SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
WISCONSIN POWER AND LIGHT COMPANY
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
222 West Washington Avenue, P. O. Box 2568, Madison, WI 53701-2568
Phone: 608/252-3110
NOTICE OF ANNUAL MEETING OF SHAREOWNERS
May 26, 1999
1:00 P.M.
The Annual Meeting of Shareowners of Wisconsin Power and Light Company
(the "Company") will be held at the offices of the Company, 222 West Washington
Avenue, Madison, WI, Room 1A on Wednesday, May 26, 1999, at 1:00 P.M. (local
time), for the following purposes:
(1) To elect five directors for terms expiring at the 2002 Annual
Meeting of Shareowners.
(2) To consider and act upon any other business that may properly come
before the meeting or any adjournment or postponement thereof.
The Board of Directors of the Company presently knows of no other
business to come before the meeting.
Only the sole common shareowner, Interstate Energy Corporation (d/b/a
Alliant Energy Corporation), and preferred shareowners of record on the books of
the Company at the close of business on April 7, 1999 are entitled to vote at
the meeting.
Please sign and return your proxy immediately. If you attend the meeting,
you may withdraw your proxy at the registration desk and vote in person. All
shareowners are urged to return their proxies promptly.
The 1998 Annual Report of the Company appears as to this Proxy Statement.
The Proxy Statement and Annual Report have been combined into a single document
to improve the effectiveness of our financial communication and to reduce costs,
although the Annual Report does not constitute a part of the Proxy Statement.
Any Wisconsin Power and Light Company preferred shareowner who desires to
receive a copy of the Interstate Energy Corporation 1998 Annual Report to
Shareowners may do so by calling the Shareowner Services Department at
608-252-3110 or writing to the Company at the above address.
By Order of the Board of Directors,
/s/Edward M. Gleason
Edward M. Gleason
Vice President - Treasurer
and Corporate Secretary
Madison, Wisconsin
April 12, 1999
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
222 West Washington Avenue, P. O. Box 2568, Madison, WI 53701-2568
Phone: 608/252-3110
April 12, 1999
PROXY STATEMENT RELATING TO
1999 ANNUAL MEETING OF SHAREOWNERS
The purposes of the meeting are set forth in the accompanying notice. The
enclosed proxy relating to the meeting is solicited on behalf of the Board of
Directors of the Company and the cost of such solicitation will be borne by the
Company. Following the original solicitation of proxies by mail, beginning on or
about April 12, 1999, certain of the officers and regular employees of the
Company may solicit proxies by telephone, telegraph or in person, but without
extra compensation. The Company will pay to banks, brokers, nominees, and other
fiduciaries, their reasonable charges and expenses incurred in forwarding the
proxy material to their principals.
On April 21, 1998, the merger involving IES Industries Inc. ("IES
Industries," the former parent of IES Utilities Inc. ("IES")), Interstate Power
Company ("IPC") and WPL Holdings, Inc. was completed (the "Merger"), after which
the name of the Company's parent corporation, WPL Holdings, Inc., was changed to
Interstate Energy Corporation ("IEC"). The Company remains a subsidiary of IEC.
The Company will furnish without charge, to each shareowner who is
entitled to vote at the meeting and who makes a written request, a copy of the
Company's Annual Report on Form 10-K (not including exhibits thereto), as filed
pursuant to the Securities Exchange Act of 1934. Written requests for the Form
10-K should be mailed to the Corporate Secretary at the address stated above.
ELECTION OF DIRECTORS
Five directors are to be elected at the Company's Annual Meeting of
Shareowners for terms expiring in 2002. The nominees for election as selected by
the Nominating and Governance Committee of the Company's Board of Directors are:
Alan B. Arends, Rockne G. Flowers, Katharine C. Lyall, Robert D. Ray and Anthony
R. Weiler. Each of the nominees is currently serving as a director of the
Company, IEC, IES, IPC and Alliant Energy Resources, Inc. ("AERI"), the holding
company for non-regulated operations of IEC. All persons elected as directors
will serve until the Annual Meeting of Shareowners of the Company in the year
2002, or until their successors have been duly elected and qualified.
Directors will be elected by a plurality of the votes cast at the meeting
(assuming a quorum is present). Consequently, any shares not voted at the
meeting, whether due to abstentions or otherwise, will have no effect on the
election of directors. The proxies solicited may be voted for a substitute
nominee or nominees in the event that any of the nominees shall be unable to
serve, or for good reason will not serve, a contingency not now anticipated.
<PAGE>
Brief biographies of the director nominees and continuing directors
follow. These biographies include their age (as of December 31, 1998), an
account of their business experience, and the names of publicly-held and certain
other corporations of which they are also directors. Except as otherwise
indicated, each nominee and continuing director has been engaged in his or her
present occupation for at least the past five years.
NOMINEES
For Terms Expiring in 2002
Alan B. Arends Principal Occupation: Chairman of the Board of Alliance
Benefit Group Financial Services Corp. (an employee
benefits company formerly known as Arends Associates,
Inc.), Albert Lea, Minnesota.
Age: 65
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which nominated term of office will
expire: 2002
Other Information: Mr. Arends founded Alliance Benefit Group Financial Services
Corp. in 1983. Mr. Arends has served as a director of IPC since 1993 and of IEC
and IES since the consummation of the Merger.
Rockne G. Flowers Principal Occupation: Chairman of Nelson Industries, Inc.
(a muffler, filter, industrial silencer, and active sound
and vibration control technology and manufacturing firm and
a subsidiary of Cummins Engine Company), Stoughton,
Wisconsin.
Age: 67
(Photo)
Served as a director of the Company from 1979 to 1990 and
since 1994.
Annual Meeting at which nominated term of office will
expire: 2002
Other Information: Mr. Flowers is a director of American Family Mutual Insurance
Company, Janesville Sand and Gravel Company, M&I Bank of Southern Wisconsin, the
Wisconsin History Foundation, and University Research Park. Mr. Flowers has
served as a director of IEC since 1981 and of IES and IPC since the consummation
of the Merger.
2
<PAGE>
Katharine C. Lyall Principal Occupation: President, University of Wisconsin
System, Madison, Wisconsin.
Age: 57
(Photo) Served as a director of the Company since 1986.
Annual Meeting at which nominated term of office will
expire: 2002
Other Information: Ms. Lyall has served as President of the University of
Wisconsin System since April 1992. Prior thereto, she served as Executive Vice
President of the University of Wisconsin System. She also serves on the Board of
Directors of the Kemper National Insurance Companies and the Carnegie Foundation
for the Advancement of Teaching. She is a member of a variety of professional
and community organizations, including the American Economic Association,
Carnegie Foundation for Advancement of Teaching (President, Board of Trustees),
the Wisconsin Academy of Sciences, Arts and Letters, the American Red Cross
(Dane County), Competitive Wisconsin, Inc., and Forward Wisconsin. In addition
to her administrative position, she is a professor of economics at the
University of Wisconsin-Madison. Ms. Lyall has served as a director of IEC since
1994 and of IES and IPC since the consummation of the Merger.
Robert D. Ray Principal Occupation: President, Drake University, Des
Moines, Iowa.
Age: 70
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which nominated term of office will
expire: 2002
Other Information: Mr. Ray has served as President of Drake University since
April 1998. He served as President and Chief Executive Officer of Life Investors
Insurance Co. (AEGON USA) from 1983 to 1989 and President of Blue Cross/Blue
Shield (Wellmark) from 1989 until his retirement in 1996. Prior thereto, Mr. Ray
served as Governor of the State of Iowa for fourteen years, and was a United
States Delegate to the United Nations in 1984. Before that he was a trial
lawyer. He is a director of the Maytag Company (an appliance manufacturer) and a
director of Norwest Bank IA. He serves as Chairman of the National Coalition on
Health Care and the National Advisory Committee on Rural Health. Mr. Ray
previously served as Chairman of the Board of Governors, Drake University, and
as a member of the Iowa Business Council. Mr. Ray has served as a director of
IES (or predecessor companies) since 1987 and of IEC and IPC since the
consummation of the Merger.
3
<PAGE>
Anthony R. Weiler Principal Occupation: Senior Vice President for
Heilig-Meyers Company (a national furniture retailer),
Richmond, Virginia.
Age: 62
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which nominated term of office will
expire: 2002
Other Information: Mr. Weiler was previously Chairman and Chief Executive
Officer of Chittenden & Eastman Company, a national manufacturer of mattresses
in Burlington, Iowa. Chittenden & Eastman employed him in various management
positions from 1960 to 1995. Mr. Weiler joined Heilig-Meyers Company as Senior
Vice President in 1995. Mr. Weiler previously served as President and Chairman
of the National Home Furnishings Association and is currently a director of the
Retail Home Furnishings Foundation and the NHFA Insurance Trust. He is a past
director of the Burlington Area Development Corporation, the Burlington Area
Chamber of Commerce and various community organizations. He is a board member of
the Tuckahoe YMCA in Richmond, Virginia. Mr. Weiler has served as a director of
IES (or predecessor companies) since 1979 and of IEC and IPC since the
consummation of the Merger.
THE BOARD OF DIRECTORS RECOMMENDS THE FOREGOING NOMINEES FOR ELECTION AS
DIRECTORS AND URGES EACH SHAREOWNER TO VOTE "FOR" ALL NOMINEES. SHARES OF COMMON
STOCK REPRESENTED BY EXECUTED BUT UNMARKED PROXIES WILL BE VOTED "FOR" ALL
NOMINEES.
4
<PAGE>
CONTINUING DIRECTORS
Erroll B. Davis, Jr.
Principal Occupation: President and Chief Executive Officer
of IEC.
Age: 54
(Photo)
Served as a director of the Company since 1984.
Annual Meeting at which current term of office will expire:
2000
Other Information: Mr. Davis was elected President of IEC in January 1990, and
was elected President and Chief Executive Officer of IEC effective July 1, 1990.
Mr. Davis joined the Company in August 1978 and was elected President in July
1987. He was elected President and Chief Executive Officer of the Company in
August 1988. Mr. Davis has also served as Chief Executive Officer of IES and IPC
since the consummation of the Merger. He is a member of the Boards of Directors
of BP Amoco p.l.c., PPG Industries, Inc., the Edison Electric Institute, the
Wisconsin Manufacturers and Commerce Association and the Association of Edison
Illuminating Companies. He also is a member of the Electric Power Research
Institute, the Iowa Business Council, the American Society of Corporate
Executives and the Nuclear Energy Institute. Mr. Davis has served as a director
of IEC since 1982 and of IES and IPC since the consummation of the Merger.
Joyce L. Hanes
Principal Occupation: Director and Chairman of Midwest
Wholesale, Inc. (a products wholesaler), Mason City, Iowa.
Age: 66
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual meeting at which current term of office will expire:
2001
Other Information: Ms. Hanes has been a director of Midwest Wholesale Inc.,
Mason City, Iowa since 1970. She was re-elected Chairman of the Board of that
company in December 1997, having previously served as Chairman from 1986 to
1988. She is a director of the Iowa Student Loan Liquidity Corp. and the North
Iowa Area Community College Foundation and is President of Camp Tanglefoot, Inc.
Ms. Hanes has served as a director of IPC since 1982 and of IEC and IES since
the consummation of the Merger.
5
<PAGE>
Lee Liu
Principal Occupation: Chairman of the Board of IEC.
Age: 65
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which current term of office will expire:
2000
Other Information: Mr. Liu has served as Chairman of the Board of the Company
and IEC since the consummation of the Merger. Mr. Liu was Chairman of the Board
and Chief Executive Officer of IES Industries and Chairman of the Board and
Chief Executive Officer of IES prior to the Merger. Mr. Liu has held a number of
professional, management and executive positions after joining Iowa Electric
Light and Power Company (later known as IES) in 1957. He is a director of
McLeodUSA Inc., a telecommunications company in Cedar Rapids, Iowa; Principal
Financial Group, an insurance company in Des Moines, Iowa; and Eastman Chemical
Company, a diversified chemical company in Kingsport, Tennessee. He also serves
as a trustee for Mercy Medical Center, a hospital in Cedar Rapids, Iowa and is a
member of the University of Iowa College of Business Board of Visitors. Mr. Liu
has served as a director of IES (or predecessor companies) since 1981 and of IEC
and IPC since the consummation of the Merger.
Arnold M. Nemirow
Principal Occupation: Chairman, President and Chief
Executive Officer, Bowater Incorporated (a pulp and paper
manufacturer), Greenville, South Carolina.
Age: 55
(Photo)
Served as a director of the Company since 1994.
Annual Meeting at which current term of office will expire:
2001
Other Information: Mr. Nemirow served as President, Chief Executive Officer and
Director of Wausau Paper Mills Company, a pulp and paper manufacturer, from 1990
until joining Bowater Incorporated in September 1994. He is a member of the New
York Bar. Mr. Nemirow has served as a director of IEC since 1991 and of IES and
IPC since the consummation of the Merger.
6
<PAGE>
Milton E. Neshek
Principal Occupation: General Counsel and member of the
Board of Directors of Kikkoman Foods, Inc. (a food products
manufacturer), Walworth, Wisconsin.
(Photo)
Age: 68
Served as a director of the Company since 1984.
Annual Meeting at which current term of office will expire:
2000
Other Information: Mr. Neshek is Special Consultant to the Kikkoman Corporation,
Tokyo, Japan, and General Counsel, Secretary and Manager, New Market
Development, Kikkoman Foods, Inc. He is also a director of Midwest U.S.-Japan
Association and Wisconsin-Chiba, Inc. He is a fellow in the American College of
Probate Counsel. Mr. Neshek is a member of the Walworth County Bar Association
and the State Bar of Wisconsin. Mr. Neshek is also a member of the Wisconsin
Sesquicentennial Commission and a member of its Executive and Finance Committee.
Mr. Neshek is a member of the Wisconsin International Trade Council ("WITCO")
and is Chairman of the WITCO International Education Task Force. Mr. Neshek has
served as a director of IEC since 1986 and of IES and IPC since the consummation
of the Merger.
Jack R. Newman
Principal Occupation: Partner of Morgan, Lewis & Bockius
(an international law firm), Washington, D.C.
Age: 65
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which nominated term of office will
expire: 2001
Other Information: Mr. Newman has been engaged in private practice since 1967
and has been a partner of Morgan, Lewis & Bockius since December 1, 1994. Prior
to joining Morgan, Lewis & Bockius, he was a partner in the law firms of Newman
& Holtzinger and Newman, Bouknight & Edgar. He has served as nuclear legal
counsel to IES since 1968. He advises a number of utility companies on nuclear
power matters, including many European and Asian companies. Mr. Newman is a
member of the Bar of the State of New York, the Bar Association of the District
of Columbia, the Association of the Bar of the City of New York, the Federal Bar
Association and the Lawyers Committee of the Edison Electric Institute. Mr.
Newman has served as a director of IES since 1994 and of IEC and IPC since the
consummation of the Merger.
7
<PAGE>
Judith D. Pyle
Principal Occupation: Vice Chair of The Pyle Group (a
financial services company), Madison, Wisconsin.
Age: 55
(Photo)
Served as a director of the Company since 1994.
Annual Meeting at which current term of office will expire:
2001
Other Information: Prior to assuming her current position, Ms. Pyle served as
Vice Chair and Senior Vice President of Corporate Marketing of Rayovac
Corporation (a battery and lighting products manufacturer), Madison, Wisconsin.
Ms. Pyle is a director of Firstar Corporation. She is also a member of the Board
of Visitors at the University of Wisconsin School of Human Ecology. Further, Ms.
Pyle is a member of Boards of Directors of the United Way Foundation, Greater
Madison Chamber of Commerce, Wisconsin Taxpayers Alliance, Children's Theatre of
Madison, and the Boys and Girls Club of Dane County. Ms. Pyle is also Vice
Chairman of Georgette Klinger, Inc. and is a trustee of the White House
Endowment Fund. Ms. Pyle has served as a director of IEC since 1992 and of IES
and IPC since the consummation of the Merger.
