information included under the caption
"Election of Directors" in IEC's Proxy Statement for the 1999 Annual Meeting of
Shareowners (the 1999 IEC Proxy Statement). The 1999 IEC Proxy Statement has
been filed with Section 16(a)
reporting requirements of the Securities and Exchange Commission is
included in Industries' definitive proxy statement (Proxy Statement)
prepared for the 1997 annual meeting of stockholders, which will be
filed within 120 days after the
end of December 31, 1996, (Proxy Statement under the
captions "Proposal - Nomination and Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by reference.IEC's fiscal year. The executive officers of the registrantsIEC as of December 31, 1996the date of this
filing are as follows: (Figuresfollows (figures following the names represent the officer's age
as of December 31, 1996).1998):
Executive Officers of IES Industries Inc.
Lee Liu, 63, Chairman of the Board &IEC
Erroll B. Davis, Jr., 54, has served as President and Chief Executive Officer.
First elected officer in 1975.
Larry D. Root, 60, President & Chief Operating Officer. Re-elected
officer in 1996. (i)
James E. Hoffman, 43, Executive Vice President. First elected
officer in 1996. (ii)
Thomas M. Walker, 49, Executive Vice President & Chief Financial
Officer. First elected officer in 1996. (iii)
Peter W. Dietrich, 57, Vice President, Corporate Development.
First elected officer in 1988.
Dean E. Ekstrom, 49, Vice President, Administration. First elected
officer in 1991.
Stephen W. Southwick, 50, Vice President, General Counsel &
Secretary. First elected officer in 1982.
John E. Ebright, 53, Controller & Chief Accounting Officer. First
elected officer in 1996. (iv)
Dennis B. Vass, 47, Treasurer. First elected officer in 1995.
Executive Officers of IES Utilities Inc.
Lee Liu, 63, Chairman of the Board & Chief Executive Officer.
First elected officer in 1975.
Larry D. Root, 60, President & Chief Operating Officer. Re-elected
officer in 1996. (i)
James E. Hoffman, 43, Executive Vice President, Customer Service &
Energy Delivery. First elected officer in 1995. (ii)
Thomas M. Walker, 49, Executive Vice President & Chief Financial
Officer. First elected officer in 1996. (iii)
John F. Franz, Jr., 57, Vice President, Nuclear. First elected
officer in 1992.
Harold W. Rehrauer, 59, Vice President, Field Operations. First
elected officer in 1987.
Stephen W. Southwick, 50, Vice President, General Counsel &
Secretary. First elected officer in 1982.
Philip D. Ward, 56, Vice President, Generation. First elected
officer in 1990.
John E. Ebright, 53, Controller & Chief Accounting Officer. First
elected officer in 1996. (iv)
Dennis B. Vass, 47, Treasurer. First elected officer in 1995.
Officers are elected annually by the Board of DirectorsOfficer
since 1990 and each of
the officers named above, except Larry D. Root, James E. Hoffman, Thomas
M. Walker and John E. Ebright, has been employed by Industries or one of
its significant subsidiaries as an officer or in other responsible
positions at such companies for at least five years. There are no
family relationships among these officers or among the officers and
directors. There are no arrangements or understandings with respect to
election of any person as an officer.
(i) Larrya board member since 1988.
William D. Root, who retired in 1995, was re-elected as
President & Chief Operating Officer of both IES Industries
Inc. and IES Utilities Inc. effective November 6, 1996. Mr.
Root was first elected as an officer in 1979.
(ii) James E. HoffmanHarvey, 49, was elected Executive Vice President-Generation effective
April 1998. Prior thereto, he served as Senior Vice President of
IES Industries Inc.since 1993 at
WP&L.
James E. Hoffman, 45, was elected Executive Vice President-Business Development
effective November 6, 1996.April 1998. Prior to his
appointmentthereto, he served as Executive Vice President Customersince
1996 at IES and Executive Vice President-Customer Service & Energy Delivery of IES Utilities Inc. infrom
1995 to 1997 at IESU. Prior to joining IEC, he was employed by MCI Communications as Chief Information Officer
from 1990 to 1995.
(iii) Thomas M. Walker1995 at MCI Communications.
Eliot G. Protsch, 45, was elected Executive Vice President-Energy Delivery
effective April 1998. Prior thereto, he served as Senior Vice President since
1993 at WP&L.
Barbara J. Swan, 47, was elected Executive Vice President &and General Counsel
effective October 1998. She previously served as Vice President-General Counsel
from 1994 to 1998 at WP&L.
Thomas M. Walker, 51, was elected Executive Vice President and Chief Financial
Officer of both IES Industries
Inc. and IES Utilities Inc. effective December 16, 1996.April 1998. Prior to joining the Company in December 1996,thereto, he was employed
from 1990 - 1995 by Information Resources, Inc.served as Executive Vice
President and Chief Financial Officer since 1996 at IES and IESU. Prior to
joining IEC, he was Executive Vice President-Chief Financial and Administrative
Officer and Membermember of the Board of Directors.
(iv)Directors from 1990 to 1995 at Information
Resources, Inc.
Pamela J. Wegner, 51, was elected Executive Vice President-Corporate Services
effective October 1998. She previously served as Vice President-Information
Services and Administration from 1994 to 1998 at WP&L.
John E. Ebright, 55, was elected Vice President-Controller effective April 1998.
Prior thereto, he served as Controller &and Chief Accounting Officer of bothsince 1996
at IES Industries Inc. and IES Utilities Inc.
effective July 8, 1996.IESU. Prior to joining the Company in July
1996,IEC, he was employed byVice President and Controller from
1987 to 1996 at MidCon Corp., a subsidiary of Occidental Petroleum Corporation,Corporation.
Edward M. Gleason, 58, has served as Vice President-Treasurer and Corporate
Secretary since 1993. He has also served as Controller, Treasurer and Corporate
Secretary of WP&L since 1996 and Corporate Secretary of WP&L from 1993 to 1996.
122
Susan J. Kosmo, 52, was elected Assistant Controller effective April 1998. She
previously served as Assistant Controller since 1995 and Trust Investments and
Investor Relations Supervisor from 1992 to 1995 at WP&L.
John E. Kratchmer, 36, was elected Assistant Controller effective April 1998. He
previously served as Manager of Financial Reporting and Property since 1996 and
Manager of Financial Reporting from 1994 to 1996 at IES.
Linda J. Wentzel, 50, was appointed Assistant Corporate Secretary effective May
1998. She previously served as Executive Administrative Assistant since 1995 and
Administrative Assistant from 1992 to 1995 at IEC.
Enrique Bacalao, 49, was appointed Assistant Treasurer effective November 1998.
Prior to joining IEC, he was Vice President, Corporate Banking at the Chicago
Branch from 1995 to 1998, and Manager and Head of the Customer Dealing Group at
the London Branch from 1993 to 1995, of The Industrial Bank of Japan, Limited.
NOTE: None of the executive officers listed above is related to any member of
the Board of Directors or nominee for director or any other executive officer.
Messrs. Liu and Davis have employment agreements with IEC pursuant to which
their terms of office are established. All other executive officers have no
definite terms of office and serve at the pleasure of the Board of Directors.
IESU
IESU's directors are identical to IEC, but are elected by consent action. The
information required by Item 10 relating to directors and nominees for election
of directors at the 1999 Annual Meeting of Shareowners is incorporated herein by
reference to the relevant information included under the caption "Election of
Directors" in the 1999 IEC Proxy Statement. The 1999 IEC Proxy Statement has
been filed with the Securities and Exchange Commission within 120 days after the
end of IESU's fiscal year. The executive officers of IESU as of the date of this
filing are as follows (figures following the names represent the officer's age
as of December 31, 1998):
Executive Officers of IESU
Erroll B. Davis, Jr., 54, was elected Chief Executive Officer effective April
1998. Mr. Davis is also an officer of IEC and WP&L.
Eliot G. Protsch, 45, was elected President effective April 1998. Mr. Protsch is
also an officer of IEC and WP&L.
William D. Harvey, 49, was elected Executive Vice President-Generation effective
October 1998. Mr. Harvey is also an officer of IEC and WP&L.
Barbara J. Swan, 47, was elected Executive Vice President and General Counsel
effective October 1998. Ms. Swan is also an officer of IEC and WP&L.
Thomas M. Walker, 51, was elected Executive Vice President and Chief Financial
Officer since 1996. Prior to joining IESU, he was Executive Vice President-Chief
Financial and Administrative Officer and member of the Board of Directors from
1990 to 1995 at Information Resources, Inc. Mr. Walker is also an officer of IEC
and WP&L.
Pamela J. Wegner, 51, was elected Executive Vice President-Corporate Services
effective October 1998. Ms. Wegner is also an officer of IEC and WP&L.
Dale R. Sharp, 58, was elected Senior Vice President-Engineering and Standards
effective October 1998. He previously served as Vice President-Engineering since
1996, Vice President-Power Production from 1995 to 1996 and Director-Electrical
Engineering from 1980 to 1995 at IPC. Mr. Sharp is also an officer of WP&L.
123
Daniel A. Doyle, 40, was elected Vice President-Manufacturing and Energy
Portfolio Services effective October 1998. Mr. Doyle is also an officer of WP&L.
John E. Ebright, 55, was elected Vice President-Controller effective April 1998.
He previously served as Controller and Chief Accounting Officer since 1996.
Prior to joining IESU, he was Vice President and Controller from 1987 to 1996.1996 at
MidCon Corp., a subsidiary of Occidental Petroleum Corporation. Mr. Ebright is
also an officer of IEC and WP&L.
Dean E. Ekstrom, 51, was elected Vice President-Sales and Services effective
April 1998. He previously served as Vice President-Administration since 1996 and
Vice President-Management Systems from 1994 to 1996 at IES. Mr. Ekstrom is also
an officer of WP&L.
John F. Franz, Jr., 59, has served as Vice President-Nuclear since 1992. Mr.
Franz is also an officer of WP&L.
Edward M. Gleason, 58, was elected Vice President-Treasurer and Corporate
Secretary effective April 1998. Mr. Gleason is also an officer of IEC and WP&L.
Dundeana K. Langer, 40, was elected Vice President-Customer Operations effective
April 1998. She previously served as Assistant Vice President-Field Operations
since 1997, General Manager-Operations & Director Process Redesign
Implementation from 1996 to 1997, Team Leader-Energy Delivery Process Redesign
Team from 1995 to 1996, and District Manger from 1988 to 1995. Ms. Langer is
also an officer of WP&L.
Daniel L. Mineck, 50, was elected Vice President-Performance Engineering and
Environmental effective October 1998. He previously served as Assistant Vice
President-Corporate Engineering since 1996, Assistant Vice President-Nuclear
from 1995 to 1996 and Manager-Economic Development from 1992 to 1995. Mr. Mineck
is also an officer of WP&L.
Kim K. Zuhlke, 45, was elected Vice President-Customer Operations effective
October 1998. Mr. Zuhlke is also an officer of WP&L.
David L. Wilson, 52, has served as Assistant Vice President-Nuclear since 1997,
Facility Leader from 1996 to 1997, Plant Manager from 1995 to 1996 and Pllant
Supervisor-Nuclear from 1991 to 1995. Mr. Wilson is also an officer of WP&L.
Linda J. Wentzel, 50, was appointed Assistant Corporate Secretary effective May
1998. Ms. Wentzel is also an officer of IEC and WP&L.
Enrique Bacalao, 49, was appointed Assistant Treasurer effective November 1998.
Prior to joining IESU, he was Vice President, Corporate Banking at the Chicago
Branch from 1995 to 1998, and Manager and Head of the Customer Dealing Group at
the London Branch from 1993 to 1995, of The Industrial Bank of Japan, Limited.
Mr. Bacalao is also an officer of IEC and WP&L.
Steven F. Price, 46, was elected Assistant Treasurer effective April 1998. Mr.
Price is also an officer of WP&L.
Robert A. Rusch, 36, was elected Assistant Treasurer effective April 1998. Mr.
Rusch is also an officer of WP&L.
Daniel L. Siegfried, 39, was elected Assistant Secretary effective April 1998.
He also serves as Senior Attorney for IEC. Previously he served as Senior
Environmental Counsel from 1992 to 1998 at IES.
NOTE: None of the executive officers listed above is related to any member of
the Board of Directors or nominee for director or any other executive officer.
124
Messrs. Liu and Davis have employment agreements with IEC pursuant to which
their terms of office are established. All other executive officers have no
definite terms of office and serve at the pleasure of the Board of Directors.
