UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______ to _______
Commission Name of Registrant, State of Incorporation, IRS Employer
File Number Address of Principal Executive Offices and Identification
Telephone Number Number
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 UTILITIES INC. 42-0331370
(an Iowa corporation)
Alliant Tower
Cedar Rapids, Iowa 52401
Telephone (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
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past (90) days. Yes X No _____
This combined Form 10-Q 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.
Number of shares outstanding of each class of common stock as of October 31,
1998:
Interstate Energy Corporation Common stock, $.01 par value, 77,152,806
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)
CONTENTS
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Interstate Energy Corporation:
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 6
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 7
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 9
Notes to Consolidated Financial Statements 10
IES Utilities Inc.:
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 14
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 15
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 17
Notes to Consolidated Financial Statements 18
Wisconsin Power and Light Company:
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 20
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 21
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 23
Notes to Consolidated Financial Statements 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 57
Part II. Other Information 57
Item 1. Legal Proceedings 57
Item 5. Other Information 58
Item 6. Exhibits and Reports on Form 8-K 59
Signatures 60
2
DEFINITIONS
Certain abbreviations or acronyms used in the text and notes of this combined
Form 10-Q are defined below:
Abbreviation or Acronym Definition
AICPA American Institute of Certified Public Accountants
Alliant Industries Alliant Industries, Inc.
Alliant Services Alliant Services Company
DAEC Duane Arnold Energy Center
Diversified IES Diversified Inc.
DOE U.S. Department of Energy
Dth Dekatherm
EAC Energy Adjustment Clause
EPA United States Environmental Protection Agency
EWG Exempt Wholesale Generator
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FUCO Foreign Utility Company
HDC Heartland Development Corporation
ICC Illinois Commerce Commission
IDNR Iowa Department of Natural Resources
IEC Interstate Energy Corporation
IEPC Iowa Environmental Protection Commission
IES IES Industries Inc.
IESU IES Utilities Inc.
IPC Interstate Power Company
ISO Independent System Operator
IUB Iowa Utilities Board
Kewaunee Kewaunee Nuclear Power Plant
3
Abbreviation or Acronym Definition
LIBOR London Interbank Offer Rate
McLeod McLeodUSA Inc.
MD&A Management's Discussion and Analysis of Financial
Condition and Results of Operations
MG&E Madison Gas and Electric Company
MGP Manufactured Gas Plants
Midwest ISO Midwest Independent System Operator
MPUC Minnesota Public Utilities Commission
MW Megawatt
MWH Megawatt-Hour
NOx Nitrogen Oxides
OCA Office of Consumer Advocate
PCB Polychlorinated Biphenyl
PGA Purchased Gas Adjustment
PSCW Public Service Commission of Wisconsin
PSD Prevention of Significant Deterioration
PUHCA Public Utility Holding Company Act of 1935
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SIP State Implementation Plan
SO2 Sulfur Dioxide
SOP Statement of Position
Whiting Whiting Petroleum Corporation
WP&L Wisconsin Power and Light Company
WPLH WPL Holdings, Inc.
WPSC Wisconsin Public Service Corporation
4
INTERSTATE ENERGY CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
5
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(Restated) (Restated) (Restated)
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Operating revenues:
Electric utility $ 460,974 $ 433,983 $ 1,199,139 $ 1,145,377
Gas utility 29,082 33,893 204,395 269,709
Nonregulated and other 65,257 88,982 199,074 299,264
---------------- --------------- --------------- ----------------
555,313 556,858 1,602,608 1,714,350
---------------- --------------- --------------- ----------------
- --------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Electric and steam production fuels 85,854 75,185 224,948 215,522
Purchased power 69,366 65,783 198,930 193,616
Cost of utility gas sold 12,215 18,833 113,401 175,544
Other operation 140,082 157,953 456,113 500,349
Maintenance 29,274 28,833 87,921 89,613
Depreciation and amortization 70,097 64,532 212,787 192,035
Taxes other than income taxes 26,229 25,442 79,804 78,106
---------------- --------------- --------------- ----------------
433,117 436,561 1,373,904 1,444,785
---------------- --------------- --------------- ----------------
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 122,196 120,297 228,704 269,565
---------------- --------------- --------------- ----------------
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense and other:
Interest expense 31,890 31,584 95,045 88,519
Allowance for funds used during construction (1,884) (1,468) (5,024) (3,832)
Preferred dividend requirements of subsidiaries 1,675 1,674 5,024 5,020
Miscellaneous, net 1,131 (2,449) 8,289 (7,701)
---------------- --------------- --------------- ----------------
32,812 29,341 103,334 82,006
---------------- --------------- --------------- ----------------
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 89,384 90,956 125,370 187,559
---------------- --------------- --------------- ----------------
- --------------------------------------------------------------------------------------------------------------------------------
Income taxes 37,680 35,987 53,889 72,103
---------------- --------------- --------------- ----------------
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 51,704 $ 54,969 $ 71,481 $ 115,456
================ =============== =============== ================
- --------------------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding 77,008 76,327 76,796 76,130
================ =============== =============== ================
- --------------------------------------------------------------------------------------------------------------------------------
Earnings per average common share (basic and diluted) $ 0.67 $ 0.72 $ 0.93 $ 1.52
================ =============== =============== ================
- --------------------------------------------------------------------------------------------------------------------------------
Dividends declared per common share $ 0.50 $ 0.50 $ 1.50 $ 1.50
================ =============== =============== ================
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
INTERSTATE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
1998 1997
ASSETS (Restated)
- ---------------------------------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 4,820,913 $ 4,733,222
Gas 506,895 495,155
Other 386,132 366,395
----------------- -----------------
5,713,940 5,594,772
Less - Accumulated depreciation 2,812,179 2,631,582
----------------- -----------------
2,901,761 2,963,190
Construction work in progress 118,988 86,511
Nuclear fuel, net of amortization 48,204 55,777
----------------- -----------------
3,068,953 3,105,478
Other property, plant and equipment, net of accumulated
depreciation and amortization of $173,049 and $139,920,
respectively 343,104 329,264
----------------- -----------------
3,412,057 3,434,742
----------------- -----------------
- ---------------------------------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 9,467 27,329
Accounts receivable:
Customer, less allowance for doubtful accounts
of $2,303 and $2,400, respectively 93,554 123,545
Other, less allowance for doubtful accounts
of $401 and $224, respectively 19,013 20,824
Notes receivable 13,465 23,410
Production fuel, at average cost 43,141 40,656
Materials and supplies, at average cost 52,600 49,845
Gas stored underground, at average cost 22,627 32,364
Regulatory assets 35,488 36,330
Prepaid gross receipts tax 18,372 22,153
Other 22,978 35,786
----------------- -----------------
330,705 412,242
----------------- -----------------
- ---------------------------------------------------------------------------------------------------------
Investments:
Investment in McLeodUSA Inc. 223,499 328,022
Nuclear decommissioning trust funds 212,745 190,238
Investment in foreign entities 57,519 57,072
Other 50,759 49,319
----------------- -----------------
544,522 624,651
----------------- -----------------
- ---------------------------------------------------------------------------------------------------------
Other assets:
Regulatory assets 321,181 352,365
Deferred charges and other 101,663 99,550
----------------- -----------------
422,844 451,915
----------------- -----------------
$ 4,710,128 $ 4,923,550
================= =================
- ---------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
7
INTERSTATE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED)
September 30, December 31,
1998 1997
CAPITALIZATION AND LIABILITIES (Restated)
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
Capitalization:
Common stock - $.01 par value - authorized 200,000,000 shares;
outstanding 77,133,936 and 76,481,102 shares, respectively $ 771 $ 765
Additional paid-in capital 889,469 868,903
Retained earnings 550,754 581,376
Accumulated other comprehensive income 103,982 173,512
----------------- -----------------
Total common equity 1,544,976 1,624,556
----------------- -----------------
Cumulative preferred stock of subsidiaries:
Par/Stated Authorized Shares Mandatory
Value Shares Outstanding Redemption
$ 100 * 449,765 No 44,977 44,977
$ 25 * 599,460 No 14,986 14,986
$ 50 466,406 366,406 No 18,320 18,320
$ 50 ** 216,381 No 10,819 10,819
$ 50 ** 545,000 Yes *** 27,250 27,250
----------------- -----------------
116,352 116,352
Less: unamortized expenses (2,887) (2,983)
----------------- -----------------
Total cumulative preferred stock of subsidiaries 113,465 113,369
----------------- -----------------
Long-term debt (excluding current portion) 1,485,607 1,467,903
----------------- -----------------
3,144,048 3,205,828
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities and sinking funds 68,764 18,329
Variable rate demand bonds 56,975 56,975
Commercial paper 54,000 114,500
Notes payable 74 42,000
Capital lease obligations 13,211 13,197
Accounts payable 164,380 192,634
Accrued taxes 101,465 78,923
Other 119,488 133,233
----------------- -----------------
578,357 649,791
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 641,284 719,899
Accumulated deferred investment tax credits 78,743 82,862
Environmental liabilities 55,643 66,455
Customer advances 36,002 36,619
Capital lease obligations 15,745 23,634
Other 160,306 138,462
----------------- -----------------
987,723 1,067,931
----------------- -----------------
- -----------------------------------------------------------------------------------------------------------------------
$ 4,710,128 $ 4,923,550
================= =================
- -----------------------------------------------------------------------------------------------------------------------
* 3,750,000 authorized shares in total between the two classes ** 2,000,000
authorized shares in total between the two classes *** $53.20 mandatory
redemption price
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
8
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
1998 1997
(Restated) (Restated)
- -----------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 71,481 $ 115,456
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 212,787 192,035
Amortization of nuclear fuel 13,718 12,560
Amortization of deferred energy efficiency expenditures 20,849 8,637
Deferred taxes and investment tax credits (22,731) (6,286)
Refueling outage provision (6,707) 6,654
Other 10,788 7,121
Other changes in assets and liabilities:
Accounts receivable 31,802 44,329
Notes receivable 9,945 (13,052)
Production fuel (2,485) (5,385)
Materials and supplies (2,755) (1,595)
Gas stored underground 9,737 (1,175)
Accounts payable (28,254) (64,252)
Accrued taxes 22,542 21,563
Benefit obligations and other 36,103 18,528
-------------- ---------------
Net cash flows from operating activities 376,820 335,138
-------------- ---------------
- -----------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends (117,556) (109,108)
Proceeds from issuance of common stock 18,317 12,201
Net change in Alliant Industries, Inc. credit facility 77,037 19,160
Proceeds from issuance of other long-term debt 2,594 295,000
Reductions in other long-term debt (10,879) (146,338)
Net change in short-term borrowings (102,426) (132,066)
Principal payments under capital lease obligations (9,655) (9,405)
Other (91) (661)
-------------- ---------------
Net cash flows used for financing activities (142,659) (71,217)
-------------- ---------------
- -----------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Construction and acquisition
expenditures:
Utility (167,109) (182,905)
Other (74,437) (43,471)
Deferred energy efficiency expenditures - (13,254)
Nuclear decommissioning trust funds (18,084) (15,214)
Other 7,607 2,239
-------------- ---------------
Net cash flows used for investing activities (252,023) (252,605)
-------------- ---------------
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and temporary cash investments (17,862) 11,316
-------------- ---------------
- -----------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 27,329 22,817
-------------- ---------------
- -----------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 9,467 $ 34,133
============== ===============
- -----------------------------------------------------------------------------------------------
Supplemental cash flow information: Cash paid during the period for:
Interest $ 92,707 $ 83,489
============== ===============
Income taxes $ 57,428 $ 61,133
============== ===============
Noncash investing and financing activities:
Capital lease obligations incurred $ 1,276 $ 13,912
============== ===============
- -----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
9
INTERSTATE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The interim consolidated financial statements included herein have been
prepared by IEC, without audit, pursuant to the rules and regulations of
the SEC. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although
management believes that the disclosures are adequate to make the
information presented not misleading. The consolidated financial statements
include IEC and its consolidated subsidiaries (WP&L, IESU, IPC, Alliant
Industries and Alliant Services). These statements are prepared on the
basis of accounting for the merger of WPLH, IES and IPC, which was
effective on April 21, 1998, as a pooling of interests. Certain adjustments
have been made to the prior period amounts as part of the restatement to
reflect the pooling of interests transaction. In addition, the prior period
amounts have been restated for a change in accounting method implemented in
the third quarter of 1998 (see Note 7 for further discussion). These
financial statements should be read in conjunction with the financial
statements and the notes thereto included in WPLH's and WP&L's latest
Annual Report on Form 10-K, as amended, and IES's, IESU's and IPC's latest
Annual Report on Form 10-K.
In the opinion of management, all adjustments, which are normal and
recurring in nature, necessary for a fair presentation of (a) the
consolidated results of operations for the three and nine months ended
September 30, 1998 and 1997, (b) the consolidated financial position at
September 30, 1998 and December 31, 1997, and (c) the consolidated
statement of cash flows for the nine months ended September 30, 1998 and
1997, have been made. Because of the seasonal nature of IESU's, WP&L's and
IPC's operations, results for the three and nine months ended September 30,
1998 are not necessarily indicative of results that may be expected for the
year ending December 31, 1998. Certain prior period amounts have been
reclassified on a basis consistent with the 1998 presentation.
2. On January 1, 1998, IEC adopted SFAS No. 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: (a) unrealized holding gains/losses on securities
classified as available-for-sale under SFAS 115, (b) foreign currency
translation adjustments accounted for under SFAS 52, and (c) minimum
pension liability adjustments made pursuant to SFAS 87. Prior years have
been restated to conform to the SFAS 130 requirements. IESU and WP&L had no
comprehensive income in the periods presented.