David Q. Reed
Principal Occupation: Independent practitioner of law in
Kansas City, Missouri.
Age: 67
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which current term of office will expire:
2001
Other Information: Mr. Reed has been engaged in the private practice of law
since 1960. He is also President and Chief Executive Officer of Fairview
Enterprises, Inc., a land holding corporation with properties in Missouri and
Michigan. He is a member of the American Bar Association, the Association of
Trial Lawyers of America, the Missouri Association of Trial Lawyers, the
Missouri Bar and the Kansas City Metropolitan Bar Association. Mr. Reed has
served as a director of IES (or predecessor companies) since 1967 and of IEC and
IPC since the consummation of the Merger.
8
<PAGE>
Robert W. Schlutz
Principal Occupation: President of Schlutz Enterprises (a
diversified farming and retailing business), Columbus
Junction, Iowa.
Age: 63
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which current term of office will expire:
2000
Other Information: Mr. Schlutz is a director of PM Agri-Nutritional Group Inc.,
an animal health business in St. Louis, Missouri. Mr. Schlutz is a past director
for the Iowa Foundation for Agricultural Advancement, past President of the Iowa
State Fair Board, past President of the Association of National Kentucky Fried
Chicken Franchisees, and a past director of the National Certified Angus Beef
Association. Mr. Schlutz is also a member of various community organizations. He
previously served on the National Advisory Council for the Kentucky Fried
Chicken Corporation. He is a past Chairman of the Environmental Protection
Commission for the State of Iowa. Mr. Schlutz has served as a director of IES
(or predecessor companies) since 1989 and of IEC and IPC since the consummation
of the Merger
Wayne H. Stoppelmoor
Principal Occupation: Vice Chairman of the Board of IEC.
Age: 64
(Photo)
Served as a director of the Company since the consummation
of the Merger.
Annual Meeting at which current term of office will expire:
2000
Other Information: Mr. Stoppelmoor has served as Vice Chairman of the Board of
the Company and IEC since the consummation of the Merger. Prior thereto, Mr.
Stoppelmoor had served as Chairman, President and Chief Executive Officer of
IPC. He retired as President of IPC on October 1, 1996 and as Chief Executive
Officer on January 1, 1997. Mr. Stoppelmoor has served as a director of IPC
since 1986 and of IEC and IES since the consummation of the Merger.
9
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company has standing Audit, Compensation
and Personnel, and Nominating and Governance Committees. Information regarding
each of the committees is set forth below.
Audit Committee
The Audit Committee held one meeting in 1998. The Audit Committee
currently consists of J. L. Hanes (Chair), K. C. Lyall, M. E. Neshek, J. R.
Newman and R. W. Schlutz. The Audit Committee recommends to the Board the
appointment of independent auditors; reviews the reports and comments of the
independent auditors; reviews the activities and reports of the Company's
internal audit staff; and, in response to the reports and comments of both the
independent auditors and internal auditors, recommends to the Board any action
which the Audit Committee considers appropriate.
Compensation and Personnel Committee
The Compensation and Personnel Committee held two meetings in 1998. The
Compensation and Personnel Committee currently consists of A. M. Nemirow
(Chair), A. B. Arends, J. D. Pyle, D. Q. Reed and A. R. Weiler. The Compensation
and Personnel Committee sets executive compensation policy; reviews the
performance of and approves salaries for officers and certain other management
personnel; reviews and recommends to the Board new or changed employee benefit
plans; reviews major provisions of negotiated employment contracts; and reviews
human resource development programs.
Nominating and Governance Committee
The Nominating and Governance Committee held two meetings in 1998. The
Nominating and Governance Committee currently consists of R. G. Flowers (Chair),
A. B. Arends, J. D. Pyle, R. D. Ray and A. R. Weiler. The Nominating and
Governance Committee's responsibilities include recommending and nominating new
members of the Board, recommending committee assignments and committee
chairpersons, evaluating overall Board effectiveness, preparing an annual report
on Chief Executive Officer effectiveness, and considering and developing
recommendations to the Board of Directors on other corporate governance issues.
In making recommendations of nominees for election to the Board, the Nominating
and Governance Committee will consider nominees recommended by shareowners. Any
shareowner wishing to make a recommendation should write the Chief Executive
Officer of the Company, who will forward all recommendations to the Committee.
The Board of Directors held five meetings during 1998. All directors
attended at least 88% of the aggregate number of meetings of the Board and Board
committees on which he or she served.
10
<PAGE>
COMPENSATION OF DIRECTORS
No fees are paid to directors who are officers of the Company, IEC or any
of IEC's subsidiaries (presently Mr. Davis, Mr. Liu and Mr. Stoppelmoor).
Non-management directors, each of whom serve on the Boards of the Company, IEC,
IES, IPC and AERI, receive an annual retainer of $32,800 for service on all five
Boards. Travel expenses are paid for each meeting day attended. All
non-management directors also receive a 25 percent matching contribution in IEC
common stock for limited optional cash purchases, up to $10,000, of IEC's common
stock through IEC's Shareowner Direct Plan. Matching contributions of $2,500
each for calendar year 1998 were made for the following directors: A. B. Arends,
R. G. Flowers, J. L. Hanes, K. C. Lyall, A. M. Nemirow, M. E. Neshek, J. R.
Newman, J. D. Pyle, R. D. Ray, and R. W. Schlutz. As of the effective date of
the Merger, a previously existing retirement plan for IES Industries directors
was terminated. Persons with vested interests in that plan received a payout of
those interests at the time of the Merger. Those persons receiving such a payout
included the following directors: L. Liu - $76,800, R. D. Ray - $76,800, D. Q.
Reed - $76,800, R. W. Schlutz - $76,800, and A. R. Weiler - $76,800.
Director's Charitable Award Program - IEC maintains a Director's
Charitable Award Program for the members of its Board of Directors beginning
after three years of service. The purpose of the Program is to recognize the
interest of the Company and its directors in supporting worthy institutions, and
to enhance the Company's director benefit program so that the Company is able to
continue to attract and retain directors of the highest caliber. Under the
Program, when a director dies, the Company and/or IEC will donate a total of
$500,000 to one qualified charitable organization, or divide that amount among a
maximum of four qualified charitable organizations, selected by the individual
director. The individual director derives no financial benefit from the Program.
All deductions for charitable contributions are taken by the Company or IEC, and
the donations are funded by the Company or IEC through life insurance policies
on the directors. Over the life of the Program, all costs of donations and
premiums on the life insurance policies, including a return of the Company's
cost of funds, will be recovered through life insurance proceeds on the
directors. The Program, over its life, will not result in any material cost to
the Company or IEC.
Director's Life Insurance Program - IEC maintains a split-dollar
Director's Life Insurance Program for non-employee directors, beginning after
three years of service, which provides a maximum death benefit of $500,000 to
each eligible director. Under the split-dollar arrangement, directors are
provided a death benefit only and do not have any interest in the cash value of
the policies. The Life Insurance Program is structured to pay a portion of the
total death benefit to IEC to reimburse IEC for all costs of the program,
including a return on its funds. The Life Insurance Program, over its life, will
not result in any material cost to IEC. The imputed income allocations reported
for each director in 1998 under the Director's Life Insurance Program were as
follows: R. G. Flowers - $432, K. C. Lyall - $393, A. M. Nemirow - $37, M. E.
Neshek - $950 and J. D. Pyle - $70.
Director Jack R. Newman serves as legal counsel to IEC on nuclear issues.
Mr. Newman's firm, Morgan, Lewis & Bockius provides certain legal services to
IEC.
11
<PAGE>
OWNERSHIP OF VOTING SECURITIES
All of the common stock of the Company is held by IEC. Listed in the
following table are the shares of IEC's common stock owned by the executive
officers listed in the Summary Compensation Table and all directors of the
Company, as well as the number of shares owned by directors and officers as a
group as of December 31, 1998. The directors and executive officers of the
Company as a group owned less than one percent of the outstanding shares of IEC
common stock on that date. To the Company's knowledge, no shareowner
beneficially owned 5 percent or more of IEC's outstanding common stock or the
Company's preferred stock as of December 31, 1998. None of the directors or
officers of the Company own any shares of Company preferred stock.
Shares
Beneficially
Name of Beneficial Owner Owned(1)
------------------------ -------------
Executives(2)
William D. Harvey......................... 23,759 (3)
Eliot G. Protsch.......................... 23,817 (3)
Thomas M. Walker.......................... 5,105 (3)
Director Nominees
Alan B. Arends............................ 2,202
Rockne G. Flowers......................... 10,189
Katharine C. Lyall........................ 7,715
Robert D. Ray............................. 4,032
Anthony R. Weiler......................... 4,603 (3)
Continuing Directors
Erroll B. Davis, Jr....................... 59,292 (3)
Joyce L. Hanes............................ 2,858 (3)
Lee Liu................................... 66,247 (3)
Arnold M. Nemirow......................... 10,387
Milton E. Neshek.......................... 12,315
Jack R. Newman............................ 2,027
Judith D. Pyle............................ 6,297
David Q. Reed............................. 6,043 (3)
Robert W. Schlutz......................... 4,185
Wayne H. Stoppelmoor...................... 12,424
All Executives and Directors as a Group
35 people, including those listed above... 399,672 (3)
- - ----------
(1) Total shares of IEC common stock outstanding as of December 31, 1998 were
77,630,043.
(2) Stock ownership of Mr. Davis and Mr. Liu are shown with continuing
directors.
(3) Included in the beneficially owned shares shown are: Indirect ownership
interests with shared voting and investment powers: Mr. Harvey - 1,897,
Mr. Protsch - 573, Mr. Davis - 5,866, Ms. Hanes - 541, Mr. Liu - 9,755,
Mr. Reed - 353 and Mr. Weiler - 1,037; and exercisable stock options: Mr.
Davis - 37,950, Mr. Liu -8,449, Mr. Harvey - 13,152, Mr. Protsch -13,152,
Mr. Walker - 3,802 and Mr. Stoppelmoor - 6,336 (all executive officers
and directors as a group - 148,072).
12
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth the total
compensation paid by IEC, the Company and IEC's other subsidiaries for all
services rendered to such companies during 1998, 1997 and 1996 to the Chief
Executive Officer and the four other most highly compensated executive officers
of the Company (the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(Dollars)
Long-Term
Annual Compensation Compensation Awards
------------------------------------------ --------------------------
Securities
Underlying
Other Restricted Options/
Name and Annual Stock SARs All Other
Principal Position Year Salary Bonus(1) Compensation(2) Awards(3) (Shares)(4) Compensation(5)
- - ------------------ ---- ------ -------- --------------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Erroll B. Davis, Jr. 1998 $540,000 $ - $13,045 $ - 36,752 $57,996
Chief Executive Officer 1997 450,000 200,800 19,982 - 13,800 60,261
1996 450,000 297,862 23,438 - 12,600 66,711
Lee Liu 1998 400,000 - - 337,241 25,347 52,073
Chairman of the Board 1997 400,000 189,000 5,956 176,391 - 13,277
of IEC 1996 380,000 175,000 2,578 253,475 - 13,956
William D. Harvey 1998 233,846 - 4,699 - 11,406 28,642
President 1997 220,000 43,986 14,944 - 5,100 33,043
1996 220,000 92,104 10,765 - 4,650 29,343
Eliot G. Protsch 1998 233,846 - 2,443 - 11,406 20,398
Executive Vice President 1997 220,000 51,400 11,444 - 5,100 30,057
1996 220,000 101,224 7,657 - 4,650 25,890
Thomas M. Walker (6) 1998 229,846 - 814 - 11,406 13,263
Executive Vice President 1997 230,000 62,100 38,138 - - 2,367
and Chief Financial Officer 1996 9,583 - - 30,000 - 119
(1) No bonuses were paid for 1998.
(2) Other Annual Compensation for 1998 consists of: income tax gross-ups for
reverse split-dollar life insurance for Messrs. Davis, Harvey and
Protsch; and relocation expense reimbursement for Mr. Walker.
(3) Prior to the Merger, IES Industries had historically made awards of
restricted stock. Such awards (to the extent not previously vested)
vested automatically upon the consummation of the Merger. The number of
shares of restricted stock reflected in this table that were subject to
such automatic vesting are as follows: Mr. Liu - 8,703 shares awarded for
1998, 5,004 shares awarded for 1997 and 8,703 shares awarded for 1996;
Mr. Walker - 1,000 shares awarded for 1996. Restricted stock was
considered outstanding upon the award date and dividends were paid to the
eligible officers on these shares while restricted. The amounts shown in
the table above represent the value of the awards based upon the closing
price of IES Industries common stock on the award date.
(4) Awards made in 1998 were in combination with performance share awards as
described in the table entitled "Long-Term Incentive Awards in 1998".
(5) All Other Compensation for 1998 consists of: matching contributions to
401(k) Plan and Deferred Compensation Plan, Mr. Davis - $16,200, Mr. Liu
- $4,754, Mr. Harvey - $7,015, Mr. Protsch - $7,015 and Mr. Walker -
$5,000; financial counseling benefit, Mr. Davis -
13
<PAGE>
$7,000, Mr. Liu - $4,448, Mr. Harvey - $7,000, Mr. Protsch - $2,333 and
Mr. Walker - $7,000; split dollar life insurance premiums, Mr. Davis -
$20,653, Mr. Harvey - $8,738 and Mr. Protsch - $7,989; reverse split
dollar life insurance, Mr. Davis - $14,143, Mr. Harvey - $5,889 and Mr.
Protsch - $3,061; life insurance coverage in excess of $50,000, Mr. Liu -
$9,910; and dividends on restricted stock, Mr. Liu - $32,961 and Mr.
Walker - $1,263. The split dollar insurance premiums are calculated using
the "foregone interest" method.
(6) Mr. Walker's employment with the Company began in 1996.
</TABLE>
STOCK OPTIONS
The following table sets forth certain information concerning options
granted by IEC during 1998 to the executives named below:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN 1998
- - ----------------------- ------------------------------------------------------------------ ---------------------------
Potential Realizable
Value at Assumed Annual
Rates of Stock
Appreciation for Option
Individual Grants Term(2)
- - ----------------------- ------------------------------------------------------------------ ---------------------------
Number of
Securities % of Total
Underlying Options/SARs
Options/ Granted to
SARs Employees in Exercise or Base Expiration
Name Granted(1) Fiscal Year Price ($/Share) Date 5% 10%
- - ----------------------- ------------- ---------------- ------------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Erroll B. Davis, Jr. 36,752 5.8% $31.5625 6/30/08 $729,527 $1,848,993
- - ----------------------- ------------- ---------------- ------------------- --------------- ------------ --------------
Lee Liu 25,347 4.0% 31.5625 6/30/08 503,138 1,275,208
- - ----------------------- ------------- ---------------- ------------------- --------------- ------------ --------------
William D. Harvey 11,406 1.8% 31.5625 6/30/08 226,409 573,836
- - ----------------------- ------------- ---------------- ------------------- --------------- ------------ --------------
Eliot G. Protsch 11,406 1.8% 31.5625 6/30/08 226,409 573,836
- - ----------------------- ------------- ---------------- ------------------- --------------- ------------ --------------
Thomas M. Walker 11,406 1.8% 31.5625 6/30/08 226,409 573,836
- - ----------------------- ------------- ---------------- ------------------- --------------- ------------ --------------
(1) Consists of non-qualified stock options to purchase shares of IEC common
stock granted pursuant to IEC's Long Term Equity Incentive Plan. Options
were granted on July 1, 1998, and will fully vest on January 2, 2001.
Upon a "change in control" of IEC as defined in the Plan or upon
retirement, disability or death of the option holder, these options shall
become immediately exercisable. Upon exercise of an option, the executive
purchases all or a portion of the shares covered by the option by paying
the exercise price multiplied by the number of shares as to which the
option is exercised, either in cash or by surrendering common shares
already owned by the executive.