WP&L
The information required by Item 11. Executive Compensation
Information regarding executive compensation10 relating to directors and transactions is
included innominees for
election of directors at the Proxy Statement under the captions "Compensation1999 Annual Meeting of Directors", "Summary Compensation Table" and "IES Industries Plans" and
isShareowners will be
incorporated herein by reference exceptto the relevant information in WP&L's Proxy
Statement for the "Report1999 Annual Meeting of the
Compensation Committee on Executive Compensation" and the "Performance
Graph", which are not incorporated herein by reference.Shareowners (the 1999 WP&L Proxy
Statement). The 1999 WP&L Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after the end of WP&L's fiscal year. The
executive officers of WP&L as of the date of this filing are as follows (figures
following the names represent the officer's age as of December 31, 1998):
Executive Officers of WP&L
Erroll B. Davis, Jr., 54, was elected Chief Executive Officer effective April
1998. He previously served as President and Chief Executive Officer of WP&L
since 1988 and has been a board member of WP&L since 1984.
Mr. Davis is also an officer of IEC and IESU.
William D. Harvey, 49, was elected President effective April 1998. He previously
served as Senior Vice President since 1993 at WP&L. Mr. Harvey is also an
officer of IEC and IESU.
Eliot G. Protsch, 45, was elected Executive Vice President-Energy Delivery
effective October 1998. He previously served as Senior Vice President from 1993
to 1998 at WP&L. Mr. Protsch is also an officer of IEC and IESU.
Barbara J. Swan, 47, was elected Executive Vice President and General Counsel
effective October 1998. She previously served as Vice President-General Counsel
from 1994 to 1998 at WP&L. Ms. Swan is also an officer of IEC and IESU.
Thomas M. Walker, 51, was elected Executive Vice President and Chief Financial
Officer effective October 1998. Mr. Walker is also on officer of IEC and IESU.
Pamela J. Wegner, 51, was elected Executive Vice President-Corporate Services
effective October 1998. She previously served as Vice President-Information
Services and Administration from 1994 to 1998 at WP&L. Ms. Wegner is also an
officer of IEC and IESU.
Dale R. Sharp, 58, was elected Senior Vice President-Engineering and Standards
effective October 1998. He previously served as Vice President-Engineering since
1996, Vice President-Power Production from 1995 to 1996 and Director-Electrical
Engineering from 1980 to 1995 at IPC. Mr. Sharp is also an officer of IESU.
Daniel A. Doyle, 40, was elected Vice President-Manufacturing and Energy
Portfolio Services effective October 1998. He previously served as Vice
President-Fossil Plants since April 1998, Vice President-Power Production from
1996 to 1998 and Vice President-Finance, Controller and Treasurer from 1994 to
1996 at WP&L. Mr. Doyle is also an officer of IESU.
John E. Ebright, 55, was elected Vice President-Controller effective April 1998.
Mr. Ebright is also an officer of IEC and IESU.
Dean E. Ekstrom, 51, was elected Vice President-Sales and Services effective
April 1998. Mr. Ekstrom is also an officer of IESU.
John F. Franz, Jr., 59, was elected Vice President-Nuclear effective April 1998.
Mr. Franz is also an officer of IESU.
125
Edward M. Gleason, 58, was elected Vice President-Treasurer and Corporate
Secretary effective April 1998. He previously served as Controller, Treasurer,
and Corporate Secretary of WP&L since 1996 and Corporate Secretary of WP&L from
1993 to 1996. Mr. Gleason is also an officer of IEC and IESU.
Dundeana K. Langer, 40, was elected Vice President-Customer Services effective
October 1998. Ms. Langer is also an officer of IESU.
Daniel L. Mineck, 50, was elected Vice President-Performance Engineering and
Environmental effective April 1998. Mr. Mineck is also an officer of IESU.
Kim K. Zuhlke, 45, was elected Vice President-Customer Operations effective
April 1998. He previously served as Vice President-Customer Services and Sales
since 1993 at WP&L. Mr. Zuhlke is also an officer of IESU.
David L. Wilson, 52, was elected Assistant Vice President-Nuclear effective
April 1998. Mr. Wilson is also an officer of IESU.
Linda J. Wentzel, 50, was appointed Assistant Corporate Secretary effective May
1998. She previously served as Executive Administrative Assistant since 1995 and
Administrative Assistant from 1992 to 1995 at IEC. Ms. Wentzel is also an
officer of IEC and IESU.
Enrique Bacalao, 49, was appointed Assistant Treasurer effective November 1998.
Prior to joining WP&L, he was Vice President, Corporate Banking at the Chicago
Branch from 1995 to 1998, and Manager and Head of the Customer Dealing Group at
the London Branch from 1993 to 1995, of The Industrial Bank of Japan, Limited.
Mr. Bacalao is also an officer of IEC and IESU.
Steven F. Price, 46, was elected Assistant Treasurer effective April 1998. He
previously served as Assistant Corporate Secretary since 1992 at IEC and WP&L
and as Assistant Treasurer since 1992 at IEC. Mr. Price is also an officer of
IESU.
Robert A. Rusch, 36, was elected Assistant Treasurer effective April 1998. He
previously served as Assistant Treasurer since 1995 and Financial Analyst from
1989 to 1995 at WP&L. Mr. Rusch is also an officer of IESU.
NOTE: None of the executive officers listed above is related to any member of
the Board of Directors or nominee for director or any other executive officer.
Messrs. Liu and Davis have employment agreements with IEC pursuant to which
their terms of office are established. All other executive officers have no
definite terms of office and serve at the pleasure of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
IEC
The information required by Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial
owners and management is included in the Proxy Statement under the
captions "Security Ownership of Beneficial Owners" and "Security
Ownership of Management" and11 is incorporated herein by reference.reference to the
relevant information in the 1999 IEC Proxy Statement. The 1999 IEC Proxy
Statement has been filed with the Securities and Exchange Commission within 120
days after the end of IEC's fiscal year.
126
IESU
EXECUTIVE OFFICERS' COMPENSATION TABLE
The following Summary Compensation Table sets forth the total compensation paid
by IEC and its subsidiaries for all services rendered during 1998, 1997, and
1996 to the Chief Executive Officer and the four other most highly compensated
executive officers of IESU at December 31, 1998.
Long-Term
Annual Compensation Compensation Awards
--------------------------------------------- -------------------------------
Securities
Underlying
Other Annual Restricted Options/SARs All Other
Name and Principal Position Year Salary Bonus 1 Compensation 2 Stock Awards 3 (Shares) 4 Compensation 5
- ----------------------------- ------ ---------- ---------- ---------------- --------------- --------------- -----------------
Erroll B. Davis, Jr. 1998 $540,000 $ - $13,045 $ - 36,752 $57,996
Chief Executive Officer 1997 450,000 200,800 19,982 - 13,800 60,261
1996 450,000 297,862 23,438 - 12,600 66,711
Lee Liu 1998 400,000 - - 337,241 25,347 52,073
Chairman of the Board 1997 400,000 189,000 5,956 176,391 - 13,277
1996 380,000 175,000 2,578 253,475 - 13,956
William D. Harvey 1998 233,846 - 4,699 - 11,406 28,642
Executive Vice President 1997 220,000 43,986 14,944 - 5,100 33,043
1996 220,000 92,104 10,765 - 4,650 29,343
Eliot T. Protsch 1998 233,846 - 2,443 - 11,406 20,398
Executive Vice President 1997 220,000 51,400 11,444 - 5,100 30,057
1996 220,000 101,224 7,657 - 4,650 25,890
Thomas M. Walker 6 1998 229,846 - 814 - 11,406 13,263
Executive Vice President 1997 230,000 62,100 38,138 - - 2,367
and Chief Financial Officer 1996 9,583 - - 30,000 - 119
1 No bonuses were paid for 1998.
2 Other Annual Compensation for 1998 consists of: income tax gross-ups for
reverse split-dollar life insurance for Messrs. Davis, Harvey and Protsch;
and relocation expense reimbursement for Mr. Walker.
3 Prior to the Merger, IES had historically made awards of restricted stock.
Such awards (to the extent not previously vested) vested automatically upon
the consummation of the Merger. The number of shares of restricted stock
reflected in this table that were subject to such automatic vesting are as
follows: Mr. Liu - 8,703 shares awarded for 1998, 5,004 shares awarded for
1997 and 8,703 shares awarded for 1996; Mr. Walker - 1,000 shares awarded
for 1996. Restricted stock was considered outstanding upon the award date
and dividends were paid to the eligible officers on these shares while
restricted. The amounts shown in the table above represent the value of the
awards based upon the closing price of IES common stock on the award date.
4 Awards made in 1998 were in combination with performance share awards as
described in the table entitled "Long-Term Incentive Awards in 1998."
5 All Other Compensation for 1998 consists of: matching contributions to
401(k) Plan and Deferred Compensation Plan, Mr. Davis - $16,200, Mr. Liu -
$4,754, Mr. Harvey - $7,015, Mr. Protsch - $7,015 and Mr. Walker - $5,000;
financial counseling benefit, Mr. Davis - $7,000, Mr. Liu - $4,448, Mr.
Harvey - $7,000, Mr. Protsch - $2,333 and Mr. Walker - $7,000; split dollar
life insurance premiums, Mr. Davis - $20,653, Mr. Harvey - $8,738 and Mr.
Protsch - $7,989; reverse split dollar life insurance, Mr. Davis - $14,143,
Mr. Harvey - $5,889 and Mr. Protsch - $3,061; life insurance coverage in
excess of $50,000, Mr. Liu - $9,910; and dividends on restricted stock, Mr.
Liu - $32,961 and Mr. Walker - $1,263. The split dollar insurance premiums
are calculated using the "foregone interest" method.
6 Mr. Walker's employment with the company began in 1996.
127
IEC STOCK OPTIONS
The following table sets forth certain information concerning stock options
granted by IEC during 1998 to the executives named below:
OPTION/SAR GRANTS IN 1998
- -------------------------- ---------------------------------------------------------- ----------------------------
Potential Realizable
Value at Assumed Annual
Rates of Stock
Individual Grants Appreciation for Option
Term2
- -------------------------- ---------------------------------------------------------- ----------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/ Employees in Base Price Expiration
Name SARs Granted 1 Fiscal Year ($/Share) Date 5% 10%
- -------------------------- -------------- ---------------- ------------- ------------ ------------- --------------
Erroll B. Davis, Jr. 36,752 5.8% $31.5625 6/30/08 $729,527 $1,848,993
- -------------------------- -------------- ---------------- ------------- ------------ ------------- --------------
Lee Liu 25,347 4.0% 31.5625 6/30/08 503,138 1,275,208
- -------------------------- -------------- ---------------- ------------- ------------ ------------- --------------
William D. Harvey 11,406 1.8% 31.5625 6/30/08 226,409 573,836
- -------------------------- -------------- ---------------- ------------- ------------ ------------- --------------
Eliot G. Protsch 11,406 1.8% 31.5625 6/30/08 226,409 573,836
- -------------------------- -------------- ---------------- ------------- ------------ ------------- --------------
Thomas M. Walker 11,406 1.8% 31.5625 6/30/08 226,409 573,836
- -------------------------- -------------- ---------------- ------------- ------------ ------------- --------------
1 Consists of non-qualified stock options to purchase shares of IEC common
stock granted pursuant to IEC's Long Term Equity Incentive Plan. Options
were granted on July 1, 1998, and will fully vest on January 2, 2001. Upon a
"change in control" of IEC as defined in the Plan or upon retirement,
disability or death of the option holder, these options shall become
immediately exercisable. Upon exercise of an option, the executive purchases
all or a portion of the shares covered by the option by paying the exercise
price multiplied by the number of shares as to which the option is
exercised, either in cash or by surrendering common shares already owned by
the executive.
2 The hypothetical potential appreciation shown for the named executives is
required by the SEC rules. The amounts shown do not represent either the
historical or expected future performance of IEC's common stock level of
appreciation. For example, in order for the named executives to realize the
potential values set forth in the 5% and 10% columns in the table above, the
price per share of IEC's common stock would be $51.41 and $81.87,
respectively, as of the expiration date of the options.
The following table provides information for the executives named below
regarding the number and value of exercisable and unexercised options. None of
these executives exercised options in fiscal 1998.
