UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Name of Registrant, State of
Commission Incorporation, Address of Principal IRS Employer
File Number Executive Offices and Telephone Number Identification 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 April 30, 1999:
Interstate Energy Corporation Common stock, $.01 par value, 78,116,598
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 Months
Ended March 31, 1999 and 1998 4
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999
and 1998 7
Notes to Consolidated Financial Statements 8
IES Utilities Inc.:
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 10
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 11
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 13
Notes to Consolidated Financial Statements 14
Wisconsin Power and Light Company:
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 15
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 16
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 18
Notes to Consolidated Financial Statements 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Part II. Other Information 33
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 35
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
- ----------------------- ----------
Cargill Cargill Incorporated
CEMS Continuous Emission Monitoring System
Corporate Services Alliant Energy Corporate Services, Inc.
Dth Dekatherm
EAC Energy Adjustment Clause
EPA United States Environmental Protection Agency
IEC Interstate Energy Corporation
IESU IES Utilities Inc.
IPC Interstate Power Company
IUB Iowa Utilities Board
Kewaunee Kewaunee Nuclear Power Plant
MAEC MidAmerican Energy Company
McLeod McLeodUSA Inc.
MD&A Management's Discussion and Analysis of Financial
Condition and Results of Operations
MW Megawatt
MWH Megawatt-Hour
NOx Nitrogen Oxides
OCA Office of Consumer Advocate
PGA Purchased Gas Adjustment
Polsky Polsky Energy Corporation
PSCW Public Service Commission of Wisconsin
PUHCA Public Utility Holding Company Act of 1935
Resources Alliant Energy Resources, Inc.
SEC Securities and Exchange Commission
SIP State Implementation Plan
Whiting Whiting Petroleum Corporation
WP&L Wisconsin Power and Light Company
WPSC Wisconsin Public Service Corporation
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended March 31
1999 1998
- --------------------------------------------------------------------------------
(in thousands, except per share amounts
Operating revenues:
Electric utility $ 351,338 $ 357,751
Gas utility 133,684 130,046
Nonregulated and other 61,833 68,486
--------- ---------
546,855 556,283
--------- ---------
- --------------------------------------------------------------------------------
Operating expenses:
Electric and steam production fuels 65,404 69,556
Purchased power 52,065 56,147
Cost of utility gas sold 81,343 77,280
Other operation 130,365 157,352
Maintenance 23,812 25,259
Depreciation and amortization 73,640 69,832
Taxes other than income taxes 27,239 26,977
--------- ---------
453,868 482,403
--------- ---------
- --------------------------------------------------------------------------------
Operating income 92,987 73,880
--------- ---------
- --------------------------------------------------------------------------------
Interest expense and other:
Interest expense 33,400 30,924
Allowance for funds used during
construction (1,934) (1,503)
Preferred dividend requirements
of subsidiaries 1,676 1,674
Miscellaneous, net (6,771) (3,877)
--------- ---------
26,371 27,218
--------- ---------
- --------------------------------------------------------------------------------
Income before income taxes 66,616 46,662
--------- ---------
- --------------------------------------------------------------------------------
Income taxes 24,872 17,787
--------- ---------
- --------------------------------------------------------------------------------
Net income $ 41,744 $ 28,875
========= =========
- --------------------------------------------------------------------------------
Average number of common shares
outstanding 77,780 76,579
========= =========
- --------------------------------------------------------------------------------
Earnings per average common share
(basic and diluted) $ 0.54 $ 0.38
========= =========
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
INTERSTATE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31,
1999 December 31,
ASSETS (Unaudited) 1998
- --------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 4,884,916 $ 4,866,152
Gas 517,775 515,074
Other 409,844 409,711
------------ -----------------
5,812,535 5,790,937
Less - Accumulated depreciation 2,917,085 2,852,605
------------ -----------------
2,895,450 2,938,332
Construction work in progress 133,054 119,032
Nuclear fuel, net of amortization 40,709 44,316
------------ -----------------
3,069,213 3,101,680
Other property, plant and equipment,
net of accumulated depreciation and
amortization of $189,289 and
$178,248, respectively 354,075 355,100
------------ -----------------
3,423,288 3,456,780
------------ -----------------
- ------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 54,183 31,827
Accounts receivable:
Customer, less allowance for doubtfu
accounts of $2,594 and $2,518,
respectively 96,973 102,966
Other, less allowance for doubtful
accounts of $499 and $490, respectively 22,273 26,054
Notes receivable, less allowance for
doubtful accounts of $117 and $120,
respectively 9,433 13,392
Production fuel, at average cost 44,397 54,140
Materials and supplies, at average cost 55,025 53,490
Gas stored underground, at average cost 12,489 26,013
Regulatory assets 26,628 30,796
Prepaid gross receipts tax 16,882 22,222
Other 24,316 30,767
------------ -----------------
362,599 391,667
------------ -----------------
- ------------------------------------------------------------------------------
Investments:
Investment in McLeodUSA Inc. 431,255 320,280
Nuclear decommissioning trust funds 245,024 225,803
Investment in foreign entities 119,124 68,882
Other 52,619 54,776
------------ -----------------
848,022 669,741
------------ -----------------
- ------------------------------------------------------------------------------
Other assets:
Regulatory assets 278,147 284,467
Deferred charges and other 159,066 156,682
------------ -----------------
437,213 441,149
------------ -----------------
- ------------------------------------------------------------------------------
Total assets $ 5,071,122 $ 4,959,337
============ =================
- ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
INTERSTATE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
1999 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1998
- ------------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
Capitalization:
Common stock - $.01 par value - authorized 200,000,000 shares;
outstanding 77,935,693 and 77,630,043 shares, respectively $ 779 $ 776
Additional paid-in capital 913,728 905,130
Retained earnings 540,282 537,372
Accumulated other comprehensive income 237,434 163,017
----------------- -----------------
Total common equity 1,692,223 1,606,295
----------------- -----------------
Cumulative preferred stock of subsidiaries:
Par/Stated Authorized Shares Mandatory
Value Shares Outstanding Series Redemption
----- ------ ----------- ------ ----------
$ 100 * 449,765 4.40% - 6.20% No 44,977 44,977
$ 25 * 599,460 6.50% No 14,986 14,986
$ 50 466,406 366,406 4.30% - 6.10% No 18,320 18,320
$ 50 ** 216,381 4.36% - 7.76% No 10,819 10,819
$ 50 ** 545,000 6.40% Yes *** 27,250 27,250
----------------- -----------------
116,352 116,352
Less: unamortized expenses (2,819) (2,854)
----------------- -----------------
Total cumulative preferred stock of subsidiaries 113,533 113,498
----------------- -----------------
Long-term debt (excluding current portion) 1,545,251 1,543,131
----------------- -----------------
3,351,007 3,262,924
----------------- -----------------
* 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
- ------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities and sinking funds 54,084 63,414
Variable rate demand bonds 56,975 56,975
Commercial paper 64,000 64,500
Notes payable 50,027 51,784
Capital lease obligations 12,146 11,978
Accounts payable 163,589 204,297
Accrued taxes 106,845 84,921
Other 113,414 111,685
----------------- -----------------
621,080 649,554
----------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 738,168 691,624
Accumulated deferred investment tax credits 75,949 77,313
Environmental liabilities 68,192 68,399
Customer advances 35,964 37,171
Capital lease obligations 11,499 13,755
Other 169,263 158,597
----------------- -----------------
1,099,035 1,046,859
----------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------
Total capitalization and liabilities $ 5,071,122 $ 4,959,337
================= =================
- ------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
INTERSTATE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31,
1999 1998
- -----------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 41,744 $ 28,875
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 73,640 69,832
Amortization of nuclear fuel 5,024 5,437
Amortization of deferred energy efficiency expenditures 7,930 8,240
Deferred taxes and investment tax credits (1,799) (13,424)
Refueling outage provision 2,415 1,299
Impairment of oil and gas properties - 6,746
Other (2,070) 1,197
Other changes in assets and liabilities:
Accounts receivable 9,774 20,221
Notes receivable 3,959 2,091
Production fuel 9,743 7,289
Materials and supplies (1,535) (1,543)
Gas stored underground 13,524 21,544
Prepaid gross receipts tax 5,340 4,912
Accounts payable (40,708) (23,964)
Accrued taxes 21,924 29,699
Adjustment clause balances 9,168 14,220
Benefit obligations and other 12,079 (398)
----------------- -----------------
Net cash flows from operating activities 170,152 182,273
----------------- -----------------
- -----------------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends declared (38,834) (36,580)
Proceeds from issuance of common stock 8,538 2,828
Net change in Alliant Energy Resources, Inc. credit facility 42,995 29,562
Proceeds from issuance of other long-term debt 11,994 41
Reductions in other long-term debt (62,310) (1,013)
Net change in short-term borrowings (2,257) (67,676)
Principal payments under capital lease obligations (3,369) (4,106)
Other 113 (423)
----------------- -----------------
Net cash flows used for financing activities (43,130) (77,367)
----------------- -----------------
- -----------------------------------------------------------------------------------------------------
Cashflows used for investing activities:
Construction and acquisition expenditures:
Utility (41,638) (39,160)
Nonregulated businesses (49,198) (22,554)
Nuclear decommissioning trust funds (15,437) (13,642)
Shared savings expenditures (4,247) (1,808)
Other 5,854 7,032
----------------- -----------------
Net cash flows used for investing activities (104,666) (70,132)
----------------- -----------------
- -----------------------------------------------------------------------------------------------------
Net increase in cash and temporary cash investments 22,356 34,774
----------------- -----------------
- -----------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 31,827 27,329
----------------- -----------------
- -----------------------------------------------------------------------------------------------------
----------------- -----------------
Cash and temporary cash investments at end of period $ 54,183 $ 62,103
================= =================
- -----------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 31,952 $ 32,237
================= =================
Income taxes $ 4,600 $ 11,892
================= =================
Noncash investing and financing activities:
Capital lease obligations incurred $ 1,414 $ 1,039
================= =================
- -----------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
7
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, Resources and Corporate Services). These financial statements should
be read in conjunction with the financial statements and the notes
thereto included in IEC's, IESU's and WP&L'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 months ended March 31,
1999 and 1998, (b) the consolidated financial position at March 31, 1999
and December 31, 1998, and (c) the consolidated statement of cash flows
for the three months ended March 31, 1999 and 1998, have been made.