IEC's comprehensive income (loss), and the components of other
comprehensive income (loss), net of taxes, were as follows (in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(Restated) (Restated) (Restated)
-------------------------------- --------------------------------
Net income $ 51,704 $ 54,969 $ 71,481 $ 115,456
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities (1)
(102,546) 218,567 (61,075) 218,567
Foreign currency translation adjustments
(8,511) (19) (8,455) (19)
-------------- --------------- -------------- ---------------
Other comprehensive income (loss), net of tax
(111,057) 218,548 (69,530) 218,548
-------------- --------------- -------------- ---------------
Comprehensive income (loss) $ (59,353) $ 273,517 $ 1,951 $ 334,004
============== =============== ============== ===============
10
(1): Adjustment to the estimated fair value each quarter of IEC's
investment in McLeod.
3. 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
revenue. In 1997, off-system gas sales were included in the Consolidated
Statements of Income as gas revenue.
4. WPLH, as the surviving corporation in the merger involving WPLH, IES and
IPC, changed its name to IEC. In connection with the merger, the number of
authorized shares of IEC common stock was increased to 200,000,000. See
Item 2, "MD&A Merger" for additional information.
5. The provisions for income taxes are based on the estimated annual effective
tax rate, which differs from the federal statutory rate of 35% principally
due to: state income taxes, tax credits, effects of utility rate making and
certain nondeductible expenses.
6. On September 14, 1998, WP&L entered into an interest rate forward contract
related to the anticipated issuance of $60 million of debentures. The
securities were issued on October 30, 1998 and the forward contract was
settled, which resulted in a cash payment of $1.5 million by WP&L. This
payment will be recognized as an adjustment to interest expense over the
life of the new debt securities to approximate the interest rate implicit
in the forward contract.
7. During the third quarter of 1998, IEC's oil and gas subsidiary, Whiting,
changed 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 Whiting'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. Had Whiting not converted to the
successful efforts method, management estimates in the results of
operations for the three months ended September 30, 1998, IEC would have
experienced a full cost ceiling write-down comparable to the cumulative
impact on net income realized upon the conversion to the successful efforts
method. 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.
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 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 geophysical costs, are expensed
as incurred. Depreciation, depletion and amortization of proved oil and gas
properties is determined on a field-by-field basis using the
unit-of-production method over the life of the remaining proved reserves.
Estimated costs (net of salvage value) of site remediation, including
offshore platform dismantlement, are included in the depreciation and
depletion calculation. Proven oil and gas properties are reviewed on a
field-by-field basis whenever events or circumstances indicate that the
carrying value of such properties may be impaired.
11
The cumulative effect of the restatement at January 1, 1997, was an
after-tax reduction in retained earnings of $11.8 million. The restated net
income amounts for the quarters ended March 31, 1997 through June 30, 1998
are as follows (in thousands):
For the Quarters Ended
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
---------- ---------- ----------- ----------- ----------- -----------
Previously reported net income $ (9,567) $32,628 $34,544 $56,030 $20,859 $42,857
Adjustment for change in accounting
method for oil and gas properties from the
full cost method to the successful efforts
method 469 (3,753) (5,422) (1,061) (1,060) (2,169)
---------- ---------- ----------- ----------- ----------- -----------
Restated net income $ (9,098) $28,875 $29,122 $54,969 $19,799 $40,688
========== ========== =========== =========== =========== ===========
The restated earnings per average common share (basic and diluted) for the
quarters ended March 31, 1997 through June 30, 1998 are as follows:
For the Quarters Ended
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
---------- ---------- ----------- ----------- ----------- -----------
Previously reported earnings per average
common share (basic and diluted) $ (0.12) $ 0.43 $ 0.45 $ 0.73 $ 0.27 $ 0.57
Adjustment for change in accounting
method for oil and gas properties from the
full cost method to the successful efforts
method ---- (0.05) (0.07) (0.01) (0.01) (0.03)
---------- ---------- ----------- ----------- ----------- -----------
Restated earnings per average common share
(basic and diluted) $ (0.12) $ 0.38 $ 0.38 $ 0.72 $ 0.26 $ 0.54
========== ========== =========== =========== =========== ===========
12
IES UTILITIES INC.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
13
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating revenues:
Electric utility $ 201,336 $ 184,676 $ 489,625 $ 459,653
Gas utility 14,984 15,507 96,299 122,711
Steam and other 5,870 5,528 19,277 19,369
----------------- ----------------- ------------------ -----------------
222,190 205,711 605,201 601,733
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Electric and steam production fuels 35,478 27,613 87,411 84,026
Purchased power 18,315 18,749 55,132 52,472
Cost of gas sold 7,524 7,835 55,963 84,413
Other operation 42,020 42,507 133,891 116,763
Maintenance 13,042 12,224 37,993 37,675
Depreciation and amortization 23,885 21,840 72,127 68,605
Taxes other than income taxes 11,986 10,956 36,699 34,563
----------------- ----------------- ------------------ -----------------
152,250 141,724 479,216 478,517
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 69,940 63,987 125,985 123,216
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense and other:
Interest expense 13,124 13,371 39,154 38,446
Allowance for funds used during construction (976) (784) (2,543) (1,551)
Miscellaneous, net 809 864 5,256 2,394
----------------- ----------------- ------------------ -----------------
12,957 13,451 41,867 39,289
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 56,983 50,536 84,118 83,927
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes 26,346 21,900 38,861 36,550
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 30,637 28,636 45,257 47,377
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred dividend requirements 229 229 686 686
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings available for common stock $ 30,408 $ 28,407 $ 44,571 $ 46,691
================= ================= ================== =================
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
14
IES UTILITIES INC.
CONSOLIDATED BALANCE SHEETS
September 30,
1998 December 31,
ASSETS (Unaudited) 1997
- ----------------------------------------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,108,039 $ 2,072,866
Gas 193,687 187,098
Steam 55,391 55,374
Common 96,172 90,342
----------------- -----------------
2,453,289 2,405,680
Less - Accumulated depreciation 1,188,390 1,115,261
----------------- -----------------
1,264,899 1,290,419
Construction work in progress 61,791 38,923
Leased nuclear fuel, net of amortization 28,865 36,731
----------------- -----------------
1,355,555 1,366,073
Other property, plant and equipment, net of accumulated
depreciation and amortization of $1,904 and $1,709, respectively 5,567 5,762
----------------- -----------------
1,361,122 1,371,835
----------------- -----------------
- ----------------------------------------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 1,142 230
Temporary cash investments with associated companies 68,053 -
Accounts receivable:
Customer, less allowance for doubtful accounts
of $984 and $630, respectively 5,692 29,259
Associated companies 1,805 907
Other, less allowance for doubtful accounts
of $315 and $224, respectively 7,685 9,235
Production fuel, at average cost 9,050 10,579
Materials and supplies, at average cost 23,823 22,976
Gas stored underground, at average cost 7,864 17,192
Regulatory assets 32,208 36,330
Prepayments and other 5,976 11,680
----------------- -----------------
163,298 138,388
----------------- -----------------
- ----------------------------------------------------------------------------------------------------------------
Investments:
Nuclear decommissioning trust funds 82,979 77,882
Other 5,767 5,167
----------------- -----------------
88,746 83,049
----------------- -----------------
- ----------------------------------------------------------------------------------------------------------------
Other assets:
Regulatory assets 138,058 163,264
Deferred charges and other 13,754 12,393
----------------- -----------------
151,812 175,657
----------------- -----------------
- ----------------------------------------------------------------------------------------------------------------
$ 1,764,978 $ 1,768,929
================= =================
- ----------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
15
IES UTILITIES INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30,
1998 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1997
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
Capitalization:
Common stock - par value $2.50 per share - authorized 24,000,000
shares; 13,370,788 shares outstanding $ 33,427 $ 33,427
Additional paid-in capital 279,042 279,042
Retained earnings 258,947 233,216
------------------ -----------------
Total common equity 571,416 545,685
Cumulative preferred stock, not mandatorily redeemable - par value
$50 per share - authorized 466,406 shares; 366,406 shares outstanding 18,320 18,320
Long-term debt (excluding current portion) 601,909 651,848
------------------ -----------------
1,191,645 1,215,853
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities and sinking funds 50,140 140
Capital lease obligations 13,197 13,183
Accounts payable 27,394 60,546
Accounts payable to associated companies 12,696 2,736
Accrued payroll and vacations 7,430 7,615
Accrued interest 10,035 12,230
Accrued taxes 70,161 58,996
Accumulated refueling outage provision 3,899 10,606
Environmental liabilities 5,409 4,054
Other 17,726 11,533
------------------ -----------------
218,087 181,639
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 225,637 238,829
Accumulated deferred investment tax credits 29,892 31,838
Environmental liabilities 32,016 38,256
Pension and other benefit obligations 27,370 17,334
Capital lease obligations 15,668 23,548
Other 24,663 21,632
------------------ -----------------
355,246 371,437
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
$ 1,764,978 $ 1,768,929
================== =================
- --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
16
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 45,257 $ 47,377
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 72,127 68,605
Amortization of leased nuclear fuel 9,143 10,668
Amortization of deferred energy efficiency expenditures 14,339 6,003
Deferred taxes and investment tax credits (9,948) (8,970)
Refueling outage provision (6,707) 6,654
Other 621 3,188
Other changes in assets and liabilities:
Accounts receivable 24,219 10,680
Production fuel 1,529 2,522
Materials and supplies (847) (1,043)
Gas stored underground 9,328 2,806
Accounts payable (23,192) (38,974)
Accrued taxes 11,165 25,335
Adjustment clause balances 6,307 11,534
Benefit obligations and other 15,534 6,255
------------- -------------
Net cash flows from operating activities 168,875 152,640
------------- -------------
- ---------------------------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends (14,000) (42,000)
Preferred stock dividends (686) (686)
Proceeds from issuance of long-term debt - 190,000
Reductions in long-term debt (140) (63,140)
Net change in short-term borrowings - (135,000)
Principal payments under capital lease obligations (9,655) (9,405)
Other - (821)
------------- -------------
Net cash flows used for financing activities (24,481) (61,052)
------------- -------------
- ---------------------------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Construction expenditures (71,390) (74,529)
Deferred energy efficiency expenditures - (8,450)
Nuclear decommissioning trust funds (4,506) (4,506)
Other 467 240
------------- -------------
Net cash flows used for investing activities (75,429) (87,245)
------------- -------------
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and temporary cash investments 68,965 4,343
------------- -------------
- ---------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 230 11,608
------------- -------------
- ---------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 69,195 $ 15,951
============= =============
- ---------------------------------------------------------------------------------------------------------------
Supplemental cash flow information: Cash paid during the period for:
Interest $ 39,420 $ 33,215
============= =============
Income taxes $ 46,500 $ 31,875
============= =============
Noncash investing and financing activities - Capital lease obligations incurred $ 1,276 $ 13,912
============= =============
- ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
17
IES UTILITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Except as modified below, the IEC Notes to Consolidated Financial
Statements are incorporated by reference insofar as they relate to IESU.
IEC Notes 3, 4, 6 and 7 do not relate to IESU and, therefore, are not
incorporated by reference.
1. The interim consolidated financial statements included herein have been
prepared by IESU, without audit, pursuant to the rules and regulations of
the SEC. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although
management believes that the disclosures are adequate to make the
information presented not misleading. The consolidated financial statements
include IESU and its consolidated wholly-owned subsidiary, IES Ventures
Inc. IESU is a subsidiary of IEC. These statements are prepared on the
basis of accounting for the merger of WPLH, IES and IPC, which was
effective on April 21, 1998, as a pooling of interests. Certain adjustments
have been made to the prior period amounts as part of the restatement to
reflect the pooling of interests transaction. These financial statements
should be read in conjunction with the financial statements and the notes
thereto included in IESU's latest Annual Report on Form 10-K.
In the opinion of management, all adjustments, which are normal and
recurring in nature, necessary for a fair presentation of (a) the
consolidated results of operations for the three and nine months ended
September 30, 1998 and 1997, (b) the consolidated financial position at
September 30, 1998 and December 31, 1997, and (c) the consolidated
statement of cash flows for the nine months ended September 30, 1998 and
1997, have been made. Because of the seasonal nature of IESU's operations,
results for the three and nine months ended September 30, 1998 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1998. Certain prior period amounts have been reclassified on a
basis consistent with the 1998 presentation.