(2) The hypothetical potential appreciation shown for the named executives is
required by the Securities and Exchange Commission ("SEC") rules. The
amounts shown do not represent either the historical or expected future
performance of IEC common stock level of appreciation. For example, in
order for the named executives to realize the potential values set forth
in the 5% and 10% columns in the table above, the price per share of IEC
common stock would be $51.41 and $81.87, respectively, as of the
expiration date of the options.
</TABLE>
14
<PAGE>
The following table provides information for the executives named below
regarding the number and value of exercisable and unexercised options. None of
the executives exercised options in fiscal 1998.
<TABLE>
<CAPTION>
OPTION/SAR VALUES AT DECEMBER 31, 1998
- - -------------------------- ------------------------------------- ---------------------------------------
Number of Securities Underlying
Unexercised Value of Unexercised In-the-Money
Options/SAR's at Fiscal Year End Options/SARs at Fiscal Year End(1)
- - -------------------------- ------------------------------------- ---------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - -------------------------- ----------------- ------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Erroll B. Davis, Jr. 13,100 63,152 $62,225 $102,817
- - -------------------------- ----------------- ------------------- ----------------- ---------------------
Lee Liu - 25,347 - 17,426
- - -------------------------- ----------------- ------------------- ----------------- ---------------------
William D. Harvey 4,700 21,156 22,325 36,492
- - -------------------------- ----------------- ------------------- ----------------- ---------------------
Eliot G. Protsch 4,700 21,156 22,325 36,492
- - -------------------------- ----------------- ------------------- ----------------- ---------------------
Thomas M. Walker - 11,406 - 7,842
- - -------------------------- ----------------- ------------------- ----------------- ---------------------
(1) Based on the closing per share price on December 31, 1998 of IEC common
stock of $32.25.
</TABLE>
Long-Term Incentive Awards - The following table provides information
concerning long-term incentive awards made by IEC to the executives named below
in 1998.
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE AWARDS IN 1998
- - --------------------------- ---------------- --------------------- -----------------------------------------------
Estimated Future Payouts Under
Non-Stock Price-Based Plans
- - --------------------------- ---------------- --------------------- -----------------------------------------------
Performance or
Number Of Other Period
Shares, Units Until Maturation
Name or Other Rights or Payout Threshold Target Maximum
(#)(1) (#) (#) (#)
- - --------------------------- ---------------- --------------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Erroll B. Davis, Jr. 11,026 1/2/01 5,513 11,026 22,052
- - --------------------------- ---------------- --------------------- ----------------- ------------- ---------------
Lee Liu 7,604 1/2/01 3,802 7,604 15,208
- - --------------------------- ---------------- --------------------- ----------------- ------------- ---------------
William D. Harvey 2,661 1/2/01 1,330 2,661 5,322
- - --------------------------- ---------------- --------------------- ----------------- ------------- ---------------
Eliot G. Protsch 2,661 1/2/01 1,330 2,661 5,322
- - --------------------------- ---------------- --------------------- ----------------- ------------- ---------------
Thomas M. Walker 2,661 1/2/01 1,330 2,661 5,322
- - --------------------------- ---------------- --------------------- ----------------- ------------- ---------------
(1) Consists of performance shares awarded under IEC's Long-Term Equity
Incentive Plan. These performance shares will vest based on achievement
of specified Total Shareholder Return (TSR) levels as compared with an
investor-owned utility peer group over the period ending January 2, 2001.
Payouts will be in shares of IEC common stock, but will be modified by a
performance multiplier which ranges from 0 to 2.00.
</TABLE>
15
<PAGE>
CERTAIN AGREEMENTS AND TRANSACTIONS
Each of Messrs. Liu and Davis have employment agreements with IEC.
Pursuant to Mr. Liu's agreement, Mr. Liu will serve as Chairman of IEC until
April 21, 2000. Mr. Liu will thereafter retire as an officer of IEC, although he
may continue to serve as a director. Under Mr. Davis' agreement, Mr. Davis will
serve as the Chief Executive Officer of IEC until April 21, 2003. Mr. Davis will
also serve as the Chairman of IEC following April 21, 2000. Following the
expiration of the initial term of Mr. Davis' employment agreement, his agreement
will automatically renew for successive one-year terms, unless either Mr. Davis
or IEC gives prior written notice of his or its intent to terminate the
agreement. Mr. Davis will also serve as Chief Executive Officer of each
subsidiary of IEC, including the Company, until at least April 21, 2001 and as a
director of such companies during the term of his employment agreement.
Mr. Liu's employment agreement provides that he receive an annual base
salary of not less than $400,000, and supplemental retirement benefits and the
opportunity to earn short-term and long-term incentive compensation (including
stock options, restricted stock and other long-term incentive compensation) in
amounts no less than he was eligible to receive from IES Industries before the
effective time of the Merger. Pursuant to Mr. Davis' employment agreement, he is
paid an annual base salary of not less than $450,000. Mr. Davis also has the
opportunity to earn short-term and long-term incentive compensation (including
stock options, restricted stock and other long-term incentive compensation) in
amounts no less than he was eligible to receive before the effective time of the
Merger, as well as supplemental retirement benefits (including continued
participation in the Company Executive Tenure Compensation Plan) in an amount no
less than he was eligible to receive before the effective time of the Merger,
and life insurance providing a death benefit of three times his annual salary.
If the employment of either Mr. Liu or Mr. Davis is terminated without
cause (as defined in their respective employment agreements) or if either of
them terminates his employment for good reason (as defined in their respective
employment agreements), IEC or its affiliates will continue to provide the
compensation and benefits called for by the respective employment agreement
through the end of the term of such employment agreement (with incentive
compensation based on the maximum potential awards and with any stock
compensation paid in cash), and all unvested stock compensation will vest
immediately. If either Mr. Liu or Mr. Davis dies or becomes disabled, or
terminates his employment without good reason, during the term of his respective
employment agreement, IEC or its affiliates will pay to the officer or his
beneficiaries or estate all compensation earned through the date of death,
disability or such termination (including previously deferred compensation and
pro rata incentive compensation based upon the maximum potential awards). If the
officer is terminated for cause, IEC or its affiliates will pay his base salary
through the date of termination plus any previously deferred compensation.
Notwithstanding the foregoing, in the event that any payments to Mr. Liu under
his employment agreement or otherwise are subject to the excise tax on excess
parachute payments under the Internal Revenue Code (the "Code"), then the total
payments to be made under Mr. Liu's employment agreement will be reduced so that
the value of these payments he is entitled to receive is $1 less than the amount
that would subject Mr. Liu to the 20% excise tax imposed by the Code on certain
excess payments, or which IEC may pay without loss of deduction under the Code.
Under Mr. Davis' employment agreement, if any payments thereunder constitute an
excess parachute payment, IEC will pay to Mr. Davis the amount necessary to
offset the excise tax and any applicable taxes on this additional payment.
Each of the three companies that were party to the Merger had in effect,
at the time of the Merger, key executive employment and severance agreements
(the "Pre-Merger KEESAs") with certain of their executive officers. The
Pre-Merger KEESAs were intended to provide the executives with specified
severance benefits in the event of certain terminations following a change in
control of the employer. The consummation
16
<PAGE>
of the Merger constituted such a change in control. Although each party to the
Merger had Pre-Merger KEESAs in effect, the terms of such agreements were not
identical.
To provide selected executives of IEC with severance arrangements with
generally comparable terms relating to any future change in control of IEC, IEC
in 1999 offered new key executive employment and severance agreements (the "New
KEESAs") to such executive officers of IEC (including Messrs. Davis, Harvey,
Protsch and Walker). In order to receive a New KEESA, each executive officer
(other than Mr. Davis) was required to cancel existing rights under his or her
Pre-Merger KEESA in exchange for a grant of restricted stock; Mr. Davis did not
receive a grant of restricted stock in connection with the cancellation of his
Pre-Merger KEESA. The grants of restricted stock were valued at one times salary
for certain executive officers (including Messrs. Harvey, Protsch and Walker)
and one-half times salary for certain other officers. Subject to certain
exceptions, the restricted stock will vest only if the executive remains with
IEC for a period of at least three years.
The New KEESAs provide that each executive officer who is a party thereto
is entitled to benefits if, within five years after a change in control of IEC
(as defined in the New KEESAs), the officer's employment is ended through (i)
termination by IEC, other than by reason of death or disability or for cause (as
defined in the KEESAs), or (ii) termination by the officer due to a breach of
the agreement by IEC or a significant change in the officer's responsibilities,
or (iii) in the case of Mr. Davis' agreement, termination by Mr. Davis following
the first anniversary of the change of control. The benefits provided are (i) a
cash termination payment of two or three times (depending on which executive is
involved) the sum of the officer's annual salary and his or her average annual
bonus during the three years before the termination and (ii) continuation for up
to five years of equivalent hospital, medical, dental, accident, disability and
life insurance coverage as in effect at the time of termination. Each New KEESA
for executive officers below the level of Executive Vice President provides that
if any portion of the benefits under the KEESA or under any other agreement for
the officer would constitute an excess parachute payment for purposes of the
Code, benefits will be reduced so that the officer will be entitled to receive
$1 less than the maximum amount which he or she could receive without becoming
subject to the 20% excise tax imposed by the Code on certain excess parachute
payments, or which IEC may pay without loss of deduction under the Code. The New
KEESAs for the Chief Executive Officer and the Executive Vice Presidents
(including Messrs. Davis, Harvey, Protsch and Walker) provide that if any
payments thereunder or otherwise constitute an excess parachute payment, IEC
will pay to the appropriate officer the amount necessary to offset the excise
tax and any additional taxes on this additional payment. Mr. Davis' employment
agreement as described above limits benefits paid thereunder to the extent that
duplicate payments would be provided to him under his New KEESA.
Mr. Stoppelmoor entered into a three-year consulting arrangement with IEC
in connection with the Merger. Under the terms of his consulting arrangement,
Mr. Stoppelmoor receives an annual fee of $324,500 during each of the first two
years and a fee of $200,000 during the third year of the consulting period. Mr.
Stoppelmoor is also entitled to participate in compensation plans equivalent to
those provided the IEC's Chairman of the Board and Chief Executive Officer
during the consulting period, subject to approval by the Compensation and
Personnel Committee of the Board. Although Mr. Stoppelmoor is eligible to
participate in the Directors Charitable Award Program and the Directors Life
Insurance Program as a result of his service as Vice Chairman of the Board of
IEC, his consulting arrangement provides that he shall not be eligible to
receive any other compensation otherwise payable to directors of IEC.
17
<PAGE>
RETIREMENT AND EMPLOYEE BENEFIT PLANS
Alliant Energy Corporate Services Retirement Plans
Salaried employees (including officers) of the Company are eligible to
participate in a Retirement Plan maintained by Alliant Energy Corporate
Services, Inc., a subsidiary of IEC ("Alliant Energy Corporate Services"). In
1998, the Retirement Plan was amended to implement a cash balance format,
thereby changing the benefit calculation formulas and adding a lump sum
distribution option for eligible participants. The plan bases a participant's
defined benefit pension on the value of a hypothetical account balance. For
individuals participating in the plan as of August l, 1998, a starting account
balance was created equal to the present value of the benefit accrued as of
December 31, 1997, under the plans benefit formula prior to the change to a cash
balance approach. That formula provided a retirement income based on years of
credited service and final average compensation for the 36 highest consecutive
months, with a reduction for a Social Security offset. In addition, individuals
participating in the plan as of August 1, 1998 received a special one-time
transition credit amount equal to a specified percentage varying with age
multiplied by credited service and base pay.
For 1998 and thereafter, a participant receives annual credits to the
account equal to 5% of base pay (including certain incentive payments, pre-tax
deferrals and other items), plus an interest credit on all prior accruals equal
to 4% plus a share of the gain on the investment return on assets in the trust
investment for the year.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form. Individuals who were
participants in the plan on August 1, 1998 are in no event to receive any less
than what would have been provided under the prior formula, had it continued, if
they terminate on or before August 1, 2008, and do not elect to commence
benefits before the earlier of age 55.
The individuals listed in the Summary Compensation Table who participate
in the plan (i.e., Messrs. Davis, Protsch and Harvey) are "grandfathered" under
the prior plans benefit formula. Since their estimated benefits under that
formula are higher than under the cash balance plan formula, utilizing current
assumptions, their benefits would currently be determined by the prior plan
benefit formula. All eligible persons whose compensation is reported in the
foregoing Summary Compensation Table participated in the plan during 1998.
Contributions to the "grandfathered" plan are determined actuarially, computed
on a straight-life annuity basis, and cannot be readily calculated as applied to
any individual participant or small group of participants. For purposes of the
plan, compensation means payment for services rendered, including vacation and
sick pay, and is substantially equivalent to the salary amounts reported in the
foregoing Summary Compensation Table. Plan benefits depend upon length of plan
service (up to a maximum of 30 years), age at retirement, and amount of
compensation (determined in accordance with the plan) and are reduced by up to
50 percent of Social Security benefits. Credited years of service under the plan
for covered persons named in the foregoing Summary Compensation Table are as
follows: Erroll B. Davis, Jr., 19 years; Eliot G. Protsch, 19 years; and William
D. Harvey, 11 years. Assuming retirement at age 65, a plan participant (in
conjunction
18
<PAGE>
with the Unfunded Excess Plan described below) would be eligible at retirement
for a maximum annual retirement benefit as follows:
<TABLE>
<CAPTION>
Retirement Plan Table
Average
Annual Annual Benefit After Specified Years in Plan*
-------------------------------------------------------------------------
Compensation 5 10 15 20 25 30
- - ------------ ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$125,000 $10,116 $20,233 $ 30,349 $ 40,465 $ 50,582 $60,698
150,000 12,408 24,816 37,224 49,632 62,040 74,448
200,000 16,991 33,983 50,974 67,965 84,977 101,948
250,000 21,575 43,149 64,724 86,299 107,873 129,448
300,000 26,158 52,316 78,474 104,632 130,790 156,948
350,000 30,741 61,483 92,224 122,965 153,707 184,448
400,000 35,325 70,649 105,974 141,299 176,623 211,948
450,000 39,908 79,816 119,724 159,632 199,540 239,448
475,000 42,200 84,399 126,599 168,799 210,998 253,198
500,000 44,491 88,983 133,674 177,965 222,457 266,948
525,000 46,783 93,566 140,349 187,132 233,915 280,698
550,000 49,075 98,149 147,224 196,299 245,373 294,448
600,000 53,568 107,316 160,974 214,632 268,290 321,948
650,000 58,241 116,485 174,724 232,965 291,207 349,448
* Average annual compensation is based upon the average of the highest 36
consecutive months of compensation. The plan benefits shown above are net
of estimated Social Security benefits and do not reflect any deductions
for other amounts. The annual retirement benefits payable are subject to
certain maximum limitations (in general, $160,000 for 1998) under the
Code. Under the plan, if a plan participant dies prior to retirement, the
designated survivor of the participant is entitled to a monthly income
benefit equal to approximately 50 percent of the monthly retirement
benefit which would have been payable to the participant under the plan.