Because of the seasonal nature of IESU's, WP&L's and IPC's operations,
results for the three months ended March 31, 1999 are not necessarily
indicative of results that may be expected for the year ending December
31, 1999. Certain prior period amounts have been reclassified on a basis
consistent with the 1999 presentation.
2. IEC's comprehensive income, and the components of other comprehensive
income (loss), net of taxes, were as follows (in thousands):
For the Three Months
Ended March 31,
1999 1998
-------------- ---------------
Net income $ 41,744 $ 28,875
Other comprehensive income (loss):
Unrealized gain on securities, net of tax (1)
75,031 61,829
Foreign currency translation adjustments
(614) 55
-------------- ---------------
Other comprehensive income 74,417
61,884
-------------- ---------------
Comprehensive income $ 116,161 $ 90,759
============== ===============
(1) Primarily due to the adjustment to the estimated fair value each quarter
of IEC's investment in McLeod.
IESU and WP&L had no comprehensive income in the periods presented.
8
3. Certain financial information relating to IEC's significant business
segments is presented below:
Regulated Domestic Utilities Nonregulated IEC
-------------------------------------------
Electric Gas Other Total Businesses Other Consolidated
------------------------------------------------------------------------------------
(in thousands)
Three Months Ended
March 31, 1999
--------------
Operating revenues $351,338 $133,684 $9,204 $494,226 $53,199 ($570) $546,855
Operating income (loss) 68,615 23,939 2,354 94,908 (1,836) (85) 92,987
Net income (loss) 44,767 (1,906) (1,117) 41,744
Three Months Ended
March 31, 1998
--------------
Operating revenues $357,751 $130,046 $8,409 $496,206 $60,322 ($245) $556,283
Operating income (loss) 55,837 22,376 1,831 80,044 (5,499) (665) 73,880
Net income (loss) 33,177 (3,999) (303) 28,875
Resources' (i.e. the nonregulated businesses) assets increased $150
million during the first quarter of 1999, primarily due to the increase
in market value of its investment in McLeod and additional investments in
foreign entities. Intersegment revenues were not material to IEC's
operations and there was no single customer whose revenues exceeded 10%
or more of IEC's consolidated revenues.
4. 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.
5. At March 31, 1999, IEC had $119.1 million of investments in foreign
entities on its Consolidated Balance Sheets that included: (a)
investments in several New Zealand utility entities; (b) investments in
several generation facilities in China; and (c) an investment in an
international venture capital fund. IEC accounts for the China
investments under the equity method and the other investments under the
cost method. The geographic concentration of IEC's investments in foreign
entities at March 31, 1999, included investments of approximately $85.7
million in New Zealand, $32.9 million in China and $0.5 million in other
countries.
6. In October 1998, the Board of Directors of IEC adopted a new Shareowner
Rights Plan (new plan) to replace IEC's former plan that expired on
February 22, 1999. The new plan was approved on January 15, 1999 by the
SEC. On January 20, 1999, the Board of Directors declared a dividend of
one common share purchase right (right) on each outstanding share of
IEC's common stock which was issued on February 22, 1999 to coincide with
the expiration of the former plan. Rights under the new plan will be
exercisable only if a person or group acquires, or announces a tender
offer to acquire, 15% or more of IEC's common stock. Each right will
initially entitle shareowners to buy one-half of one share of IEC's
common stock. The rights will only be exercisable in multiples of two at
an initial price of $95.00 per full share, subject to adjustment. If any
shareowner acquires 15% or more of the outstanding common stock of IEC,
each right (subject to limitations) will entitle its holder to purchase,
at the right's then current exercise price, a number of common shares of
IEC or of the acquirer having a market value at the time of twice the
right's per full share exercise price. The Board of Directors is also
authorized to reduce the 15% thresholds to not less than 10%.
9
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended March 31,
1999 1998
- -------------------------------------------------------------------------------
(in thousands)
Operating revenues:
Electric utility $ 140,017 $ 140,649
Gas utility 61,296 60,395
Steam and other 7,952 7,234
--------- ---------
209,265 208,278
--------- ---------
- -----------------------------------------------------------------------------
Operating expenses:
Electric and steam production fuels 26,589 30,649
Purchased power 13,150 11,049
Cost of gas sold 37,912 37,657
Other operation 47,439 47,002
Maintenance 9,904 10,991
Depreciation and amortization 25,482 24,335
Taxes other than income taxes 12,616 12,306
--------- ---------
173,092 173,989
--------- ---------
- -----------------------------------------------------------------------------
Operating income 36,173 34,289
--------- ---------
- -----------------------------------------------------------------------------
Interest expense and other:
Interest expense 13,204 13,075
Allowance for funds used during
construction (849) (765)
Miscellaneous, net (857) 279
--------- ---------
11,498 12,589
--------- ---------
- -----------------------------------------------------------------------------
Income before income taxes 24,675 21,700
--------- ---------
- -----------------------------------------------------------------------------
Income taxes 10,216 10,040
--------- ---------
- -----------------------------------------------------------------------------
Net income 14,459 11,660
--------- ---------
- -----------------------------------------------------------------------------
Preferred dividend requirements 229 229
--------- ---------
- -----------------------------------------------------------------------------
Earnings available for common stock $ 14,230 $ 11,431
========= =========
- -----------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
10
IES UTILITIES INC.