18
WISCONSIN POWER AND LIGHT COMPANY
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
19
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating revenues:
Electric utility $ 165,345 $ 165,465 $ 470,969 $ 475,198
Gas utility 9,450 13,371 76,712 108,583
Water 1,335 1,356 3,763 3,481
----------------- ----------------- ------------------ -----------------
176,130 180,192 551,444 587,262
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Electric production fuels 33,520 31,253 91,889 89,655
Purchased power 30,539 31,514 89,378 98,610
Cost of gas sold 2,711 7,135 41,940 68,401
Other operation 31,140 29,951 105,036 95,203
Maintenance 10,793 11,598 35,240 36,759
Depreciation and amortization 30,237 26,801 91,075 77,177
Taxes other than income taxes 7,494 7,782 22,710 23,199
----------------- ----------------- ------------------ -----------------
146,434 146,034 477,268 489,004
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 29,696 34,158 74,176 98,258
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense and other:
Interest expense 9,224 9,176 26,591 23,058
Allowance for funds used during construction (778) (634) (2,175) (2,155)
Miscellaneous, net 573 799 1,849 (4,019)
----------------- ----------------- ------------------ -----------------
9,019 9,341 26,265 16,884
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 20,677 24,817 47,911 81,374
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes 8,000 9,581 18,869 31,743
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 12,677 15,236 29,042 49,631
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred dividend requirements 827 827 2,483 2,483
----------------- ----------------- ------------------ -----------------
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings available for common stock $ 11,850 $ 14,409 $ 26,559 $ 47,148
================= ================= ================== =================
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
20
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30,
1998 December 31,
ASSETS (Unaudited) 1997
- -------------------------------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 1,828,813 $ 1,790,641
Gas 242,267 237,856
Water 25,961 24,864
Common 208,556 195,815
----------------- ----------------
2,305,597 2,249,176
Less - Accumulated depreciation 1,149,329 1,065,726
----------------- ----------------
1,156,268 1,183,450
Construction work in progress 45,681 42,312
Nuclear fuel, net of amortization 19,339 19,046
----------------- ----------------
1,221,288 1,244,808
Other property, plant and equipment, net of accumulated
depreciation and amortization of $40 and $44, respectively 798 684
----------------- ----------------
1,222,086 1,245,492
----------------- ----------------
- -------------------------------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 1,123 2,492
Accounts receivable:
Customer 2,449 20,928
Associated companies 1,927 5,017
Other 8,721 11,589
Production fuel, at average cost 16,557 18,857
Materials and supplies, at average cost 20,923 19,274
Gas stored underground, at average cost 11,236 12,504
Prepaid gross receipts tax 18,372 22,153
Other 1,074 4,824
----------------- ----------------
82,382 117,638
----------------- ----------------
- -------------------------------------------------------------------------------------------------------
Investments:
Nuclear decommissioning trust funds 129,766 112,356
Other 14,573 14,877
----------------- ----------------
144,339 127,233
----------------- ----------------
- -------------------------------------------------------------------------------------------------------
Other assets:
Regulatory assets 122,706 120,826
Deferred charges and other 52,230 53,415
----------------- ----------------
174,936 174,241
----------------- ----------------
- -------------------------------------------------------------------------------------------------------
$ 1,623,743 $ 1,664,604
================= ================
- -------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
21
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30,
1998 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1997
- -------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
Capitalization:
Common stock - par value $5 per share - authorized
18,000,000 shares; 13,236,601 shares outstanding $ 66,183 $ 66,183
Additional paid-in capital 199,338 199,170
Retained earnings 303,189 320,386
----------------- -----------------
Total common equity 568,710 585,739
----------------- -----------------
Cumulative preferred stock, not mandatorily
redeemable without par value - authorized 3,750,000
shares, maximum aggregate stated value $150,000,000:
$100 stated value - 449,765 shares outstanding 44,977 44,977
$ 25 stated value - 599,460 shares outstanding 14,986 14,986
----------------- -----------------
Total cumulative preferred stock 59,963 59,963
----------------- -----------------
Long-term debt (excluding current portion) 354,608 354,540
----------------- -----------------
983,281 1,000,242
----------------- -----------------
- -------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities and sinking funds - 8,899
Variable rate demand bonds 56,975 56,975
Commercial paper - 81,000
Notes payable to associated companies 73,347 -
Accounts payable 71,837 85,617
Accounts payable to associated companies 11,646 -
Accrued payroll and vacations 12,950 12,221
Accrued interest 6,449 6,317
Other 22,339 25,162
----------------- -----------------
255,543 276,191
----------------- -----------------
- -------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 247,281 251,709
Accumulated deferred investment tax credits 33,637 35,039
Customer advances 33,484 34,240
Environmental liabilities 8,926 9,238
Other 61,591 57,945
----------------- -----------------
384,919 388,171
----------------- -----------------
- -------------------------------------------------------------------------------------------------------
$ 1,623,743 $ 1,664,604
================= =================
- -------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
22
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 29,042 $ 49,631
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 91,075 77,177
Amortization of nuclear fuel 4,575 1,892
Deferred taxes and investment tax credits (4,349) (710)
Other (1,508) (1,591)
Other changes in assets and liabilities:
Accounts receivable 24,437 21,945
Production fuel 2,300 (4,598)
Materials and supplies (1,649) 194
Gas stored underground 1,268 (3,223)
Prepaid gross receipts tax 3,781 (3,400)
Accounts payable (2,134) (5,001)
Benefit obligations and other 12,768 (1,091)
---------------- ----------------
Net cash flows from operating activities 159,606 131,225
---------------- ----------------
- ------------------------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends (43,756) (56,377)
Preferred stock dividends (2,483) (2,483)
Proceeds from issuance of long-term debt - 105,000
Reductions in long-term debt (8,899) (55,000)
Net change in short-term borrowings (7,653) (15,500)
Other - (2,669)
---------------- ----------------
Net cash flows used for financing activities (62,791) (27,029)
---------------- ----------------
- ------------------------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Construction expenditures (73,587) (89,317)
Nuclear decommissioning trust funds (13,578) (10,708)
Other (11,019) (5,217)
---------------- ----------------
Net cash flows used for investing activities (98,184) (105,242)
---------------- ----------------
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and temporary cash investments (1,369) (1,046)
---------------- ----------------
- ------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 2,492 4,167
---------------- ----------------
- ------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 1,123 $ 3,121
================ ================
- ------------------------------------------------------------------------------------------------------------
Supplemental cash flow information: Cash paid during the period for:
Interest $ 21,332 $ 24,395
================ ================
Income taxes $ 22,524 $ 25,944
================ ================
- ------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
WISCONSIN POWER AND LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Except as modified below, the IEC Notes to Consolidated Financial
Statements are incorporated by reference insofar as they relate to WP&L.
IEC Notes 4 and 7 do not relate to WP&L and, therefore, are not
incorporated by reference.
1. The interim consolidated financial statements included herein have been
prepared by WP&L, without audit, pursuant to the rules and regulations of
the SEC. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although
management believes that the disclosures are adequate to make the
information presented not misleading. The consolidated financial statements
include WP&L and its consolidated subsidiary. WP&L is a subsidiary of IEC.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in WP&L's latest Annual Report on
Form 10-K, as amended.
In the opinion of management, all adjustments, which are normal and
recurring in nature, necessary for a fair presentation of (a) the
consolidated results of operations for the three and nine months ended
September 30, 1998 and 1997, (b) the consolidated financial position at
September 30, 1998 and December 31, 1997, and (c) the consolidated
statement of cash flows for the nine months ended September 30, 1998 and
1997, have been made. Because of the seasonal nature of WP&L's operations,
results for the three and nine months ended September 30, 1998 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1998. Certain prior period amounts have been reclassified on a
basis consistent with the 1998 presentation.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MERGER
In April 1998, IES, WPLH and IPC completed a three-way merger (Merger) forming
IEC. IEC is currently doing business as Alliant Energy Corporation. As a result
of the Merger, the first tier subsidiaries of IEC include: WP&L, IESU, IPC,
Alliant Industries and Alliant Services (the subsidiary formed to provide
administrative services as required under the Public Utility Holding Company Act
of 1935). Among various other regulatory constraints, IEC is operating as a
registered public utility holding company subject to the limitations imposed by
the Public Utility Holding Company Act of 1935.
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).
Assuming capture of the anticipated merger-related synergies and no significant
legislative or regulatory changes affecting IEC, IEC does not expect the
merger-related electric and natural gas price freezes to have a material adverse
effect on its financial position or results of operations.
This MD&A includes information relating to IEC, IESU and WP&L (as well as IPC
and Alliant Industries). Where appropriate, information relating to a specific
entity has been segregated and labeled as such.
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q (including MD&A) that
are not of historical fact are forward-looking statements intended to qualify
for the safe harbor from liability established by the Private 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 other uncertainties beyond the
control 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 expectations, beliefs, future plans and strategies,
anticipated events or trends and similar comments concerning matters that are
not historical facts. Investors and other users of the forward-looking
statements are cautioned that such statements are not a guarantee of future
performance 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 relevant service territory, federal
and state regulatory or government actions, unanticipated construction and
acquisition expenditures, issues related to stranded 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
successfully integrate the operations of the parties to the Merger 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 and changes in the rate of inflation.
UTILITY INDUSTRY OUTLOOK
IEC competes in an ever-changing utility industry. Set forth below is an
overview of this evolving marketplace.
Electric energy generation, transmission and distribution are in a period of
fundamental 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
25
competitive pressures could result in loss of customers and an incurrence of
stranded costs (i.e., assets and other costs rendered unrecoverable as the
result of competitive pricing). To the extent stranded costs cannot be recovered
from customers, they would be borne by security holders.
Legislative action which would allow customers to choose their electric energy
supplier is not expected in Wisconsin, Iowa or Minnesota this year. Nationwide,
however, 18 states (including Illinois and Michigan) have adopted legislative or
regulatory plans to implement electric utility competition. In July 1998, the
Clinton Administration's plan for electric utility competition, proposing that
states implement customer choice by January 1, 2003, was introduced as a bill in
the U.S. Senate. The bill joined five other U.S. Senate bills and four U. S.
House of Representative bills to implement competition in the electric utility
industry.
IEC realized 56%, 39%, 3% and 2% of its electric utility revenues in the nine
months ended September 30, 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 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 revenues in the nine months
ended September 30, 1998, in Iowa. Approximately 93% of the electric revenues in
the first nine months of 1998 were regulated by the IUB while the other 7% were
regulated by the FERC.
WP&L realized 98% of its electric utility revenues in the nine months ended
September 30, 1998 in Wisconsin and 2% in Illinois. Approximately 78% of the
electric revenues in the first nine months of 1998 were regulated by the PSCW
and the ICC while the other 22% were regulated by the FERC. WP&L realized 96% of
its gas utility revenues in the first nine months of 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 1996, FERC issued final rules
(FERC Orders 888 and 889) requiring electric utilities to open their
transmission lines to other wholesale buyers and sellers of electricity. In
March 1997, FERC issued orders on rehearing for Orders 888 and 889 (Orders 888-A
and 889-A). In response to FERC Orders 888 and 888-A, Alliant Services, on
behalf of WP&L, IESU and IPC, filed an Open Access Transmission Tariff (Tariff)
that complies with the orders. The Tariff supersedes the transmission tariffs
previously filed by the three utilities. Upon receiving the final merger-related
regulatory order, a compliance tariff was filed by Alliant 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 permits utilities to seek recovery of legitimate, prudent and
verifiable stranded costs associated with providing open access transmission
services. FERC does not have jurisdiction over retail distribution and,
consequently, 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 to have resulted from retail competition.
The utility subsidiaries cannot predict the long-term consequences of these
rules on their results of operations or financial condition.
On September 16, 1998, the FERC conditionally approved the filing made by IEC
and twelve other transmission-owning utilities to form the Midwest ISO. The
FERC's approval is conditioned upon the results of hearings to be held on rate
issues and upon the acceptance by the member utilities of minor changes to the
filing required by the FERC. The Midwest ISO will establish independent
operation and control of the electric transmission system across
26
a thirteen state region spanning from West Virginia to Missouri. All buyers and
sellers in this region will have open access to the transmission system while
being assessed a single transmission rate.
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 will
be publicly traded, have its own board of directors, management and employees.
As such, it will not be affiliated with NSP or IEC.
In 1999, the companies plan to seek the necessary approvals from state and
federal regulators. The federal filing will include an innovative new 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. IEC and NSP believe they can have an ITC established which is capable
of serving the Upper Midwest region by the year 2000.
As a result of this announcement, IEC is reevaluating its membership in the
Midwest ISO.
State Regulation
Iowa
IESU and IPC are subject to regulation by the IUB. 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. The IUB staff's report in this docket was
accepted by the IUB, finding, in part, that there is no compelling reason to
move quickly into restructuring the electric utility industry in Iowa, based
upon the existing level of relative prices. However, the IUB is continuing the
analysis and debate on restructuring and retail competition in Iowa.
On September 10, 1997, the IUB issued an order adopting an "Action Plan to
Develop a Competitive Model for the Electric Industry in Iowa." The IUB states
in this action plan that while "the IUB has not determined retail competition in
the electric industry is in the best interests of Iowa's consumers...", the
State of Iowa is likely to be affected by federal or neighboring states' actions
so there is a need for the IUB to design a model that suits Iowa's needs. The
priority concerns in the plan are public interest issues (an Iowa-specific pilot
project, customer information and assessment, environmental impacts, public
benefits and transition costs/benefits) and transmission-related issues
(transmission and distribution system reliability and transmission system
operations). There is no timetable in the action plan. On October 2, 1997, the
IUB staff sent to the advisory group (of which IESU and IPC are members) for
written comment a set of proposed guidelines for an Iowa-specific electric pilot
project that would allow retail access to a "subset of all customer classes."
The IUB has also issued an order covering unbundling of natural gas rates for
all Iowa customers to be effective in 1999.
On September 15, 1998, the IUB staff issued draft reports on (1) Reliability and
(2) Recovery of Transition Costs/Benefits in a Restructured Electric Utility
Industry for review and comment by the IUB Advisory Group on electric
restructuring. The Recovery of Transition Costs/Benefits in a Restructured
Electric Utility Industry report is expected to be finalized in the fourth
quarter of 1998. This draft report concludes that MidAmerican Energy Company,
IESU and IPC could realize substantial transition benefits resulting from their
low-cost generating units. The report states, however, that no one can predict
with any accuracy what transition costs or benefits will actually be thus, to
accommodate this uncertainty, the costs should be determined as they occur. The
report continues that a cap on electric rates should be established during the
transition period which would allow customers to share, for a limited time, in
any transition benefits. Similarly, the report acknowledges that a stranded cost
recovery mechanism should be established, which would allow utilities to recover
from exiting customers a declining percentage of lost revenues, should
transition costs materialize. While the final report will be important in Iowa's
restructuring debate, ultimately the approach to stranded costs and benefits can
reasonably be expected to be decided in the legislative process.