OPTION/SAR VALUES AT DECEMBER 31, 1998
- -------------------------- ------------------------------------- ---------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options/SARs at Fiscal Year End Options/SARs at Year End1
- -------------------------- ------------------------------------- ---------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ----------------- ------------------- ----------------- ---------------------
Erroll B. Davis, Jr. 13,100 63,152 $62,225 $102,817
- -------------------------- ----------------- ------------------- ----------------- ---------------------
Lee Liu - 25,347 - 17,426
- -------------------------- ----------------- ------------------- ----------------- ---------------------
William D. Harvey 4,700 21,156 22,325 36,492
- -------------------------- ----------------- ------------------- ----------------- ---------------------
Eliot G. Protsch 4,700 21,156 22,325 36,492
- -------------------------- ----------------- ------------------- ----------------- ---------------------
Thomas M. Walker - 11,406 - 7,842
- -------------------------- ----------------- ------------------- ----------------- ---------------------
128
1 Based on the closing per share price on December 31, 1998 of IEC common
stock of $32.25.
The following table provides information concerning long-term incentive awards
made by IEC to the executives named below in 1998.
LONG-TERM INCENTIVE AWARDS IN 1998
- ------------------------ ----------------------- ----------------------- -----------------------------------------
Estimated Future Payouts Under
Non-Stock Price-Based Plans
- ------------------------ ----------------------- ----------------------- -----------------------------------------
Performance or Other
Number of Shares, Period Until
Name Units or Other Rights Maturation or Payout Threshold Target Maximum
- ------------------------ ----------------------- ----------------------- ------------- -------------- ------------
(#)1 (#) (#) (#)
- ------------------------ ----------------------- ----------------------- ------------- -------------- ------------
Erroll B. Davis, Jr. 11,026 1/2/01 5,513 11,026 22,052
- ------------------------ ----------------------- ----------------------- ------------- -------------- ------------
Lee Liu 7,604 1/2/01 3,802 7,604 15,208
- ------------------------ ----------------------- ----------------------- ------------- -------------- ------------
William D. Harvey 2,661 1/2/01 1,330 2,661 5,322
- ------------------------ ----------------------- ----------------------- ------------- -------------- ------------
Eliot G. Protsch 2,661 1/2/01 1,330 2,661 5,322
- ------------------------ ----------------------- ----------------------- ------------- -------------- ------------
Thomas M. Walker 2,661 1/2/01 1,330 2,661 5,322
- ------------------------ ----------------------- ----------------------- ------------- -------------- ------------
1 Consists of performance shares awarded under IEC's Long-Term Equity
Incentive Plan. These performance shares will vest based on achievement of
specified Total Shareholder Return (TSR) levels as compared with an
investor-owned utility peer group over the period ending January 2, 2001.
Payouts will be in shares of IEC common stock, but will be modified by a
performance multiplier which ranges from 0 to 2.00.
The following information required by Item 10 for IESU is incorporated herein by
reference to the relevant information in the 1999 IEC Proxy Statement, which has
been filed with the Securities and Exchange Commission within 120 days after the
end of IESU's fiscal year: Compensation of Directors, Certain Agreements and
Transactions, and Retirement and Employee Benefit Plans. Mr. Walker participates
in the Alliant Energy Corporate Services Retirement Plan and the Alliant Energy
Corporate Services Supplemental Executive Retirement Plan and has two years
credited service under such plans.
WP&L
The information required by Item 11 will be incorporated herein by reference to
the relevant information in the 1999 WP&L Proxy Statement. The 1999 WP&L Proxy
Statement will be filed with the Securities and Exchange Commission within 120
days after the end of December 31, 1996.WP&L's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
IEC
The information required by Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related
transactions is included in the Proxy Statement under the captions
"Other Transactions" and "Compensation of Directors" and12 is incorporated herein by reference.reference to the
relevant information under the caption "Ownership of Voting Securities" in the
1999 IEC Proxy Statement. The 1999 IEC Proxy Statement has been filed with the
Securities and Exchange Commission within 120 days after the end of IEC's fiscal
year.
IESU
OWNERSHIP OF VOTING SECURITIES
Listed in the following table are the shares of IEC's common stock owned by the
executive officers listed in the Summary Compensation Table and all directors of
IESU, as well as the number of shares owned by directors and
129
executive officers as a group as of December 31, 1998. The directors and
executive officers of IEC as a group owned less than one percent of the
outstanding shares of common stock on that date. To IEC's knowledge, no
shareowner beneficially owned 5 percent or more of IEC's outstanding common
stock as of December 31, 1998.
Shares
Beneficially
Name of Beneficial Owner Owned(1)
------------
Executives(2)
William D. Harvey.................................... 23,759 (3)
Eliot G. Protsch..................................... 23,817 (3)
Thomas M. Walker..................................... 5,105 (3)
Director Nominees
Alan B. Arends....................................... 2,202
Rockne G. Flowers.................................... 10,189
Katharine C. Lyall................................... 7,715
Robert D. Ray........................................ 4,032
Anthony R. Weiler.................................... 4,603 (3)
Continuing Directors
Erroll B. Davis, Jr.................................. 59,292 (3)
Joyce L. Hanes....................................... 2,858 (3)
Lee Liu.............................................. 66,247 (3)
Arnold M. Nemirow.................................... 10,387
Milton E. Neshek..................................... 12,315
Jack R. Newman....................................... 2,027
Judith D. Pyle....................................... 6,297
David Q. Reed........................................ 6,043 (3)
Robert W. Schlutz.................................... 4,185
Wayne H. Stoppelmoor................................. 12,424
All Executives and Directors as a Group
35 people, including those listed above.............. 399,672 (3)
(1) Total shares of IEC common stock outstanding as of December 31, 1998 were
77,630,043.
(2) Stock ownership of Mr. Davis and Mr. Liu are shown with continuing
directors.
(3) Included in the beneficially owned shares shown are: indirect ownership
interests with shared voting and investment powers: Mr. Harvey - 1,897, Mr.
Protsch - 573, Mr. Davis - 5,866, Ms. Hanes - 541, Mr. Liu - 9,755, Mr. Reed
- 353 and Mr. Weiler - 1,037; and exercisable stock options: Mr. Davis -
37,950, Mr. Harvey - 13,152, Mr. Protsch - 13,152, Mr. Walker - 3,802, Mr.
Liu - 8,449 and Mr. Stoppelmoor - 6,336 (all executive officers and
directors as a group - 148,072).
WP&L
The information required by Item 12 will be incorporated herein by reference to
the relevant information in the 1999 WP&L Proxy Statement. The 1999 WP&L Proxy
Statement will be filed with the Securities and Exchange Commission within 120
days after the end of December 31, 1996.WP&L's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
IEC
The information required by Item 13 is incorporated herein by reference to the
relevant information under the caption "Certain Agreements and Transactions" in
the 1999 IEC Proxy Statement. The 1999 IEC Proxy Statement has been filed with
the Securities and Exchange Commission within 120 days after the end of IEC's
fiscal year.
130
IESU
The information required by Item 13 is incorporated herein by reference to the
relevant information under the caption "Certain Agreements and Transactions" in
the 1999 IEC Proxy Statement. The 1999 IEC Proxy Statement has been filed with
the Securities and Exchange Commission within 120 days after the end of IESU's
fiscal year.
WP&L
The information required by Item 13 will be incorporated herein by reference to
the relevant information in the 1999 WP&L Proxy Statement. The 1999 WP&L Proxy
Statement will be filed with the Securities and Exchange Commission within 120
days after the end of WP&L's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
Refer to Index to Financial Statements at Item 14. Exhibits,8. "Financial Statements
and Supplementary Data."
(a) (2) Financial Statement Schedules and Reports on Form
8-K
(a) 1. Financial Statements (Included in Part II of this report) -
Page No.
IES IES
Description Industries Utilities
Inc. Inc.
Report of Independent Public Accountants 44 73
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994 45 74
Consolidated Statements of Retained Earnings
for the years ended December 31, 1996, 1995 and 1994 45 74
Consolidated Balance Sheets
at December 31, 1996 and 1995 46 - 47 75 - 76
Consolidated Statements of Capitalization
at December 31, 1996 and 1995 48 77
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 49 78
Notes to Consolidated Financial Statements 50 - 72 79 - 84
(a) 2. Financial Statementon Schedules
(Included in Part IV of
this report) -
Schedule II -II. Valuation and Qualifying Accounts and Reserves
for the years ended
December 31, 1996, 1995 and 1994 95
OtherNOTE: All other schedules are omitted asbecause they are not applicable or
not required, under
Rules of Regulation S-Xor because that required information is shown either in
the consolidated financial statements or in the notes thereto.
(a) 3.(3) Exhibits Required by Securities and Exchange Commission Regulation S-K
-
The following Exhibits designatedare filed herewith or incorporated herein by
reference. Documents indicated by an asterisk are filed herewith and all other
Exhibits as stated to be filed(*) are incorporated
herein by reference.
Exhibit
2(a)2.1* Agreement and Plan of Merger, dated as of November 10, 1995, as amended, by
and among WPL Holdings, Inc., IES Industries Inc., Interstate
Power Company and AMW Acquisition, Inc. (incorporated by
reference to Exhibit 2.1 to IEC's Current Report on Form 8-K,
dated November 10, 1995)
2.2* Amendment No. 1 to Agreement and Plan of Merger and Stock Option
Agreements, dated May 22, 1996, by and among WPL Holdings, Inc.,
IES Industries Inc., Interstate Power Company, a Delaware
corporation, AMW Acquisition, Inc., WPLH Acquisition Co. and
Interstate Power Company, (Filed asa Wisconsin corporation (incorporated
by reference to Exhibit 2.1 to Industries'
Joint Proxy Statement,IEC's Current Report on Form 8-K,
dated July 11,May 22, 1996).
2(b)
2.3* Amendment No. 2 to Agreement and Plan of Merger, as amended, dated August
16, 1996, by and among WPL Holdings, Inc., IES Industries
Inc., WPL Holdings, Inc.,
Interstate Power Company, a Delaware corporation, WPLH
Acquisition Co. and Interstate Power Company, (Filed as Annex 1a Wisconsin
corporation (incorporated by reference to the SupplementExhibit 2.1 to the Joint Proxy Statement of WPL Holdings,
Inc., IES Industries Inc. and Interstate Power Company, dated
August 21, 1996).
2(c) Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among
WPL Holdings, Inc. and IES Industries Inc. (Filed as Exhibit
2.2 to Industries'IEC's
Current Report on Form 8-K, dated November 10, 1995).
2(d) Option Grantor/Option Holder Stock Option and Trigger
Payment Agreement, datedAugust 15, 1996)
3.1* Restated Articles of Incorporation of Interstate Energy
Corporation, as of November 10, 1995,amended (incorporated by and among WPL Holdings, Inc. and Interstate
Power Company. (Filed asreference to Exhibit
2.33.2 to Industries'IEC's Current Report on Form 8-K, dated November 10, 1995).
2(e) Option Grantor/Option Holder Stock Option and
Trigger Payment Agreement, datedApril 21, 1998)
3.2 Bylaws of Interstate Energy Corporation, effective as of November
10, 1995, by and among IES Industries Inc. and
WPL Holdings, Inc. (Filed as Exhibit 2.4 to Industries'
Current Report on Form 8-K, dated November 10, 1995).
2(f) Option Grantor/Option Holder Stock Option and Trigger
Payment Agreement, dated as of November 10, 1995,
by and among IES Industries Inc. and Interstate Power
Company. (Filed as Exhibit 2.5 to Industries' Current
Report on Form 8-K, dated November 10, 1995).
2(g) Option Grantor/Option Holder Stock Option and Trigger
Payment Agreement, dated as of November 10, 1995,
by and among Interstate Power Company and WPL
Holdings, Inc. (Filed as Exhibit 2.6 to Industries'
Current Report on Form 8-K, dated November 10, 1995).
2(h) Option Grantor/Option Holder Stock Option and Trigger
Payment Agreement, dated as of November 10, 1995,
by and among Interstate Power Company and IES
Industries Inc. (Filed as Exhibit 2.7 to Industries'
Current Report on Form 8-K, dated November 10, 1995).
3(a)January
20, 1999
131
3.3* Restated Articles of Incorporation of IES Industries Inc.
(Industries),Wisconsin Power & Light
Company, as amended (incorporated by reference to Exhibit 3.1 to
WP&L's Form 10-Q for the quarter ended June 30, 1994)
3.4 Bylaws of Wisconsin Power and Light Company, effective as of
January 20, 1999
3.5* Amended and Restated as of May 4, 1993 (Filed as
Exhibit 3(a) to Industries' Form 10-K for the year 1993).