CONSOLIDATED BALANCE SHEETS
March 31,
1999 December 31,
ASSETS (Unaudited) 1998
- --------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,148,059 $ 2,140,322
Gas 199,209 198,488
Steam 55,794 55,797
Common 106,732 106,940
------------- ---------------
2,509,794 2,501,547
Less - Accumulated depreciation 1,237,623 1,209,204
------------- ---------------
1,272,171 1,292,343
Construction work in progress 57,141 48,991
Leased nuclear fuel, net of
amortization 23,559 25,644
------------- ---------------
1,352,871 1,366,978
Other property, plant and equipment,
net of accumulated depreciation and
amortization of $1,984 and $1,948,
respectively 5,586 5,623
------------- ---------------
1,358,457 1,372,601
------------- ---------------
- ------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 585 4,175
Temporary cash investments with
associated companies - 53,729
Accounts receivable:
Customer, less allowance for doubtful
accounts of $1,056 and $1,058,
respectively 17,543 16,703
Associated companies 2,466 2,662
Other, less allowance for doubtful
accounts of $363 and $357,
respectively 10,158 10,346
Production fuel, at average cost 13,306 11,863
Materials and supplies, at average cost 25,972 25,591
Gas stored underground, at average cost 5,887 12,284
Regulatory assets 19,324 23,487
Prepayments and other 3,879 4,185
------------- ---------------
99,120 165,025
------------- ---------------
- ------------------------------------------------------------------------------
Investments:
Nuclear decommissioning trust funds 95,398 91,691
Other 6,236 6,019
------------- ---------------
101,634 97,710
------------- ---------------
- ------------------------------------------------------------------------------
Other assets:
Regulatory assets 133,491 137,908
Deferred charges and other 15,201 15,734
------------- ---------------
148,692 153,642
------------- ---------------
- ------------------------------------------------------------------------------
Total assets $ 1,707,903 $ 1,788,978
============= ===============
- ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
11
IES UTILITIES INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
1999 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1998
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
Capitalization:
Common stock - $2.50 par value - authorized 24,000,000
shares; 13,370,788 shares outstanding $ 33,427 $ 33,427
Additional paid-in capital 279,042 279,042
Retained earnings 245,626 275,372
------------------ -----------------
Total common equity 558,095 587,841
Cumulative preferred stock, not mandatorily redeemable -
$50 par value - authorized 466,406 shares; 366,406 shares outstanding 18,320 18,320
Long-term debt (excluding current portion) 551,086 602,020
------------------ -----------------
1,127,501 1,208,181
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities and sinking funds 51,140 50,140
Capital lease obligations 12,132 11,965
Notes payable to associated companies 9,694 -
Accounts payable 30,117 43,953
Accounts payable to associated companies 13,930 22,487
Accrued payroll and vacations 9,311 6,365
Accrued interest 10,082 12,045
Accrued taxes 64,480 55,295
Accumulated refueling outage provision 9,020 6,605
Environmental liabilities 5,660 5,660
Other 16,928 17,617
------------------ -----------------
232,494 232,132
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 224,893 224,510
Accumulated deferred investment tax credits 28,603 29,243
Environmental liabilities 29,027 29,195
Pension and other benefit obligations 27,283 25,655
Capital lease obligations 11,427 13,679
Other 26,675 26,383
------------------ -----------------
347,908 348,665
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------------
Total capitalization and liabilities $ 1,707,903 $ 1,788,978
================== =================
- --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
12
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 14,459 $ 11,660
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 25,482 24,335
Amortization of leased nuclear fuel 3,499 4,010
Amortization of deferred energy efficiency expenditures 6,064 6,070
Deferred taxes and investment tax credits (473) (8,822)
Refueling outage provision 2,415 1,299
Other 146 319
Other changes in assets and liabilities:
Accounts receivable (456) 2,796
Production fuel (1,443) 197
Materials and supplies (381) (1,249)
Gas stored underground 6,397 10,509
Accounts payable (22,393) (12,292)
Accrued taxes 9,185 13,262
Adjustment clause balances 4,809 9,466
Benefit obligations and other 5,776 5,449
------------------ -----------------
Net cash flows from operating activities 53,086 67,009
------------------ -----------------
- -------------------------------------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends declared (43,976) (14,000)
Dividends payable (4,840) 14,000
Preferred stock dividends (229) (229)
Reductions in long-term debt (50,000) -
Net change in short-term borrowings 9,694 -
Principal payments under capital lease obligations (3,369) (4,106)
Other (3) -
------------------ ------------------
Net cash flows used for financing activities (92,723) (4,335)
------------------ ------------------
- -------------------------------------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Construction expenditures - utility (16,621) (19,198)
Nuclear decommissioning trust funds (1,502) (1,502)
Other 441 72
------------------ ------------------
Net cash flows used for investing activities (17,682) (20,628)
------------------ ------------------
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and temporary cash investments (57,319) 42,046
------------------ ------------------
- -------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 57,904 230
------------------ ------------------
- -------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 585 $ 42,276
================== ==================
- -------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information: Cash paid during the period for:
Interest $ 13,989 $ 12,378
================== ==================
Income taxes $ 7,334 $ 11,804
================== ==================
Noncash investing and financing activities - Capital lease obligations incurred $ 1,414 $ 1,039
================== ==================
- -------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
13
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 5 and 6 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 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 months ended March 31,
1999 and 1998, (b) the consolidated financial position at March 31, 1999
and December 31, 1998, and (c) the consolidated statement of cash flows
for the three months ended March 31, 1999 and 1998, have been made.
Because of the seasonal nature of IESU's operations, results for the
three months ended March 31, 1999 are not necessarily indicative of
results that may be expected for the year ending December 31, 1999.
Certain prior period amounts have been reclassified on a basis consistent
with the 1999 presentation.
14
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended March 31,
1999 1998
- ------------------------------------------------------------------------------
(in thousands)
Operating revenues:
Electric utility $ 149,944 $ 151,310
Gas utility 51,794 50,318
Water 1,252 1,175
---------- -----------
202,990 202,803
---------- -----------
- ------------------------------------------------------------------------------
Operating expenses:
Electric production fuels 27,366 28,897
Purchased power 24,000 28,602
Cost of gas sold 31,181 30,714
Other operation 26,108 34,003
Maintenance 9,103 9,967
Depreciation and amortization 31,139 29,258
Taxes other than income taxes 7,702 7,711
---------- -----------
156,599 169,152
---------- -----------
- ------------------------------------------------------------------------------
Operating income 46,391 33,651
---------- -----------
- ------------------------------------------------------------------------------
Interest expense and other:
Interest expense 9,865 8,383
Allowance for funds used during
construction (923) (656)
Miscellaneous, net (4,344) (1,867)
---------- -----------
4,598 5,860
---------- -----------
- ------------------------------------------------------------------------------
Income before income taxes 41,793 27,791
---------- -----------
- ------------------------------------------------------------------------------
Income taxes 15,505 10,193
---------- -----------
- ------------------------------------------------------------------------------
Net income 26,288 17,598
---------- -----------
- ------------------------------------------------------------------------------
Preferred dividend requirements 828 828
---------- -----------
- ------------------------------------------------------------------------------
Earnings available for common stock $ 25,460 $ 16,770
========== ===========
- ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
15
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
March 31,
1999 December 31,
ASSETS (Unaudited) 1998
- --------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 1,847,950 $ 1,839,545
Gas 246,188 244,518
Water 26,584 26,567
Common 219,715 219,268
-------------- -----------------
2,340,437 2,329,898
Less - Accumulated depreciation 1,199,761 1,168,830
-------------- -----------------
1,140,676 1,161,068
Construction work in progress 63,950 56,994
Nuclear fuel, net of amortization 17,151 18,671
-------------- -----------------
1,221,777 1,236,733
Other property, plant and equipment,
net of accumulated depreciation and
amortization of $44 for both years 630 630
-------------- -----------------
1,222,407 1,237,363
-------------- -----------------
- --------------------------------------------------------------------------------
Current assets:
Cash and temporary cash investments 9,496 1,811
Accounts receivable:
Customer 9,932 13,372
Associated companies 1,921 3,019
Other 7,307 8,298
Production fuel, at average cost 14,851 20,105
Materials and supplies, at average cost 21,117 20,025
Gas stored underground, at average cost 5,924 10,738
Regulatory assets 3,707 3,707
Prepaid gross receipts tax 16,882 22,222
Other 1,413 6,987
-------------- -----------------
92,550 110,284
-------------- -----------------
- --------------------------------------------------------------------------------
Investments:
Nuclear decommissioning trust funds 149,627 134,112
Other 15,476 15,960
-------------- -----------------
165,103 150,072
-------------- -----------------
- --------------------------------------------------------------------------------
Other assets:
Regulatory assets 74,788 76,284
Deferred charges and other 113,058 111,147
-------------- -----------------
187,846 187,431
-------------- -----------------
- --------------------------------------------------------------------------------
Total assets $ 1,667,906 $ 1,685,150
============== =================
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
16
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
1999 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1998
- ---------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
Capitalization:
Common stock - $5 par value - authorized 18,000,000
shares; 13,236,601 shares outstanding $ 66,183 $ 66,183
Additional paid-in capital 199,438 199,438
Retained earnings 305,181 294,309
----------------- -----------------
Total common equity 570,802 559,930
----------------- -----------------
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) 414,603 414,579
----------------- -----------------
1,045,368 1,034,472
----------------- -----------------
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Variable rate demand bonds 56,975 56,975
Notes payable 50,000 50,000
Notes payable to associated companies 1,102 26,799
Accounts payable 70,884 84,754
Accounts payable to associated companies 16,468 20,315
Accrued payroll and vacations 5,052 5,276
Accrued interest 8,093 6,863
Accrued taxes 16,502 740
Other 10,197 13,860
----------------- -----------------
235,273 265,582
----------------- -----------------
- ---------------------------------------------------------------------------------------------------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 243,750 245,489
Accumulated deferred investment tax credits 32,705 33,170
Customer advances 33,253 34,367
Environmental liabilities 11,644 11,683
Other 65,913 60,387
----------------- -----------------
387,265 385,096
----------------- -----------------
- ---------------------------------------------------------------------------------------------------------
Total capitalization and liabilities $ 1,667,906 $ 1,685,150
================= =================
- ---------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
17
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 26,288 $ 17,598
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 31,139 29,258
Amortization of nuclear fuel 1,525 1,427
Deferred taxes and investment tax credits (1,578) (1,607)
Other (1,617) (457)
Other changes in assets and liabilities:
Accounts receivable 5,529 15,460
Production fuel 5,254 4,889
Materials and supplies (1,092) (32)
Gas stored underground 4,814 8,768
Prepaid gross receipts tax 5,340 4,912
Accounts payable (17,717) (3,302)
Accrued taxes 15,762 10,396
Adjustment clause balances 7,157 3,691
Benefit obligations and other 2,814 (361)
--------------------- ---------------------
Net cash flows from operating activities 83,618 90,640
--------------------- ---------------------
- ---------------------------------------------------------------------------------------------------------------
Cash flows used for financing activities:
Common stock dividends (14,588) (14,586)
Preferred stock dividends (828) (828)
Net change in short-term borrowings (25,697) (42,500)
--------------------- ---------------------
Net cash flows used for financing activities (41,113) (57,914)
--------------------- ---------------------
- ---------------------------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Construction expenditures - utility (18,967) (15,584)
Nuclear decommissioning trust funds (13,935) (12,140)
Shared savings expenditures (2,519) (1,808)
Other 601 477
--------------------- ---------------------
Net cash flows used for investing activities (34,820) (29,055)
--------------------- ---------------------
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and temporary cash investments 7,685 3,671
--------------------- ---------------------
- ---------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at beginning of period 1,811 2,492
--------------------- ---------------------
- ---------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 9,496 $ 6,163
===================== =====================
- ---------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid (refunded) during the period for:
Interest $ 8,468 $ 8,150
===================== =====================
Income taxes $ (357) $ 1,668
===================== =====================
- ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
18
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 5 and 6 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.