27
On October 8, 1998, the IUB staff issued draft reports on (1) Market Structure
and Power and (2) Universal Service for review and comment by the IUB Advisory
Group on electric restructuring. The Market Structure and Power draft report
concludes that the IUB staff is concerned about market power, but it states that
mandatory divestiture of generating assets is not a necessary remedy. It
suggests that market power issues can be remedied as confronted, rather than
creating restrictive rules up-front. The Universal Service draft report covers:
(1) customer access; (2) default provider and provider of last resort; (3)
customer protections; and (4) low-income assistance. It concludes that
significant revisions to existing rules are required to introduce these concepts
into a competitive environment.
The Iowa legislature has been conducting interim legislative meetings regarding
restructuring and expects these meetings to be completed by the end of 1998.
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 natural 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 subjects which need to be resolved before deregulation may
proceed.
The short-term goals of the electric restructuring process are to ensure
reliability of the state's electric system and development of a robust wholesale
electric market. The longer-term goal is to establish prerequisite safeguards to
protect customers prior to allowing retail customer choice. The PSCW is
following a timetable to make this latter determination on allowing customer
choice in 1999-2000.
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 funding levels primarily through utility rates by $50 to $75
million statewide.
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.
In May 1998, the PSCW reactivated Docket No. 05-BU-101, with the objective of
examining the degree of separation which should be required as a matter of
policy between utility and non-utility activities involving the various state
utilities. Hearings are being held in the fourth quarter of 1998. 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 IEC will be required to file with the PSCW for permission
to turn operational control of its transmission system over to the Midwest ISO.
The PSCW has established four guiding principles for participating in an ISO
under Wisconsin Statutes. IEC would also be required to file with the PSCW for
permission to lease its transmission assets to the ITC.
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 report and recommendations on retail competition. The MPUC reviewed the
report and directed its staff to develop an electric utility restructuring plan
and timeline. The
28
Minnesota legislature had established a joint legislative task force on electric
utility restructuring in 1995. It appears the earliest restructuring legislation
could be introduced is in 1999.
Illinois
IPC and WP&L are subject to regulation by the ICC. In December 1997, the State
of Illinois 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 and all residential
customers will be eligible for customer choice beginning May 1, 2002.
Summary
Each of the utilities complies with the provisions of SFAS 71, "Accounting for
the Effects of Certain Types of Regulation." SFAS 71 provides that
rate-regulated public utilities record certain costs and credits allowed in the
ratemaking process in different periods than for nonregulated entities. These
are deferred as regulatory assets or regulatory liabilities and are recognized
in the consolidated statements of income at the time they are reflected in
rates. If a portion of the utility subsidiaries' operations becomes no longer
subject to the provisions of SFAS 71 as a result of competitive 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 that would meet the requirements
under generally accepted accounting principles for continued accounting as
regulatory assets during such recovery period. In addition, each utility
subsidiary would be required to determine any impairment of other assets and
write-down any impaired assets to their fair value. The utility subsidiaries
believe they currently meet the requirements of SFAS 71.
IEC and its subsidiaries cannot currently predict the long-term consequences of
the competitive and restructuring issues described above on their results of
operations or financial condition. The major objective is to allow the utilities
to better prepare for a competitive, deregulated utility industry. The strategy
for dealing with these emerging issues includes seeking growth opportunities,
continuing to offer quality customer service, ongoing cost reductions and
productivity enhancements.
IEC RESULTS OF OPERATIONS
Overview
IEC reported net income of $51.7 million, or $0.67 per share, for the third
quarter of 1998 compared to net income of $55.0 million, or $0.72 per share, for
the third quarter of 1997. Net income for the nine months ended September 30,
1998, was $71.5 million, or $0.93 per share, compared to net income of $115.5
million, or $1.52 per share, for the first nine months of 1997. Excluding
one-time merger-related expenses, 1998 earnings were $0.72 per share for the
quarter, equal to last year, and $1.32 year-to-date. All prior period financial
results have been restated to reflect a change in accounting method implemented
in the third quarter of 1998.
The 1998 third quarter results include approximately $6 million ($51 million
year-to-date as of September 30, 1998) of one-time, pre-tax merger-related
expenses. The merger-related expenses were primarily for employee retirements
and separations, the services of the company's advisors, costs related to IEC's
name change and other miscellaneous costs.
IEC's utility operations reported net income of $53.0 million in the third
quarter of 1998 compared to net income of $53.1 million for the same period in
1997. Excluding one-time merger expenses, the 1998 third quarter earnings would
have been approximately $56.4 million, up 6.2% from a year ago.
29
The increased utility earnings (excluding merger-related expenses) resulted
primarily from an increase in electricity sales volumes to retail customers of
5.1% and reduced costs resulting from merger-related operating efficiencies. The
increased sales volumes were due to warmer weather conditions in the third
quarter of 1998, compared to the same period in 1997, as well as continued
economic growth within IEC's service territory. Partially offsetting these items
were higher depreciation expenses, higher purchased power costs at WP&L, lower
income from off-system sales at WP&L, increased expenses for Year 2000 readiness
efforts and a higher effective income tax rate.
IEC's diversified (nonregulated) operations reported a net loss of $1.2 million
in the third quarter of 1998 compared to net income of $2.4 million in the
comparable 1997 period. Excluding one-time merger expenses, the third quarter
1998 net loss would have been approximately $0.3 million. The decrease in
earnings was largely due to lower oil and gas prices at Whiting, IEC's
Denver-based oil and gas subsidiary, a higher effective income tax rate,
expenses for new business development in international and domestic markets and
a gain realized in the third quarter of 1997 from an asset sale. Income from
IEC's electricity trading joint venture partially offset these items.
Electric Operations
Electric margins and MWH sales for IEC for the three months ended September 30
were as follows:
Revenues and Costs MWHs Sold
(in thousands) Change (in thousands) Change
---------------------------- --------- ---------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Residential $ 161,978 $ 149,653 8% 1,962 1,826 7%
Commercial 94,590 89,689 5% 1,350 1,297 4%
Industrial 136,922 130,621 5% 3,311 3,180 4%
------------- ------------- ------------- -------------
Total from ultimate
customers 393,490 369,963 6% 6,623 6,303 5%
Sales for resale 56,617 53,176 6% 1,851 1,810 2%
Other 10,867 10,844 - 38 38 -
---------------------------- ------------ -------------
Total
460,974 433,983 6% 8,512 8,151 4%
============= ============= =========
Electric production fuels
82,725 72,031 15%
Purchased power
69,366 65,783 5%
------------- -------------
Margin $ 308,883 $ 296,169 4%
============= ============= =========
30
Electric margins and MWH sales for IEC for the nine months ended September 30
were as follows:
Revenues and Costs MWHs Sold
(in thousands) Change (in thousands) Change
---------------------------- --------- ---------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Residential $ 409,757 $ 396,122 3% 5,198 5,159 1%
Commercial 241,384 232,576 4% 3,702 3,614 2%
Industrial 361,776 344,846 5% 9,461 9,119 4%
------------- ------------- ------------- -------------
Total from ultimate customers 1,012,917 973,544 4% 18,361 17,892 3%
Sales for resale 156,657 145,523 8% 5,557 5,022 11%
Other 29,565 26,310 12% 118 122 (3%)
---------------------------- ============= =============
Total 1,199,139 1,145,377 5% 24,036 23,036 4%
============= ============= =========
Electric production fuels 214,815 204,004 5%
Purchased power 198,930 193,616 3%
------------- -------------
Margin $ 785,394 $ 747,757 5%
============= ============= =========
Electric margin increased $12.7 million, or 4%, and $37.6 million, or 5%, for
the three and nine months ended September 30, 1998, respectively, as compared
with the same periods in 1997. The increase for both periods was primarily due
to the recovery of concurrent and previously deferred expenditures for
Iowa-mandated energy efficiency programs, higher sales volumes and reduced
purchased power capacity costs at IESU. The recovery for energy efficiency
programs 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 $5.9 million
and $26.0 million for the three and nine months ended September 30, 1998
compared with the same periods in 1997. The increased sales volumes were due to
warmer weather conditions in the third quarter of 1998, compared with the same
period in 1997, as well as continued growth in the IEC service territory.
The increase in electric margin for the nine month period was also due to WP&L's
reliance on more costly purchased power in the first six months of 1997 due to
various power plant outages and the collection of a $3.2 million surcharge
related to Kewaunee (a corresponding amount was included in depreciation and
amortization expense). Partially offsetting the increase in margin for the three
and nine month periods were higher than forecasted purchased power and
transmission costs at WP&L and lower income from off-system sales at WP&L. Rate
reductions implemented at WP&L and IPC in April 1997 and October 1997,
respectively, also partially offset the nine month increase.
IESU's and IPC's electric tariffs include EAC's that are designed to currently
recover the costs of fuel and the energy portion of purchased power billings.
31
Gas Operations
Gas margins and Dth sales for IEC for the three months ended September 30 were
as follows:
Revenues and Costs Dekatherms Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 15,504 $ 16,820 (8%) 1,918 2,074 (8%)
Commercial 7,709 8,785 (12%) 1,533 1,661 (8%)
Industrial 3,407 3,144 8% 998 815 22%
Transportation and other 2,462 5,144 (52%) 11,589 13,115 (12%)
--------------------------- ============ =============
Total 29,082 33,893 (14%) 16,038 17,665 (9%)
============ ============= =========
Cost of utility gas sold 12,215 18,833 (35%)
------------- -------------
Margin $ 16,867 $ 15,060 12%
============= ============= =========
Gas margins and Dth sales for IEC for the nine months ended September 30 were as
follows:
Revenues and Costs Dekatherms Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 121,797 $ 155,602 (22%) 19,475 23,524 (17%)
Commercial 58,843 78,174 (25%) 11,998 14,267 (16%)
Industrial 13,564 17,163 (21%) 3,658 3,915 (7%)
Transportation and other 10,191 18,770 (46%) 38,333 42,321 (9%)
--------------------------- ============ =============
Total 204,395 269,709 (24%) 73,464 84,027 (13%)
============ ============= =========
Cost of utility gas sold 113,401 175,544 (35%)
------------- -------------
Margin $ 90,994 $ 94,165 (3%)
============= ============= =========
Gas margin increased $1.8 million, or 12%, and decreased $3.2 million, or 3%,
for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in the prior year. Dth sales declined by 9% and
13% for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in 1997 due to milder weather. Partially
offsetting the decline in margin for the nine months ended September 30, 1998
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). Gas revenues included increased
recoveries for energy efficiency program costs in Iowa of $0.4 million and $7.5
million for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in 1997. A rate reduction implemented in April
1997 at WP&L also contributed to the decrease in margin for the nine months
ended September 30, 1998.
The increase in gas margin for the three months ended September 30, 1998 was
primarily due to gas cost adjustments at IPC and higher earnings from the gas
incentive program at WP&L.
IESU's and IPC's gas tariffs include PGA clauses that are designed to currently
recover the cost of utility gas sold.
32
Nonregulated and Other Revenues
Nonregulated and other revenues for the three and nine months ended September 30
were as follows (in thousands):
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Environmental and engineering services $17,348 $20,450 $50,672 $59,207
Oil and gas production 15,854 15,907 50,478 46,590
Transportation, rents and other 13,985 12,164 34,411 35,100
Nonregulated energy 7,668 29,703 30,796 123,353
Steam 6,059 6,317 19,885 22,227
Affordable housing 3,008 3,085 9,069 9,307
Water 1,335 1,356 3,763 3,480
------------- ------------- ------------- -------------
$65,257 $88,982 $199,074 $299,264
============= ============= ============= =============
The revenues for nonregulated energy declined significantly in the three and
nine months ended September 30, 1998 compared with the same periods in 1997
primarily due to a shift to higher margin, lower volume gas customers and the
transfer of the power marketing business to a joint venture in July 1997 with
Cargill Incorporated to market electricity and risk management services to
wholesale buyers. In addition, revenues declined in environmental and
engineering services due to sales force reductions and the performance of less
subcontracting work. For the nine months ended September 30, 1998, these
decreases were partially offset by increased oil and gas production revenues
resulting from increased acquisition and development activity. The revenue
increase from the higher oil and gas volumes sold was largely offset by lower
oil and gas prices, however.
Operating Expenses
Other operation expenses for the three and nine months ended September 30 were
as follows (in thousands):
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------------- -------------- ----------------------------
Utility-WP&L/IESU/IPC $92,688 $87,775 $308,627 $255,406
Nonregulated and other 47,394 70,178 147,486 244,943
-------------- -------------- -----------------------------
$140,082 $157,953 $456,113 $500,349
============== ============== ============================
IEC's other operation expenses decreased $17.9 million and $44.2 million for the
three and nine months ended September 30, 1998, respectively, as compared with
the same periods in 1997. The increase in other operation expense at the utility
subsidiaries was primarily due to increased merger-related expenses of $1.9
million and $31.7 million for the three and nine months ended September 30,
1998, an increase in energy efficiency expenses in Iowa of $5.6 million and
$26.8 million for the three and nine months ended September 30, 1998, higher
administrative and general expenses at WP&L and increased expenses for Year 2000
readiness efforts. The merger-related expenses were primarily for employee
retirements and separations. The increase was partially offset by reduced
pension and benefit expenses, lower costs resulting from merger-related
operating efficiencies and reduced nuclear operation expenses at IESU.