</TABLE>
19
<PAGE>
Pension Plan Applicable to Messrs. Liu and Walker
Prior to the Merger, Messrs. Liu and Walker participated in the IES
Industries retirement plan (which plan was transferred to Alliant Energy
Corporate Services in connection with the Merger). Messrs. Liu's and Walker's
benefits under the plan have been "grandfathered" to reflect the benefit plan
formula in effect at the time of the Merger. Maximum annual benefits payable at
age 65 to participants who retire at age 65, calculated on the basis of straight
life annuity, are illustrated in the following table:
<TABLE>
<CAPTION>
Alliant Energy Corporate Services Pension Plan Table
Average of Highest Annual Estimated Maximum Annual Retirement Benefits Based on
Salary (Remuneration) Years of Service
for 3 Consecutive --------------------------------------------------------------------
Years of the last 10 15 20 25 30 35
-------------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 26,869 $ 35,828 $ 44,784 $ 53,741 $ 62,697
150,000 32,683 43,576 54,471 65,366 76,259
175,000 35,913 48,282 60,650 73,019 85,388
200,000 40,038 54,282 68,525 82,769 97,013
225,000 44,163 60,282 76,400 92,519 108,638
250,000 44,818 61,235 77,652 94,068 110,485
300,000 44,818 61,235 77,652 94,068 110,485
400,000 44,818 61,235 77,652 94,068 110,485
450,000 44,818 61,235 77,652 94,068 110,485
500,000 44,818 61,235 77,652 94,068 110,485
</TABLE>
With respect to Messrs. Liu and Walker, the remuneration for retirement
plan purposes would be substantially the same as that shown as "Salary" in the
Summary Compensation Table. As of December 31, 1998, Messrs. Liu and Walker had
41 and 2, respectively, accredited years of service under the retirement plan.
Unfunded Excess Plan - Alliant Energy Corporate Services maintains an
Unfunded Excess Plan that provides funds for payment of retirement benefits
above the limitations on payments from qualified pension plans in those cases
where an employee's retirement benefits exceed the qualified plan limits. This
plan provides an amount equal to the difference between the actual pension
benefit payable under the pension plan and what such pension benefit would be if
calculated without regard to any limitation imposed by the Code on pension
benefits or covered compensation.
Unfunded Executive Tenure Compensation Plan - Alliant Energy Corporate
Services maintains an Unfunded Executive Tenure Compensation Plan to provide
incentive for key executives to remain in the service of Alliant Energy
Corporate Services by providing additional compensation which is payable only if
the executive remains with Alliant Energy Corporate Services until retirement
(or other termination if approved by the Board of Directors). In the case of the
Chief Executive Officer only, in the event that the Chief Executive Officer (1)
is terminated under his employment agreement with IEC as described above (the
"Employment Agreement") other than for cause, death or disability (as those
terms are defined in the Employment Agreement), (2) terminates his employment
under the Employment Agreement for good reason (as such term is defined in the
Employment Agreement), or (3) is terminated as a result of a failure of the
Employment Agreement to be renewed automatically pursuant to its terms
(regardless of the reason for such non-renewal), then for purposes of the plan,
the Chief Executive Officer shall be deemed to have retired at age
20
<PAGE>
65 and shall be entitled to benefits under the plan. Participants in the plan
must be designated by the Chief Executive Officer of the Company and approved by
its Board of Directors. Mr. Davis was the only active participant in the plan as
of December 31, 1998. The plan provides for monthly payments to a participant
after retirement (at or after age 65, or with Board approval, prior to age 65)
for 120 months. The payments will be equal to 25 percent of the participant's
highest average salary for any consecutive 36-month period. If a participant
dies prior to retirement or before 120 payments have been made, the
participant's beneficiary will receive monthly payments equal to 50 percent of
such amount for 120 months in the case of death before retirement, or if the
participant dies after retirement, 50 percent of such amount for the balance of
the 120 months. Annual benefits of $145,000 would be payable to Mr. Davis upon
retirement, assuming he continues in Alliant Energy Corporate Services' service
until retirement at the same salary as was in effect on December 31, 1998.
Alliant Energy Corporate Services Supplemental Retirement Plans
Supplemental Executive Retirement Plan - The Company maintains an
unfunded Supplemental Executive Retirement Plan to provide incentive for key
executives to remain in the service of the Company by providing additional
compensation which is payable only if the executive remains with the Company
until retirement, disability or death. Participants in the plan must be approved
by the Compensation and Personnel Committee of the Board. The plan provides for
payments of 60% of the participant's average annual earnings (base salary and
bonus) for the highest paid three years out of the last ten years of the
participant's employment reduced by the sum of benefit payable to the officer
from the officer's defined benefit plan. The normal retirement date under the
plan is age 62 with at least 10 years of service. If a participant retires prior
to age 62, the 60% payment under the plan is reduced by 3% per year for each
year the participant's retirement date precedes his/her normal retirement date.
Benefit payments under the plan will be made for a maximum of 18 years, with a
minimum of 12 years of payments if the participant dies after retirement.
Messrs. Davis, Harvey, Protsch and Walker are participants in this plan. The
following table shows payments under the plan, assuming a minimum of 10 years of
service at retirement age.
Supplemental Executive Retirement Plan Table
Average
Compensation ( 10 Years )10 Years*
------------ ---------- ----------
$125,000 $0 $ 75,000
150,000 0 90,000
200,000 0 120,000
250,000 0 150,000
300,000 0 210,000
400,000 0 240,000
450,000 0 270,000
500,000 0 300,000
550,000 0 330,000
600,000 0 360,000
650,000 0 390,000
* Reduced by the sum of the benefit payable from the applicable defined
benefit plan.
21
<PAGE>
Alliant Energy Corporate Services Supplemental Retirement Plan - Alliant
Energy Corporate Services maintains a non-qualified Supplemental Retirement Plan
("SRP") for eligible former officers of IES Industries who elected to remain
under this plan following the Merger. Mr. Liu is the only executive named in the
Summary Compensation Table participating in the SRP. The SRP currently provides
for payment of supplemental retirement benefits equal to 75% of the officer's
base salary in effect at the date of retirement, reduced by benefits receivable
under the qualified retirement plan, for a period not to exceed 15 years
following the date of retirement. In the event of the death of the officer
following retirement, similar payments reduced by the joint and survivor annuity
of the qualified retirement plan will be made to his or her designated
beneficiary (surviving spouse or dependent children), if any, for a period not
to exceed 10 years from the date of the officer's retirement. Thus, if an
officer died 10 years after retirement, no payment to the beneficiary would be
made. Death benefits are provided on the same basis to a designated beneficiary
for a period not to exceed 10 years from the date of death should the officer
die prior to retirement. The SRP further provides that if, at the time of the
death of an officer, the officer is entitled to receive, is receiving, or has
received supplemental retirement benefits by virtue of having taken retirement,
a death benefit shall be paid to the officer's designated beneficiary or to the
officer's estate in an amount equal to 100% of the officer's annual salary in
effect at the date of retirement. Under certain circumstances, an officer who
takes early retirement will be entitled to reduced benefits under the SRP. The
SRP also provides for benefits in the event an officer becomes disabled under
the terms of the qualified retirement plan. Life insurance policies on the
participants have been purchased sufficient in amount to finance actuarially all
future liabilities under the SRP. The SRP has been designed so that if the
assumptions made as to mortality, experience, policy dividends, tax credits and
other factors are realized, all life insurance premium payments will be
recovered over the life of the SRP.
The following table shows the estimated annual benefits payable under the
Supplemental Retirement Plan equal to 75% of the officer's base salary in effect
at the date of retirement:
<TABLE>
<CAPTION>
Alliant Energy Corporate Services
Supplemental Retirement Plan Payments
75% SRP Benefit
Years of Service
--------------------------------------------------------------------
Annual Salary 15 20 25 30 35
------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$150,000 $ 79,817 $ 68,924 $ 58,029 $ 47,134 $ 36,241
175,000 95,337 82,968 70,600 58,231 45,862
200,000 109,962 95,718 81,475 67,231 52,987
225,000 124,587 108,468 92,350 76,231 60,112
250,000 142,682 126,265 109,848 93,432 77,015
300,000 180,182 163,765 147,348 130,932 114,515
400,000 255,182 238,765 222,348 205,932 189,515
450,000 292,682 276,265 259,848 243,432 227,015
500,000 330,182 313,765 297,348 280,932 264,515
</TABLE>
Key Employee Deferred Compensation Plan - The Company maintains an
unfunded Key Employee Deferred Compensation Plan under which participants may
defer up to 100% of base salary or incentive compensation. The Company matches
up to 50% of the employee deferral (plus 401(k) contributions up to
22
<PAGE>
6% of pay, less 401(k) matching contributions). The deferrals and matching
contributions received an annual return to the A-utility bond rate with a
minimum return no less than the prime interest rate published in the Wall Street
Journal. Payments from the plan may be made in lump sums or installments at the
election of the participant. Participants are selected by the Chief Executive
Officer of Alliant Energy Corporate Services. Messrs. Davis, Harvey and Protsch
currently participate in the Plan.
REPORT OF THE COMPENSATION AND PERSONNEL COMMITTEE
ON EXECUTIVE COMPENSATION
To Our Shareowners: The Compensation and Personnel Committee (the
"Committee") of the Board of Directors of the Company is comprised of five
non-employee directors (the same directors that comprise the IEC Compensation
and Personnel Committee). The following is a report prepared by these directors
with respect to compensation paid by IEC, the Company and IEC's other
subsidiaries. The Committee assesses the effectiveness and competitiveness of,
approves the design of, and administers executive compensation programs within a
consistent total compensation framework for the Company. The Committee also
reviews and approves all salary arrangements and other remuneration for
executives, evaluates executive performance, and considers related matters. To
support the Committee in carrying out its mission, an independent consultant is
engaged to provide assistance to the Committee.
The Committee is committed to implementing a total compensation program
for executives which furthers the Company's mission. The Committee, therefore,
adheres to the following compensation policies which are intended to facilitate
the achievement of the Company's business strategies.
* Total compensation should enhance the Company's ability to
attract, retain, and encourage the development of exceptionally
knowledgeable and experienced executives, upon whom, in large
part, the successful operation and management of the Company
depends.
* Base salary levels should be targeted at a competitive market
range paid to executives at comparable companies. Specifically,
the Committee targets the median (50th percentile) of equally
weighted data from utility and general industry companies.
* Incentive compensation programs should strengthen the relationship
between pay and performance by emphasizing variable, at-risk
compensation that is consistent with meeting predetermined
Company, subsidiary, business unit and individual performance
goals. In addition, incentive levels will be targeted at the
median (50th percentile) of equally weighted data from utility and
general industry companies.
Components of Compensation
The Committee relates total compensation levels for the Company's senior
executives to the compensation paid to executives of comparable companies. As
the Company is a diversified utility holding company with both regulated and
non-regulated operations, comparison groups are customized to the respective
position which an executive holds. Utility executives' pay is compared to that
of executives with similar responsibilities at utilities and/or non-utilities
(general industries) in both the Midwest and national markets, as well as to
companies with similar revenue levels and employment levels. Compensation paid
to holding company executives, including Mr. Davis, the Company's Chief
Executive Officer, is compared to the compensation paid by a utility comparison
group. However, in order to recognize holding company employees for increasing
non-regulated business responsibilities, benchmark data also are drawn from
similarly sized diversified
23
<PAGE>
industrial companies furnished by public survey data. For executives with sole
responsibilities in the non-regulated businesses, comparison group data reflect
the relevant mix of the non-regulated business operations.
The Committee has determined that total executive compensation, including
that for Mr. Davis, is in line with competitive salaries of the comparison
groups of companies.
The current elements of the Company's executive compensation program are
base salary, short-term (annual) incentives and long-term (equity) incentives.
These elements are addressed separately below. In determining each component of
compensation, the Committee considers all elements of an executive's total
compensation package, including benefit and prerequisite programs.
Base Salaries
The Committee annually reviews each executive's base salary. Base
salaries are targeted at a competitive market range when comparing both utility
and non-utility (general industry) data. Base salaries are adjusted annually by
the Committee to recognize changes in the market, varying levels of
responsibility, prior experience, and breadth of knowledge. Increases to base
salaries are driven primarily by market adjustments. Individual performance
factors are not considered by the Committee in setting base salaries. Base pay
adjustments are tied to market changes in appropriate salary levels and will
minimize across-the-board increases. Executive salaries were reviewed for market
comparability using utility and general industry data contained in compensation
surveys published by Edison Electric Institute, American Gas Association and
several compensation consulting firms. Based on these factors, the base salary
for Mr. Davis was set at $540,000 for 1998.
Short-Term Incentives
The goal of the short-term (annual) incentive programs is to promote the
Committee's pay-for-performance philosophy by providing executives with direct
financial incentives in the form of annual cash or stock based bonuses to
achieve corporate, subsidiary, business unit, and individual performance goals.
Annual bonus opportunities allow the Committee to communicate specific goals
that are of primary importance during the coming year and motivate executives to
achieve these goals. The Committee on an annual basis reviews and approves the
program's performance goals and the relative weight assigned to each goal as
well as targeted and maximum award levels. A description of the short-term
incentive programs available during 1998 to executive officers follows.
Interstate Energy Corporation Officer Incentive Compensation Plan--The
IEC Officer Incentive Compensation Plan (the "IEC OICP") covered utility
executives and in 1998 was based on achieving annual targets in corporate
performance that included an earnings per share ("EPS") target, and business
unit and individual performance. Target and maximum bonus awards were set at the
median of the utility and general industry market levels. Targets were
considered by the Committee to be achievable, but required above-average
performance from each of the executives. Actual payment of bonuses, as a
percentage of annual salary, is determined by the level of performance achieved
in each category. Weighting factors are applied to the percentage achievement
under each category to determine overall performance. If a pre-determined EPS
has not been met, there is no bonus payment associated with the plan. If the
threshold performance is not reached, there is no bonus payment associated with
that particular category. Once the designated maximum performance is reached,
there is not additional payment. The actual percentage of salary paid as a
bonus, within the allowable range, is equal to the weighted average percent
achievement for all the performance
24
<PAGE>
categories. Potential IEC OICP awards for executives range from 0 to 70 percent
of annual salary. In 1998 there was no payout associated with the IEC OICP since
the pre-determined EPS was not met.
In 1998, Mr. Davis was covered by the Company's Officer Incentive
Compensation Plan (the "Company OICP"). Awards under the Company OICP in 1998
were based on corporate and strategic goal achievement in relation to
predetermined goals. For each plan year, the Committee determines the
performance apportionment for Mr. Davis. In 1998 that apportionment was 75% for
corporate performance and 25% for strategic goal performance. Corporate
performance is measured based on a company-wide EPS target established at the
beginning of the year. Strategic goals are measured based on the achievement of
certain specific goals, which included strategy development and implementation,
established for Mr. Davis by the Committee. The 1998 OICP award range for Mr.
Davis was from 0 to 100 percent of annual salary. The actual payment of bonuses
as a percentage of annual salary is determined as described for the IEC OICP. In
1998, the Company OICP did not provide a payment to Mr. Davis as a result of the
pre-determined EPS not being met.
Alliant Energy Resources Annual Incentive Plan--The Alliant Energy
Resources Annual Incentive Plan covered non-utility executives and in 1998 was
based on achieving annual targets in corporate performance that included an EPS
target, business unit performance that includes the contribution to EPS, and
group (International) unit and individual performance. Target and maximum bonus
awards were set at competitive market levels. Targets were considered by the
Committee to be achievable, but required above-average performance from each of
the executives. Actual payment of bonuses, as a percentage of annual salary, is
determined by the level of performance achieved in each category. Weighting
factors are applied to the percentage achievement under each category to
determine overall performance. If the business unit's EPS contribution to
corporate is below threshold level, there is no bonus payment associated with
the plan. If the threshold performance is not reached, there is no bonus payment
associated with that particular category. Once the designated maximum
performance is reached, there is not additional payment. The actual percentage
of salary paid as a bonus, within the allowable range, is equal to the weighted
average percent achievement for all the performance categories. Potential
Alliant Energy Resources Annual Incentive Plan awards for executives range from
0 to 50 percent of annual salary. In 1998 there was no payout associated with
the plan since the business unit's EPS contribution to corporate was below the
threshold level.