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 months ended March 31,
1999 and 1998, (b) the consolidated financial position at March 31, 1999
and December 31, 1998, and (c) the consolidated statement of cash flows
for the three months ended March 31, 1999 and 1998, have been made.
Because of the seasonal nature of WP&L's operations, results for the
three months ended March 31, 1999 are not necessarily indicative of
results that may be expected for the year ending December 31, 1999.
Certain prior period amounts have been reclassified on a basis consistent
with the 1999 presentation.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IEC is currently doing business as Alliant Energy Corporation and is the result
of a three-way merger involving WP&L Holdings, Inc., IES Industries Inc. and
Interstate Power Company that was completed in April 1998. The first tier
subsidiaries of IEC include: WP&L, IESU, IPC, Resources and Corporate Services.
Among various other regulatory constraints, IEC is operating as a registered
public utility holding company subject to the limitations imposed by PUHCA.
This MD&A includes information relating to IEC, IESU and WP&L (as well as IPC,
Resources and Corporate Services). Where appropriate, information relating to a
specific entity has been segregated and labeled as such. The following
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements included in
this report as well as the financial statements, notes and MD&A included in
IEC's, IESU's and WP&L's latest Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Statements contained in this report (including MD&A) that are not of historical
fact are forward-looking statements intended to qualify for the safe harbors
from liability established by the Private Securities Litigation Reform Act of
1995. From time to time, IEC, IESU or WP&L may make other forward-looking
statements within the meaning of the federal securities laws that involve
judgments, assumptions and 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 its
operations and unanticipated costs associated therewith, unanticipated
difficulties in achieving expected synergies from the merger, unanticipated
costs associated with certain environmental remediation efforts being undertaken
by IEC, technological developments, employee workforce factors, including
changes in key executives, collective bargaining agreements or work stoppages,
political, legal and economic conditions in foreign countries IEC has
investments in and changes in the rate of inflation.
UTILITY INDUSTRY OUTLOOK
A summary of the current regulatory environment is included in the Form 10-K
filed by IEC, IESU and WP&L for the year ended December 31, 1998. Set forth
below are several developments relating to such regulatory environment.
The IUB has been reviewing all forms of competition in the electric utility
industry for several years. A group comprised of the IUB, IEC, MAEC, the rural
electric cooperatives, the municipal utilities and Iowans for Choice in
Electricity (a diverse group of industrial customers, marketers, such as Enron,
and a low income customer representative, among others) endorsed a bill to allow
for such competition that was introduced in the Iowa Legislature in March 1999.
The bill was opposed by the OCA, which is charged by Iowa law with
representation of all consumers generally. While the bill did not pass, it will
by operation of Iowa General Assembly rules remain alive in the General Assembly
upon adjournment of its 1999 regular session. By operation of House rules, it
will be
20
rereferred to the House Commerce Committee and will again be inserted into the
legislative process in the Second Regular Session of the 78th General Assembly
(2000).
In November 1998, IEC and Northern States Power Co. (NSP) announced plans to
develop an independent transmission company to provide electric transmission
services to the Upper Midwest. The companies are evaluating modifications to the
original structure as a result of the recent merger announcement between NSP and
New Century Energies Inc.
Each of the utilities complies with the provisions of Statement of Financial
Accounting Standards (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 rate making process in different
periods than for nonregulated entities. These are deferred as regulatory assets
or regulatory liabilities and are recognized in the consolidated statements of
income at the time they are reflected in rates. If a portion of 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 RESULTS OF OPERATIONS
Overview
IEC reported net income of $41.7 million, or $0.54 per share (basic and
diluted), for the first quarter of 1999 compared with net income of $28.9
million, or $0.38 per share (basic and diluted), for the first quarter of 1998.
The 44% increase in earnings resulted from higher electric margins, lower
utility operation and maintenance expenses, improved results from IEC's
nonregulated operations and income from a weather hedge. In addition, the 1998
results included approximately $10 million of non-recurring merger-related
expenses ($0.07 per share). Higher depreciation and interest expenses partially
offset the 1999 increase in earnings.
The 1999 first quarter utility earnings were approximately $44.8 million
compared with $33.2 million ($39.0 million excluding merger-related expenses)
for the same period in 1998. The increase in utility earnings resulted primarily
from a $5.3 million increase in electric margins (excluding energy efficiency
revenues), a $2.6 million decrease in operation and maintenance expenses
(excluding merger-related and energy efficiency expenses) and $2.5 million of
pre-tax income realized from a weather hedge. Increases of $3.7 million and $1.6
million in depreciation and interest expense, respectively, partially offset
these items.
The higher electric margins stemmed from separate $15 million annual rate
increases implemented at WP&L in July 1998 and early March 1999 to recover
higher purchased power and transmission costs and a 4% increase in sales to
retail customers.
The sales increase resulted from a combination of more normal weather conditions
in 1999 as well as continued economic growth within IEC's utility service
territory. While the weather conditions in the first quarter of 1999 were milder
than normal, they were more favorable to earnings than the same period of 1998.
Through the first quarter, the estimated benefit to earnings in 1999 was $0.03
per share compared to 1998. Decreased sales to off-system customers at WP&L
partially offset these items.
The lower operation and maintenance expenses resulted from decreases in
administrative and general expenses (including lower costs in 1999 due to
merger-related operating efficiencies). This was partially offset by increased
expenses for Year 2000 readiness efforts.
21
IEC's nonregulated operations reported a net loss of $1.9 million in the first
quarter of 1999, compared with a net loss of $4.0 million for the same period in
1998. The change in earnings was largely due to improved operating results at
Whiting, IEC's Denver-based oil and gas subsidiary. The 1998 results also
included an asset impairment charge of $6.7 million at Whiting. However,
Whiting's average oil and gas prices were 25% and 16% lower, respectively, in
the first quarter of 1999 compared with the same period in 1998. As a result,
Whiting experienced a slight loss in the first quarter of 1999.
Electric Utility Operations
Electric margins and MWH sales for IEC for the three months ended March 31 were
as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
------------------------------ ----------------------------
1999 1998 Change 1999 1998 Change
-------------- ------------- --------- ------------- ------------- ---------
Residential $ 130,280 $ 127,069 3% 1,810 1,712 6%
Commercial 72,023 72,035 - 1,244 1,185 5%
Industrial 102,601 106,403 (4%) 3,076 2,999 3%
-------------- ------------- ------------- -------------
Total from ultimate customers 304,904 305,507 - 6,130 5,896 4%
Sales for resale 36,214 43,032 (16%) 1,345 1,670 (19%)
Other 10,220 9,212 11% 41 43 (5%)
-------------- ------------- ------------- -------------
Total 351,338 357,751 (2%) 7,516 7,609 (1%)
============= ============= =========
Electric production fuels 61,309 65,702 (7%)
Purchased power 52,065 56,147 (7%)
-------------- -------------
Margin $ 237,964 $ 235,902 1%
============== ============= =========
Electric margin increased $2.1 million, or 1%, in the first quarter of 1999,
compared with the same period in 1998. The increase was primarily due to
separate $15 million annual rate increases implemented at WP&L in July 1998 and
early March 1999 to recover higher purchased power and transmission costs and a
4% increase in sales to retail customers. The sales increase resulted from a
combination of more favorable weather conditions in 1999 as well as continued
economic growth within IEC's retail utility service territory. Partially
offsetting the increase in electric margin were decreased sales to off-system
customers at WP&L and decreased recoveries of concurrent and previously deferred
expenditures for Iowa-mandated energy efficiency program costs. Electric
revenues included recoveries for energy efficiency program costs of $7.3 million
and $12.0 million for the first quarter of 1999 and 1998, respectively, which is
in accordance with IUB orders (a portion of these recoveries is also amortized
to expense in other operation expenses).