Other operation expenses at the nonregulated businesses were lower for the three
and nine months ended September 30, 1998 compared with the same periods in 1997
due to a decrease in the cost of nonregulated energy sold of $21.8 million and
$92.9 million, respectively, sales force reductions and the performance of less
subcontracting work in the environmental and engineering services business.
These reductions in operation expense were partially offset by higher expenses
in the oil and gas production business due to increased activity and expenses
for new business
33
development in international and domestic markets. In addition, under the
successful efforts method (see Note 7 of the "Notes to Consolidated Financial
Statements" for a further discussion), Whiting recorded pre-tax impairment
charges of $1.7 million and $8.4 million for the three and nine months ended
September 30, 1998, respectively, and pre-tax charges of $0.3 million and $2.7
million for the three and nine months ended September 30, 1997, respectively.
Depreciation and amortization expense increased $5.6 million and $20.8 million
for the three and nine months ended September 30, 1998, respectively, as
compared with the same period last year as a result of utility property
additions. The increase for the nine month period was also due to the Kewaunee
surcharge (which is recorded in depreciation and amortization expense with a
corresponding increase in revenues resulting in no impact on earnings) and
higher depletion expense at Whiting.
Interest Expense and Other
Interest expense increased $6.5 million for the nine months ended September 30,
1998 compared with the same period in 1997 due to higher borrowings during 1998
and unusually low interest expense in the second quarter of 1997, resulting from
an adjustment to decrease interest expense relating to a tax audit settlement.
Miscellaneous, net expense increased $3.6 million and $16.0 million for the
three and nine months ended September 30, 1998, respectively, primarily due to
merger-related expenses for the services of IEC's advisors and costs related to
IEC's name change.
Income Taxes
IEC's income tax expense increased $1.7 million and decreased $18.2 million for
the three and nine months ended September 30, 1998, respectively. The change for
nine months ended September 30, 1998 was due to lower pre-tax income, which was
partially offset by an increase in the overall effective tax rate. The effective
tax rate increase is primarily due to the incurrence of various non-deductible
merger-related expenses in 1998.
IESU RESULTS OF OPERATIONS
Overview
IESU reported 1998 earnings available for common stock of $30.4 million and
$44.6 million for the three and nine months ended September 30, 1998,
respectively, as compared with $28.4 million and $46.7 million for the same
periods in 1997. The increased earnings for the three months ended September 30,
1998 were primarily due to a higher electric margin which was partially offset
by merger-related expenses, increased depreciation and amortization expenses and
a higher effective tax rate. The decreased earnings for the nine months ended
September 30, 1998 were primarily due to merger-related expenses, increased
depreciation and amortization expenses, a higher effective tax rate and lower
gas sales due to milder weather conditions. These items were partially offset by
a higher electric margin and the nonrecurrence of a $2.5 million reserve for
non-utility investments recorded in the second quarter of 1997.
Prior to August 1997, energy efficiency expenditures for Iowa mandated energy
efficiency programs had been recorded as a regulatory asset and recovered
through rates over a four-year period. In August 1997, the IUB allowed IESU to
begin concurrent recovery of its prospective expenditures (see "Rates and
Regulatory Matters" for additional information).
34
Electric Operations
Electric margins and MWH sales for IESU for the three months ended September 30
were as follows:
Revenues and Costs MWHs Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 74,079 $ 71,521 4% 761 737 3%
Commercial 53,132 50,107 6% 676 640 6%
Industrial 55,883 53,675 4% 1,229 1,175 5%
------------- ------------- ------------ -------------
Total from ultimate customers 183,094 175,303 4% 2,666 2,552 4%
Sales for resale 15,190 6,373 138% 520 161 223%
Other 3,052 3,000 2% 11 11 -
--------------------------- ----------- -------------
Total 201,336 184,676 9% 3,197 2,724 17%
============ ============= =========
Electric production fuels 32,349 24,458 32%
Purchased power 18,315 18,749 (2%)
------------- -------------
Margin $ 150,672 $ 141,469 7%
============= ============= =========
Electric margins and MWH sales for IESU for the nine months ended September 30
were as follows:
Revenues and Costs MWHs Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 178,917 $ 175,047 2% 1,995 2,033 (2%)
Commercial 127,998 123,369 4% 1,823 1,777 3%
Industrial 140,620 135,306 4% 3,630 3,505 4%
------------- ------------- ------------ -------------
Total from ultimate customers 447,535 433,722 3% 7,448 7,315 2%
Sales for resale 34,153 17,866 91% 1,241 518 140%
Other 7,937 8,065 (2%) 32 33 (3%)
--------------------------- ----------- --------------
Total 489,625 459,653 7% 8,721 7,866 11%
============ ============= =========
Electric production fuels 77,278 72,507 7%
Purchased power 55,132 52,472 5%
------------- -------------
Margin $ 357,215 $ 334,674 7%
============= ============= =========
Electric margin increased $9.2 million, or 7%, and $22.5 million, or 7%, for the
three and nine months ended September 30, 1998, respectively, as compared with
the same periods in 1997 primarily due to the recovery of concurrent and
previously deferred expenditures for Iowa-mandated energy efficiency programs,
reduced purchased power capacity costs and customer sales growth. The recovery
for energy efficiency programs 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 $3 million and $15 million for the three and nine months
ended September 30, 1998, respectively, as compared with the same periods in
1997. Sales for resale increased significantly for both periods as a result of
the implementation of a 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). See "Rates
and Regulatory Matters" for a further discussion.
35
Electric margin also increased for the three months ended September 30, 1998 as
a result of a 3% increase in sales to higher margin residential customers as a
result of warmer weather as compared with the same period last year. The
increase in electric margin for the nine months ended September 30, 1998 was
partially offset by a decrease of 2% in sales to higher margin residential
customers due to milder winter weather conditions in 1998 compared with the same
period in 1997.
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.
Gas Operations
Gas margins and Dth sales for IESU for the three months ended September 30 were
as follows:
Revenues and Costs Dekatherms Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 8,187 $ 8,802 (7%) 933 1,025 (9%)
Commercial 3,852 4,259 (10%) 714 758 (6%)
Industrial 2,110 1,656 27% 652 440 48%
Transportation and other 835 790 6% 2,537 2,287 11%
--------------------------- ------------ -------------
Total 14,984 15,507 (3%) 4,836 4,510 7%
============ ============= =========
Cost of gas sold (4%)
7,524 7,835
------------- -------------
Margin $ 7,460 $ 7,672 (3%)
============= ============= =========
Gas margins and Dth sales for IESU for the nine months ended September 30 were
as follows:
Revenues and Costs Dekatherms Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 59,183 $ 75,037 (21%) 9,350 11,140 (16%)
Commercial 27,357 37,078 (26%) 5,650 6,520 (13%)
Industrial 6,801 7,926 (14%) 1,997 1,874 7%
Transportation and other 2,958 2,670 11% 8,273 7,507 10%
--------------------------- ------------ -------------
Total 96,299 122,711 (22%) 25,270 27,041 (7%)
============ ============= =========
Cost of gas sold 55,963 84,413 (34%)
------------- -------------
Margin $ 40,336 $ 38,298 5%
============= ============= =========
Gas margin increased $2.0 million, or 5%, for the nine months ended September
30, 1998 compared with the same period in 1997 primarily due to 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). For the nine months ended September 30, 1998 gas
revenues included an increase of $5.0 million in recoveries for energy
efficiency program costs as compared to the same period last year. Partially
offsetting the increased recoveries for energy efficiency programs was a
decrease in Dth sales of 7% resulting from milder winter weather.
IESU's gas tariffs include PGA clauses that are designed to currently recover
the cost of gas sold.
36
Operating Expenses
IESU's other operation expenses decreased $0.5 million and increased $17.1
million for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in 1997. The decrease for the three months was
primarily due to reduced pension and benefit costs and lower injury and damage
expenses which were largely offset by an increase of $2.7 million in energy
efficiency expenses. The nine month increase resulted from $17.7 million of
higher energy efficiency expenses, merger-related expenses and Year 2000
compliance costs which were partially offset by lower nuclear operation
expenses, reduced pension and benefit costs and lower injury and damage
expenses. The merger-related expenses were primarily for employee retirements
and separations.
Depreciation and amortization expense increased $2.0 million and $3.5 million
for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in 1997 primarily due to property additions.
Interest Expense and Other
Miscellaneous, net expense increased $2.9 million for the nine months ended
September 30, 1998 compared with the same period in 1997 primarily due to
merger-related expenses and lower returns on deferred energy efficiency
expenditures (which are being recovered concurrently effective August 1997). The
increase was partially offset by the nonrecurrence of a $2.5 million reserve for
non-utility investments recorded in the second quarter of 1997.
Income Taxes
IESU's income tax expense increased $4.4 million and $2.3 million for the three
and nine months ended September 30, 1998, respectively, as compared with the
same periods in 1997 due to higher pre-tax income and an increase in the overall
effective tax rate. The effective rate increased primarily as a result of the
incurrence of certain merger-related expenses which are not deductible.
WP&L RESULTS OF OPERATIONS
Overview
WP&L reported consolidated earnings available for common stock of $11.9 million
and $26.6 million for the three and nine months ended September 30, 1998,
respectively, as compared with $14.4 million and $47.1 million for the same
periods in 1997. The decline in earnings for the three months ended September
30, 1998 was primarily due to higher depreciation and amortization expenses,
lower electric margin and merger-related expenses. The decline in earnings for
the nine months ended September 30, 1998 was primarily due to merger-related
expenses, higher depreciation and amortization expenses, lower gas margin and
higher interest expense which were partially offset by reduced maintenance
expenses.
37
Electric Operations
Electric margins and MWH sales for WP&L for the three months ended September 30
were as follows:
Revenues and Costs MWHs Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 55,156 $ 50,194 10% 833 763 9%
Commercial 29,671 27,944 6% 522 499 5%
Industrial 42,504 38,812 10% 1,182 1,100 7%
------------- ------------- ------------ -------------
Total from ultimate customers 127,331 116,950 9% 2,537 2,362 7%
Sales for resale 33,800 44,464 (24%) 1,072 1,591 (33%)
Other 4,214 4,051 4% 13 13 -
--------------------------- ------------ -------------
Total 165,345 165,465 - 3,622 3,966 (9%)
============ ============= =========
Electric production fuels 33,520 31,253 7%
Purchased power 30,539 31,514 (3%)
------------- -------------
Margin $ 101,286 $ 102,698 (1%)
============= ============= =========
Electric margins and MWH sales for WP&L for the nine months ended September 30
were as follows:
Revenues and Costs MWHs Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 152,861 $ 150,205 2% 2,289 2,227 3%
Commercial 83,039 80,481 3% 1,453 1,403 4%
Industrial 121,179 113,003 7% 3,335 3,145 6%
------------- ------------- ------------ -------------
Total from ultimate customers 357,079 343,689 4% 7,077 6,775 4%
Sales for resale 103,373 123,015 (16%) 3,592 4,384 (18%)
Other 10,517 8,494 24% 44 46 (4%)
--------------------------- ------------ -------------
Total 470,969 475,198 (1%) 10,713 11,205 (4%)
============ ============= =========
Electric production fuels 91,889 89,655 2%
Purchased power 89,378 98,610 (9%)
------------- -------------
Margin $ 289,702 $ 286,933 1%
============= ============= =========
Electric margin decreased $1.4 million, or 1%, and increased $2.8 million, or
1%, for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in 1997. Sales to ultimate customers for both
periods increased due to economic strength in the service territory and warmer
weather. Sales for resale declined in both periods as a result of a less active
bulk power market, increased transmission constraints, and implementation of the
merger-related joint sales agreement. Under the agreement, the marginal revenues
resulting from sales in the bulk power market are shared among the utility
merger partners (WP&L, IESU and IPC).
The increase in electric margin for the nine month period was also due to
reliance on more costly purchased power in the first six months of 1997 due to
various power plant outages and the collection of a $3.2 million surcharge
related to Kewaunee (a corresponding amount was included in depreciation and
amortization expense). Higher than forecasted purchased power and transmission
costs and lower income from off-system sales negatively impacted the
38
1998 three and nine month margin as compared to the prior period. A rate
reduction implemented in April 1997 also partially offset the nine month
increase.
Gas Operations
Gas margins and Dth sales for WP&L for the three months ended September 30 were
as follows:
Revenues and Costs Dekatherms Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 5,112 $ 5,631 (9%) 737 778 (5%)
Commercial 2,969 3,445 (14%) 663 715 (7%)
Industrial 561 698 (20%) 152 176 (14%)
Transportation and other 808 3,597 (78%) 2,715 3,436 (21%)
--------------------------- ------------ -------------
Total 9,450 13,371 (29%) 4,267 5,105 (16%)
============ ============= =========
Cost of gas sold 2,711 7,135 (62%)
------------- -------------
Margin $ 6,739 $ 6,236 8%
============= ============= =========
Gas margins and Dth sales for WP&L for the nine months ended September 30 were
as follows:
Revenues and Costs Dekatherms Sold
(in thousands) Change (in thousands) Change
--------------------------- --------- --------------------------- ---------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Residential $ 45,102 $ 59,037 (24%) 7,454 8,887 (16%)
Commercial 22,712 30,061 (24%) 4,781 5,665 (16%)
Industrial 4,019 5,656 (29%) 951 1,164 (18%)
Transportation and other 4,879 13,829 (65%) 9,190 13,439 (32%)
--------------------------- ------------ -------------
Total 76,712 108,583 (29%) 22,376 29,155 (23%)
============ ============= =========
Cost of gas sold 41,940 68,401 (39%)
------------- -------------
Margin $ 34,772 $ 40,182 (13%)
============= ============= =========
Gas margin declined $5.4 million or 13% for the nine months ended September 30,
1998 compared with the same period in 1997 due to a reduction in Dth sales
resulting from milder weather and an average retail rate reduction of 2.2%
effective April 29, 1997. 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 are reported as a reduction of the
cost of gas sold rather than as gas revenue. Off-system gas revenues were $1.8
million and $9.6 million for the three and nine months ended September 30, 1997.