Long-Term Incentives
The Committee strongly believes compensation for executives should
include long-term, at-risk pay to strengthen the alignment of shareowner and
management. In this regard, IEC's Long-Term Equity Incentive Plan allows for
grants of stock options, restricted stock, and performance unit/shares with
respect to IEC's common stock. The Long-Term Equity Incentive Plan is
administered by the IEC Compensation and Personnel Committee. The Committee
believes the Long-Term Equity Incentive Plan balances the Company's existing
compensation programs by emphasizing compensation based on the long-term
successful performance of the Company from the perspective of the shareowners of
IEC. A description of the long-term incentive programs available during 1998 to
executive officers follows.
Interstate Energy Corporation Long-Term Incentive Program--The Interstate
Energy Corporation Long-Term Incentive Program covered utility executives and
consisted of the following components: stock options and performance shares.
Stock options provide a reward that is directly tied to the benefit shareowners
of IEC receive from increases in the price of IEC's common stock. The payout
from the performance shares is based on IEC's three-year total return to
shareowners relative to an investor-owned utility peer group. Thus, the two
components of the Long-Term Incentive Program, i.e. stock options and
performance shares, provide
25
<PAGE>
incentives for management to produce superior shareowner returns on both an
absolute and relative basis. During 1998 the IEC Compensation and Personnel
Committee made a grant of stock options and performance shares to Messrs. Davis,
Liu, Harvey, Protsch and Walker. All option grants were made at the fair market
value of IEC common stock on the date the grants were approved (July 1, 1998).
Options have a two and one-half year vesting schedule with one-third vesting on
January 2, 1999, one-third vesting on January 2, 2000 and the final one-third
vesting on January 2, 2001 and have a ten-year term from the date of the grant.
Executives were also granted performance shares. Performance shares will be paid
out in shares of IEC's common stock. The award will be modified by a performance
multiplier which ranges from 0 to 2.00 based on the three-year average of IEC's
total shareowner return relative to an investor-owned utility peer group. In
determining actual award levels, the IEC Compensation and Personnel Committee
was primarily concerned with providing a competitive total compensation level to
officers. As such, award levels (including awards made to Mr. Davis) were based
on a competitive analysis of similarly-sized utility companies that took into
consideration the market level of long-term incentives, as well as the
competitiveness of the total compensation package. Award ranges, as well as
individual award levels, were then established based on responsibility level and
market competitiveness. No corporate or individual performance measures were
reviewed in connection with the awards of options and performance shares. Award
levels were targeted to the median of the range of such awards paid by
comparable companies. In addition, the IEC Compensation and Personnel Committee
did not consider the amounts of options and performance shares already
outstanding or previously granted when making awards for 1998.
Alliant Energy Resources Long-Term Incentive Program--The Alliant Energy
Resources Long-Term Incentive Program covered non-utility executives and
consisted of the following components: stock options and performance units.
Stock options provide a reward that is directly tied to the benefit shareowners
of IEC receive from increases in the price of IEC's common stock. The payout
from the performance units is based on the Alliant Energy Resources three-year
average growth in EPS contribution to IEC's EPS. Thus, the two components of the
Long-Term Incentive Program, i.e. stock options and performance units, provide
incentives for management to produce superior shareowner returns on both an
absolute and relative basis. All option grants were made at the fair market
value of IEC common stock on the date the grants were approved (August 21,
1998). Options have a two and one-half year vesting schedule with one-third
vesting on January 2, 1999, one-third vesting on January 2, 2000 and the final
one-third vesting on January 2, 2001 and have a ten-year term from the date of
the grant. Executives were also granted performance units. Performance units
will be paid out in cash. The payment will be modified by a performance
multiplier which ranges from 0 to 2.00 based on the Alliant Energy Resources
three-year average growth in EPS contribution to IEC's EPS. In determining
actual award levels, the IEC Compensation and Personnel Committee was primarily
concerned with providing a competitive total compensation level to officers. As
such, award levels were based on a competitive analysis of similarly-sized
general industry companies that took into consideration the market level of
long-term incentives, as well as the competitiveness of the total compensation
package. Award ranges, as well as individual award levels, were then established
based on responsibility level and market competitiveness. No corporate or
individual performance measures were reviewed in connection with the awards of
options and performance units. Award levels were targeted to the median of the
range of such awards paid by comparable companies. In addition, the IEC
Compensation and Personnel Committee did not consider the amounts of options and
performance units already outstanding or previously granted when making awards
for 1998.
26
<PAGE>
Policy with Respect to the $1 Million Deduction Limit
Section 162(m) of the Code generally limits the corporate deduction for
compensation paid to executive officers named in the proxy statement to $1
million unless such compensation is based upon performance objectives meeting
certain regulatory criteria or is otherwise excluded from the limitation. Based
on the Committee's commitment to link compensation with performance as described
in this report, the Committee currently intends to qualify future compensation
paid to the Company's executive officers for deductibility by the Company under
Section 162(m).
Conclusion
The Committee believes the existing executive compensation policies and
programs provide the appropriate level of competitive compensation for the
Company's executives. In addition, the Committee believes that the long and
short term performance incentives effectively align the interests of executives
and shareowners toward a successful future for the Company.
COMPENSATION AND PERSONNEL COMMITTEE
Arnold M. Nemirow (Chair)
Alan B. Arends
Jack R. Newman
Judith D. Pyle
Anthony R. Weiler
COMPENSATION AND PERSONNEL COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
The members of the Compensation and Personnel Committee who served during
1998 are identified above. Mr. Newman, a member of the Compensation and
Personnel Committee during 1998, is a partner in the law firm of Morgan, Lewis
and Bockius. Morgan, Lewis and Bockius provides certain legal services to the
Company. Mr. Newman no longer serves on this Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, its executive officers, and certain other
officers are required to report their ownership of IEC's common stock and
Company preferred stock and any changes in that ownership to the Securities and
Exchange Commission. In November, 1998, a Form 4 was inadvertently filed late
for Mr. Alan B. Arends reflecting a stock purchase on October 29, 1998. In
addition, Form 3s were filed late on behalf of Thomas Aller and Claire
Fulenwider reflecting their status as insiders effective October 21, 1998. To
the best of the Company's knowledge, all required filings in 1998, with the
exception of those noted, were properly made in a timely fashion. In making the
above statements, the Company has relied on the representations of the persons
involved and on copies of their reports filed with the Securities and Exchange
Commission.
27
<PAGE>
GENERAL
Voting - The outstanding voting securities of the Company on the record
date stated below consisted of approximately 13,236,601 shares of common stock
(owned solely by IEC) and 1,049,225 shares of preferred stock, in seven series
(representing 599,630 votes). Only shareowners of the Company of record on its
books at the close of business on April 7, 1999, are entitled to vote at the
meeting. Each share of Company common stock is entitled to one vote per share.
Each share of Company preferred stock, with the exception of the 6.50% Series,
is entitled to one vote per share. The 6.50% Series of Company preferred stock
is entitled to 1/4 vote per share. Shareowners may vote their shares either in
person or by proxy. The giving of proxies by shareowners will not effect their
right to vote their shares if they attend the meeting and desire to vote in
person. Presence at the meeting of a shareowner who signed a proxy, however,
does not itself revoke the proxy. A proxy may be revoked by the person giving
it, at any time prior to the time it is voted, by advising the Secretary of the
Company prior to such voting. A proxy may also be revoked by a shareowner who
duly executes another proxy bearing a later date but prior to the voting. All
shares represented by effective proxies on the enclosed form, received by the
Company, will be voted at the meeting or any adjourned session of the meeting,
all in accordance with the terms of such proxies.
Proposals of Shareowners - Any shareowner proposal intended to be
presented at and included in the Company's proxy materials for the 2000 annual
Meeting of Shareowners pursuant to Rule 14a-8 under the Securities Exchange Act
of 1934 ("Rule 14a-8"), must be received at the principal office of the Company
no later than December 14, 1999. If the Company does not receive notice of a
shareowner proposal submitted otherwise than pursuant to Rule 14a-8 prior to
February 27, 2000, then the notice will be considered untimely, and the persons
named in proxies solicited by the Board of Directors for the 2000 Annual Meeting
of Shareowners may exercise discretionary voting power with respect to such
proposal.
Independent Auditors - The Board of Directors has appointed Arthur
Andersen LLP as the Company's independent auditors for 1999. Arthur Andersen LLP
acted as independent auditors for the Company in 1998. Representatives of Arthur
Andersen LLP are not expected to be present at the meeting.
Other Business - The meeting is being held for the purposes set forth in
the notice accompanying this proxy statement. The Board of Directors of the
Company knows of no business to be transacted at the meeting other than that set
forth in the notice. However, if any other business should properly be presented
to the meeting, the proxies will be voted in respect thereof in accordance with
the judgment of the person or persons voting the proxies.
By Order of the Board of Directors
/s/Edward M. Gleason
Edward M. Gleason
Vice President - Treasurer
and Corporate Secretary
28
<PAGE>
APPENDIX A
WISCONSIN POWER AND LIGHT COMPANY
ANNUAL REPORT
For the Year Ended December 31, 1998
Contents Page
The Company A-2
Selected Financial Data ....................................................A-3
Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................A-4
Report of Independent Public Accountants ..................................A-25
Consolidated Financial Statements:
Consolidated Statements of Income and Retained Earnings ................A-26
Consolidated Balance Sheets ............................................A-27
Consolidated Statements of Cash Flows ..................................A-29
Consolidated Statements of Capitalization ..............................A-30
Notes to Consolidated Financial Statements .............................A-31
Shareowner Information ....................................................A-53
Executive Officers ........................................................A-54
A-1
<PAGE>
Wisconsin Power and Light Company (WP&L) filed a combined Form 10-K for
1998 with the Securities and Exchange Commission (SEC); such document included
the filings of WP&L's parent, Interstate Energy Corporation (IEC), IES Utilities
Inc. (IESU) and WP&L. Certain portions of Management's Discussion and Analysis
of Financial Condition and Results of Operations (MD&A) and the Notes to the
Consolidated Financial Statements included in this WP&L Proxy Statement
represent excerpts from the combined Form 10-K. As a result, the disclosure
included in this WP&L Proxy Statement at times includes information relating to
IEC, IESU, Interstate Power Company (IPC) and/or Alliant Energy Resources, Inc.
(Alliant Energy Resources). All required disclosures for WP&L are included in
this appendix, thus such additional disclosures solely represent supplemental
information.
THE COMPANY
On April 21, 1998, IES Industries Inc. (IES), WPL Holdings, Inc. (WPLH)
and IPC completed a three-way merger (Merger) forming IEC. IEC is currently
doing business as Alliant Energy Corporation. As a result of the Merger, the
first tier subsidiaries of IEC include: IESU, WP&L, IPC, Alliant Energy
Resources and Alliant Energy Corporate Services, Inc. (Alliant Energy Corporate
Services).
WP&L, incorporated in Wisconsin in 1917 as the Eastern Wisconsin Electric
Company, is a public utility engaged principally in the generation,
transmission, distribution and sale of electric energy; the purchase,
distribution, transportation and sale of natural gas; and the provision of water
services in selective markets. Nearly all of WP&L's customers are located in
south and central Wisconsin. WP&L operates in municipalities pursuant to permits
of indefinite duration which are regulated by Wisconsin law. At December 31,
1998, WP&L supplied electric and gas service to approximately 401,000 and
159,000 customers, respectively. WP&L also has approximately 35,000 water
customers. In 1998, 1997 and 1996, WP&L had no single customer for which
electric and/or gas sales accounted for 10% or more of WP&L's consolidated
revenues.
WP&L owns all of the outstanding capital stock of South Beloit Water, Gas
and Electric Company (South Beloit), a public utility supplying electric, gas
and water service, principally in Winnebago County, Illinois, which was
incorporated in 1908. WP&L also owns varying interests in several other
subsidiaries and investments which are not material to WP&L's operations.
Electric Operations
WP&L provides electricity in 34 counties in southern and central
Wisconsin and four counties in northern Illinois. As of December 31, 1998, WP&L
provided retail electric service to approximately 401,000 customers in 599
communities and wholesale service to 24 municipal utilities, one privately owned
utility, three rural electric cooperatives, one Native American nation and to
the Wisconsin Public Power, Inc. system for the provision of retail service to
14 communities.
The percentage of utility operating revenues and utility operating income
from electric utility operations for WP&L for the year ended December 31, 1998
was as follows:
Percent of Percent of
Operating Operating
Revenues Income
--------------- -------------
84.0% 94.3%
A-2
<PAGE>
Electric sales are seasonal to some extent with the annual peak normally
occurring in the summer months. In 1998, the maximum peak hour demand for WP&L
was 2,292 megawatts (MW) and occurred on July 14, 1998.
WP&L's electric generating facilities include: three coal-fired
generating stations (including seven units; four jointly-owned), one multi-fuel
generating facility (coal and natural gas; including two units), seven
natural-gas-fired peaking units, five hydro-electric plants (two jointly owned),
one gas-fired steam generating plant and one nuclear power plant.
Gas Operations
As of December 31, 1998, WP&L provided retail natural gas service to
approximately 159,000 customers in 233 communities in southern and central
Wisconsin and one county in northern Illinois.
The percentage of utility operating revenues and utility operating income
from gas utility operations for WP&L for the year ended December 31, 1998 was as
follows:
Percent of Percent of
Operating Operating
Revenues Income
--------------- -------------
15.3% 3.9%
The gas sales of WP&L follow a seasonal pattern. There is an annual base
load of gas used for heating, cooking, water heating and other purposes, with a
large peak occurring during the winter heating season.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 731,448 $ 794,717 $ 759,275 $ 689,672 $ 687,811
Earnings available for common stock 32,264 67,924 79,175 75,342 68,185
Cash dividends declared on common stock 58,341 58,343 66,087 56,778 55,911
Total assets 1,685,150 1,664,604 1,677,814 1,641,165 1,585,124
Long-term obligations, net 471,554 420,414 370,634 375,574 393,513
The 1998 financial results reflect the recording of $17 million of pre-tax
merger-related charges.
</TABLE>
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (MD&A)
This MD&A includes information relating to IEC, IESU and WP&L (as well as
IPC and Alliant Energy Resources). Where appropriate, information relating to a
specific entity has been segregated and labeled as such. The financial results
described below reflect the consummation of the Merger accounted for as a
pooling of interests.
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 the
operations of the parties to the Merger and unanticipated costs associated
therewith, unanticipated difficulties in achieving expected synergies from the
Merger, unanticipated costs associated with certain environmental remediation
efforts being undertaken by IEC, technological developments, 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
IEC competes in an ever-changing utility industry. Set forth below is an
overview of this evolving marketplace.
Electric energy generation, transmission and distribution are in a period
of fundamental change in the manner in which customers obtain, and energy
suppliers provide, energy services. As legislative, regulatory, economic and
technological changes occur, electric utilities are facing increased numbers of
alternative suppliers. Such competitive pressures could result in loss of
customers and an incurrence of stranded costs (i.e., assets and other costs
rendered unrecoverable as the result of competitive pricing). To the extent
stranded costs cannot be recovered from customers, they would be borne by
security holders.
Legislation which would allow customers to choose their electric energy
supplier is expected to be introduced in Iowa and Minnesota in 1999. IEC does
not currently expect similar legislation to be introduced
A-4
<PAGE>
in Wisconsin this year. Nationwide, 16 states (including Illinois and Michigan)
have decided to provide for customer choice.
IEC realized 56%, 39%, 3% and 2% of its electric utility revenues in
1998, in Iowa, Wisconsin, Minnesota and Illinois, respectively. Approximately
87% of the electric revenues were regulated by the respective state commissions
while the other 13% were regulated by the Federal Energy Regulatory Commission
(FERC). IEC realized 58%, 36%, 3% and 3% of its gas utility revenues in Iowa,
Wisconsin, Minnesota and Illinois, respectively, during the same period.
WP&L realized 98% of its electric utility revenues in 1998 in Wisconsin
and 2% in Illinois. Approximately 79% of the electric revenues in 1998 were
regulated by the Public Service Commission of Wisconsin (PSCW) or the Illinois
Commerce Commission (ICC) while the other 21% were regulated by the FERC. WP&L
realized 96% of its gas utility revenues in 1998 in Wisconsin and 4% in
Illinois.