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.
22
Gas Utility Operations
Gas margins and Dth sales for IEC for the three months ended March 31 were as
follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1999 1998 Change 1999 1998 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 82,439 $ 80,293 3% 8%
14,836 13,779
Commercial 39,159 39,198 - 8,559 8,112 6%
Industrial 6,767 7,129 (5%) 1,919 1,841 4%
Transportation and other 5,319 3,426 55% 14,609 14,790 (1%)
------------- ------------- ----------- ------------
Total 133,684 130,046 3% 39,923 38,522 4%
============ ============= =========
Cost of gas sold 81,343 77,280 5%
------------- -------------
Margin $ 52,341 $ 52,766 (1%)
============= ============= =========
Gas margin decreased $0.4 million, or 1%, in the first quarter of 1999, compared
with the same period in 1998, primarily due to reduced revenues from the
recovery of concurrent and previously deferred expenditures for Iowa-mandated
energy efficiency program costs in accordance with IUB orders (a portion of
these recoveries is also amortized to expense in other operation expenses) and
gas cost adjustments at IPC. Partially offsetting the decrease was a 4% increase
in Dth sales, largely due to colder weather. Gas revenues included recoveries
for energy efficiency program costs in Iowa of $6.2 million and $7.1 million for
the first quarter of 1999 and 1998, respectively. Refer to "Interest Expense and
Other" for a discussion of income IEC realized from settlement of a weather
hedge in the first quarter of 1999.
IESU's and IPC's gas tariffs include PGA clauses that are designed to currently
recover the cost of utility gas sold.
Nonregulated and Other Revenues
Nonregulated and other revenues for the three months ended March 31 were as
follows (in thousands):
1999 1998
------------- -------------
Environmental and engineering services $16,174 $16,637
Oil and gas production 12,833 17,147
Nonregulated energy 10,175 13,445
Transportation, rents and other 10,065 9,676
Steam 8,262 7,445
Affordable housing 3,072 2,961
Water 1,252 1,175
------------- -------------
$61,833 $68,486
============= =============
Oil and gas production revenues declined $4.3 million in the first quarter of
1999, compared with the same period in 1998, primarily due to lower oil and gas
prices as well as reduced volumes sold at Whiting. Average oil and gas prices in
the first quarter of 1999 declined by 25% and 16%, respectively. In addition,
nonregulated energy revenues declined by $3.3 million primarily due to a shift
to higher margin, lower volume gas customers.
23
Operating Expenses
Other operation expenses for the three months ended March 31 were as follows (in
thousands):
1999 1998
-------------- --------------
Utility-IESU / WP&L / IPC $ 87,829 $102,747
Nonregulated and other 42,536 54,605
-------------- --------------
$ 130,365 $157,352
============== ==============
Other operation expenses at the utility subsidiaries decreased $14.9 million in
the first quarter of 1999, compared with the same period in 1998, primarily due
to $9.7 million of merger-related expenses in the first quarter of 1998, lower
administrative and general expenses (including lower costs in 1999 due to
merger-related operating efficiencies) and lower energy efficiency expenses.
This was partially offset by increased expenses for Year 2000 readiness efforts.
Other operation expenses at the nonregulated businesses decreased $12.1 million
in the first quarter of 1999, compared with the first quarter in 1998, primarily
due to a $6.7 million asset impairment charge in the first quarter of 1998 at
Whiting and lower operation expenses in the gas marketing business.
Depreciation and amortization expense increased $3.8 million in the first
quarter of 1999 compared with the same period last year, primarily as a result
of utility property additions.
Interest Expense and Other
Interest expense increased $2.5 million in the first quarter of 1999, compared
with the first quarter in 1998, due to higher utility and nonregulated
borrowings outstanding during 1999.
Miscellaneous, net income increased $2.9 million in the first quarter of 1999,
compared with the same period last year, primarily due to $2.5 million of income
realized from settlement of a weather hedge at WP&L for the November 1, 1998, to
March 31, 1999, heating season.
Income Taxes
IEC's income tax expense increased $7.1 million in the first quarter of 1999,
compared with the same period last year, primarily due to higher pre-tax income.
The effective rate was 36.4% and 36.8% for the first quarter of 1999 and 1998,
respectively.
IESU RESULTS OF OPERATIONS
Overview
IESU's earnings available for common stock increased $2.8 million for the first
quarter of 1999, compared with the same period in 1998. The increased earnings
in 1999 were primarily due to the non-recurrence of $2 million of merger-related
expenses in the first quarter of 1998, higher electric margins and a lower
effective tax rate. Higher operation and maintenance expenses (excluding
merger-related expenses) and increased depreciation and amortization expense
partially offset these items.
24
Electric Utility Operations
Electric margins and MWH sales for IESU for the three months ended March 31 were
as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1999 1998 Change 1999 1998 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 54,353 $ 54,569 - 693 663 5%
Commercial 38,548 37,611 2% 628 583 8%
Industrial 37,882 40,239 (6%) 1,182 1,163 2%
------------- ------------- ------------ -------------
Total from ultimate customers 130,783 132,419 (1%) 2,503 2,409 4%
Sales for resale 6,353 5,712 11% 341 189 80%
Other 2,881 2,518 14% 10 10 -
------------- ------------- ------------ -------------
Total 140,017 140,649 - 2,854 2,608 9%
============ ============= =========
Electric production fuels 22,494 26,795 (16%)
Purchased power 13,150 11,049 19%
------------- -------------
Margin $ 104,373 $ 102,805 2%
============= ============= =========
Electric margin increased $1.6 million, or 2%, for the first quarter of 1999,
compared with the same period in 1998, primarily due to a 4% increase in sales
volumes to retail customers due to economic growth in the service territory and
colder weather. Increased purchased power capacity costs partially offset the
increase. Sales for resale increased significantly in the first quarter of 1999
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 EAC and therefore have no impact on electric margin.
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 Utility Operations
Gas margins and Dth sales for IESU for the three months ended March 31 were as
follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1999 1998 Change 1999 1998 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 39,161 $ 38,002 3% 6,855 6,624 3%
Commercial 17,970 17,992 - 3,889 3,876 -
Industrial 2,803 3,163 (11%) 873 914 (4%)
Transportation and other 1,362 1,238 10% 3,195 3,237 (1%)
------------- ------------- ------------ -------------
Total 61,296 60,395 1% 14,812 14,651 1%
============ ============= =========
Cost of gas sold 37,912 37,657 1%
------------- -------------
Margin $ 23,384 $ 22,738 3%
============= ============= =========
Gas margin increased $0.6 million, or 3%, for the first quarter of 1999,
compared with the same period in 1998, primarily due to increased residential
sales resulting from colder weather.
IESU's gas tariffs include PGA clauses that are designed to currently recover
the cost of gas sold.
25
Operating Expenses
IESU's other operation expenses increased $0.4 million in the first quarter of
1999, compared with the same period in 1998, largely due to increased Year 2000
readiness efforts and higher employee pension and benefits costs. Merger-related
expenses of $1.8 million in the first quarter of 1998 and lower costs associated
with merger-related operating efficiencies realized in 1999 virtually offset
these items.
Interest Expense and Other
Miscellaneous, net income increased $1.1 million for the first quarter of 1999,
compared with the same period in 1998, primarily due to higher interest income,
lower sale of accounts receivable expenses and merger-related expenses incurred
in 1998.
Income Taxes
IESU's income tax expense increased $0.2 million for the first quarter of 1999,
compared with the same period in 1998, due to higher taxable income which was
largely offset by a decrease in the overall effective tax rate. The effective
income tax rates were 41.4% and 46.3% for the first quarter of 1999 and 1998,
respectively. The effective income tax rate was lower in 1999, primarily due to
a reduction in flow-through depreciation expense and nondeductible merger
expenses in 1998.
WP&L RESULTS OF OPERATIONS
Overview
WP&L's earnings available for common stock increased $8.7 million for the first
quarter of 1999, compared with the same period in 1998. In addition to a $3.2
million decrease in merger-related expenses, the improvement in earnings in the
first quarter of 1999 primarily reflects higher electric margins, lower
operation expenses and $2.5 million of pre-tax income realized from settlement
of a weather hedge. Partially offsetting these items were $1.9 million and $1.5
million increases in depreciation and amortization expense and interest expense,
respectively.