3(b) Articles of Incorporation of IES Utilities
Inc. (Utilities)(incorporated by reference to Exhibit 3.5 to IESU's Form
10-Q for the quarter ended June 30, 1998)
3.6 Bylaws of IES Utilities Inc., Amended and Restatedeffective as of January 6, 1994 (Filed20, 1999
4.1* Indenture of Mortgage or Deed of Trust dated August 1, 1941,
between WP&L and First Wisconsin Trust Company and George B.
Luhman, as Trustees, filed as Exhibit 4(b)7(a) in File No. 2-6409,
and the indentures supplemental thereto dated, respectively,
January 1, 1948, September 1, 1948, June 1, 1950, April 1, 1951,
April 1, 1952, September 1, 1953, October 1, 1954, March 1,
1959, May 1, 1962, August 1, 1968, June 1, 1969, October 1,
1970, July 1, 1971, April 1, 1974, December 1, 1975, May 1,
1976, May 15, 1978, August 1, 1980, January 15, 1981, August 1,
1984, January 15, 1986, June 1, 1986, August 1, 1988, December
1, 1990, September 1, 1991, October 1, 1991, March 1, 1992, May
1, 1992, June 1, 1992 and July 1, 1992 (Second Amended Exhibit
7(b) in File No. 2-7361; Amended Exhibit 7(c) in File No.
2-7628; Amended Exhibit 7.02 in File No. 2-8462; Amended Exhibit
7.02 in File No. 2-8882; Second Amendment Exhibit 4.03 in File
No. 2-9526; Amended Exhibit 4.03 in File No. 2-10406; Amended
Exhibit 2.02 in File No. 2-11130; Amended Exhibit 2.02 in File
No. 2-14816; Amended Exhibit 2.02 in File No. 2-20372; Amended
Exhibit 2.02 in File No. 2-29738; Amended Exhibit 2.02 in File
No. 2-32947; Amended Exhibit 2.02 in File No. 2-38304; Amended
Exhibit 2.02 in File No. 2-40802; Amended Exhibit 2.02 in File
No. 2-50308; Exhibit 2.01(a) in File No. 2-57775; Amended
Exhibit 2.02 in File No. 2-56036; Amended Exhibit 2.02 in File
No. 2-61439; Exhibit 4.02 in File No. 2-70534; Amended Exhibit
4.03 File No. 2-70534; Exhibit 4.02 in File No. 33-2579; Amended
Exhibit 4.03 in File No. 33-2579; Amended Exhibit 4.02 in File
No. 33-4961; Exhibit 4B to Utilities'WP&L's Form 10-K for the year ended
December 31, 1988, Exhibit 4.1 to WP&L's Form 8-K dated December
10, 1990, Amended Exhibit 4.26 in File No. 33-45726, Amended
Exhibit 4.27 in File No.33-45726, Exhibit 4.1 to WP&L's Form 8-K
dated March 9, 1992, Exhibit 4.1 to WP&L's Form 8-K dated May
12, 1992, Exhibit 4.1 to WP&L's Form 8-K dated June 29, 1992 and
Exhibit 4.1 to WP&L's Form 8-K dated July 20, 1992)
4.2* Rights Agreement, dated January 20, 1999, between Interstate
Energy Corporation and Firstar Bank Milwaukee, N.A.
(incorporated by reference to Exhibit 4.1 to IEC's Registration
Statement on Form 8-A, dated January 20, 1999)
4.3* Indenture, dated as of June 20, 1997, between WP&L and Firstar
Trust Company, as Trustee, relating to debt securities
(incorporated by reference to Exhibit 4.33 to Amendment No. 2 to
WP&L's Registration Statement on Form S-3 (Registration No.
33-60917))
4.4* Officers' Certificate, dated as of June 25, 1997, creating the
7% debentures due June 15, 2007 of WP&L (incorporated by
reference to Exhibit 4 to WP&L's Current Report on Form 8-K,
dated January 7, 1994).
* 3(c) BylawsJune 25, 1997)
4.5* Officers' Certificate, dated as of Industries, as amended FebruaryOctober 27, 1998, creating
the 5.70% debentures due October 15, 2008 of WP&L (incorporated
by reference to Exhibit 4 1997.
* 3(d) Bylaws of Utilities, as amended February 4, 1997.
4(a)to WP&L's Current Report on Form 8-K,
dated October 27, 1998)
132
4.6* Indenture of Mortgage and Deed of Trust, dated as of September
1, 1993, between IES Utilities Inc. (formerly Iowa Electric
Light and Power Company (IE)) and The First National Bank of
Chicago, as Trustee (Mortgage) (Filed as(incorporated by reference to
Exhibit 4(c) to IE'sIESU's Form 10-Q for the quarter ended September
30, 1993).
4(b)
4.7* Supplemental Indentures to the Mortgage:
IESU/IES
Number Dated as of IE/Utilities File Reference Exhibit
---------- --------------------- -------------------------- ---------
First October 1, 1993 Form 10-Q, 11/12/93 4(d)
Second November 1, 1993 Form 10-Q, 11/12/93 4(e)
Third March 1, 1995 Form 10-Q, 5/12/95 4(b)
Fourth September 1, 1996 Form 8-K, 9/19/96 4(c)(i)
4(c)Fifth April 1, 1997 Form 10-Q, 5/14/97 4(a)
4.8* Indenture of Mortgage and Deed of Trust, dated as of August 1,
1940, between IES Utilities Inc. (formerly IE) and The First
National Bank of Chicago, Trustee (1940 Indenture)
(Filed as(incorporated by reference to Exhibit 2(a) to IE'sIESU's
Registration Statement, File No. 2-25347).
4(d)
4.9* Supplemental Indentures to the 1940 Indenture:
IESU
Number Dated as of IE/Utiliites File Reference Exhibit
------------------- ---------------------- --------------------------- ---------
First March 1, 1941 2-25347 2(a)
Second July 15, 1942 2-25347 2(a)
Third August 2, 1943 2-25347 2(a)
Fourth August 10, 1944 2-25347 2(a)
Fifth November 10, 1944 2-25347 2(a)
Sixth August 8, 1945 2-25347 2(a)
Seventh July 1, 1946 2-25347 2(a)
Eighth July 1, 1947 2-25347 2(a)
Ninth December 15, 1948 2-25347 2(a)
Tenth November 1, 1949 2-25347 2(a)
Eleventh November 10, 1950 2-25347 2(a)
Twelfth October 1, 1951 2-25347 2(a)
Thirteenth March 1, 1952 2-25347 2(a)
Fourteenth November 5, 1952 2-25347 2(a)
Fifteenth February 1, 1953 2-25347 2(a)
Sixteenth May 1, 1953 2-25347 2(a)
Seventeenth November 3, 1953 2-25347 2(a)
Eighteenth November 8, 1954 2-25347 2(a)
Nineteenth January 1, 1955 2-25347 2(a)
Twentieth November 1, 1955 2-25347 2(a)
Twenty-first November 9, 1956 2-25347 2(a)
Twenty-second November 6, 1957 2-25347 2(a)
Twenty-third November 4, 1958 2-25347 2(a)
Twenty-fourth November 3, 1959 2-25347 2(a)
Twenty-fifth November 1, 1960 2-25347 2(a)
Twenty-sixth January 1, 1961 2-25347 2(a)
Twenty-seventh November 7, 1961 2-25347 2(a)
Twenty-eighth November 6, 1962 2-25347 2(a)
Twenty-ninth November 5, 1963 2-25347 2(a)
133
Thirtieth November 4, 1964 2-25347 2(a)
Thirty-first November 2, 1965 2-25347 2(a)
Thirty-second September 1, 1966 Form 10-K, 1966 4.10
Thirty-third November 30, 1966 Form 10-K, 1966 4.10
Thirty-fourth November 7, 1967 Form 10-K, 1967 4.10
Thirty-fifth November 5, 1968 Form 10-K, 1968 4.10
Thirty-sixth November 1, 1969 Form 10-K, 1969 4.10
Thirty-seventh December 1, 1970 Form 8-K, 12/70 1
Thirty-eighth November 2, 1971 2-43131 2(g)
Thirty-ninth May 1, 1972 Form 8-K, 5/72 1
Fortieth November 7, 1972 2-56078 2(i)
Forty-first November 7, 1973 2-56078 2(j)
Forty-second September 10, 1974 2-56078 2(k)
Forty-third November 5, 1975 2-56078 2(l)
Forty-fourth July 1, 1976 Form 8-K, 7/76 1
Forty-fifth November 1, 1976 Form 8-K, 12/76 1
Forty-sixth December 1, 1977 2-60040 2(o)
Forty-seventh November 1, 1978 Form 10-Q, 6/30/79 1
Forty-eighth December 1, 1979 Form S-16, 2-65996 2(q)
Forty-ninth November 1, 1981 Form 10-Q, 3/31/82 2
Fiftieth December 1, 1980 Form 10-K, 1981 4(s)
Fifty-first December 1, 1982 Form 10-K, 1982 4(t)
Fifty-second December 1, 1983 Form 10-K, 1983 4(u)
Fifty-third December 1, 1984 Form 10-K, 1984 4(v)
Fifty-fourth March 1, 1985 Form 10-K, 1984 4(w)
Fifty-fifth March 1, 1988 Form 10-Q, 5/12/88 4(b)
Fifty-sixth October 1, 1988 Form 10-Q, 11/10/88 4(c)
Fifty-seventh May 1, 1991 Form 10-Q, 8/13/91 4(d)
Fifty-eighth March 1, 1992 Form 10-K, 1991 4(c)
Fifty-ninth October 1, 1993 Form 10-Q, 11/12/93 4(a)
Sixtieth November 1, 1993 Form 10-Q, 11/12/93 4(b)
Sixty-first March 1, 1995 Form 10-Q, 5/12/95 4(a)
Sixty-second September 1, 1996 Form 8-K, 9/19/96 4(f)
Sixty-third April 1, 1997 Form 10-Q, 5/14/97 4(b)
Fifty-sixth October 1, 1988 Form 10-Q, 11/10/88 4(c)
Fifty-seventh May 1, 1991 Form 10-Q, 8/13/91 4(d)
Fifty-eighth March 1, 1992 Form 10-K, 1991 4(c)
Fifty-ninth October 1, 1993 Form 10-Q, 11/12/93 4(a)
Sixtieth November 1, 1993 Form 10-Q, 11/12/93 4(b)
Sixty-first March 1, 1995 Form 10-Q, 5/12/95 4(a)
Sixty-second September 1, 1996 Form 8-K, 9/19/96 4(f)
4(e)
4.10* Indenture or Deed of Trust dated as of February 1, 1923, between
IES Utilities Inc. (successor to Iowa Southern Utilities Company
(IS) as result of merger of IS and IE) and The Northern Trust
Company (The First National Bank of Chicago, successor) and
Harold H. Rockwell (Richard D. Manella, successor), as Trustees
(1923 Indenture) (Filed as(incorporated by reference to Exhibit B-1 to
File No. 2-1719).
4(f)
4.11* Supplemental Indentures to the 1923 Indenture:
Dated as of File Reference Exhibit
------------------------ ----------------- -----------
May 1, 1940 2-4921 B-1-k
May 2, 1940 2-4921 B-1-l
October 1, 1945 2-8053 7(m)
October 2, 1945 2-8053 7(n)
January 1, 1948 2-8053 7(o)
September 1, 1950 33-3995 4(e)
February 1, 1953 2-10543 4(b)
October 2, 1953 2-10543 4(q)
August 1, 1957 2-13496 2(b)
September 1, 1962 2-20667 2(b)
134
June 1, 1967 2-26478 2(b)
February 1, 1973 2-46530 2(b)
February 1, 1975 2-53860 2(aa)
July 1, 1975 2-54285 2(bb)
September 2, 1975 2-57510 2(bb)
March 10, 1976 2-57510 2(cc)
February 1, 1977 2-60276 2(ee)
January 1, 1978 0-849 2
March 1, 1979 0-849 2
March 1, 1980 0-849 2
May 31, 1986 33-3995 4(g)
July 1, 1991 0-849 4(h)
September 1, 1992 0-849 4(m)
December 1, 1994 0-4117-1 4(f)
* 4(g) Third Amended and Restated Credit Agreement dated
as of November 20, 1996 among IES Diversified Inc. as Borrower,
certain banks and Citibank, N.A., as Agent.