Federal Regulation
WP&L, IESU and IPC are subject to regulation by the FERC. The National
Energy Policy Act of 1992 addresses several matters designed to promote
competition in the electric wholesale power generation market. In 1996, FERC
issued final rules (FERC Orders 888 and 889) requiring electric utilities to
open their transmission lines to other wholesale buyers and sellers of
electricity. In March 1997, FERC issued orders on rehearing for Orders 888 and
889 (Orders 888-A and 889-A). In response to FERC Orders 888 and 888-A, Alliant
Energy Corporate Services, on behalf of WP&L, IESU and IPC, filed an Open Access
Transmission Tariff that complies with the orders. Upon receiving the final
merger-related regulatory order, a compliance tariff was filed by Alliant Energy
Corporate Services with the FERC. This filing was made to comply with the FERC's
merger order. In response to FERC Orders 889 and 889-A, WP&L, IESU and IPC are
participating in a regional Open Access Same-Time Information System.
FERC Order 888 permits utilities to seek recovery of legitimate, prudent
and verifiable stranded costs associated with providing open access transmission
services. FERC does not have jurisdiction over retail distribution and,
consequently, the final FERC rules do not provide for the recovery of stranded
costs resulting from retail competition. The various states retain jurisdiction
over the question of whether to permit retail competition, the terms of such
retail competition, and the recovery of any portion of stranded costs that are
ultimately determined to have resulted from retail competition.
IEC and the utility subsidiaries cannot predict the long-term
consequences of these rules on their results of operations or financial
condition.
In November 1998, IEC and Northern States Power Co. (NSP) announced plans
to develop an independent transmission company (ITC) to provide electric
transmission services to the Upper Midwest. The two companies are developing a
relationship by which NSP will create an independent transmission entity that,
in turn, will lease the transmission assets of IEC. The independent entity is
expected to be publicly traded and have its own board of directors, management
and employees. In February 1999, the Nebraska Public Power District signed an
agreement with IEC and NSP to share information and discuss how they might
participate in the proposed ITC.
IEC expects to file with the PSCW, FERC and Minnesota Public Utilities
Commission (MPUC) in the second quarter of 1999 for permission to lease its
transmission assets to the ITC. Filings will also be made at the IUB and ICC at
a later time. The first FERC filing will also include a tariff designed to allow
for open and economical delivery of electric power throughout the region. The
tariff will be available to non-ITC
A-5
<PAGE>
participants as well as ITC members. Although no assurance can be given, IEC and
NSP currently believe they can have the ITC established in the year 2000.
IEC had originally filed to participate in the Midwest Independent System
Operator (Midwest ISO) which was conditionally approved by the FERC on September
16, 1998. However, as a result of the ITC announcement, IEC has withdrawn its
Midwest ISO membership.
State Regulation
Wisconsin
WP&L is subject to regulation by the PSCW. The PSCW's inquiries into the
future structure of the natural gas and electric utility industries are ongoing.
The stated goal of the PSCW in the natural gas docket is "to accommodate
competition but not create it." The PSCW has followed a measured approach to
restructuring the natural gas industry in Wisconsin. The PSCW has determined
that customer classes will be deregulated (i.e., the gas utility would no longer
have an obligation to procure gas commodity for customers, but would still have
a delivery obligation) in a step-wise manner, after each class has been
demonstrated to have a sufficient number of gas suppliers available. A number of
working groups have been established by the PSCW and these working groups are
addressing numerous issues which need to be resolved before deregulation may
proceed.
The short-term goals of the electric restructuring process are to ensure
reliability of the state's electric system and development of a robust wholesale
electric market. The longer-term goal is to establish prerequisite safeguards to
protect customers prior to allowing retail customer choice.
The PSCW has issued an order outlining its policies and principles for
Public Benefits (low-income assistance, energy efficiency, renewable generation
and environmental research and development) including funding levels,
administration of the funds and how funds should be collected from customers.
The PSCW has proposed increasing annual funding levels primarily through utility
rates by $50 to $75 million statewide.
In May 1998, the PSCW reactivated Docket No. 05-BU-101, with the
objective of examining the degree of separation which should be required as a
matter of policy between utility and non-utility activities involving the
various state utilities. Hearings were held in the fourth quarter of 1998 but a
final decision by the PSCW has not been issued yet. A future phase of the docket
will investigate the standards of conduct that should govern relationships and
transactions between a utility and its affiliates.
It is anticipated that there will be legislative proposals introduced in
the 1999-2000 legislative session on issues dealing with restructuring,
including affiliated interest, public benefits, competition and others. It is
impossible to predict at this time the scope or the possibility of enactment of
such proposals.
Illinois
IPC and WP&L are subject to regulation by the ICC. In December 1997, the
State of Illinois passed electric deregulation legislation requiring customer
choice of electric suppliers for non-residential customers with loads of four
megawatts or larger and for approximately one-third of all other non-residential
customers starting October 1, 1999. All remaining non-residential customers will
be eligible for customer choice beginning December 31, 2000 and all residential
customers will be eligible for customer choice beginning May 1, 2002. The new
legislation is not expected to have a significant impact on IEC's results of
operations or financial condition given the relatively small size of IEC's
Illinois operations.
A-6
<PAGE>
Accounting Implications
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.
Positioning for a Competitive Environment
IEC and its subsidiaries cannot currently predict the long-term
consequences of the competitive and restructuring issues described above on
their results of operations or financial condition. The major objective is to
allow the company to compete successfully in a competitive, deregulated utility
industry. The strategy for dealing with these emerging issues includes seeking
growth opportunities, forming strategic alliances with other energy-related
businesses, continuing to offer quality customer service, initiating ongoing
cost reductions and productivity enhancements and developing new products and
services.
As competitive forces shape the energy-services industry, energy
providers will face challenges to continued growth. Since consumption of
electricity or natural gas is expected to grow only modestly within IEC's
utility service territory, IEC has entered several markets that provide
opportunities for new sources of earnings growth.
In addition to Alliant Energy Resources' existing businesses, IEC has
launched four distinct platforms designed to meet customer needs throughout the
Midwest, the nation and the world. These platforms include:
Alliant Energy Industrial Services, a provider of energy and
environmental services designed to maximize productivity for industrial
and large commercial customers;
Alliant Energy International, a partner in developing energy generation
and infrastructure in growing markets throughout the world;
Alliant Energy Retail Services, encompassing a wide array of products and
services designed to meet the comfort, security and productivity needs of
residential and small commercial customers; and
Cargill-Alliant Energy, an energy-trading joint venture that combines the
superior risk-management and commodity trading expertise of Cargill
Incorporated (Cargill), one of the world's largest and most established
commodity trading firms, with IEC's low-cost electric-generation and
transmission business experience.
IEC believes that each of these four platforms provides unique prospects
for growth both individually and collectively as the competitive energy-services
marketplace evolves.
A-7
<PAGE>
WP&L RESULTS OF OPERATIONS
Overview
WP&L's earnings available for common stock decreased $35.7 million and
$11.3 million in 1998 and 1997, respectively. The decreased earnings for 1998
were primarily due to merger-related expenses, higher purchased-power and
transmission costs, higher depreciation and amortization expenses, decreased
retail natural gas sales largely due to milder weather, higher injuries and
damages expenses, higher interest expense and a higher effective tax rate. These
decreases were partially offset by a 3 percent increase in retail electricity
sales volumes, largely due to continued economic growth within WP&L's service
territory, reduced employee pension and benefit costs and lower costs in 1998
due to merger-related operating efficiencies. The decreased earnings for 1997
were primarily due to lower gas and electric margins, higher depreciation
expense, higher interest expense and the recognition of a gain on the sale of a
combustion turbine in 1996.
Electric Utility Operations
Electric margins and MWH sales for WP&L for 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Residential $198,770 $ 199,633 - 2,964 2,974 -
Commercial 108,724 107,132 1% 1,898 1,878 1%
Industrial 162,771 152,073 7% 4,493 4,256 6%
------------- ------------- ------------ -------------
Total from ultimate customers 470,265 458,838 2% 9,355 9,108 3%
Sales for resale 128,536 160,917 (20%) 4,492 5,824 (23%)
Other 15,903 14,388 11% 59 60 (2%)
------------- ------------- ------------ -------------
Total 614,704 634,143 (3%) 13,906 14,992 (7%)
============ ============= =========
Electric production fuels 120,485 116,812 3%
Purchased-power 113,936 125,438 (9%)
------------- -------------
Margin $380,283 $ 391,893 (3%)
============= ============= =========
</TABLE>
A-8
<PAGE>
Electric margins and MWH sales for WP&L for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Revenues and Costs MWHs Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1997 1996 Change 1997 1996 Change
------------- ------------- --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Residential $ 199,633 $ 201,690 (1%) 2,974 2,980 -
Commercial 107,132 105,319 2% 1,878 1,814 4%
Industrial 152,073 143,734 6% 4,256 3,986 7%
------------- ------------- ------------ -------------
Total from ultimate customers 458,838 450,743 2% 9,108 8,780 4%
Sales for resale 160,917 131,836 22% 5,824 5,246 11%
Other 14,388 6,903 108% 60 57 5%
------------- ------------- ------------ -------------
Total 634,143 589,482 8% 14,992 14,083 6%
============ ============= =========
Electric production fuels 116,812 114,470 2%
Purchased-power 125,438 81,108 55%
------------- -------------
Margin $ 391,893 $ 393,904 (1%)
============= ============= =========
</TABLE>
Electric margin decreased $11.6 million, or 3%, and $2.0 million, or 1%,
during 1998 and 1997, respectively. The 1998 decline in margin was due to:
a) Purchased-power and transmission costs - such costs have increased
significantly because of stricter reliability requirements and higher
transmission costs due to system constraints in Wisconsin. Recovery of
such increased costs in Wisconsin generally involves regulatory lag
between the time of the cost increase and the time a rate increase is
implemented. The PSCW granted WP&L an annual rate increase of $15 million
in July 1998 related to these cost increases. In addition, WP&L made a
filing with the PSCW in November 1998 seeking another rate increase for
higher purchased-power and transmission costs. (Refer to "Liquidity and
Capital Resources - Rates and Regulatory Matters" for a further
discussion of this filing). The effect of these 1998 cost increases was
partially offset by WP&L's reliance on more costly purchased-power in the
first six months of 1997 due to various power plant outages, particularly
Kewaunee Nuclear Power Plant (Kewaunee).
b) Lower off-system sales income - due to the transmission constraints,
increased native demand, a more active bulk power market, which resulted
in lower bulk power margins, and the implementation of a merger-related
joint sales agreement (effective with the consummation of the Merger, the
margins resulting from IEC's off-system sales are allocated among IESU,
IPC and WP&L).
A 2.4% retail rate decrease implemented at WP&L in April 1997 also
contributed to the lower electric margin in 1998. The increased sales to
ultimate customers, largely due to economic growth in WP&L's service territory,
partially offset these items. Weather normalized sales volumes (excluding
off-system sales) increased approximately 2.2% in 1998 compared to an actual
increase of 1.3%.
The decrease in margin in 1997 was due to the rate decrease, milder
weather conditions in 1997 as compared to 1996 and WP&L's reliance on more
costly purchased power in 1997 due to the various power plant outages. These
items were partially offset by the increased commercial and industrial sales, an
increase in off-system sales in 1997 and higher revenues from conservation
services.
A-9
<PAGE>
Gas Utility Operations
Gas margins and Dth sales for WP&L for 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- --------- ------------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Residential $ 65,173 $ 84,513 (23%) 10,936 12,770 (14%)
Commercial 33,898 45,456 (25%) 7,285 8,592 (15%)
Industrial 5,896 8,378 (30%) 1,422 1,714 (17%)
Transportation and other 6,770 17,536 (61%) 12,948 17,595 (26%)
------------- ------------- ------------ -------------
Total 111,737 155,883 (28%) 32,591 40,671 (20%)
============ ============= =========
Cost of gas sold 61,409 99,267 (38%)
------------- -------------
Margin $ 50,328 $ 56,616 (11%)
============= ============= =========
</TABLE>
Gas margins and Dth sales for WP&L for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Revenues and Costs Dekatherms Sold
(in thousands) (in thousands)
--------------------------- ---------------------------
1997 1996 Change 1997 1996 Change
------------- ------------- --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Residential $ 84,513 $ 90,382 (6%) 12,770 14,297 (11%)
Commercial 45,456 46,703 (3%) 8,592 9,167 (6%)
Industrial 8,378 11,410 (27%) 1,714 1,997 (14%)
Transportation and other 17,536 17,132 2% 17,595 18,567 (5%)
------------- ------------- ------------ -------------
Total 155,883 165,627 (6%) 40,671 44,028 (8%)
============ ============= =========
Cost of gas sold 99,267 104,830 (5%)
------------- -------------
Margin $ 56,616 $ 60,797 (7%)
============= ============= =========
</TABLE>
Gas margin declined $6.3 million, or 11%, and $4.2 million, or 7%, during
1998 and 1997, respectively, due to a reduction in Dth sales resulting from
milder weather and an average retail rate reduction of 2.2% implemented in April
1997. In 1998, the significant decline in transportation and other revenues and
sales reflects an accounting change for off-system sales as required by the PSCW
effective January 1, 1998. The accounting change requires that beginning in 1998
off-system gas sales be reported as a reduction of the cost of gas sold rather
than as gas revenue. In 1997, off-system gas revenues were $11.1 million.
Refer to "Liquidity and Capital Resources - Rates and Regulatory Matters"
for a discussion of a gas cost adjustment mechanism in place at WP&L. The impact
on the results of operations from such mechanism was not significant in any of
the periods presented.
Operating Expenses
Other operation expense increased $12.3 million and decreased $8.9
million for 1998 and 1997, respectively. The 1998 increase was primarily due to
$11.2 million of merger-related expenses for employee retirements, separations
and relocations. Higher injuries and damages expenses and an increase in other
administrative and general expenses also contributed to the increase. Such items
were partially offset by reduced employee pension and benefits expenses, reduced
conservation expense and lower costs from merger-related operating efficiencies.
The 1997 decrease was primarily due to a reduction in conservation expense,
A-10
<PAGE>
which was partially offset by costs associated with an early retirement program
in 1997 for eligible bargaining unit employees.
Depreciation and amortization expense increased $14.9 million and $19.4
million for 1998 and 1997, respectively. The 1998 increase was due to property
additions, higher Kewaunee depreciation (refer to "Liquidity and Capital
Resources - Capital Requirements - Nuclear Facilities" for additional
information) and a Kewaunee surcharge of $3.2 million (which has been recorded
in depreciation and amortization expense with a corresponding increase in
revenues resulting in no impact on earnings). The 1997 increase was due to
higher depreciation rates approved by the PSCW, effective January 1, 1997, and
property additions.
Interest Expense and Other
Interest expense increased $4.0 million in 1998 primarily due to
unusually low interest expense in the second quarter of 1997, resulting from an
adjustment to decrease interest expense relating to a tax audit settlement, and
increased borrowings during 1998.
Miscellaneous, net income decreased $2.7 million and $2.9 million in 1998
and 1997, respectively. The 1998 decrease was primarily due to $6.1 million of
merger-related expenses which was partially offset by higher earnings on the
nuclear decommissioning trust fund. The 1997 decrease was primarily due to the
recognition of a gain on the sale of a combustion turbine in 1996.
Income Taxes
Income taxes decreased $17.2 million and $12.0 million in 1998 and 1997,
respectively, due to lower pre-tax income. See Note 5 of the "Notes to
Consolidated Financial Statements" for details on the effective tax rate
changes.