Electric Utility Operations
Electric margins and MWH sales for WP&L for the three months ended March 31 were
as follows:
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1999 1998 Change 1999 1998 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 53,889 $ 49,755 8% 801 758 6%
Commercial 27,016 25,604 6% 465 459 1%
Industrial 39,599 37,069 7% 1,087 1,041 4%
------------- ------------- ------------ -------------
Total from ultimate customers 120,504 112,428 7% 2,353 2,258 4%
Sales for resale 24,929 35,626 (30%) 813 1,415 (43%)
Other 4,511 3,256 39% 15 17 (12%)
------------- ------------- ------------ -------------
Total 149,944 151,310 (1%) 3,181 3,690 (14%)
============ ============= =========
Electric production fuels 27,366 28,897 (5%)
Purchased power 24,000 28,602 (16%)
------------- -------------
Margin $ 98,578 $ 93,811 5%
============= ============= =========
26
Electric margin increased $4.8 million, or 5%, during the first quarter of 1999,
compared with the same period in 1998, primarily due to separate $15 million
annual rate increases implemented in July 1998 and early March 1999 to recover
higher purchased power and transmission costs. Sales to retail customers
increased 4% due to economic strength in the service territory and colder
weather compared with the same period in 1998. Lower income from off-system
sales, due to increased transmission constraints and implementation of the
merger-related joint sales agreement, partially offset these items. Under the
joint sales agreement, the margins resulting from IEC's off-system sales are
allocated among IESU, IPC and WP&L.
Gas Utility Operations
Gas margins and Dth sales for WP&L for the three months ended March 31 were as
follows:
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1999 1998 Change 1999 1998 Change
------------- ------------- --------- ------------ ------------- ---------
Residential $ 31,260 $ 31,010 1% 5,857 5,227 12%
Commercial 15,100 15,237 (1%) 3,493 3,121 12%
Industrial 2,504 2,675 (6%) 659 602 9%
Transportation and other 2,930 1,396 110% 4,043 3,829 6%
------------- ------------- ------------ -------------
Total 51,794 50,318 3% 14,052 12,779 10%
============ ============= =========
Cost of gas sold 31,181 30,714 2%
------------- -------------
Margin $ 20,613 $ 19,604 5%
============= ============= =========
Gas margin increased $1.0 million, or 5%, for the first quarter of 1999,
compared with the same period in 1998, primarily due to an increase in Dth sales
resulting from colder weather and customer growth. Refer to "Interest Expense
and Other" for a discussion of income WP&L realized from a weather hedge in the
first quarter of 1999.
Operating Expenses
Other operation expense decreased $7.9 million in the first quarter of 1999,
compared to the same period in 1998, primarily due to $3.2 million of
merger-related expenses in the first quarter of 1998 and reduced administrative
and general expenses in 1999, including lower costs due to merger-related
operating efficiencies.
Depreciation and amortization expense increased $1.9 million in the first
quarter of 1999, compared with the same period in 1998, primarily due to
property additions.
Interest Expense and Other
Interest expense increased $1.5 million in the first quarter of 1999, compared
with the same period in 1998, primarily due to higher borrowings outstanding in
1999.
The increase in miscellaneous, net income in the first quarter of 1999, compared
with the same period in 1998, was due to $2.5 million of pre-tax income realized
from settlement of a weather hedge for the November 1, 1998, to March 31, 1999,
heating season.
Income Taxes
Income taxes increased $5.3 million in the first quarter of 1999, compared with
the same period in 1998, due to higher pre-tax income. The effective rate for
the first quarter of 1999 was 37.1% compared with 36.7% for the same period in
1998.
27
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities at IEC decreased $12 million for the three
months ended March 31, 1999, compared with the same period in 1998, primarily
due to changes in working capital, which were partially offset by changes in net
income, and deferred taxes and investment tax credits. Cash flows used for
financing activities decreased $34 million for the three months ended March 31,
1999, compared with the same period in 1998, primarily as a result of the net
changes in the amount of debt outstanding. Cash flows used for investing
activities increased $35 million for the three months ended March 31, 1999,
compared with the same period in 1998, primarily due to changes in the levels of
construction and acquisition expenditures.
Cash flows generated from operating activities at IESU decreased $14 million for
the three months ended March 31, 1999, compared with the same period in 1998,
primarily due to changes in working capital, which were partially offset by the
change in deferred taxes and investment tax credits. Cash flows used for
financing activities increased $88 million for the three months ended March 31,
1999, compared with the same period in 1998, due to a reduction in the amount of
debt outstanding in 1999 and increased common stock dividends as no dividend
payments were made in the last three quarters of 1998 due to merger-related tax
considerations. As a result, the dividend payment in the first quarter of 1999
was larger than IESU's historical quarterly payment. Cash flows used for
investing activities decreased $3 million for the three months ended March 31,
1999, compared with the same period in 1998, primarily due to changes in the
levels of construction expenditures.
Cash flows generated from operating activities at WP&L decreased $7 million for
the three months ended March 31, 1999, compared with the same period in 1998,
primarily due to changes in working capital, which were partially offset by
higher net income. Cash flows used for financing activities decreased $17
million for the three months ended March 31, 1999, compared with the same period
in 1998, primarily due to changes in the amount of short-term borrowings. Cash
flows used for investing activities increased $6 million for the three months
ended March 31, 1999, compared with the same period in 1998, primarily due to
increased construction expenditures.
Future Considerations
At March 31, 1999, IEC had an investment in the stock of McLeod, a
telecommunications company, valued at $431.3 million (based on a March 31, 1999
closing price of $42.00 per share and compared to a cost basis of $29.1
million). Pursuant to the applicable accounting rules, the carrying value of
this investment is adjusted to the estimated fair value each quarter based on
the closing price at the end of the quarter. The adjustments do not impact net
income as the unrealized gains or losses, net of taxes, are recorded directly to
the common equity section of the balance sheet and are a component of other
comprehensive income. In addition, any such gains or losses are reflected in
current earnings only at the time they are realized through a sale. IEC entered
into an agreement in November 1998 with McLeod whereby IEC's ability to sell the
McLeod stock is subject to various restrictions.
In April 1999, IEC announced that it expects to participate as a selling
shareholder in a secondary offering of McLeod Class A Common Stock. IEC will
sell approximately 640,000 shares of McLeod stock in the offering (at a gross
sales price of $55.63 per share). The sale is scheduled to close in May 1999.
IEC plans to use the proceeds from the sale to repay outstanding short-term debt
at Resources. IEC presently beneficially owns 10.3 million shares of McLeod
Class A Common Stock.
Under PUHCA, IEC's investments in exempt wholesale generators and foreign
utility companies is limited to 50% of IEC's consolidated retained earnings. In
addition, there are limitations on the amount of non-utility investments IEC can
make under the Wisconsin Utility Holding Company Act (WUHCA) as well. If IEC is
unable to obtain relief from the WUHCA provisions, the company may be forced to
divest certain assets to stay in compliance.
Under terms of comprehensive restructuring legislation passed in New Zealand,
IEC will be selling a portion of its current New Zealand utility investments.
IEC anticipates that it may realize a gain on such sales.
28
Financing and Capital Structure
At March 31, 1999, Resources had $296 million of commercial paper outstanding
and backed by its 3-Year Credit Agreement with interest rates ranging from
4.90%-5.25%. Resources intends to continue issuing commercial paper backed by
this facility, and no conditions existed at March 31, 1999 that would prevent
the issuance of commercial paper or direct borrowings on its bank lines.
Accordingly, this debt is classified as long-term.
On February 11, 1999, IPC issued $3.25 million of pollution control revenue
bonds due February 1, 2010. The proceeds were used to retire $3.25 million of
6.375% pollution control revenue bonds that were due serially 1999-2007. The
bonds have a fixed interest rate of 4.05% for the first five years. Thereafter,
IPC will have the option to reset the interest rate at one of three variable
short-term interest rates or at a new long-term interest rate, based on the then
prevailing market conditions, provided the rate does not exceed 12% per annum.
On March 23, 1999, IPC issued $7.7 million of pollution control revenue bonds
due January 1, 2013. The proceeds were used to refinance $7.7 million of 6.375%
pollution control revenue bonds that were due serially 1999-2007. The bonds have
a fixed interest rate of 4.20% for the first five years. Thereafter, IPC will
have the option to reset the interest rate at one of three variable short-term
interest rates or at a new long-term interest rate, based on the then prevailing
market conditions, provided the rate does not exceed 12% per annum.
On March 1, 1999, IESU retired $50 million of Series Z, 7.6% First Mortgage
Bonds due in March 1999. Internally generated funds were used to retire the
bonds.
Capital Requirements
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 originally planned for
the spring of 2000 is now scheduled for the fall of 2001 and will take
approximately 60 days. The delay is attributable to the inability of the steam
generator manufacturer to meet the spring 2000 delivery schedule. Delays in
meeting the delivery schedule did not allow for steam generator replacement to
occur prior to the start of the summer weather in 2000. Therefore, the decision
was made to store the steam generators after they are received and wait until
the next scheduled refueling outage in the fall of 2001. It is anticipated that
the delay will not adversely impact the reliability of Kewaunee in the interim.