The PSCW has approved a gas cost adjustment mechanism based on a prescribed
commodity price index which replaced the PGA clause formerly in place for WP&L.
Under the current sharing mechanism, 40% of all gains and losses relative to
current commodity prices as well as other benchmarks are recognized by WP&L
rather than refunded to or recovered from customers. WP&L realized favorable
contributions to gas margin of $0.7 million and $0.2 million for the three and
nine months ended September 30, 1998. For the same periods in 1997, WP&L
realized an unfavorable contribution of $0.2 million and a favorable
contribution of $0.2 million.
39
Operating Expenses
Other operation expense increased $1.2 million and $9.8 million for the three
and nine months ended September 30, 1998, respectively, as compared with the
same periods in 1997 primarily due to merger-related expenses for employee
retirements and separations and higher administrative and general expenses. Such
items were partially offset by the reflection in the third quarter of 1998 of
updated actuarial estimates for annual benefit costs which were lower than
earlier estimates. Maintenance expense declined for the nine months ended
September 30, 1998 due to increased expenses in the same period in 1997
resulting from several generating plant outages and overhauls.
Depreciation and amortization expense increased $3.4 million and $13.9 million
for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in 1997 due to property additions. The nine
months ended September 30, 1998, expenses also increased due to higher Kewaunee
depreciation (see "Capital Requirements - Nuclear Facilities" for additional
information) and $3.2 million of amortization costs related to the recovery of
deferred charges associated with the 1997 outages at the Kewaunee nuclear plant.
Interest Expense and Other
Interest expense increased $3.5 million for the nine months ended September 30,
1998 compared with the same period in 1997 primarily due to unusually low
interest expense in the second quarter of 1997, resulting from an adjustment to
decrease interest expense relating to a tax audit settlement. Interest expense
was also impacted by increased borrowings during 1998.
Miscellaneous, net expense increased $5.9 million for the nine months ended
September 30, 1998 compared with the same period in 1997 largely due to
merger-related expenses.
Income Taxes
Income taxes decreased $1.6 million and $12.9 million for the three and nine
months ended September 30, 1998, respectively, as compared with the same periods
in 1997 due to lower taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Historical IEC Analysis
Cash flows from operating activities at IEC increased to $377 million for the
nine months ended September 30, 1998 compared with $335 million for the nine
months ended September 30, 1997, primarily due to changes in working capital
partially offset by lower net income. Cash flows used for financing activities
were higher for the first nine months of 1998 compared with the first nine
months of 1997 due to the net change in borrowings. Cash flows used for
investing activities were constant in the first nine months of 1998 compared
with the first nine months of 1997. Times interest earned before income taxes
for IEC for the nine months ended September 30, 1998 was 2.37 compared with 3.18
for the same time period in 1997.
Historical IESU Analysis
Cash flows generated from operating activities increased to $169 million during
the nine months ended September 30, 1998 compared with $153 million for the nine
months ended September 30, 1997 primarily due to changes in working capital.
Cash flows used for financing activities were lower in the first nine months of
1998 compared with the same period last year primarily due to reduced common
stock dividends and changes in debt levels. Cash flows used for investing
activities were lower during the first nine months of 1998 as compared with the
first nine months of 1997 due to the concurrent recovery of energy efficiency
expenditures in 1998 and lower construction expenditures.
40
Historical WP&L Analysis
Cash flows generated from operations were $160 million for the nine months ended
September 30, 1998 compared with $131 million for the nine months ended
September 30, 1997. The increase was primarily due to higher depreciation
expense and changes in working capital, partially offset by lower net income.
Cash flows used for financing activities were higher in the first nine months of
1998 compared with the same period in 1997 primarily due to changes in debt
levels partially offset by lower common stock dividends. Cash flows used for
investing activities were lower in the third quarter of 1998 due to reduced
construction expenditures which were partially offset by higher nuclear
decommissioning funding levels.
Future Considerations
The capital requirements of IEC are primarily attributable to its utility
subsidiaries' construction and acquisition programs, its debt maturities and
business opportunities of Alliant Industries. 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 utility costs. IEC's liquidity and
capital 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.
IEC has interests in the international arena. At September 30, 1998, Alliant
Industries had approximately $58 million of investments in foreign entities. At
September 30, 1998, IESU, WP&L and IPC did not have any foreign investments. It
is expected that IEC will continue to explore additional international
investment opportunities. Such investments may carry a higher level of risk than
IEC's traditional domestic utility investments or Alliant Industries' 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 EWG's and FUCO's is limited to 50%
of IEC's consolidated retained earnings.
At September 30, 1998, Alliant Industries and IPC had investments in the stock
of McLeod, a telecommunications company, valued at $222.5 million and $1.0
million (based on a September 30, 1998 closing price of $21.875 per share and
compared to a cost basis of $29.0 million and $0.1 million), respectively. The
McLeod stock price closed at $36.69 per share on November 10, 1998. 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. 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. In addition, any such gains or losses are
reflected in current earnings only at the time they are realized through a sale.
IEC had certain off-balance sheet financial guarantees and commitments
outstanding at September 30, 1998. They generally consist of third-party
borrowing arrangements and lending commitments as well as guarantees of
financial performance of syndicated affordable housing properties. Such
guarantees were generally issued to support third party borrowing arrangements
and similar transactions. Management currently believes the possibility of IEC
having to make any material cash payments under these agreements is remote.
41
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets, and costs of
external financing, are dependent on creditworthiness. The debt ratings of IEC
and certain subsidiaries are as follows:
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 Industries - 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 loaning money to non-Wisconsin utilities and therefore
WP&L is restricted from loaning money to the utility money pool.
Alliant Industries 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 Industries'
commercial paper program. A combined maximum of $450 million of borrowings under
this agreement and the commercial paper program may be outstanding at any one
time. Interest rates and maturities are set at the time of borrowing. The rates
are based upon quoted market prices and the maturities are less than one year.
At September 30, 1998, Alliant Industries had $259 million of borrowings
outstanding under this facility with interest rates ranging from 5.66%-5.75%.
(Refer to the "Other Matters - Financial Instruments" section for a discussion
of several interest rate swaps Alliant Industries has entered into relative to
$200 million of borrowings under this Agreement). Alliant Industries intends to
continue borrowing under the renewal options of this facility and no conditions
existed at September 30, 1998 that would prevent the issuance of commercial
paper or direct borrowings on its bank lines. Accordingly, this debt is
classified as long-term. In addition, Alliant Industries also 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, 2002:
IESU $185.0
IPC 8.1
WP&L 1.9
Alliant Industries 287.6
-----------------
IEC $482.6
=================
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.
42
IESU, WP&L and IPC currently have no authority from their applicable
federal/state regulatory commissions or the SEC to issue additional long-term
debt. The companies continually evaluate their future financing needs and will
make the necessary regulatory filings as needed. In October 1998, IESU and IPC
filed applications with the SEC under PUHCA to issue up to $200 million and $80
million of debt securities, respectively. It is anticipated that these
securities will be issued during the next two years.
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.
The various charter provisions of the entities identified below authorize and
limit the aggregate amount of additional shares of Cumulative Preferred Stock
and Cumulative Preference Stock that may be issued. At September 30, 1998, the
companies 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
The capitalization ratios of IEC, IESU, WP&L and IPC were as follows:
IEC IESU WP&L IPC
9/30/98 12/31/97 9/30/98 12/31/97 9/30/98 12/31/97 9/30/98 12/31/97
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Common equity 49% 51% 48% 45% 58% 59% 53% 52%
Preferred stock 4 3 2 1 6 6 8 8
Long-term debt 47 46 50 54 36 35 39% 40
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
100% 100% 100% 100% 100% 100% 100% 100%
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 September 30, 1998:
IESU WP&L IPC
---- ---- ---
Regulatory authorization $200 $138 $75
Short-term debt outstanding - $73 $7
In addition to the short-term debt at its utility subsidiaries, IEC had an
additional $54 million of short-term debt outstanding at September 30, 1998. In
addition to providing for ongoing working capital needs, this availability of
short-term financing provides the companies flexibility in the issuance 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 Industries 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 Alliant Industries' commercial paper
program. A combined maximum of $150 million of borrowings under this agreement
and the commercial paper program may be outstanding at any one time. Interest
rates and maturities are set at the time of borrowing. The rates are based upon
quoted market prices and the maturities are less than one year. There were no
borrowings under this facility at September 30, 1998.
43
In addition to the aforementioned borrowing capability under Alliant Industries
Credit Agreements, IEC has $150 million of bank lines of credit, of which none
was utilized, at September 30, 1998 available for direct borrowing or to support
commercial paper. Commitment fees are paid to maintain these lines and there are
no conditions which restrict the unused lines of credit.
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 at September 30, 1998.
Given the above financing flexibility, including IEC's access to both the debt
and equity securities markets, management believes it has the necessary
financing capabilities in place to adequately finance its capital requirements
for the 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 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 nine months ended
September 30, 1998 were $242 million, compared with $226 million for the nine
months ended September 30, 1997. IEC's anticipated construction and acquisition
expenditures for 1998 were forecasted to be approximately $630 million,
consisting of approximately $277 million in its utility operations, $190 million
for energy-related international investments and $163 million for new business
development initiatives at Alliant Industries. The level of 1998 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 the
Wisconsin Utility Holding Company Act (WUHCA) on the amount of IEC's non-utility
investments. It is expected that IEC will spend approximately $1.2 billion on
utility construction and acquisition expenditures during 1999-2002. It is
expected that Alliant Industries will invest in energy products and services in
domestic and international markets, industrial services initiatives and other
strategic initiatives.
IEC anticipates financing utility construction expenditures during 1998-2002
through internally generated funds supplemented, when required, by outside
financing. Funding of a majority of the Alliant Industries construction and
acquisition expenditures is expected to be completed with external financings.
IESU's construction and acquisition expenditures for the nine months ended
September 30, 1998 were $71 million compared with $75 million for the nine
months ended September 30, 1997. IESU's construction and acquisition program
anticipates expenditures of approximately $124 million for 1998, of which 46%
represents expenditures for electric transmission and distribution facilities,
17% represents electric generation expenditures, 12% represents information
technology expenditures and 7% represents gas utility expenditures. The
remaining 18% represents miscellaneous electric, steam and general expenditures.
IESU's levels of utility construction and acquisition expenditures are projected
to be $129 million in 1999, $103 million in 2000, $98 million in 2001 and $99
million in 2002. IESU anticipates funding the large majority of its utility
construction and acquisition expenditures during 1998-2002 through internally
generated funds, supplemented by external financings as needed.
WP&L's construction and acquisition expenditures for the nine months ended
September 30, 1998 were $74 million compared with $89 million for the nine
months ended September 30, 1997. The decrease was due to significant
44
expenditures in 1997 for computer system development projects. WP&L's levels of
utility construction and acquisition expenditures are projected to be $133
million in 1998, $136 million in 1999, $138 million in 2000, $141 million in
2001 and $144 million in 2002. WP&L anticipates funding the large majority of
its utility construction and acquisition expenditures during 1998-2002 through
internally generated funds, supplemented by external financings as needed.
Nuclear Facilities
IEC owns interests in two nuclear facilities, Kewaunee and the DAEC. Set forth
below is a discussion of certain matters impacting these facilities.
Kewaunee, a 532-megawatt pressurized water reactor plant, is operated by WPSC
and is jointly owned by WPSC (41.2%), WP&L (41.0%), and 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. 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 are needed.
In addition to the inspection and repairs of the steam generator, a major
overhaul is being performed on the main turbine generator. The plant should be
back in operation late in the fourth quarter of 1998. On July 2, 1998, WPSC and
WP&L received approval from the PSCW to defer the costs associated with the
repair of Kewaunee steam generator tubes. If the costs are significant, recovery
of the deferred costs will be requested in a future rate proceeding. Minimal
costs have been deferred to date.
Prior to the July 2, 1998 PSCW decision, the PSCW had directed the owners of
Kewaunee to develop depreciation and decommissioning cost levels based on an
expected plant end-of-life of 2002 versus a license end-of-life of 2013. This
was prompted by 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. At September 30, 1998,
the net carrying amount of WP&L's investment in Kewaunee was approximately $43.3
million. The current cost of WP&L's share of the estimated costs to decommission
Kewaunee is $189.7 million and exceeds the trust assets at September 30, 1998 by
$59.9 million. WP&L's contribution to the decommissioning trust fund is based on
an annual inflation rate of 5.83%. WP&L's retail customers in Wisconsin are
responsible for approximately 80% of WP&L's share of Kewaunee costs.
WPSC is an intervenor defendant in Madison Gas and Electric Co. v. Public
Service Commission of Wisconsin, Dane County Circuit Court. The case involves
MG&E's appeal of the PSCW's order granting WPSC authority to replace the steam
generators at Kewaunee. MG&E opposes the steam generator replacement project.
WPSC and MG&E have entered into a letter of intent to consummate certain
transactions which would result in the settlement of MG&E's opposition to the
steam generator replacement project and the dismissal of MG&E's appeal. WPSC and
MG&E anticipate executing a definitive settlement agreement by the end of 1998.