LIQUIDITY AND CAPITAL RESOURCES
Historical WP&L Analysis
Cash flows generated from operations increased $27 million and decreased
$42 million in 1998 and 1997, respectively. The 1998 increase was primarily a
result of changes in working capital and higher depreciation and amortization
expenses partially offset by lower net income. The decrease in 1997 was mainly
attributable to the change in working capital. Cash flows used for financing
activities increased $14 million and decreased $75 million in 1998 and 1997,
respectively, primarily due to changes in the amount of debt outstanding. Cash
flows used for investing activities increased $12 million and $34 million in
1998 and 1997, respectively. The increase in 1998 was primarily due to higher
shared savings expenditures and the increase in 1997 was mainly due to the
proceeds from the sale of other property and equipment in 1996.
Future Considerations
The capital requirements of IEC are primarily attributable to its utility
subsidiaries' construction and acquisition programs, its debt maturities and
business opportunities of Alliant Energy Resources. It is anticipated that
future capital requirements of IEC will be met by cash generated from operations
and external financing. The level of cash generated from operations is partially
dependent upon economic conditions, legislative activities, environmental
matters and timely regulatory recovery of utility costs. IEC's liquidity and
capital resources will be affected by costs associated with environmental and
regulatory issues.
A-11
<PAGE>
Emerging competition in the utility industry could also impact IEC's liquidity
and capital resources, as discussed previously in the "Utility Industry Outlook"
section.
At December 31, 1998, Alliant Energy Resources had approximately $69
million of investments in foreign entities. At December 31, 1998, IESU, WP&L and
IPC did not have any foreign investments. IEC continues to explore additional
international investment opportunities. Such investments may carry a higher
level of risk than IEC's traditional domestic utility investments or Alliant
Energy Resources' domestic investments. Such risks could include foreign
government actions, foreign economic and currency risks and others.
IEC is expected to pursue various potential business development
opportunities, including international as well as domestic investments, and is
devoting resources to such efforts. It is anticipated that IEC will strive to
select investments where the international and other risks are both understood
and manageable. Under the Public Utility Holding Company Act (PUHCA), IEC's
investments in exempt wholesale generators (EWG's) and foreign utility companies
(FUCO's) is limited to 50% of IEC's consolidated retained earnings. In addition,
there are limitations on the amount of non-utility investments IEC can make
under the Wisconsin Utility Holding Company Act (WUHCA) as well.
IEC had certain off-balance sheet financial guarantees and commitments
outstanding at December 31, 1998. They generally consist of third-party
borrowing arrangements and lending commitments, guarantees of financial
performance of syndicated affordable housing properties and guarantees relating
to IEC's electricity trading joint venture. Refer to Note 11(d) of the "Notes to
the Consolidated Financial Statements" for additional details.
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets, and
costs of external financing, are dependent on creditworthiness. The debt ratings
of IEC and certain subsidiaries by Moody's and Standard & Poor's are as follows:
Standard &
Moody's Poor's
----------------- -----------------
IESU
Secured long-term debt A2 A+
Unsecured long-term debt A3 A
WP&L
Secured long-term debt Aa2 AA
Unsecured long-term debt Aa3 A+
IPC
Secured long-term debt A1 A+
Unsecured long-term debt A2 A
Alliant Energy Resources
Commercial paper P2 A1
IEC
Commercial paper (a) P1 A1
- - ---------------
(a) IESU, WP&L and IPC participate in a utility money pool which is
funded, as needed, through the issuance of commercial paper by
IEC. The PSCW has restricted WP&L from lending money to
non-utility affiliates and non-Wisconsin utilities. As a result,
WP&L is restricted from lending money to the utility money pool
but is able to borrow money from the utility money pool.
A-12
<PAGE>
Other than periodic sinking fund requirements, which will not require
additional cash expenditures, the following long-term debt (in millions) will
mature prior to December 31, 2003:
IESU $187.5
IPC 3.3
WP&L 1.9
Alliant Energy Resources 279.2
-----------
IEC $471.9
===========
Depending upon market conditions, it is currently anticipated that a
majority of the maturing debt will be refinanced with the issuance of long-term
securities.
WP&L currently has no authority from the PSCW or the Securities and
Exchange Commission (SEC) to issue additional long-term debt. On November 25,
1998, IESU and IPC received authority from the SEC under PUHCA to issue $200
million and $80 million of long-term debt securities, respectively. The
companies continually evaluate their future financing needs and will make any
necessary regulatory filings as needed.
Under the most restrictive terms of their respective indentures, IESU,
WP&L and IPC could have issued at least $241 million, $309 million and $182
million of long-term debt at December 31, 1998, respectively.
On October 30, 1998, WP&L issued $60 million of debentures at a coupon
rate of 5.70% maturing on October 15, 2008. The net proceeds from the debt
offering were used to pay down short-term debt, including short-term debt used
to retire maturing long-term debt.
The various charter provisions of the entities identified below authorize
and limit the aggregate amount of additional shares of Cumulative Preferred
Stock and Cumulative Preference Stock that may be issued. At December 31, 1998,
the companies could have issued the following additional shares of Cumulative
Preferred or Preference Stock:
IESU WP&L IPC
---- ---- ---
Cumulative Preferred - 2,700,775 1,238,619
Cumulative Preference 700,000 - 2,000,000
For interim financing, IESU, WP&L and IPC were authorized by the applicable
federal or state regulatory agency to issue short-term debt as follows (in
millions) at December 31, 1998:
IESU WP&L IPC
---- ---- ---
Regulatory authorization $150 $128 $72
Short-term debt outstanding - external parties - $50 -
Short-term debt outstanding - money pool - $27 $22
In addition to the short-term debt outstanding at its utility
subsidiaries, IEC had an additional $66 million of short-term debt outstanding
at December 31, 1998. In addition to providing for ongoing working capital
needs, this availability of short-term financing provides the companies
flexibility in the issuance of long-term securities. The level of short-term
borrowing fluctuates based on seasonal corporate needs, the timing of long-term
financing, and capital market conditions. To maintain flexibility in its capital
structure and to take advantage of favorable short-term rates, IESU and WP&L
also use proceeds from the sale of accounts receivable and unbilled revenues to
finance a portion of their long-term cash needs. IEC anticipates that short-term
debt will continue to be available at reasonable costs due to current ratings by
independent utility analysts and rating services.
A-13
<PAGE>
In addition to the aforementioned borrowing capability under Alliant
Energy Resources Credit Agreements, IEC has $150 million of bank lines of
credit, of which none was utilized at December 31, 1998, available for direct
borrowing or to support commercial paper. Commitment fees are paid to maintain
these lines and there are no conditions which restrict the unused lines of
credit.
From time to time, IEC may borrow from banks and other financial
institutions on "as-offered" credit lines in lieu of commercial paper, and has
agreements with several financial institutions for such borrowings. There are no
commitment fees associated with these agreements and there were no borrowings
outstanding under these agreements at December 31, 1998.
IEC made a filing with the SEC in February 1999 under PUHCA to provide
IEC with, among other things, broad authorization over the next three years to
issue stock and debt, provide guarantees, acquire energy-related assets and
enter into interest rate hedging transactions.
Given the above financing flexibility, including IEC's access to both the
debt and equity securities markets, management believes it has the necessary
financing capabilities in place to adequately finance its capital requirements
for the foreseeable future.
Capital Requirements
General
Capital expenditure and investment and financing plans are subject to
continual review and change. The capital expenditure and investment programs may
be revised significantly as a result of many considerations, including changes
in economic conditions, variations in actual sales and load growth compared to
forecasts, requirements of environmental, nuclear and other regulatory
authorities, acquisition and business combination opportunities, the
availability of alternate energy and purchased-power sources, the ability to
obtain adequate and timely rate relief, escalations in construction costs and
conservation and energy efficiency programs.
Construction and acquisition expenditures for IEC for the year ended
December 31, 1998 were $372 million, compared with $328 million for the year
ended December 31, 1997. IEC's anticipated construction and acquisition
expenditures for 1999 are estimated to be approximately $495 million, consisting
of approximately $275 million in its utility operations, $100 million for
energy-related international investments and $120 million for new business
development initiatives at Alliant Energy Resources. IEC's anticipated utility
construction and acquisition expenditures for 1999 is made up of 53% for
electric transmission and distribution, 18% for electric generation, 10% for
information technology and 19% for miscellaneous electric, gas, water and steam
projects. The level of 1999 domestic and international investments could vary
significantly from the estimates noted here depending on actual investment
opportunities, timing of the opportunities and the receipt of regulatory
approvals to exceed limitations in place under WUHCA and PUHCA on the amount of
IEC's non-utility investments. It is expected that IEC will spend approximately
$1.3 billion on utility construction and acquisition expenditures during
2000-2003, including expenditures to comply with nitrogen oxides (NOx) emissions
reductions in Wisconsin as discussed in "Other Matters Environmental." It is
expected that Alliant Energy Resources will invest in energy products and
services in domestic and international markets, industrial services initiatives
and other strategic initiatives during 2000-2003.
A-14
<PAGE>
WP&L's construction and acquisition expenditures for the years ended
December 31, 1998 and 1997 were $117 and $119 million, respectively. WP&L's
anticipated construction and acquisition expenditures for 1999 are estimated to
be approximately $126 million, of which 50% represents expenditures for electric
transmission and distribution facilities, 17% represents generation
expenditures, 10% represents information technology expenditures and the
remaining 23% represents miscellaneous electric, gas, water and general
expenditures. WP&L's construction and acquisition expenditures are projected to
be $162 million in 2000, $130 million in 2001, $155 million in 2002 and $185
million in 2003 which include expenditures to comply with NOx emissions
reductions as discussed in "Other Matters - Environmental."
IEC anticipates financing utility construction expenditures during
1999-2003 through internally generated funds supplemented, when required, by
outside financing. Funding of a majority of the Alliant Energy Resources
construction and acquisition expenditures is expected to be completed with
external financings.
Nuclear Facilities
IEC owns interests in two nuclear facilities, Kewaunee and the Duane
Arnold Energy Center (DAEC). Set forth below is a discussion of certain matters
impacting these facilities.
Kewaunee, a 532-megawatt pressurized water reactor plant, is operated by
Wisconsin Public Service Corporation (WPSC) and is jointly owned by WPSC
(41.2%), WP&L (41.0%), and Madison Gas and Electric Company (MG&E) (17.8%). The
Kewaunee operating license expires in 2013.
On April 7, 1998, the PSCW approved WPSC's application for replacement of
the two steam generators at Kewaunee. The total cost of replacing the steam
generators would be approximately $90.7 million, with WP&L's share of the cost
being approximately $37.2 million. The replacement work is tentatively planned
for the spring of 2000 and will take approximately 60 days. On July 2, 1998, the
PSCW approved an agreement between the owners of Kewaunee which provides for
WPSC to assume the 17.8% Kewaunee ownership share currently held by MG&E prior
to work beginning on the replacement of steam generators. On September 29, 1998,
WPSC and MG&E finalized an arrangement in which WPSC will acquire MG&E's 17.8%
share of Kewaunee. This agreement, the closing of which is contingent upon the
steam generator replacement, will give WPSC 59.0% ownership in Kewaunee. After
the change in ownership, WPSC and WP&L will be responsible for the
decommissioning of the plant. WPSC and WP&L are discussing revisions to the
joint power supply agreement which will govern operation of the plant after the
ownership change takes place.
On October 17, 1998, Kewaunee was shut down for a planned maintenance and
refueling outage. Inspection of the plant's two steam generators shows that the
repairs made in 1997 are holding up well and few additional repairs were needed.
In addition to the inspection and repairs of the steam generator, a major
overhaul was performed on the main turbine generator. The plant was back in
operation on November 27, 1998.
Prior to the July 2, 1998 PSCW decision, the PSCW had directed the owners
of Kewaunee to record depreciation and decommissioning cost levels based on an
expected plant end-of-life of 2002 versus a license end-of-life of 2013. This
was prompted by the uncertainty regarding the expected useful life of the plant
without steam generator replacement. The revised end-of life of 2002 resulted in
higher depreciation and decommissioning expense at WP&L beginning in May 1997,
in accordance with the PSCW rate order UR-110. This level of depreciation will
remain in effect until the steam generator replacement is completed at which
time the entire plant will be depreciated over 8.5 years using an accelerated
method. At December 31, 1998, the net carrying amount of WP&L's investment in
Kewaunee was approximately $44.9 million. WP&L's
A-15
<PAGE>
retail customers in Wisconsin are responsible for approximately 80% of WP&L's
share of Kewaunee costs (see Note 11 (h) of the "Notes to Consolidated Financial
Statements" for additional information).
In February 1999, IEC, NSP, WPSC and Wisconsin Electric Power Co.
announced the formation of a nuclear management company (NMC) to sustain
long-term safety, optimize reliability and improve the operational performance
of their nuclear generating plants. Combined, the four utilities operate seven
nuclear generating plants at five locations. IEC's participation in the NMC is
contingent on approval from the SEC under PUHCA. Each utility will be required
to obtain various other state or federal regulatory approvals prior to its
participation in the NMC. In addition, Nuclear Regulatory Commission (NRC)
approval is required if any utilities choose to transfer their operating license
to the new company. As presently proposed, the utilities would continue to own
their plants, be entitled to energy generated at the plants and retain the
financial obligations for their safe operation, maintenance and decommissioning.
Refer to the "Other Matters - Environmental" section for a discussion of
various issues impacting IEC's future capital requirements.
Rates and Regulatory Matters
In November 1997, as part of its Merger approval, FERC accepted a
proposal by IESU, WP&L, and IPC, which provides for a four-year freeze on
wholesale electric prices beginning with the effective date of the Merger.
In association with the Merger, IESU, WP&L and IPC entered into a System
Coordination and Operating Agreement which became effective with the
consummation of the Merger. The agreement, which has been approved by the FERC,
provides a contractual basis for coordinated planning, construction, operation
and maintenance of the interconnected electric generation and transmission
systems of the three utility companies. In addition, the agreement allows the
interconnected system to be operated as a single control area with off-system
capacity sales and purchases made to market excess system capability or to meet
system capability deficiencies. Such sales and purchases are allocated among the
three utility companies based on procedures included in the agreement. The
procedures were approved by both the FERC and all state regulatory bodies having
jurisdiction over these sales.
In connection with its approval of the Merger, the PSCW accepted a WP&L
proposal to freeze rates for four years following the date of the Merger. A
re-opening of an investigation into WP&L's rates during the rate freeze period,
for both cost increases and decreases, may occur only for single events that are
not merger-related and have a revenue requirement impact of $4.5 million or
more. In addition, the electric fuel adjustment clause and purchased gas
adjustment (PGA) clause are not affected by the rate freezes.
In rate order UR-110, the PSCW approved new rates effective April 29,
1997. On average, WP&L's retail electric rates under the new rate order declined
by 2.4% and retail gas rates declined by 2.2%. In addition, the PSCW ordered
that it must approve the payment of dividends by WP&L to IEC that are in excess
of the level forecasted in the rate order ($58.3 million), if such dividends
would reduce WP&L's average common equity ratio below 52.00% of total
capitalization. The dividends paid by WP&L to IEC since the rate order was
issued have not exceeded the level forecasted in the rate order.
The retail electric rates are based in part on forecasted fuel and
purchased-power costs. Under PSCW rules, Wisconsin utilities can seek emergency
rate increases if the annual costs are more than 3% higher than the estimated
costs used to establish rates. In March 1998, WP&L requested an electric rate
increase to cover purchased-power and transmission costs that have increased due
to transmission constraints and electric
A-16
<PAGE>
reliability concerns in the Midwest. On July 14, 1998, the PSCW granted a retail
electric rate increase of $14.8 million annually that was effective on July 16,
1998. In November 1998, WP&L requested another electric rate increase to cover
additional increases in purchased-power and transmission costs. In early March
1999, the PSCW granted a retail electric rate increase of $14.5 million. The
additional revenues collected are subject to refund if WP&L's earnings exceed
its authorized return on equity.