Plans to shutdown the plant for a spring 2000 refueling remain unchanged.
Rates and Regulatory Matters
In January 1999, WP&L made a filing with the PSCW proposing to begin deferring,
on January 1, 1999, all costs associated with the EPA's required NOx emission
reductions. In connection with a statewide docket to investigate compliance
issues associated with the EPA's NOx emission reductions, on March 30, 1999, the
PSCW authorized deferral of all non-labor related costs incurred after March 30,
1999. However, the utilities are not allowed to defer costs of replacement power
associated with NOx compliance. WP&L has requested expedited approval to start
construction of NOx reduction investments at several generating units operated
by WP&L and has requested recovery of all the NOx reduction costs through a
surcharge mechanism. WP&L anticipates receiving a final order in this proceeding
in late 1999. No assurance can be given as to what relief, if any, will be
granted by the PSCW. Refer to the "Other Matters - Environmental" section for a
further discussion of the NOx issue.
Pursuant to PSCW requirements, WP&L recognizes annual demand side management
expense based on: 1) an annual fixed expenditure amount as approved by the PSCW
in the ratemaking process, and 2) PSCW approved amortization of any difference
in historical demand side management expenditures and associated rate recoveries
of such costs. Effective with WP&L's rates implemented April 29, 1997, the
annual rate recovery for demand side management expenses (and the associated
demand side management expense) was reduced to $6.9 million reflecting annual
demand side management expenditures of $14.4 million reduced by a two-year
amortization of
29
prior period expenditures which were less than the associated rate recoveries
($7.5 million per year). At the completion of the two-year amortization period,
the annual demand side management expense to be recognized by WP&L returned to
the $14.4 million level. Given the price freeze WP&L has in effect in Wisconsin,
the annual rate recovery of demand side management expense is still $6.9
million.
The OCA has requested certain financial information related to the electric
utility operations within the state of Iowa for IESU and IPC. IESU and IPC
responded to the data requests in a timely manner. It is unknown if additional
data requests will be received by either IESU or IPC. While IESU and IPC cannot
predict the outcome of this process, such data requests could lead to an effort
by the OCA to seek a rate reduction for one or both of IESU and IPC in Iowa.
OTHER MATTERS
Year 2000
A summary of IEC's Year 2000 program is included in the Form 10-K filed by IEC,
IESU and WP&L for the year ended December 31, 1998. Set forth below are
developments relating to the Year 2000 program.
Remediation and Testing Year 2000 remediation and testing has been substantially
completed for all operational areas of IEC which include generating stations,
substations, transmission and distribution substations, natural gas distribution
systems, system and distribution operating centers and all key building
infrastructure. However, IEC is still dependent upon the timely provision of
necessary upgrades and modifications by certain software vendors. As of March
31, 1999, IEC was expecting upgrades from approximately 10 embedded system
vendors and 14 information technology vendors. IEC considers the potential
impact on the Year 2000 program to be minimal as: 1) the upgrades are for
non-mission critical systems or applications, or 2) operational contingency
plans have already been developed and deployed.
A. Embedded Systems -
All testing for assessing Year 2000 compliance has been completed. Remaining
work includes minor upgrades on less than 15 miscellaneous systems.
B. Information Technology -
As of March 31, 1999, approximately 90% of the systems and 80% of the
infrastructure components have been remediated and tested. IEC's customer
information systems and financial systems make up the majority of the remaining
remediation and testing effort. The remediation and testing of the customer
information systems was 95% complete at the end of March 1999. All remediation
work was completed in early May 1999 and will be operational by May 31, 1999.
The financial systems have been remediated with final roll-forward-testing
scheduled to be completed by July 15, 1999. Therefore, it is anticipated that
IEC will have its information technology remediation and testing efforts 99%
complete by July 15, 1999. On July 15, 1999 there will be four remaining
non-mission critical systems waiting for vendor supplied software, scheduled for
completion by September 1, 1999. Contingency plans for these remaining systems
are already in place as well as for all other critical systems.
Costs to Address Year 2000 Compliance IEC's historical Year 2000 project
expenditures as well as CURRENT ESTIMATES for the remaining costs to be incurred
on the project are as follows (incremental costs, in millions):
Description Total IESU WP&L Other
----------- ----- ---- ---- -----
Costs incurred from 1/1/98 - 12/31/98 $ 8.7 $4.8 $3.2 $0.7
Costs incurred from 1/1/99 - 3/31/99 $ 5.2 $2.3 $1.9 $1.0
Current estimate of remaining modifications $18.5 $5.4 $8.6 $4.5
In addition, IEC estimates it incurred $3 million in costs for internal labor
and associated overheads in 1998 and anticipates expenditures of $6 million in
1999 ($1.6 million was incurred in the first quarter of 1999). The total
30
estimated project cost has decreased from the figures reported in the Form 10-K
due to lower than anticipated remediation costs and a reduction in the
contingency estimate.
In accordance with an order received from the PSCW, WP&L is deferring its Year
2000 project costs, other than internal labor and associated overheads
(approximately $4.3 million of the expenditures incurred at WP&L from January 1,
1998 through March 31, 1999 have been deferred).
Risks and Contingency Planning IEC continues to work on developing its Year 2000
contingency plan. The planning process includes three components: 1) base
contingency planning, 2) emergency preparedness, and 3) electric and gas
industry-wide coordination. The base contingency planning phase involves the
development of operating procedures to handle the malfunction of a specific
device. This work was completed in the first quarter of 1999. The emergency
preparedness phase involves the development of operating procedures to handle
the malfunction of major business processes. This work started in late 1998 and
will continue through the end of 1999.
The electric and gas industry-wide coordination is a major focus of IEC's
efforts in preparation for industry-wide drills which are being coordinated by
the North American Electric Reliability Council (NERC). As part of its
contingency planning process, NERC scheduled two nation-wide electric utility
industry drills in April 1999 and September 1999. These drills focus on safe and
reliable electrical system operations with the partial loss of
telecommunications. Results of the April 1999 NERC drill were very positive. All
contingency plans worked as anticipated, however, some procedures and manual
data forms will be refined to enhance efficiency.
In addition to these NERC drills, IEC will be conducting five additional
internal drills. These include an already completed March table-top drill, a
June 1999 functional drill and an August 1999 full-scale development drill where
key employees will test and critique IEC's contingency plans. Two additional
internal drills will also be scheduled after the September NERC full-scale
drill.
IEC also retained an outside third party to assess and evaluate its Year 2000
program and such study did not find any material deficiencies in the program.
Summary Based on IEC's current schedule for completion of its Year 2000 tasks,
IEC believes its plan is adequate to secure Year 2000 readiness of its critical
systems. Nevertheless, achieving Year 2000 readiness is subject to many risks
and uncertainties, as described above. If IEC, or third parties, fail to achieve
Year 2000 readiness with respect to critical systems and, as such, there are
systematic problems, there could be a material adverse effect on IEC's results
of operations and financial condition.
Market Risk Sensitive Instruments and Positions
Whiting is exposed to market risk in the pricing of its oil and gas production.
Historically, prices received for oil and gas production have been volatile
because of seasonal weather patterns, supply and demand factors, transportation
availability and price, and general economic conditions. Worldwide political
developments have historically also had an impact on oil prices. In the past,
IEC generally has not utilized derivative instruments designed to reduce its
exposure to these price fluctuations. However, during the first quarter of 1999,
IEC entered into a limited amount of commodity derivative transactions to fix
the ultimate sales price for approximately two-thirds of Whiting's anticipated
gas production for the remainder of 1999. At March 31, 1999, the estimated fair
value of the outstanding agreements would have resulted in a settlement payment
by IEC of approximately $1.8 million.
WP&L settled the weather insurance agreement it entered into for the November 1,
1998, to March 31, 1999, heating season and recognized income of $2.5 million in
the first quarter of 1999 relating to such settlement.
At March 31, 1999, IEC had an investment in the stock of McLeod, a
telecommunications company, valued at $431.3 million (based on a March 31, 1999
closing price of $42.00 per share and compared to a cost basis of $29.1
million). Pursuant to the applicable accounting rules, the carrying value of
this investment is adjusted to the
31
estimated fair value each quarter based on the closing price at the end of the
quarter. IEC entered into an agreement in November 1998 with McLeod whereby
IEC's ability to sell the McLeod stock is subject to various restrictions.
IEC has a 50% interest in an electricity trading joint venture with Cargill.
Guarantees of approximately $61 million have been issued of which approximately
$12 million were outstanding at March 31, 1999. Under the terms of the joint
venture agreement, any payments required under the guarantees would be shared by
IEC and Cargill on a 50/50 basis to the extent the joint venture is not able to
reimburse the guarantor for payments made under the guarantee.