45
DAEC, a 535-megawatt boiling water reactor plant, is operated by IESU and IESU
has a 70% ownership interest in the plant. The DAEC operating license expires in
2014. Pursuant to the most recent electric rate case order, the IUB allows IESU
to recover $6.0 million annually for the cost to decommission the DAEC. The
current recovery figures are based on an assumed cost to decommission the DAEC
of $252.8 million, which is IESU's 70% portion in 1993 dollars, based on the
Nuclear Regulatory Commission minimum formula (which exceeds the amount in the
current site-specific study completed in 1994). At September 30, 1998, IESU had
$83.0 million invested in external decommissioning trust funds and also had an
internal decommissioning reserve of $21.7 million recorded as accumulated
depreciation.
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 (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, and
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 OCA
into whether IESU is exceeding a reasonable return on common equity.
Pursuant to the authority described in the prior paragraph, the OCA requested
certain financial information related to both electric and gas utility
operations within the state of Iowa for IESU. The OCA requested information on
what pro forma adjustments IESU would make to its most recent historical test
year (1997) to be in compliance with the State of Iowa Code, IUB rules and past
rate case precedent. IESU completed the data request in a timely manner and
based upon that information management believes no change that would reduce
utility rates is warranted. While IESU cannot predict the outcome of this
process, management currently believes that the final outcome will not have a
material adverse impact on IESU's results of operations or financial position.
Under provisions of the IUB rules, IESU is currently recovering the costs it has
incurred for its energy efficiency programs. There have been several cost
recovery filings made with and approved by the IUB over the course of the last
few years. Generally, the costs incurred through July 1997 are being recovered
over various four-year periods. The IUB commenced a rulemaking in January 1997
to implement statutory changes allowing concurrent recovery and a final order in
this proceeding was issued in April 1997. The new rules allowed IESU to begin
concurrent recovery of its prospective expenditures on August 1, 1997. The
implementation of these changes will gradually eliminate the regulatory asset
that was created under the prior rate making mechanism as these costs are
recovered.
46
IESU has the following amounts of energy efficiency costs included in regulatory
assets on its Consolidated Balance Sheets (in thousands):
Four-Year
Recovery
Beginning September 30, 1998 December 31, 1997
------------ ---------------------- ----------------------
Costs incurred through 1993 6/95 $4,240 $7,779
Costs incurred in 1994 -1995 8/97 24,551 30,924
Costs incurred from 1/96 - 7/97 8/97 15,420 19,847
(Over) under collection
of concurrent recovery N/A 30 850
---------------------- ----------------------
$44,241 $59,400
====================== ======================
WP&L
In connection with its approval of the Merger, the 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 not
merger-related and have a revenue 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%. Other items included in the rate order
were: authorization of a surcharge to collect replacement power costs while
Kewaunee remained out of service for the period effective April 29, 1997 through
July 1, 1997; authorization of an increase in the return on equity to 11.7% from
11.5%; reinstatement of the electric fuel adjustment clause; continuation of a
modified gas performance based ratemaking incentive mechanism; and a modified
SO2 incentive. In addition, 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. Based on the PSCW method
approved for calculating return on average common equity, the common equity
ratio at September 30, 1998 was 53.85%.
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 these 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 an electric rate increase of $14.8 million
annually that was effective on July 16, 1998.
The gas performance incentive was modified to eliminate the maximum gain or loss
to be recognized by WP&L. Previously, this incentive was limited to a maximum of
$1.1 million to WP&L. The incentive includes a sharing mechanism, whereby 40% of
all gains and losses relative to current commodity prices as well as other
benchmarks are recognized by WP&L rather than refunded to or recovered from
customers.
In April 1998, WP&L filed a request with the PSCW requesting deferral treatment
of all non-labor Year 2000 costs. In May 1998, the PSCW approved the deferral of
certain costs associated with the Year 2000 issue and required WP&L to submit a
request and support for the rate recovery of costs deferred as well as estimated
future Year 2000 costs in November 1998.
Refer to "Nuclear Facilities" for a discussion of recent PSCW rulings regarding
Kewaunee.
47
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 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 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.
Pursuant to the authority described in the prior paragraph, OCA has requested
certain financial information related to both electric and gas utility
jurisdictions within the state of Iowa for IPC. The OCA requested information on
what pro forma adjustments IPC would make to their most recent historical test
year (1997) to be in compliance with the State of Iowa Code, IUB rules and past
rate case precedent. IPC completed the data request in a timely manner and based
upon that information management believes no change that would reduce utility
rates is warranted. While IPC cannot predict the outcome of this process,
management currently believes that the final outcome will not have a material
adverse impact on IPC's results of operations or financial position.
On September 30, 1997, the IUB approved a settlement between IPC and the OCA
which provided for an electric rate reduction of approximately $3.2 million
annually. 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. IPC has the
following amounts of energy efficiency costs to be recovered in Iowa included in
regulatory assets on its Balance Sheets (in thousands):
Four-Year
Recovery
Beginning September 30, 1998 December 31, 1997
------------- ---------------------- ----------------------
Costs incurred through 1992 10/94 $- $912
Costs incurred in 1993 -1995 5/97 12,937 16,576
Costs incurred from 1/96 - 9/97 10/97 7,837 9,796
---------------------- ----------------------
$20,774 $27,284
====================== ======================
In addition, IPC had $3.3 million and $2.7 million at September 30, 1998 and
December 31, 1997, respectively, included in regulatory assets for energy
efficiency recoveries in Minnesota.
Assuming capture of the merger-related synergies and no significant legislative
or regulatory changes affecting its utility subsidiaries, IEC does not expect
the merger-related electric and gas price freezes to have a material adverse
effect on its financial position or results of operations.
OTHER 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 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.
48
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. A full-time project manager heads up
a team of approximately 50 employees who are dedicated to the team full-time and
another 110 employees working on the project on a part-time basis. In addition,
there are approximately 60 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 Year 2000 inventory, remediation efforts and
contingency planning is being done by the Internal Audits Department. IEC is
also seeking to retain 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 already 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.
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, 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.
The goal is to complete remediation work for the embedded systems by March 1999;
approximately 80% of this remediation work has been completed as of the end of
October 1998. Excluding the financial and customer information systems, there
are 434 applications in the information technology (I/T) inventory; 223 have
been remediated, tested and are in production; 183 are currently being
remediated or tested; the remaining 28 are being analyzed to determine final
action plans. Many of these 28 items are expected to be non-critical and,
therefore, probably will not need to be tested for compliance. The goal is to
complete the I/T remediation work by March 1999; approximately 40% has been
completed as of the end of October 1998. Remediation efforts are underway on the
financial and customer information systems which are also approximately 40%
complete as of the end of October 1998. IEC intends these efforts to be 90%
complete by the end of the first quarter of 1999 with work completed by
mid-year.
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. Should these upgrades be delayed it would impact IEC's ability
to meet its target date.
49
Costs to Address Year 2000 Compliance IEC's historical Year 2000 project
expenditures as well as CURRENT BEST 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 - 9/30/98 $4.3 $2.6 $1.2 $0.5
Remaining modifications for financial and
customer information systems $5.3 $2.3 $2.1 $0.9
Remaining modifications for other I/T systems
and embedded systems $32 $10 $14 $8
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 $1.0 million
of the $1.2 million expenditures incurred for the nine months ended September
30, 1998 have been deferred by WP&L). (Refer to "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 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 co-hosted a Year 2000 conference with the Iowa
Municipal Utility Association. IEC is also working closely with the North
American 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 plant control
and automated transmission and distribution systems and information technology
systems. The potential problems related to these systems include service
interruptions, service order and billing delays and the resulting customer
relations 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
Y2K-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. The Mid-Continent Area Power Pool
(MAPP) is also one of the 10 NERC councils and IEC also belongs to MAPP and will
be coordinating Year 2000 contingency planning with that organization as well.
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
50
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.
The Year 2000 cost estimates and other Year 2000 readiness statements contained
above constitute "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Such estimates and other statements
are based on numerous assumptions by management, including assumptions relating
to the accuracy of representations made by third parties regarding Year 2000
compliance and the continued availability of resources to deal with Year 2000
issues. Investors and other users of the forward-looking statements are
cautioned that such statements are subject to various risks and uncertainties
(some of which are described above) that could cause actual results to differ
materially from those expressed in, or implied by, such statements. Refer to the
"Forward-Looking Statements" section of MD&A for a further discussion.
Labor Issues
The status of the collective bargaining agreements at each of the utilities is
as follows at September 30, 1998:
IESU WP&L IPC
---- ---- ---
Number of collective bargaining agreements 6 1 3
Percentage of workforce covered by agreements 61 92 83
There are two agreements at IESU which expired on July 1, 1998. Two new
agreements were reached effective July 1, 1998 and both will expire on June 30,
2000. The number of employees covered under these agreements is relatively
small. There are eight agreements scheduled to expire in 1999.
Financial Instruments
IEC 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
historically has entered into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating-rate long-term debt, short-term
debt and the sales of its accounts receivable. The total notional amount of
interest rate swaps outstanding was $30 million at September 30, 1998. On
September 14, 1998 WP&L entered into an interest rate forward contract related
to the anticipated issuance of $60 million of long-term debt securities (see
Note 6 of IEC's "Notes to Consolidated Financial Statements" for additional
information). IEC has historically used swaps, futures and options to hedge the
price risks associated with the purchase and sale of stored gas at WP&L and with
the purchases and sales of gas and electric power at its energy marketing
subsidiary.
On April 23, 1998, Alliant Industries successfully competitively bid $200
million of interest rate swaps. These interest rate swap agreements were entered
into to reduce the impact of changes in variable interest rates by converting
variable rate borrowings into fixed rate borrowings. Two separate structures of
$100 million each were put in place. The first structure, a straight 2-year
swap, was priced at 5.841%. Under this structure, Alliant Industries pays a
fixed rate of 5.841% and receives 3-month LIBOR. Payments are made and LIBOR is
reset quarterly. The second structure, a 2-year swap with a 1-year extension
option, was priced at 5.6891%. This structure is identical to the first
structure except the bank has the option to extend the swap an additional year
at the end of the second year. The LIBOR set for the current 3-month period is
5.2092%.
IESU and IPC had no derivatives outstanding at September 30, 1998.
Accounting Pronouncements
In February 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
authoritative guidance for determining whether computer software
51
is in fact internal-use software, citing specific examples and situations that
answer that preliminary question. Further, it provides guidelines on accounting
for the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public.
Additionally, SOP 98-1 addresses specifics of accounting by discussing 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
will be adopting the requirements of this statement in 1999 and does not
anticipate any material impact on its financial statements upon adoption.
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 will be adopting the requirements
of this statement in 1999 and does not anticipate any material impact on its
financial statements upon adoption.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits. The Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate analysis, and
eliminates certain disclosures that are no longer useful.
In June 1998, the 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.
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
1997, 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.
52
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 Industries are
subject to continuing review and are revised from 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.
IESU, WP&L and IPC all have current or previous ownership interests in
properties previously associated with the production of gas at MGP sites for
which they may be liable for investigation, remediation and monitoring costs
relating to the sites. A summary of information relating to the sites is as
follows:
IESU WP&L IPC
---- ---- ---
Number of known sites for which liability may exist 34 14 9
Liability recorded at September 30, 1998 (millions) $28.6 $8.9 $5.8
Regulatory asset recorded at September 30, 1998 (millions) $28.5 $15.3 $5.9
The companies are working pursuant to the requirements of various federal and
state agencies to investigate, mitigate, prevent and remediate, where necessary,
the environmental impacts to property, including natural resources, at and
around the sites in order to protect public health and the environment. The
companies each believe that they have completed the remediation at various
sites, although they are still in the process of obtaining final approval from
the applicable environmental agencies for some of these sites.
Each company has recorded environmental liabilities related to the MGP sites;
such amounts are based 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. Management currently estimates the range of remaining
costs to be incurred for the investigation, remediation and monitoring of all
IEC sites to be approximately $34 million to $81 million. IESU and WP&L
currently estimate their share of the remaining costs to be incurred to be
approximately $21 million to $49 million and $7 million to $12 million,
respectively. An extensive study is currently underway to review all of IEC's
MGP sites and the liability for each site will be updated based on the results
of such study. The company expects the study will be completed in the fourth
quarter of 1998. 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.
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 have been recorded by each company which reflect the
probable future rate recovery, where applicable. Considering the current rate
treatment, and assuming no material change therein, each of IESU, WP&L and IPC
believes that the clean-up costs incurred for these MGP sites will not have a
material adverse effect on their respective financial positions or results of
operations.
In April 1996, IESU filed a lawsuit against certain of its insurance carriers
seeking reimbursement for its MGP-related costs. Settlement has been reached
with all twenty-one carriers. As a result, IESU will dismiss its lawsuit, as all
issues will have been resolved. In 1994, IPC filed a lawsuit against certain of
its insurance carriers to recover
53
its MGP-related costs. Settlements have been reached with eight carriers. IPC is
continuing its pursuit of additional recoveries. Amounts received from insurance
carriers are being deferred by IESU and IPC pending a determination of the
regulatory treatment of such recoveries. WP&L has settled with twelve carriers
and is also continuing to pursue additional recoveries from other carriers. IPC
and WP&L are unable to predict the amount of any additional insurance recoveries
they may realize.
The Clean Air Act Amendments of 1990 (Act) require emission reductions of SO2,
NOx and 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 Act also governs SO2 allowances, which
are defined as an authorization for an owner to emit one ton of SO2 into the
atmosphere. The companies are reviewing their options to ensure they will have
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 EPA to study and regulate, if
necessary, additional issues that potentially affect the electric utility
industry, including emissions relating to ozone transport, mercury and
particulate control as well as modifications to the PCB rules. In July 1997, the
EPA issued final rules that would tighten the National Ambient Air Quality
Standards for ozone and particulate matter emissions. The company cannot predict
the long-term consequences of these rules on its results of operations or
financial condition as the potential impact is too speculative at this point in
time.