4(h)4.12* Indenture (For Unsecured Subordinated Debt Securities), dated as
of December 1, 1995, between IES Utilities Inc. and The First
National Bank of Chicago, as Trustee (Subordinated Indenture)
(Filed as(incorporated by reference to Exhibit 4(i) to Utilities'IESU's Amendment
No. 1 to Registration Statement, File No. 33-62259).
10(a)
4.13* Indenture (For Senior Unsecured Debt Securities), dated as of
August 1, 1997, between IES Utilities Inc. and The First
National Bank of Chicago, as Trustee (incorporated by reference
to Exhibit 4(j) to IESU's Registration Statement, File No.
333-32097)
4.14* The Original through the Nineteenth Supplemental Indentures of
Interstate Power Company to The Chase Manhattan Bank and Carl E.
Buckley and C. J. Heinzelmann, as Trustees, dated January 1,
1948 securing First Mortgage Bonds (incorporated by reference to
Exhibits 4(b) through 4(t) to IPC's Registration Statement No.
33-59352 dated March 11, 1993)
4.15* Twentieth Supplemental Indenture of Interstate Power Company to
The Chase Manhattan Bank and C. J. Heinzelmann, as Trustees,
dated May 15, 1993 (incorporated by reference to Exhibit 4(u) to
IPC's Registration Statement No. 33-59352 dated March 11, 1993)
10.1* Service Agreement by and among Wisconsin Power & Light Company,
South Beloit Water, Gas and Electric Company, IES Utilities
Inc., Interstate Power Company, and Alliant Services Company
(incorporated by reference to Exhibit 10.1 to IEC's Form 10-Q
for the quarter ended June 30, 1998)
10.2* Service Agreement by and among Alliant Industries, Inc., IPC
Development Company, Inc. and Alliant Services Company
(incorporated by reference to Exhibit 10.2 to IEC's Form 10-Q
for the quarter ended June 30, 1998)
10.3* System Coordination and Operating Agreement dated April 11,
1997, among IES Utilities Inc., Interstate Power Company,
Wisconsin Power & Light Company and Alliant Services, Inc.
(incorporated by reference to Exhibit 10.3 to IEC's Form 10-Q
for the quarter ended June 30, 1998)
10.4* Joint Power Supply Agreement among Wisconsin Public Service
Corporation, Wisconsin Power and Light Company, and Madison Gas
and Electric Company, dated February 2, 1967 (incorporated by
reference to Exhibit 4.09 of Wisconsin Public Service
Corporation in File No. 2-27308)
10.5* Joint Power Supply Agreement among Wisconsin Public Service
Corporation, Wisconsin Power and Light Company, and Madison Gas
and Electric Company, dated July 26, 1973 (incorporated by
135
reference to Exhibit 5.04A of Wisconsin Public Service
Corporation in File No. 2-48781)
10.6* Basic Generating Agreement, Unit 4, Edgewater Generating
Station, dated June 5, 1967, between Wisconsin Power and Light
Company and Wisconsin Public Service Corporation (incorporated
by reference to Exhibit 4.10 of Wisconsin Public Service
Corporation in File No. 2-27308)
10.7* Agreement for Construction and Operation of Edgewater 5
Generating Unit, dated February 24, 1983, between Wisconsin
Power and Light Company, Wisconsin Electric Power Company and
Wisconsin Public Service Corporation (incorporated by reference
to Exhibit 10C-1 to Wisconsin Public Service Corporation's Form
10-K for the year ended December 31, 1983 (File No. 1-3016))
10.7a* Amendment No. 1 to Agreement for Construction and Operation of
Edgewater 5 Generating Unit, dated December 1, 1988
(incorporated by reference to Exhibit 10C-2 to Wisconsin Public
Service Corporation's Form 10-K for the year ended December 31,
1988 (File No. 1-3016))
10.8* Revised Agreement for Construction and Operation of Columbia
Generating Plant among Wisconsin Public Service Corporation,
Wisconsin Power and Light Company, and Madison Gas and Electric
Company, dated July 26, 1973 (incorporated by reference to
Exhibit 5.07 of Wisconsin Public Service Corporation in File No.
2-48781)
10.9* Operating and Transmission Agreement between Central Iowa Power
Cooperative and IE (Filed asIESU (incorporated by reference to Exhibit 10(q)
to IE'sIESU's Form 10-K for the year 1990).
10(b)
10.10* Duane Arnold Energy Center Ownership Participation Agreement
dated June 1, 1970 between Central Iowa Power Cooperative, Corn
Belt Power Cooperative and IE. (Filed asIESU (incorporated by reference to
Exhibit 5(kk) to IE'sIESU's Registration Statement, File No.
2-38674).
10(c)
10.11* Duane Arnold Energy Center Operating Agreement dated June 1,
1970 between Central Iowa Power Cooperative, Corn Belt Power
Cooperative and IE. (Filed asIESU (incorporated by reference to Exhibit 5(ll)
to IE'sIESU's Registration Statement, File No. 2-38674).
10(d)
10.12* Duane Arnold Energy Center Agreement for Transmission,
Transformation, Switching, and Related Facilities dated June 1,
1970 between Central Iowa Power Cooperative, Corn Belt Power
Cooperative and IE. (Filed asIESU (incorporated by reference to Exhibit 5(mm)
to IE'sIESU's Registration Statement, File No. 2-38674).
10(e)
10.13* Basic Generating Agreement dated April 16, 1975 between Iowa
Public Service Company, Iowa Power and Light Company,
Iowa-Illinois Gas and Electric Company and ISIESU for the joint
ownership of Ottumwa Generating Station-Unit 1 (OGS-1).
(Filed as
(incorporated by reference to Exhibit 1 to IE'sIESU's Form 10-K for
the year 1977).
10(f)
10.13a* Addendum Agreement to the Basic Generating Agreement for OGS-1
dated December 7, 1977 between Iowa Public Service Company,
Iowa-Illinois Gas and Electric Company, Iowa Power and Light
Company IS and IEIESU for the purchase of 15% ownership in OGS-1. (Filed asOGS-1
(incorporated by reference to Exhibit 3 to IE'sIESU's Form 10-K for
the year 1977).
10(g)
10.14* Second Amended and Restated Credit Agreement dated as of
September 17, 1987 between Arnold Fuel, Inc. and the First
National Bank of Chicago and the Amended and Restated Consent
and Agreement dated as of September 17, 1987 by IE. (Filed asIESU
(incorporated by reference to Exhibit 10(j) to IE'sIESU's Form 10-K
for the year 1987).
Management Contracts and/or Compensatory Plans (Exhibits 10(h) through 10(s))
10(h)
10.15#* Form of Supplemental Retirement Plan. (FiledAgreement (incorporated by
reference to Exhibit 10.15 to IEC's Form 10-Q for the quarter
ended June 30, 1998)
136
10.16#* Interstate Energy Corporation 1998 Officer Incentive
Compensation Plan (incorporated by reference to Exhibit 10.16 to
IEC's Form 10-Q for the quarter ended June 30, 1998)
10.17#* Interstate Energy Corporation Long-Term Incentive Program,
revised July 1, 1998 (incorporated by reference to Exhibit 10.17
to IEC's Form 10-Q for the quarter ended June 30, 1998)
10.18#* Alliant Services Company Key Employee Deferred Compensation Plan
(incorporated by reference to Exhibit 10.18 to IEC's Form 10-Q
for the quarter ended June 30, 1998)
10.19#* Executive Tenure Compensation Plan as revised November 1992
(incorporated by reference to Exhibit 10(l)10A to Industries'IEC's Form 10-K for
the year 1987).
10(i) Management Incentiveended December 31, 1992)
10.19a#* Amendment to Executive Tenure Compensation Plan. (FiledPlan adopted February
23, 1998 (incorporated by reference to Exhibit 10.19a to IEC's
Form 10-Q for the quarter ended June 30, 1998)
10.20#* Forms of Deferred Compensation Plans, as amended June, 1990
(incorporated by reference to Exhibit 10(m)10C to Industries'IEC's Form 10-K for
the year 1987).
10(j) Key Employeeended December 31, 1990)
10.20a#* Officer's Deferred Compensation Plan. (FiledPlan II, as adopted September
1992 (incorporated by reference to Exhibit 10(n)10C.1 to Industries'IEC's Form
10-K for the year 1987).
10(k) Long-Term Incentive Plan. (Filedended December 31, 1992)
10.20b#* Officer's Deferred Compensation Plan III, as adopted January
1993 (incorporated by reference to Exhibit A10C.2 to Industries' Proxy Statement dated March 20, 1995).
10(l) Executive Guaranty Plan. (Filed as Exhibit 10(p)
to Industries'IEC's Form
10-K for the year ended December 31, 1993)
10.21#* Deferred Compensation Plan for Directors, as amended January 17,
1995 (incorporated by reference to Exhibit 10I to IEC's Form
10-K for the year ended December 31, 1995)
10.22#* Interstate Energy Corporation Long-Term Equity Incentive Plan
(incorporated by reference to Exhibit 4.1 to IEC's Form 10-Q for
the quarter ended June 30, 1994)
10.23#* Key Executive Employment and Severance Agreement by and between
Interstate Energy Corporation and Erroll B. Davis, Jr.
(incorporated by reference to Exhibit 4.2 to IEC's Form 10-Q for
the quarter ended June 30, 1994)
10.23a#* Key Executive Employment and Severance Agreement by and between
Interstate Energy Corporation and each of W.D. Harvey and E.G.
Protsch (incorporated by reference to Exhibit 4.3 to IEC's Form
10-Q for the quarter ended June 30, 1994)
10.24#* Key Executive Employment and Severance Agreement by and between
Interstate Energy Corporation and each of E.M. Gleason, B.J.
Swan, D.A. Doyle, P.J. Wegner, C. Fulenwider and K.K. Zuhlke
(incorporated by reference to Exhibit 4.4 to IEC's Form 10-Q for
the quarter ended June 30, 1994)
10.25#* Severance Agreement by and between Interstate Energy Corporation
and Lance W. Ahearn (incorporated by reference to Exhibit 10N to
IEC's Form 10-K for the year ended December 31, 1997)
10.26#* Severance Agreement by and between Interstate Energy Corporation
and Anthony J. Amato (incorporated by reference to Exhibit 10.28
to IEC's Form 10-Q for the quarter ended June 30, 1998)
10.27#* Early Retirement Agreement, dated as of October 7, 1998, by and
between Interstate Energy Corporation et al. and Michael R.
Chase (incorporated by reference to Exhibit 10.1 to IEC's Form
10-Q for the quarter ended September 30, 1998)
10.28#* Employment Agreement, dated as of April 21, 1998, by and between
Interstate Energy Corporation and Erroll B. Davis, Jr.
(incorporated by reference to Exhibit 10.1 to IEC's Form 8-K
dated April 21, 1998)
137
10.29#* Employment Agreement, dated as of April 21, 1998, by and between
Interstate Energy Corporation and Lee Liu (incorporated by
reference to Exhibit 10.2 to IEC's Form 8-K dated April 21,
1998)
10.30#* Supplemental Retirement Plan (incorporated by reference to
Exhibit 10(l) to IES's Form 10-K for the year ended December 31,
1987).
10(m)
10.31#* Key Employee Deferred Compensation Plan (incorporated by
reference to Exhibit 10(n) to IES's Form 10-K for the year ended
December 31, 1987)
10.31a#* Amendments to Key Employee Deferred Compensation Agreement for
Key Employees (incorporated by reference to Exhibit 10(v) to
IES's Form 10-Q for the quarter ended March 31, 1990)
10.32#* Executive Guaranty Plan (incorporated by reference to Exhibit
10(p) to IES's Form 10-K for the year ended December 31, 1987)
10.33#* Executive Change of Control Severance Agreement - CEO
(Filed as(incorporated by reference to Exhibit 10(a) to Industries'IES's Form 10-Q
for the quarter ended September 30, 1996 (File No. 1-9187)).
10(n)1996)
10.34#* Executive Change of Control Severance Agreement - Vice
Presidents (Filed as(incorporated by reference to Exhibit 10(b) to Industries'IES's
Form 10-Q for the quarter ended September 30, 1996 (File No. 1-9187)).
10(o)1996)
10.35#* Executive Change of Control Severance Agreement - Other Officers
(Filed as(incorporated by reference to Exhibit 10(c) to Industries'IES's Form 10-Q
for the quarter ended September 30, 1996 (File No. 1-9187)).
10(p)1996)
10.36#* Amendments to Key Employee Deferred Compensation Agreement for
Directors. (Filed asDirectors (incorporated by reference to Exhibit 10(u) to Industries'IES's
Form 10-Q for the quarter ended March 31, 1990).