Environmental
A summary of IEC's environmental issues is included in the Form 10-K filed by
IEC, IESU and WP&L for the year ended December 31, 1998. Set forth below are
several developments relating to IEC's environmental issues.
In October 1998, the EPA issued a final rule requiring 22 states, including
Wisconsin, to modify their SIP's 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 a fleet average of .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 will be in the range of $150 to $215 million. Refer to the "Rates
and Regulatory Matters" section for a discussion of a filing WP&L made with the
PSCW regarding seeking rate recovery of these costs.
On February 28, 1998, the EPA issued the final report to Congress on the Study
of Hazardous Air Pollutant Emissions from Electric Utility Steam Generating
Units regarding hazardous air pollutant emissions from electric utilities (the
HAPs report). The HAPs report concluded that mercury emissions from coal fired
utilities were a concern. However, the EPA does not believe they have sufficient
information regarding mercury emissions from coal fired units. To remedy this
lack of information, the EPA required IESU, WP&L, IPC and all other coal fired
electric utilities to start collecting information regarding the types and
amount of mercury emitted as of January 1, 1999. Although the control of mercury
emissions from coal fired plants is uncertain at this time, IEC believes that
the capital investments and/or modifications required to control mercury
emissions could be significant.
Pursuant to an internal review of operations, IPC discovered that Unit No. 6 at
its generating facility in Dubuque, Iowa might require a Clean Air Act Acid Rain
permit and CEMS. IPC initiated discussions with the regulators and discontinued
operation of the unit during resolution of the issues. IPC has resolved the
issue by installing a CEMS on the unit and obtaining an Acid Rain permit.
Pursuant to its internal review, IPC also identified and disclosed to regulators
a potentially similar situation at its Lansing, Iowa generating facility, and
will potentially be installing CEMS and applying for Acid Rain permits for these
units as well, pending the outcome of regulatory review. IPC may be subject to a
penalty for not having installed the CEMS and for not having obtained the permit
previously. However, IPC believes that any likely actions resulting from this
matter will not have a material adverse effect on its financial position or
results of operations.
Power Supply
In July 1998, IEC and Polsky announced an agreement whereby Polsky would build,
own and operate a power plant in southeastern Wisconsin capable of producing up
to 450 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. During the first quarter of 1999, Polsky changed its name to
SkyGen Energy LLC (SkyGen). Recent developments for the 450 MW SkyGen project
include an appeal to the EPA Appeals Board on the NOx mitigation. The appeal, if
successful, would require selective catalytic reduction to be used for NOx
mitigation instead of dry low NOx burners. Accelerated treatment (60 day
process) of the appeal is being requested and, if approved, would still allow
the facility to meet its in-service date of June 2000. Management currently
believes that the EPA will rule in favor of SkyGen.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk are reported under
Item 2. MD&A "Other Matters - Market Risk Sensitive Instruments and Positions."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 were filed with the court and
oral arguments were held on January 13, 1999. The court issued its decision on
March 16, 1999 upholding the SEC's decision in approving the merger and denying
the petition for review.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following Exhibits are filed herewith or incorporated herein by
reference. Documents indicated by an asterisk (*) are incorporated herein
by reference.
3.1* Bylaws of Interstate Energy Corporation, effective as of January
20, 1999 (incorporated by reference to Exhibit 3.2 to IEC's Form
10-K for the year ended December 31, 1998)
3.2* Bylaws of Wisconsin Power and Light Company, effective as of
January 20, 1999 (incorporated by reference to Exhibit 3.4 to
WP&L's Form 10-K for the year ended December 31, 1998)
3.3* Bylaws of IES Utilities Inc., effective as of January 20, 1999
(incorporated by reference to Exhibit 3.6 to IESU's Form 10-K
for the year ended December 31, 1998)
4.1* Rights Agreement, dated January 20, 1999, between Interstate
Energy Corporation and Firstar Bank Milwaukee, N.A.
(incorporated by reference to Exhibit 4.1 to IEC's Registration
Statement on Form 8-A, dated January 20, 1999)
10.1 Restricted Stock Agreement pursuant to the Interstate Energy
Corporation Long-Term Equity Incentive Plan
10.2 Key Executive Employment and Severance Agreement, dated March
29, 1999, by and between Interstate Energy Corporation and
Erroll B. Davis, Jr.
10.3 Key Executive Employment and Severance Agreement, dated March
29, 1999, by and between Interstate Energy Corporation and each
of J.E. Hoffman, W.D. Harvey, E.G. Protsch, P.J. Wegner, T.M.
Walker and B.J. Swan
10.4 Key Executive Employment and Severance Agreement, dated March
29, 1999, by and between Interstate Energy Corporation and each
of T.L. Aller, D.A. Doyle, E.M. Gleason, D.K. Langer, D.L.
Mineck, D.R. Sharp and K.K. Zuhlke
10.5 Employment Agreement by and between Interstate Energy
Corporation and Erroll B. Davis, Jr., amended and restated as of
March 29, 1999
33
27.1 Financial Data Schedule for Interstate Energy Corporation at and
for the period ended March 31, 1999
27.2 Financial Data Schedule for IES Utilities Inc. at and for the
period ended March 31, 1999
27.3 Financial Data Schedule for Wisconsin Power and Light Company at
and for the period ended March 31, 1999
(b) Reports on Form 8-K:
Interstate Energy Corporation filed a Current Report on Form 8-K, dated January
20, 1999, reporting (under Item 5) that on January 20, 1999 the Board of
Directors of Interstate Energy Corporation adopted a series of amendments to the
Bylaws of Interstate Energy Corporation.
Interstate Energy Corporation filed a Current Report on Form 8-K, dated January
20, 1999, reporting (under Item 5) that on January 20, 1999, the Board of
Directors of Interstate Energy Corporation declared a dividend of one common
share purchase right for each outstanding share of common stock, $.01 par value,
of Interstate Energy Corporation. The description and terms of the common share
purchase rights are set forth in a Rights Agreement dated January 20, 1999
between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A., as
Rights Agent.
34
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 17th day of May 1999.
INTERSTATE ENERGY CORPORATION
Registrant
By: /s/ Thomas M. Walker Executive Vice President and Chief
Thomas M. Walker Financial 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
Thomas M. Walker Financial 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
Thomas M. Walker Financial Officer
(Principal Financial Officer)
By: /s/ John E. Ebright Vice President-Controller
John E. Ebright (Principal Accounting Officer)
35
EXHIBIT INDEX
(a) Exhibits:
The following Exhibits are filed herewith or incorporated herein by
reference. Documents indicated by an asterisk (*) are incorporated herein
by reference.
3.1* Bylaws of Interstate Energy Corporation, effective as of January
20, 1999 (incorporated by reference to Exhibit 3.2 to IEC's Form
10-K for the year ended December 31, 1998)
3.2* Bylaws of Wisconsin Power and Light Company, effective as of
January 20, 1999 (incorporated by reference to Exhibit 3.4 to
WP&L's Form 10-K for the year ended December 31, 1998)
3.3* Bylaws of IES Utilities Inc., effective as of January 20, 1999
(incorporated by reference to Exhibit 3.6 to IESU's Form 10-K
for the year ended December 31, 1998)
4.1* Rights Agreement, dated January 20, 1999, between Interstate
Energy Corporation and Firstar Bank Milwaukee, N.A.
(incorporated by reference to Exhibit 4.1 to IEC's Registration
Statement on Form 8-A, dated January 20, 1999)
10.1 Restricted Stock Agreement pursuant to the Interstate Energy
Corporation Long-Term Equity Incentive Plan
10.2 Key Executive Employment and Severance Agreement, dated March
29, 1999, by and between Interstate Energy Corporation and
Erroll B. Davis, Jr.
10.3 Key Executive Employment and Severance Agreement, dated March
29, 1999, by and between Interstate Energy Corporation and each
of J.E. Hoffman, W.D. Harvey, E.G. Protsch, P.J. Wegner, T.M.
Walker and B.J. Swan
10.4 Key Executive Employment and Severance Agreement, dated March
29, 1999, by and between Interstate Energy Corporation and each
of T.L. Aller, D.A. Doyle, E.M. Gleason, D.K. Langer, D.L.
Mineck, D.R. Sharp and K.K. Zuhlke
10.5 Employment Agreement by and between Interstate Energy
Corporation and Erroll B. Davis, Jr., amended and restated as of
March 29, 1999
27.1 Financial Data Schedule for Interstate Energy Corporation at and
for the period ended March 31, 1999
27.2 Financial Data Schedule for IES Utilities Inc. at and for the
period ended March 31, 1999
27.3 Financial Data Schedule for Wisconsin Power and Light Company at
and for the period ended March 31, 1999