In October 1998, the EPA issued a final rule requiring 22 states, including
Wisconsin, to modify their SIPs to address the ozone transport issue. The
implementation 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 capital investments could be
as high as $150 million. Such costs are not included in the anticipated
construction and acquisition expenditures for WP&L in the "Capital Requirements"
section of MD&A.
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 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.
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, suggested that the Cedar Rapids area could be classified as
"nonattainment" for the National Ambient Air Quality Standards established for
SO2. The worst-case modeling suggested that two of IESU's generating facilities
contributed to the modeled exceedences. As a result of exceedences at a monitor
near one of IESU's generating facilities, the EPA issued a letter to the Iowa
Governor's office directing the state to develop a plan of action. In this
regard, IESU entered into a consent order with the IDNR in the third quarter of
1997 on this issue. IESU agreed to limit the SO2 emissions from the two noted
generating facilities and to install a new stack (the stack will be completed in
1999 at a capital cost of up to $2.5 million) at one of the facilities. The
consent order is one piece of a revision to the SIP being proposed by the IDNR.
The public comment period on the SIP revision was May 28 through June 26, 1998.
IEPC approved the SIP revision on July 20, 1998. The SIP revision transmittal
letter from Iowa to the EPA was signed by the Governor of Iowa and sent to the
EPA Region VII for review and approval.
Pursuant to a routine internal review of documents, IESU determined that certain
changes undertaken during previous years at one of its generating facilities may
have required a federal PSD permit. IESU 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 a penalty for not having obtained the
54
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. In addition, IESU
may be required to obtain a PSD permit. 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. Depending on the outcome of communications with the IDNR, IESU may be
subject to a penalty for not having a PSD permit for this facility; 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, IPC received a Notice 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 alleged violations. IPC responded to the IDNR on June 26, 1998
with a plan of action addressing the IDNR's concerns. While IPC believes that it
has satisfied IDNR's concerns, IPC notes that 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 Acid Rain
permit and continuous emissions monitoring system (CEMS). IPC has initiated
discussions with its regulators, has discontinued operation of the unit, pending
resolution of the issues, and will be installing a CEMS on the unit and will be
applying for an Acid Rain permit. Pursuant to its internal review, IPC also
identified and disclosed to its regulators a potentially similar situation at
its Lansing, Iowa generating facility, and will be installing CEMS and applying
for Acid Rain permits for these units as well. 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
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. Negotiators left significant implementation
and compliance questions open to resolution at meetings to be held starting in
November 1998. 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 Nuclear Waste Policy Act of 1982 assigned responsibility to the 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. IESU and WP&L entered into
such contracts and have made the agreed payments to the Nuclear Waste Fund held
by the U.S. Treasury. The companies were subsequently notified by the DOE that
it was not able to begin acceptance of spent nuclear fuel by the January 31,
1998 deadline. Furthermore, 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. Several other electric
utilities with nuclear operations have filed lawsuits in the U.S. Court of
Federal Claims alleging that the DOE was financially responsible for its failure
to take the utilities' high level waste and spent nuclear fuel. The court has
issued rulings of summary judgment in favor of three utilities to-date. IESU and
WP&L are evaluating and pursuing multiple options, including litigation and
legislation to protect the contractual and statutory rights of the companies and
their customers.
55
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 site at DAEC and Kewaunee, respectively, since plant
operations began. IESU will have to increase its spent fuel storage capacity at
DAEC to store all of the spent fuel that will be produced before the current
license expires in 2014. There are several options available that will satisfy
DAEC's storage needs. IESU is currently reviewing its options to expand on-site
storage capability. To provide assurance that both the operating and
post-shutdown storage needs are satisfied, a combination of expanding the
capacity of the existing fuel pool and construction of a dry cask modular
facility are being contemplated. With minor modifications, Kewaunee would have
sufficient fuel storage capacity to store all of the fuel they will generate
through the end of the license life in 2013. Legislation is being considered on
the federal level to provide for the establishment of an interim storage
facility as early as 2002.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates that each
state must take responsibility for the storage of low-level radioactive waste
produced within its borders. The States of Iowa and Wisconsin are members of the
six-state Midwest Interstate Low-Level Radioactive Waste Compact (Compact) which
is responsible for development of any new disposal capability within the Compact
member states. In June 1997, the Compact commissioners voted to discontinue work
on a proposed waste disposal facility in the State of Ohio because the expected
cost of such a facility was 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 disposal facility located
near Barnwell, South Carolina continues to accept the low-level waste and IESU
and WP&L currently ship the waste each produces to such site, thereby minimizing
the amount of low-level waste stored on-site. In 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.
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. IESU is recovering the costs associated with this assessment through
its electric fuel adjustment clauses over the period the costs are assessed.
IESU's 70% share of the future assessment at September 30, 1998 was $8.9 million
and has been recorded as a liability with a related regulatory asset for the
unrecovered amount. WP&L is also recovering these costs from its customers and
at September 30, 1998 had a regulatory asset and a liability of $5.8 million and
$5.1 million recorded, respectively.
Whiting, a wholly-owned subsidiary of Alliant Industries, is responsible for
certain dismantlement and abandonment costs related to various off-shore oil and
gas platforms (and related on-shore plants and equipment), the most significant
of which is located off the coast of California. Whiting estimates the total
costs for these properties to be approximately $13 million and the expenditures
are not expected to be incurred for approximately five years. In accordance with
applicable accounting requirements, Whiting has accrued these costs resulting in
a recorded liability of $13 million at September 30, 1998.
The estimates of environmental remediation costs and statements of other than
historical fact relating to environmental matters are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Refer to the "Forward-Looking Statements" section of MD&A for a further
discussion.
Power Supply
The power supply concerns of 1997 have raised awareness of the electric system
reliability challenges facing Wisconsin and the Midwest region. WP&L was among
an 11-member group of Wisconsin energy suppliers that, on October 1, 1997,
recommended to the Governor of Wisconsin a series of steps to improve electric
reliability in the state. Wisconsin enacted electric reliability legislation in
April 1998 (Wisconsin Reliability Act). The legislation has the goal of assuring
reliable electric energy for Wisconsin. The new law, effective May 12, 1998,
requires Wisconsin utilities to join a regional independent system operator for
transmission by the year 2000, allows the
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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 response to this order, WP&L issued a Request for
Proposal for contracts to provide WP&L with an additional 150 MW of electric
capacity beginning as early as June 1, 1999. WP&L evaluated applications on the
basis of per-megawatt cost, transmission capacity, environmental factors,
experience in building and operating similar generating facilities and the
ability to meet a June 2000 in-service date. 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 525
MW of electricity. 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 generation will be operational in
June of 2000. This is the first plant to be announced by the three Wisconsin
utilities under the Wisconsin Reliability Act. In September 1998, the PSCW
declared the Polsky application complete. Public hearings are scheduled to be
held in November 1998. The PSCW has until December 21, 1998 to act on the
application, or it is automatically approved. Polsky will also be seeking the
necessary approvals from the Wisconsin Department of Natural Resources.
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 1998 and 1999, problems still could arise if there are
unexpected power plant outages, transmission system outages or extended periods
of extremely hot weather.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
IEC
On April 29, 1998, a lawsuit, Aliant Communications Inc. v. Interstate Energy
Corporation, was filed in federal district court against IEC by Aliant
Communications Inc. alleging trademark infringement, dilution and unfair
competition in connection with the use by IEC of the name "Alliant." A mutual
settlement agreement between the parties was reached effective October 1, 1998.
The agreement calls for IEC to begin operating as Alliant Energy Corporation
within the next six months. Aliant Communications Inc. will continue to operate
as Aliant Communications. As part of the agreement, IEC also agreed to modify
the names of several of its subsidiaries and business units. IEC shareowners
will be asked to change the legal name of the company to Alliant Energy
Corporation at the annual meeting scheduled to be held on May 19, 1999. IEC
recognized the costs associated with the settlement in the third quarter of 1998
as part of its merger-related expenses as discussed earlier in MD&A.
On April 17, 1998, MG&E and Citizens Utility Board appealed the decision of the
SEC approving the Merger, Madison Gas and Electric Company and Citizens Utility
Board v. Securities and Exchange Commission. On May 15, 1998, IEC moved to
intervene in this appeal and the United States Court of Appeals for the District
of Columbia District granted the motion. Briefs have been filed with the court
and oral arguments are scheduled for January 13, 1999.
IESU
On April 30, 1996, IESU 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
57
Company (ISU) and Iowa Electric Light and Power Company (IE) (IESU was formed as
the result of a merger of ISU and IE). The suit seeks judicial determination of
the respective rights of the parties, a judgment that each defendant is
obligated under its respective insurance policies to pay in full all sums that
IESU has become or may become obligated to pay in connection with its defense
against allegations of liability for property damage at and around MGP sites,
and indemnification for all sums that it has or may become obligated to pay for
the investigation, mitigation, prevention, remediation and monitoring of
environmental impacts to property, including natural resources like groundwater,
at and around the MGP sites. Settlement has been reached with all twenty-one
carriers. As a result, IESU will dismiss its lawsuit, as all issues will have
been resolved. Any amounts received from insurance carriers are being deferred
pending a determination of the regulatory treatment of such recoveries.
IESU is in discussions with the regulators regarding certain environmental
permit issues. For a discussion of these matters, see MD&A above, which
information is incorporated herein by reference.
IPC
- ---
IPC is in discussions with its regulators regarding various issues at generating
facilities in Clinton, Iowa, Dubuque, Iowa and Lansing, Iowa. For a discussion
of these matters, see "Other Matters - Environmental", which information is
incorporated herein by reference.
ITEM 5. OTHER INFORMATION
On October 21, 1998, the Board of Directors of IEC adopted a new shareowner
rights plan to replace IEC's existing shareowner rights plan, which expires on
February 22, 1999. The issuance of new rights pursuant to the new shareowner
rights plan is subject to approval by the SEC under the Public Utility Holding
Company Act of 1935. A draft copy of the new shareowner rights plan has been
submitted to the SEC in connection with an application filed by IEC under the
Public Utility Holding Company Act.
The new shareowner rights plan is designed to provide additional protection
against abusive takeover tactics such as partial tender offers, selective
open-market purchases and offers for all the shares of IEC at less than full
value or at an inappropriate time. The new shareowner rights plan is intended to
assure that IEC's Board of Directors has the ability to protect shareowners and
IEC if efforts are made to gain control of IEC in a manner that is not in the
best interests of IEC and all of its shareowners. The new shareowner rights plan
was not adopted in response to any specific effort to acquire control of IEC,
and IEC is not aware of any such effort.
Assuming approval by the SEC, it is expected that the new rights will be issued
on February 22, 1999 to coincide with the expiration of the existing shareowner
rights plan. The new rights will be exercisable only if a person or group
acquires 15% or more of IEC's common stock or announces a tender offer,
consummation of which would result in ownership by a person or group of 15% or
more of the 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 integral multiples of two at an initial exercise price of $95 per full share,
subject to adjustment. If any person becomes a 15% or more shareowner of IEC,
the rights (subject to certain limitations) will entitle holders thereof to
purchase, at the then-current exercise price per full share, a number of common
shares of IEC or of the acquiror having a market value at the time of twice the
rights' per full share exercise price. The IEC Board of Directors is also
authorized under the new shareowner rights plan to reduce the 15% thresholds
referred to above to not less than 10%.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed herewith.
4.1 Officers' Certificate, dated as of October 27, 1998, creating the
5.70% debentures due October 15, 2008 of WP&L (incorporated by
reference to Exhibit 4 to WP&L's Current Report on Form 8-K, dated
October 27, 1998)
10.1 Early Retirement Agreement, dated as of October 7, 1998, by and
between Interstate Energy Corporation et al. and Michael R. Chase
27.1 Financial Data Schedule for Interstate Energy Corporation at and for
the period ended September 30, 1998
27.2 Restated Financial Data Schedule for Interstate Energy Corporation
at and for the period ended September 30, 1997
27.3 Restated Financial Data Schedule for Interstate Energy Corporation
at and for the period ended December 31, 1997
27.4 Financial Data Schedule for IES Utilities Inc. at and for the period
ended September 30, 1998
27.5 Restated Financial Data Schedule for IES Utilities Inc. at and for
the period ended September 30, 1997
27.6 Financial Data Schedule for Wisconsin Power and Light Company at and
for the period ended September 30, 1998
(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 through Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Robert W. Baird & Co.
Incorporated and Legg Mason Wood Walker, Incorporated.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Interstate
Energy Corporation, IES Utilities Inc. and Wisconsin Power and Light Company
have each duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on the 13th day of November 1998.
INTERSTATE ENERGY CORPORATION
Registrant
By: /s/ Thomas M. Walker Executive Vice President and Chief Financial
Thomas M. Walker Officer
(Principal Financial Officer)
By: /s/ John E. Ebright Vice President-Controller
John E. Ebright (Principal Accounting Officer)
IES UTILITIES INC.
Registrant
By: /s/ Thomas M. Walker Executive Vice President and Chief Financial
Thomas M. Walker Officer
(Principal Financial Officer)
By: /s/ John E. Ebright Vice President-Controller
John E. Ebright (Principal Accounting Officer)
WISCONSIN POWER AND LIGHT COMPANY
Registrant
By: /s/ Thomas M. Walker Executive Vice President and Chief Financial
Thomas M. Walker Officer
(Principal Financial Officer)
By: /s/ John E. Ebright Vice President-Controller
John E. Ebright
(Principal Accounting Officer)
60