10(q) Amendments
10.37#* IES Industries Inc. Grantor Trust for Director Retirement Plan
(incorporated by reference to Key Employee Deferred Compensation
Agreement for Key Employees. (Filed as Exhibit 10(v)10(c) to Industries'IES's Form 10-Q
for the quarter ended March 31, 1990).
10(r) AmendmentsSeptember 30, 1997)
10.38#* IES Industries Inc. Grantor Trust for Deferred Compensation
Agreements (incorporated by reference to Management Incentive Compensation
Plan. (Filed as Exhibit 10(y)10(d) to Industries'IES's
Form 10-Q for the quarter ended March 31, 1990).
*10(s) Director Retirement Plan.
10(t) Agreement and Plan of Merger, dated as of February
27, 1991, by and between IE Industries Inc. and Iowa Southern
Inc. (Filed as Exhibit 2 to Industries' Form 8-K dated
February 27, 1991).
10(u)September 30, 1997)
10.39#* IES Industries Inc. Shareholders' Rights Plan.
(Filed asGrantor Trust for Supplemental Retirement
Agreements (incorporated by reference to Exhibit I-210(e) to Industries' Registration Statement on
Form 8-A filed November 13, 1991).
10(v) Lease and Security Agreement, dated
October 1, 1993, between IES Diversified Inc., as lessee, and
Sumitomo Bank Leasing and Finance, Inc., as lessor. (Filed as
Exhibit 10(z) to Industries' Form 10-K for the year 1993).
10(w) Receivables Purchase and Sale Agreement dated as of June 30,
1989, as Amended and Restated as of April 15, 1994, among IES
Utilities Inc. (as Seller) and CIESCO L.P. (as the Investor) and
Citicorp North America, Inc. (as Agent). (Filed as Exhibit 10(a)
to Utilities'IES's
Form 10-Q for the quarter ended March 31, 1994
(File No. 0-4117-1)).
10(x) Guaranty (IES Utilities Trust No. 1994-A) fromSeptember 30, 1997)
10.40#* IES Utilities Inc., dated as of June 29, 1994. (Filed as Grantor Trust for Deferred Compensation
Agreements (incorporated by reference to Exhibit 10(b)10(f) to Utilities'IES's
Form 10-Q for the quarter ended JuneSeptember 30, 1994 (File
No. 0-4117-1)).
10(y) Copy of Coal Supply1997)
10.41#* IES Utilities Inc. Grantor Trust for Supplemental Retirement
Agreements (incorporated by reference to Exhibit 10(g) to IES's
Form 10-Q for the quarter ended September 30, 1997)
10.42#* Interstate Power Company Irrevocable Trust Agreement dated July 27,
1977, between IS and Sunoco Energy Development Co. (former parent
of Cordero Mining Co.), and letter memorandum thereto, dated
October 29, 1984, relatingApril
30, 1990 (incorporated by reference to the purchase of coal suppliesExhibit 99.f to IPC's
Form 10-K for the fuel requirements atyear ended December 31, 1993)
10.43#* Interstate Power Company Amended Deferred Compensation Plan as
amended through January 30, 1990 (incorporated by reference to
Exhibit 99.e to IPC's Form 10-K for the Ottumwa Generating Station. (Filedyear ended December 31,
1993)
10.44#* Interstate Power Company Supplemental Retirement Plan as amended
and restated November 10, 1995 and December 9, 1997
(incorporated by reference to Exhibit 10-A-499.5 to File No. 33-3995).
*12 RatioIPC's Form 10-K
for the year ended December 31, 1997)
138
10.45#* Interstate Power Company Irrevocable Trust Agreement dated
December 1997 (incorporated by reference to Exhibit 99.7 to
IPC's Form 10-K for the year ended December 31, 1997)
10.46# Early Retirement Agreement, dated as of Earnings to Fixed Charges (IES UtilitiesDecember 4, 1998, by and
between Interstate Energy Corporation et al. and Richard R.
Ewers
10.47 Stockholders' Agreement entered into as of November 18, 1998, by
and among McLeodUSA Incorporated, Alliant Energy Investments,
Inc. (formerly known as IES Investments Inc.) *21and certain other
principal stockholders of McLeodUSA Incorporated
21 Subsidiaries of the Registrant (IES Industries Inc.)
*23(a)Interstate Energy Corporation
23 Consent of Independent Public Accountants (IES Industries Inc.)
*23(b) Consent of Independent Public Accountants (IES Utilities Inc.)
*27(a)for Interstate Energy
Corporation
27.1 Financial Data Schedule (IES Industries Inc.)
*27(b)for Interstate Energy Corporation at and
for the period ended December 31, 1998
27.2 Restated Financial Data Schedule (IESfor Interstate Energy
Corporation at and for the period ended June 30, 1998
27.3 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended March 31, 1998
27.4 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended June 30, 1997
27.5 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended March 31, 1997
27.6 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended December 31, 1996
27.7 Financial Data Schedule for IES Utilities Inc.)
Note: at and for the
period ended December 31, 1998
27.8 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended March 31, 1998
27.9 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended December 31, 1997
27.10 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended March 31, 1997
27.11 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended December 31, 1996
27.12 Financial Data Schedule for Wisconsin Power and Light Company at
and for the period ended December 31, 1998
Pursuant to (b)Item 601(b)(4)(iii)(A) of Item 601 of Regulation S-K, the Company hasregistrants agree to
furnish to the Securities and Exchange Commission, upon request, any instrument
defining the rights of holders of unregistered long-term debt not filed as an
exhibit to this Form 10-K
certain instruments with respect to long-term debt that has not
been registered if the total amount10-K. No such instrument authorizes securities in excess of securities authorized
thereunder does not exceed
10% of the total assets of IEC, WP&L or IESU, as the Company but
hereby agreescase may be.
Documents incorporated by reference to furnishfilings made by IEC under the Securities
Exchange Act of 1934, as
139
amended, are under File No. 1-9894. Documents incorporated by reference to
filings made by WP&L under the Commission on request any such
instruments.
(a) 4. Unaudited Pro Forma Combined Financial InformationSecurities Exchange Act of Interstate Energy Corporation:
Unaudited Pro Forma Combined Balance Sheet at
December 31, 1996 971934, as amended, are
under File No. 0-337. Documents incorporated by reference to filings made by IES
under the Securities Exchange Act of 1934, as amended, are under File No.
1-9187. Documents incorporated by reference to filings made by IESU under the
Securities Exchange Act of 1934, as amended, are under File No. 0-4117-1.
Documents incorporated by reference to filings made by IPC under the Securities
Exchange Act of 1934, as amended, are under File No. 1-3632.
# - 98
Unaudited Pro Forma Combined Statements of Income
for the years ended December 31, 1996, 1995 and 1994 99 - 101
Notes to Unaudited Pro Forma Combined
Financial Statements 102 - 104A management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Wisconsin Power and Light Company filed a Current Report on Form 8-K, dated
October 27, 1998, reporting (under Item 5) that on October 27, 1998, Wisconsin
Power and Light Company agreed to sell $60,000,000 principal amount of its 5.70%
Debentures due October 15, 2008 in a public offering.
Interstate Energy Corporation filed a Current Report on Form 8-K, dated January
20, 1999, reporting (under Item 5) that on January 20, 1999 the Board of
Directors of Interstate Energy Corporation adopted a series of amendments to the
Bylaws of Interstate Energy Corporation.
Interstate Energy Corporation filed a Current Report on Form 8-K, dated January
20, 1999, reporting (under Item 5) that on January 20, 1999, the Board of
Directors of Interstate Energy Corporation declared a dividend of one common
share purchase right for each outstanding share of common stock, $.01 par value,
of Interstate Energy Corporation. The description and terms of the common share
purchase rights are set forth in a Rights Agreement dated January 20, 1999
between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A., as
Rights Agent.
IESU - Industries - None.
Utilities - None.
IES INDUSTRIES INC. AND IES UTILITIES INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Column A Column B Column E
Balance Balance
Description January 1 December 31
(in thousands)
VALUATION AND QUALIFYING ACCOUNTS WHICH ARE DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
IES Utilities Inc.:
Accumulated Provision for Uncollectible Accounts:
Year ended December 31, 1996 $ 676 $ 757
Year ended December 31, 1995 $ 650 $ 676
Year ended December 31, 1994 $ 409 $ 650
Non-utility Subsidiaries:
Accumulated Provision for Uncollectible Accounts:
Year ended December 31, 1996 $ 685 $ 774
Year ended December 31, 1995 $ 372 $ 685
Year ended December 31, 1994 $ 506 $ 372
Note: The above provisions relate to various customer, notes and other
receivable balances included in several line items on the Company's
Consolidated Balance Sheets.
OTHER RESERVES:
IES Utilities Inc.:
Accumulated Provision for Rate Refunds
Year ended December 31, 1996 $ 106 $ -
Year ended December 31, 1995 $ - $ 106
Year ended December 31, 1994 $ 8,670 $ -
IES Utilities Inc.:
Accumulated Provision for Merchandise Warranty, Property
Insurance, Injuries and Damages, Workmen's Compensation
and Other Miscellaneous Claims
Year ended December 31, 1996 $ 2,876 $ 2,694
Year ended December 31, 1995 $ 2,516 $ 2,876
Year ended December 31, 1994 $ 1,611 $ 2,516
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OFnone.
140
INTERSTATE ENERGY CORPORATION, IES Industries Inc. (IES), WPL Holdings, Inc. (WPLH), Interstate Power
Company (IPC), and certain related parties have entered into an
Agreement and Plan of Merger, dated as of November 10, 1995, as amended
(the Merger Agreement), providing for (a) the merger of IES with and
into WPLH and (b) the merger of IPC with a subsidiary of WPLH pursuant
to which IPC will become a subsidiary of WPLH (the above referenced
mergers are collectively referred herein to as the Mergers). In
connection with the consummation of the Mergers, WPLH will change its
name to Interstate Energy Corporation. Detailed information with
respect to the Merger Agreement and the proposed Mergers is contained in
the Joint Proxy Statement/Prospectus, dated July 11, 1996, as
supplemented by the Supplement to Joint Proxy Statement/Prospectus,
dated August 21, 1996, contained in WPLH's Registration Statements on
Form S-4, Registration Nos. 333-07931 and 333-10401 relating to the
meetings of shareowners of WPLH, IES and IPC to vote on the Merger
Agreement and related matters.
The following unaudited pro forma financial information combines the
historical consolidated balance sheets and statements of income of WPLH,
IES and IPC, including their respective subsidiaries, after giving
effect to the Mergers. The historical data for WPLH have been adjusted
to reflect the restatement of such data to account for certain
discontinued operations discussed in the notes hereto. The unaudited
pro forma combined balance sheet at December 31, 1996 gives effect to
the Mergers as if they had occurred at December 31, 1996. The unaudited
pro forma combined statements of income for each of the three years in
the periodUTILITIES INC.
AND WISCONSIN POWER AND LIGHT COMPANY
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Description Balance, January 1 Balance, December 31
(in thousands)
Valuation and Qualifying Accounts Which are Deducted in the
Balance Sheet From the Assets to Which They Apply:
Accumulated Provision for Uncollectible Accounts:
Interstate Energy Corporation
Year ended December 31, 1998 $ 2,624 $ 3,008
======== ========
Year ended December 31, 1997 $ 3,319 $ 2,624
======== ========
Year ended December 31, 1996 give effect to the Mergers as if they
had occurred at January 1, 1994. These statements are prepared on the
basis of accounting for the Mergers as a pooling of interests and are
based on the assumptions set forth in the notes thereto. In addition,
the pro forma financial information does not give effect to the expected
synergies or the cost to be incurred to achieve such synergies. The pro
forma financial information, however, does reflect the transaction costs
to effect the Mergers.
The following pro forma financial information has been prepared from,
and should be read in conjunction with, the historical consolidated
financial statements and related notes thereto of WPLH, IES and IPC.
The following information is not necessarily indicative of the financial
position or operating results that would have occurred had the Mergers
been consummated on the date, or at the beginning of the periods, for
which the Mergers are being given effect nor is it necessarily
indicative of future operating results or financial position.
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET December 31, 1996 (In thousands)
ASSETS WPLH$ 3,341 $ 3,319
======== ========
IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
UTILITY PLANT
ElectricUtilities Inc.
Year ended December 31, 1998 $ 1,729,311854 $ 2,007,8391,415
======== ========
Year ended December 31, 1997 $ 853,007757 $ ---- $ 4,590,157
Gas 227,809 175,472 68,047 ---- 471,328
Other 175,998 126,850 --- ---- 302,848
Total 2,133,118 2,310,161 921,054 ---- 5,364,333
Less: Accumulated provision for depreciation 967,436 1,030,390 426,471 ---- 2,424,297
Construction work in progress 55,519 43,719 3,129 ---- 102,367
Nuclear fuel--net 19,368 34,725 --- ---- 54,093
Net utility plant 1,240,569 1,358,215 497,712 ---- 3,096,496
OTHER PROPERTY, PLANT AND EQUIPMENT
---NET AND INVESTMENTS (NOTE 8) 144,671 314,071 453 ---- 459,195
CURRENT ASSETS
Cash and cash equivalents 11,070 8,675 3,072 ---- 22,817
Accounts receivable ---net 88,798 62,861 28,227 ---- 179,886
Fossil fuel inventories, at average cost 15,841 13,323 16,623 ---- 45,787
Materials and supplies, at average cost 29,907 22,842 6,214 ---- 58,963
Prepayments and other 26,786 70,350 13,497 ---- 110,633
Total current assets 172,402 178,051 67,633 ---- 418,086
EXTERNAL DECOMMISSIONING FUND 90,671 59,325 --- ---- 149,996
DEFERRED CHARGES AND OTHER 252,218 215,900 73,402 ---- 541,520
TOTAL ASSETS $ 1,900,531 $ 2,125,562 $ 639,200 $ ---- $ 4,665,293
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued)854
======== ========
Year ended December 31, 1996 (In thousands)
LIABILITIES AND EQUITY WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
CAPITALIZATION
Common Stock Equity:
Common Stock (Note 1) $ 308676 $ 407,635757
======== ========
Wisconsin Power and Light Company
Year ended December 31, 1998 $ 33,84812 $ -441,0338
======== ========
Year ended December 31, 1997 $ 758
Other stockholders' equity (Note 1) 607,047 219,246 172,210 430,033 1,428,536
Total common stock equity 607,355 626,881 206,058 -11,000 1,429,294
Preferred stock not mandatorily redeemable 59,963 18,320 10,819 ---- 89,102
Preferred stock mandatory sinking fund ---- ---- 24,147 ---- 24,147
Long-term debt ---net 362,564 701,100 171,731 ---- 1,235,395
Total capitalization 1,029,882 1,346,301 412,755 -11,000 2,777,938
CURRENT LIABILITIES
Current maturities, sinking funds, and
capital lease obligations 67,626 23,598 17,000 ---- 108,224
Commercial paper, notes payable45 $ 12
======== ========
Year ended December 31, 1996 $ 45 $ 45
======== ========
Note: The above provisions relate to various customer and other
102,779 135,000 28,700 ---- 266,479
Variable rate demand bonds 56,975 ---- ---- ---- 56,975
Accounts payablereceivable balances included in various line items on the respective
Consolidated Balance Sheets.
Other Reserves:
Accumulated Provision for Injuries and accruals 120,986 99,861 14,013 ---- 234,860
Taxes accrued 4,669 43,926 16,953 ---- 65,548Damages, Workers' Compensation
and Other accrued liabilities 54,303 54,498 11,785 11,000 131,586
Total current liabilities 407,338 356,883 88,451 11,000 863,672
OTHER LIABILITIES
Deferred income taxes 245,686 262,675 99,303 ---- 607,664
Deferred investment tax credits 36,931 34,470 17,013 ---- 88,414
Accrued environmental remediation costs 74,075 47,502 7,234 ---- 128,811
Capital lease obligations ---- 19,600 ---- ---- 19,600
Other liabilities and deferred credits 106,619 58,131 14,444 ---- 179,194
Total other liabilities 463,311 422,378 137,994 ---- 1,023,683
TOTAL CAPITALIZATION AND LIABILITIESMiscellaneous Reserves:
Interstate Energy Corporation
Year ended December 31, 1998 $ 1,900,5316,400 $ 2,125,5627,458
======== ========
Year ended December 31, 1997 $ 639,2004,616 $ ---- $ 4,665,293
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER6,400
======== ========
Year ended December 31, 1996 (In thousands, except per share amounts)
WPLH$ 4,311 $ 4,616
======== ========
IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
Operating Revenues
ElectricUtilities Inc.
Year ended December 31, 1998 $ 589,4825,033 $ 574,2733,129
======== ========
Year ended December 31, 1997 $ 276,6203,219 $ -----5,033
======== ========
Year ended December 31, 1996 $ 1,440,375
Gas 165,627 273,979 49,464 ----- 489,070
Other 177,735 125,660 ----- ----- 303,395
Total operating revenues 932,844 973,912 326,084 ----- 2,232,840
Operating Expenses
Electric production fuels 114,470 84,579 57,560 ----- 256,609
Purchased power 81,108 88,350 61,556 ----- 231,014
Cost of gas sold 104,830 217,351 31,617 ----- 353,798
Other operation 319,154 214,759 53,134 ----- 587,047
Maintenance 46,492 49,001 16,164 ----- 111,657
Depreciation3,076 $ 3,219
======== ========
Wisconsin Power and amortization 90,683 107,393 31,087 ----- 229,163
Taxes other than income
taxes 34,603 48,171 16,064 ----- 98,838
Total operating expenses 791,340 809,604 267,182 ----- 1,868,126
Operating Income 141,504 164,308 58,902 ----- 364,714
Other Income (Expense)
AllowanceLight Company
Year ended December 31, 1998 $ 1 $ 2,799
======== ========
Year ended December 31, 1997 $ - $ 1
======== ========
Year ended December 31, 1996 $ - $ -
======== ========
Reserve for equity funds
used during construction 2,270 -100 13 ----- 2,183
Other incomeMerger-Related Employee Separation Charges:
Interstate Energy Corporation
Year ended December 31, 1998 $ - $ 5,712
======== ========
Year ended December 31, 1997 $ - $ -
======== ========
Year ended December 31, 1996 $ - $ -
======== ========
IES Utilities Inc.
Year ended December 31, 1998 $ - $ 1,893
======== ========
Year ended December 31, 1997 $ - $ -
======== ========
Year ended December 31, 1996 $ - $ -
======== ========
Wisconsin Power and deductions ---net 15,644 -2,333 3,763 ----- 17,074
Total other income (expense) 17,914 -2,433 3,776 ----- 19,257
Interest Charges 41,089 52,619 16,222 ----- 109,930
Income from continuing
operations before income taxes
and preferred dividends 118,329 109,256 46,456 ----- 274,041
Income Taxes 41,814 47,435 18,133 ----- 107,382
Preferred dividends of
subsidiaries (Note 2) 3,310 914 2,463 ----- 6,687
Income from continuing
Operations (Notes 3 and 6)Light Company
Year ended December 31, 1998 $ 73,205- $ 60,907766
======== ========
Year ended December 31, 1997 $ 25,860- $ ------
======== ========
Year ended December 31, 1996 $ 159,972
Average Common Shares
Outstanding (Note 1) 30,790 29,861 9,594 5,236 75,481
Earnings per share of Common
Stock from continuing
operations- $ 2.38 $ 2.04 $ 2.69 $ ---- $ 2.12
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements-
======== ========
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
Operating Revenues
Electric $ 546,324 $ 560,471 $ 274,873 $ ---- $ 1,381,668
Gas 139,165 190,339 43,669 ---- 373,173
Other 121,766 100,200 ---- ---- 221,966
Total operating revenues 807,255 851,010 318,542 ---- 1,976,807
Operating Expenses
Electric production fuels 116,488 96,256 62,164 ---- 274,908
Purchased power 44,940 66,874 57,566 ---- 169,380
Cost of gas sold 84,002 141,716 25,888 ---- 251,606
Other operation 253,277 201,390 45,717 ---- 500,384
Maintenance 42,043 46,093 14,881 ---- 103,017
Depreciation and amortization 86,319 97,958 29,560 ---- 213,837
Taxes other than income
taxes 34,188 49,011 15,990 ---- 99,189
Total operating expenses 661,257 699,298 251,766 ---- 1,612,321
Operating Income 145,998 151,712 66,776 ---- 364,486
Other Income (Expense)
Allowance for equity funds
used during construction 1,425 386 ---- ---- 1,811
Other income and
deductions ---net 6,509 3,170 -2,872 ---- 6,807
Total other income (expense) 7,934 3,556 -2,872 ---- 8,618
Interest Charges 42,896 47,689 16,795 ---- 107,380
Income from continuing
operations before income taxes
and preferred dividends 111,036 107,579 47,109 ---- 265,724
Income Taxes 36,108 42,489 19,453 ---- 98,050
Preferred dividends of
subsidiaries (Note 2) 3,310 914 2,458 ---- 6,682
Income from continuing
Operations (Notes 3 and 6) $ 71,618 $ 64,176 $ 25,198 $ ---- $ 160,992
Average Common Shares
Outstanding (Note 1) 30,774 29,202 9,564 5,140 74,680
Earnings per share of Common
Stock from continuing
operations $ 2.33 $ 2.20 $ 2.63 $ ---- $ 2.16
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994
(In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma
(As Reported) (As Reported) (As Reported) Adjustments Combined
Operating Revenues
Electric $ 531,747 $ 537,327 $ 261,730 $ ----- $ 1,330,804
Gas 151,931 165,569 45,920 ----- 363,420
Other 112,039 82,968 ---- ----- 195,007
Total operating revenues 795,717 785,864 307,650 ----- 1,889,231
Operating Expenses
Electric production fuels 123,469 85,952 61,384 ----- 270,805
Purchased power 37,913 68,794 58,339 ----- 165,046
Cost of gas sold 100,942 120,795 30,905 ----- 252,642
Other operation 248,847 176,863 51,917 ----- 477,627
Maintenance 41,227 52,841 17,160 ----- 111,228
Depreciation and amortization 80,351 86,378 28,212 ----- 194,941
Taxes other than income
taxes 33,788 46,308 16,298 ----- 96,394
Total operating expenses 666,537 637,931 264,215 ----- 1,568,683
Operating Income 129,180 147,933 43,435 ----- 320,548
Other Income (Expense)
Allowance for equity funds
used during construction 3,009 2,299 166 ----- 5,474
Other income and
deductions ---net 10,245 3,472 3,100 ----- 16,817
Total other income (expense) 13,254 5,771 3,266 ----- 22,291
Interest Charges 36,657 44,399 16,845 ----- 97,901
Income from continuing
operations before income taxes
and preferred dividends 105,777 109,305 29,856 ----- 244,938
Income Taxes 36,043 41,573 9,189 ----- 86,805
Preferred dividends of
subsidiaries (Note 2) 3,310 914 2,454 ---- 6,678
Income from continuing
Operations (Notes 3 and 6) $ 66,424 $ 66,818 $ 18,213 $ ---- $ 151,455
Average Common Shares
Outstanding (Note 1) 30,671 28,560 9,479 5,041 73,751
Earnings per share of Common
Stock from continuing
operations $ 2.17 $ 2.34 $ 1.92 $ ---- $ 2.05
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. The pro forma combined financial statements reflect the
conversion of each share of IES Common Stock (no par value) outstanding
into 1.14 shares of WPLH Common Stock ($.01 par value) and the
conversion of each share of IPC Common Stock ($3.50 par value) into
1.11 shares of WPLH Common Stock ($.01 par value), and the continuation
of each share of WPLH Common Stock ($.01 par value) outstanding as one
share of Interstate Energy Common Stock, as provided in the Merger
Agreement. The pro forma adjustment to common stock equity restates
the common stock account to equal par value for all shares to be issued
($.01 par value per share of Interstate Energy Common Stock) and
reclassifies the excess to other stockholders' equity. The pro forma
combined statements of income are presented as if the companies were
combined on January 1, 1994. The pro forma combined balance sheet
gives effect to the Mergers as if they occurred at December 31, 1996.
The number of shares of common stock used for calculating per share
amounts is based on the exchange ratio shown below.
Exchange As reported Pro forma As reported Pro forma As reported Pro forma
Ratio 12/31/96 12/31/96 12/31/95 12/31/95 12/31/94 12/31/94
IES___ 1.14 29,861 34,042 29,202 33,290 28,560 32,558
IPC___ 1.11 9,594 10,649 9,564 10,616 9,479 10,522
WPLH__ N/A 30,790 30,790 30,774 30,774 30,671 30,671
2. The Preferred Stock of IPC has been reclassified in the pro forma
statements as preferred stock of subsidiary companies and deducted in
the determination of income from continuing operations which reflects
the holding company structure of the entity formed through the
Mergers.
3. IES's income from continuing operations for the year ended December
31, 1996 included costs incurred relating to its successful defense of
a hostile takeover attempt mounted by MidAmerican Energy Company. The
after-tax impact on income from continuing operations was a decrease
of $4.6 million.
Nonrecurring items affecting WPLH's performance for the year ended
December 31, 1996 included the impact of the sale of a combustion
turbine and the sale of WPLH's assisted-living real estate
investments. The after-tax impact of these items on continuing
operations was an increase of $5.9 million. Nonrecurring items
affecting WPLH's 1994 performance included the impact of early
retirement and severance programs and the reversal of a coal contract
penalty assessed by the Public Service Commission of Wisconsin which was
charged to income in 1989. The net after-tax impact of these items on
income from continuing operations for the year ended December 31, 1994
was a decrease of $8.3 million related to the early retirement and
severance programs offset by an increase of $4.9 million related to
the coal contract penalty reversal.
4. The allocation between WPLH, IES and IPC and their customers of the
estimated cost savings of approximately $749 million over ten years
resulting from the Mergers, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval. Costs
arising from the proposed Mergers are currently estimated to be
approximately $78 million (including transaction costs of $11 million
related to fees for financial advisors, attorneys, accountants and
consultants). The estimate of potential cost savings constitutes a
forward-looking statement and actual results may differ materially from
this estimate. The estimate is necessarily based upon various
assumptions that involve judgments with respect to, among other things,
future national and regional economic and competitive conditions,
technological developments, inflation rates, regulatory treatments,
weather conditions, financial market conditions, future business
decisions and other uncertainties. No assurance can be given that the
estimated costs savings will actually be realized.
In addition to the $11 million of remaining transaction costs, since
the announcement of the Merger Agreement on November 11, 1995, IES,
IPC and WPLH have collectively incurred $6 million of merger-related
transaction costs through December 31, 1996, which have been expensed
and are reflected in the combined income statements as presented. The
remaining $11 million of transaction costs have been reflected in the
pro forma balance sheet at December 31, 1996 such that shareowners'
equity has been reduced by $11 million and accrued liabilities have
been increased by $11 million. None of the estimated cost savings,
or costs to achieve such savings, have been reflected in the pro forma
combined financial statements.
5. Intercompany transactions (including purchased and exchange power
transactions) between WPLH, IES and IPC during the periods presented
were included in the determination of regulated rates and were not
material. Accordingly, no pro forma adjustments were made to eliminate
such transactions.
6. The financial statements of WPLH reflect the discontinuance of
operations of its utility energy and marketing consulting business in
1995. The discontinuance of this business resulted in a pre-tax loss
in the fourth quarter of 1995 of $7.7 million. The after-tax loss on
disposition was $11.0 million reflecting the associated tax expense on
disposition due to the non-deductibility of the carrying value of
goodwill at sale. During 1996, WPLH recognized an additional loss of
$1.3 million, net of applicable income tax benefit, associated with the
final disposition of the business. Operating revenues, operating
expenses, other income and expense and income taxes for the
discontinued operations for the time periods presented have been
excluded from income from continuing operations. Interest expense has
been adjusted for the amounts associated with direct obligations of the
discontinued operations.
Operating revenues, related losses, and income tax benefits associated
with the discontinued operations for the years ending December 31 were
as follows:
1995 1994
Operating revenues $ 24,979 $ 34,798
Loss from discontinued operations before income tax $ 3,663 $ 1,806
Income tax benefit 1,451 632
Loss from discontinued operations $ 2,212 $ 1,174
7. Accounting principles have been consistently applied in the
financial statement presentations for WPLH, IES and IPC with one
exception. IPC does not include unbilled electric and gas revenues in
its calculation of total revenues. The utility subsidiaries of WPLH and
IES accrue unbilled revenues. The impact of this difference in
accounting principles among the companies does not have a material
impact on the unaudited pro forma combined financial statements as
presented and, accordingly, no adjustments have been made to conform
accounting principles.
8. At December 31, 1996, IES had a $20.0 million investment in Class A
common stock of McLeod, Inc. (McLeod), a $9.2 million investment in
Class B common stock and vested options that, if exercised, would
represent an additional investment of approximately $2.3 million.
McLeod provides local, long-distance and other telecommunications
services.
McLeod completed an Initial Public Offering (IPO) of its Class A common
stock in June 1996 and a secondary offering in November 1996. As of
December 31, 1996, IES is the beneficial owner of approximately 10.6
million total shares on a fully diluted basis. Class B shares are
convertible at the option of IES into Class A shares at any time on a
one-for-one basis. The rights of McLeod Class A common stock and Class
B common stock are substantially identical except that Class A common
stock has 1 vote per share and Class B common stock has 0.40 vote per
share. IES currently accounts for this investment under the cost method.
IES has entered into an agreement with McLeod which provides that for
two years commencing on June 10, 1996, IES cannot sell or otherwise
dispose of any of its securities of McLeod without the consent of the
McLeod Board of Directors. This contractual sale restriction results in
restricted stock under the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain
Investments in Debt and Equity Securities, until such time as the
restrictions lapse and such shares became qualified for sale within a
one year period. As a result, IES currently carries this investment at
cost.
The closing price of the McLeod Class A common stock on December 31,
1996, on the Nasdaq National Market, was $25.50 per share. The current
market value of the shares IES beneficially owns (approximately 10.6
million shares) is currently impacted by, among other things, the fact
that the shares cannot be sold for a period of time and it is not
possible to estimate what the market value of the shares will be at the
point in time such sale restrictions are lifted. In addition, any gain
upon an eventual sale of this investment would likely be subject to a
tax.
Under the provisions of SFAS No. 115, the carrying value of the McLeod
investment will be adjusted to estimated fair value at the time such
shares become qualified for sale within a one year period; this will
occur on June 10, 1997, which is one year before the contractual
restrictions on sale are lifted. At that time, the adjustment to
reflect the estimated fair value of this investment will be reflected
as an increase in the investment carrying value with the unrealized gain
reported as a net of tax amount in other common shareholders' equity
until realized (i.e. until the shares are sold by IES).141
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 14th29th day of
March 1997.
IES INDUSTRIES INC.
(Registrant)
By1999.
INTERSTATE ENERGY CORPORATION
By: /s/ Lee Liu
Lee Liu
Chairman of the Board &Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of March 14,
1997:1999.
/s/ Lee Liu Chairman of the Board &
Lee LiuErroll B. Davis, Jr. President, Chief Executive Officer and Director
Erroll B. Davis, Jr. (Principal Executive Officer)
/s/ Thomas M. Walker Executive Vice President &and Chief Financial
Thomas M. Walker Chief Financial Officer (Principal Financial Officer)
/s/ John E. Ebright Controller & ChiefVice President-Controller (Principal Accounting Officer
John E. Ebright (Principal Accounting Officer)
/s/ C.R.S. AndersonAlan B. Arends Director
C.R.S. Anderson
J. Wayne Bevis Director
J. Wayne Bevis /s/ Jack R. Newman Director
Alan B. Arends Jack R. Newman
Director /s/ Judith D. Pyle Director
Rockne G. Flowers Judith D. Pyle
/s/ Joyce L. Hanes Director /s/ Robert D. Ray Director
Joyce L. Hanes Robert D. Ray
/s/ Lee Liu Director /s/ David Q. Reed Director
Lee Liu David Q. Reed
/s/ Henry RoyerKatharine C. Lyall Director Henry Royer
/s/Director
Katharine C. Lyall Robert W. Schlutz
Director Robert W. Schlutz/s/ Wayne H. Stoppelmoor Director
Arnold M. Nemirow Wayne H. Stoppelmoor
/s/ Milton E. Neshek Director /s/ Anthony R. Weiler Director
Milton E. Neshek Anthony R. Weiler
142
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 14th29th day of
March 1997.1999.
IES UTILITIES INC.
(Registrant)
ByBy: /s/ Lee Liu
Lee Liu
Chairman of the Board &Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of March 14, 1997:1999.
/s/ Lee Liu Chairman of the Board &
Lee LiuErroll B. Davis, Jr. President, Chief Executive Officer and Director
Erroll B. Davis, Jr. (Principal Executive Officer)
/s/ Thomas M. Walker Executive Vice President &and Chief Financial
Thomas M. Walker Chief Financial Officer (Principal Financial Officer)
/s/ John E. Ebright Controller & ChiefVice President-Controller (Principal Accounting Officer
John E. Ebright (Principal Accounting Officer)
/s/ C.R.S. AndersonAlan B. Arends Director
C.R.S. Anderson
J. Wayne Bevis Director
J. Wayne Bevis /s/ Jack R. Newman Director
Alan B. Arends Jack R. Newman
Director /s/ Judith D. Pyle Director
Rockne G. Flowers Judith D. Pyle
/s/ Joyce L. Hanes Director /s/ Robert D. Ray Director
Joyce L. Hanes Robert D. Ray
/s/ Lee Liu Director /s/ David Q. Reed Director
Lee Liu David Q. Reed
/s/ Henry RoyerKatharine C. Lyall Director Henry Royer
/s/Director
Katharine C. Lyall Robert W. Schlutz
Director Robert W. Schlutz/s/ Wayne H. Stoppelmoor Director
Arnold M. Nemirow Wayne H. Stoppelmoor
/s/ Milton E. Neshek Director /s/ Anthony R. Weiler Director
Milton E. Neshek Anthony R. Weiler
143
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 29th day of
March 1999.
WISCONSIN POWER AND LIGHT COMPANY
By: /s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of March 1999.
/s/ Erroll B. Davis, Jr. President, Chief Executive Officer and Director
Erroll B. Davis, Jr. (Principal Executive Officer)
/s/ Thomas M. Walker Executive Vice President and Chief Financial
Thomas M. Walker Officer (Principal Financial Officer)
/s/ John E. Ebright Vice President-Controller (Principal Accounting
John E. Ebright Officer)
/s/ Alan B. Arends Director /s/ Jack R. Newman Director
Alan B. Arends Jack R. Newman
Director /s/ Judith D. Pyle Director
Rockne G. Flowers Judith D. Pyle
/s/ Joyce L. Hanes Director /s/ Robert D. Ray Director
Joyce L. Hanes Robert D. Ray
/s/ Lee Liu Director /s/ David Q. Reed Director
Lee Liu David Q. Reed
/s/ Katharine C. Lyall Director Director
Katharine C. Lyall Robert W. Schlutz
Director /s/ Wayne H. Stoppelmoor Director
Arnold M. Nemirow Wayne H. Stoppelmoor
/s/ Milton E. Neshek Director /s/ Anthony R. Weiler Director
Milton E. Neshek Anthony R. Weiler
144
EXHIBIT INDEX
Exhibit Description
3.2 Bylaws of Interstate Energy Corporation, effective as of January
20, 1999
3.4 Bylaws of Wisconsin Power and Light Company, effective as of
January 20, 1999
3.6 Bylaws of IES Utilities Inc., effective as of January 20, 1999
10.46 Early Retirement Agreement, dated as of December 4, 1998, by and
between Interstate Energy Corporation et al. and Richard R.
Ewers
10.47 Stockholders' Agreement entered into as of November 18, 1998, by
and among McLeodUSA Incorporated, Alliant Energy Investments,
Inc. (formerly known as IES Investments Inc.) and certain other
principal stockholders of McLeodUSA Incorporated
21 Subsidiaries of Interstate Energy Corporation
23 Consent of Independent Public Accountants for Interstate Energy
Corporation
27.1 Financial Data Schedule for Interstate Energy Corporation at and
for the period ended December 31, 1998
27.2 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended June 30, 1998
27.3 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended March 31, 1998
27.4 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended June 30, 1997
27.5 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended March 31, 1997
27.6 Restated Financial Data Schedule for Interstate Energy
Corporation at and for the period ended December 31, 1996
27.7 Financial Data Schedule for IES Utilities Inc. at and for the
period ended December 31, 1998
27.8 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended March 31, 1998
27.9 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended December 31, 1997
27.10 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended March 31, 1997
27.11 Restated Financial Data Schedule for IES Utilities Inc. at and
for the period ended December 31, 1996
27.12 Financial Data Schedule for Wisconsin Power and Light Company at
and for the period ended December 31, 1998
145