The gas performance incentive includes a sharing mechanism, whereby 40%
of all gains and losses relative to current commodity prices as well as other
benchmarks are retained by WP&L rather than refunded to or recovered from
customers.
Rate order UR-110 also provided for the recovery of costs associated with
WP&L's energy efficiency programs, including the recovery of the cost of capital
associated with advances made to customers to install energy-efficient
equipment.
In May 1998, the PSCW approved the deferral of certain costs associated
with the Year 2000 issue and in November 1998, WP&L filed for rate recovery of
$16.1 million related to the Wisconsin retail portion of Year 2000 costs. A
pre-hearing conference was held in January 1999 and hearings are scheduled for
May 1999. Management anticipates receiving an order by the end of the second
quarter of 1999.
In January 1999, WP&L made a filing with the PSCW proposing to begin
deferring, on January 1, 1999, all costs associated with the United States
Environmental Protection Agency's (EPA) required NOx emission reductions. WP&L
has requested recovery of all the NOx reduction costs through a surcharge
mechanism. WP&L anticipates receiving a final order in this proceeding in late
1999 or early 2000. Refer to the "Other Matters - Environmental" section for a
further discussion of the NOx issue.
Refer to "Nuclear Facilities" for a discussion of several PSCW rulings
regarding Kewaunee.
Assuming capture of the merger-related synergies and no significant
legislative or regulatory changes negatively affecting its utility subsidiaries,
IEC does not expect the merger-related electric and gas price freezes to have a
material adverse effect on its financial position or results of operations.
OTHER MATTERS
Year 2000
Overview IEC utilizes software, embedded systems and related technologies
throughout its business that will be affected by the date change in the Year
2000. The Year 2000 problem exists because many computerized operating systems,
applications, databases and embedded systems use a standard two digit year field
instead of four digits to reference a given year. For example, "00" in the date
field would actually represent 1900. As a result, information technology and
embedded systems may not properly recognize the Year 2000 or process data
correctly, potentially causing data inaccuracies, operational malfunctions or
operational failures.
Following up on earlier work, IEC formally established a company-wide
project team in 1997 to assess, remediate and communicate its Year 2000 issues
as well as develop the necessary contingency plans. Expertise on the team has
been drawn from various areas, including, but not limited to, information
technology, engineering, communications, internal audits, legal, facilities,
supply chain, finance, and project management. A full-time project manager heads
up a team of approximately 50 employees who are dedicated to the team full-time
and another 475 employees are working on the project on a part-time basis. In
addition, there are approximately 135 individuals from external consulting firms
who are also providing various Year 2000-related
A-17
<PAGE>
services for the project team. Status reports are provided to senior management
monthly and at every meeting of IEC's Board of Directors. Auditing of the Year
2000 inventory, remediation efforts and contingency planning is being done by
the Internal Audits Department. IEC has also retained an outside third party to
assess and evaluate its Year 2000 project.
The various phases of and other matters relating to the Year 2000 project
are described below.
Assessment A company-wide inventory has been completed for information
technology (hardware, software, databases, network infrastructure operating
systems) and embedded systems (computers or microprocessors that run specialized
software). Inventoried devices and systems have been assessed and prioritized
into three categories based on the relative critical nature of their business
function: safety-related; critical-business-continuity-related; and
non-critical.
Remediation and Testing IEC's approach to remediation is to repair,
replace or retire the affected devices and systems. Remediation and testing of
safety-related and critical-business-continuity-related devices and systems is
underway in all business units. In some cases IEC's ability to meet its target
date for remediation is dependent upon the timely provision of necessary
upgrades and modifications by its software vendors. As of December 31, 1998, IEC
was expecting upgrades from 48 embedded system vendors and 14 information
technology vendors. Should these upgrades be delayed it would impact IEC's
ability to meet its target date. At this time, IEC does not expect that these
upgrades will be delayed. As part of the testing process, client/server
applications are being tested in an isolated test lab on Year 2000 compliant
hardware and software. Also, IEC intends to implement a process to protect the
integrity of the data once it is year 2000 compliant.
A. Embedded Systems - The project team is using testing standards and
procedures based on those developed in the national electric utility industry
effort led by the Electric Power Research Institute (EPRI). The team is also
using information and testing guidance received from IEC's vendors. IEC is
participating in EPRI's Year 2000 collaborative effort to share information
about test procedures, test results and vendor information. The project team is
also working with equipment vendors to ascertain Year 2000 compliance with
systems and devices. Testing methodology includes a power on/off test and
testing for 13 critical dates including 12/31/99, 1/1/2000 and 2/29/2000. All
testing for assessing Year 2000 compliance has been completed. The only testing
remaining is post-remediation testing. The goal is to complete
remediation/testing work for the embedded systems by March 31, 1999;
approximately 85% of this remediation/testing work has been completed as of the
end of 1998.
Experience to date suggests that Year 2000 problems in embedded systems
are occurring at a lower rate than originally anticipated. For IEC, 1-2% of
embedded systems have been identified as Year 2000 problematic. This rate is
generally consistent in both volume and by type of device with other similar
sized electric utilities participating in EPRI's Year 2000 Embedded System
Program.
B. Information Technology - IEC's information technology Year 2000
readiness project consists of both application and operating systems, and
infrastructure (PC, servers, printers, etc.) components. The inventory and
assessment of both the systems and the infrastructure has been completed. IEC's
goal is to complete the remediation and testing of the systems by March 31, 1999
and the infrastructure components by June 30, 1999. At the end of 1998,
approximately 65% of the systems and 40% of the infrastructure components have
been remediated and tested.
A-18
<PAGE>
IEC's customer information systems and financial systems make up the
majority of the remediation and testing effort remaining. The remediation and
testing of the customer information systems was 70% complete at the end of 1998
with an anticipated completion date of May 31, 1999. The financial systems have
been remediated with final roll-forward-testing scheduled to be completed by
mid-year 1999. Therefore, it is anticipated that IEC will have its information
technology remediation and testing efforts 90% complete by March 31, 1999 with
work completed and into production by mid-year 1999.
Costs to Address Year 2000 Compliance IEC's historical Year 2000 project
expenditures as well as CURRENT ESTIMATES for the remaining costs to be incurred
on the project are as follows (incremental costs, in millions):
<TABLE>
<CAPTION>
Description Total IESU WP&L Other
----------- ----- ---- ---- -----
<S> <C> <C> <C> <C>
Costs incurred from 1/1/98 - 12/31/98 $8.7 $4.8 $3.2 $0.7
Current estimate of remaining modifications $32 $10 $ 14 $ 8
</TABLE>
In addition, the company estimates it incurred $3 million in costs for
internal labor and associated overheads in 1998 and anticipates expenditures of
$8 million in 1999.
While work was done on the Year 2000 project prior to 1998, IEC did not
begin tracking the costs separately until 1998. In accordance with an order
received from the PSCW, WP&L began deferring its Year 2000 project costs, other
than internal labor and associated overheads, in May 1998 (approximately $2.7
million of the expenditures incurred at WP&L for the 12 months ended December
31, 1998 have been deferred.) (Refer to "Liquidity and Capital Resources - Rates
and Regulatory Matters" for a further discussion.) IEC expects to fund its Year
2000 expenditures through internal sources. Other than the costs being deferred
by WP&L pursuant to the PSCW order, IEC is expensing all the Year 2000 costs
noted above.
Communications / Third Party Assessment IEC is heavily dependent on other
utilities (including electric, gas, telecommunications and water utilities) and
its suppliers. An effort is underway to communicate with such parties to
increase their awareness of Year 2000 issues and monitor and assess, to the
extent possible, their Year 2000 readiness. IEC has sought written assurance
that third parties with significant relationships with IEC will be Year 2000
ready. As part of an extensive awareness effort, IEC is also communicating with
its utility customers, regulatory agencies, elected and appointed government
officials, and industry groups. IEC executives and account managers are also
having discussions with IEC's largest customers to review their initiatives for
Year 2000 readiness. IEC is also working closely with the North American
Electric Reliability Council (NERC) and the Natural Gas Council to assist their
efforts to make certain all system interconnections across regional areas are
Year 2000 compliant.
Risks and Contingency Planning The systems which pose the greatest Year
2000 risks for IEC if the Year 2000 project is not successful are the
telecommunications facilities and network systems as well as the information
technology systems. The potential problems related to these systems include
service interruptions, service order and billing delays and the resulting
customer relations and cash flow issues. IEC is currently unable to quantify the
financial impact of such contingencies if in fact they were to occur.
Even though IEC intends to complete the bulk of its Year 2000 remediation
and testing activities by the end of March 1999 and has initiated Year 2000
communications with significant customers, key vendors, suppliers, and other
parties material to IEC's operation, failures or delay in achieving Year 2000
compliance could significantly disrupt IEC's business. Therefore, IEC has
initiated contingency planning to address alternatives in the event of a Year
2000 failure that occurs within IEC or where IEC is impacted by an external Year
2000 failure. The plan will address mission-critical processes, devices and
systems and will
A-19
<PAGE>
include training, testing and rehearsal of procedures, and the need for
installation of backup equipment as necessary. The goal is to have the
contingency plan completed by mid-year 1999. As a member of Mid-America
Interconnected Network, Inc. (MAIN), IEC is also working with the Operating
Committee Y2K Task Force which will expand existing emergency operating
strategies for member company control centers to ensure rapid responses to any
Year 2000-related electric system disturbances and will coordinate those
strategies with other reliability organizations. MAIN is one of the 10 regional
coordinating councils that make up NERC. IEC also belongs to the Mid-Continent
Area Power Pool (MAPP), another one of the 10 NERC councils, and will be
coordinating Year 2000 contingency planning with MAPP as well.
As part of its contingency planning process, NERC has scheduled two
nation-wide electric utility industry drills in April 1999 and September 1999.
These drills will focus on safe and reliable electrical system operations with
the partial loss of telecommunications. In addition to these NERC drills, IEC
will be conducting three additional internal drills. These will include a March
1999 table-top drill, a June 1999 functional drill and an August 1999 full-scale
development drill where key employees will test and critique IEC's contingency
plans.
Since early 1998, IEC has devoted a significant portion of its
information technology resources to the Year 2000 project given the importance
of such project to the continued operations of IEC. As a result, there have been
some delays in implementing other information technology projects. The delays
are simply a matter of timing and IEC does not currently believe that such
delays will have a material adverse impact on its results of operations or
financial position.
Summary Based on IEC's current schedule for completion of its Year 2000
tasks, IEC believes its plan is adequate to secure Year 2000 readiness of its
critical systems. Nevertheless, achieving Year 2000 readiness is subject to many
risks and uncertainties, as described above. If IEC, or third parties, fail to
achieve Year 2000 readiness with respect to critical systems and, as such, there
are systematic problems, there could be a material adverse effect on IEC's
results of operations and financial condition.
Labor Issues
The status of the collective bargaining agreements at each of the
utilities is as follows at December 31, 1998:
IESU WP&L IPC
---- ---- ---
Number of collective bargaining agreements 6 1 3
Percentage of workforce covered by agreements 61 92 81
Eight agreements are scheduled to expire in 1999 and represent
substantially all employees covered under collective bargaining agreements.
These employees represent approximately 50% of all IEC employees. IEC has not
experienced any significant work stoppage problems in the past. While
negotiations have commenced, IEC is currently unable to predict the outcome of
these negotiations.
Market Risk Sensitive Instruments and Positions
IEC, through its consolidated subsidiaries, has historically had only
limited involvement with derivative financial instruments and has not used them
for speculative purposes. They have been used to manage well-defined interest
rate and commodity price risks.
A-20
<PAGE>
WP&L and Alliant Energy Resources have historically entered into interest
rate swap agreements to reduce the impact of changes in interest rates on its
variable-rate debt. The total notional amount of interest rate swaps outstanding
at WP&L and Alliant Energy Resources at December 31, 1998, was $30 million and
$200 million, respectively. See Note 10(a) of the "Notes to Consolidated
Financial Statements" for additional information.
As discussed in Note 10(a) of the "Notes to Consolidated Financial
Statements," from time to time WP&L utilizes gas commodity swap arrangements to
mitigate the impact of price fluctuations on gas purchased and injected into
storage during the summer months and withdrawn and sold at current prices during
the winter months. While it is not WP&L's intent to terminate the contracts
currently in place, the impact of a termination of all the agreements
outstanding at December 31, 1998, would have been an estimated gain of $0.8
million.
WP&L has entered into a weather insurance agreement which terminates
March 31, 1999, for the purpose of hedging a portion of the risk associated with
the changes in weather from normal conditions. Under this agreement, a payment
will be made or received if the heating degree days from November 1, 1998 to
March 31, 1999, fall outside certain pre-determined heating degree levels. The
payment is limited to a maximum of $5 million. At December 31, 1998, the fair
value of this agreement if it were terminated would have resulted in a payment
to WP&L of an estimated $1.8 million.
While IEC is exposed to credit risk when it enters into a hedging
transaction, it has established procedures and policies designed to mitigate
such risks due to a counterparty default. IEC utilizes a listing of approved
counterparties and monitors the creditworthiness on an ongoing basis.
Accounting Pronouncements
In February 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 addresses,
among other things, expensing versus capitalization of costs, accounting for the
costs incurred in the upgrading of the software and amortizing the capitalized
cost of software. This statement is effective for fiscal years beginning after
December 15, 1998. IEC adopted the requirements of this statement in 1999 and
such adoption did not have any significant impact on its financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." This SOP provides guidance on the financial reporting of
start-up costs and organization costs. Costs of start-up activities and
organization costs are required to be expensed as incurred. The statement is
effective for periods beginning after December 15, 1998. IEC adopted the
requirements of this statement in 1999 and such adoption did not have any
significant impact on its financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded on the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
A-21
<PAGE>
SFAS 133 is effective for fiscal years beginning after June 15, 1999.
SFAS 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. IEC has not yet quantified
the impacts of SFAS 133 on the financial statements and has not determined the
timing of or method of adoption of SFAS 133. However, the Statement could
increase volatility in earnings and other comprehensive income.
In December 1998, the Emerging Issues Task Force reached consensus on
Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities" (EITF Issue 98-10). EITF Issue 98-10 is effective for
fiscal years beginning after December 15, 1998 and requires energy trading
contracts to be recorded at fair value on the balance sheet, with the changes in
fair value included in earnings. IEC anticipates that the adoption of EITF Issue
98-10 will not have a significant impact on IEC's financial statements based on
its current operations.
Accounting for Obligations Associated with the Retirement of Long-Lived Assets
The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry, including IESU and WP&L, regarding
the recognition, measurement and classification of decommissioning costs for
nuclear generating stations in financial statements of electric utilities. In
response to these questions, the FASB is reviewing the accounting for closure
and removal costs, including decommissioning of nuclear power plants. If current
electric utility industry accounting practices for nuclear power plant
decommissioning are changed, the annual provision for decommissioning could
increase relative to 1998, and the estimated cost for decommissioning could be
recorded as a liability (rather than as accumulated depreciation), with
recognition of an increase in the cost of the related nuclear power plant.
Assuming no significant change in regulatory treatment, IESU and WP&L do not
believe that such changes, if required, would have an adverse effect on their
financial position or results of operations due to their ability to recover
decommissioning costs through rates.
Inflation
IEC, IESU and WP&L do not expect the effects of inflation at current
levels to have a significant effect on their financial position or results of
operations.
Environmental
The pollution abatement programs of IESU, WP&L, IPC and Alliant Energy
Resources are subject to continuing review and are revised from time to time due
to changes in environmental regulations, changes in construction plans and
escalation of construction costs. While management cannot precisely forecast the
effect of future environmental regulations on IEC's operations, it has taken
steps to anticipate the future while also meeting the requirements of current
environmental regulations.
The Clean Air Act Amendments of 1990 (Act) require emission reductions of
sulfur dioxide (SO2), NOx and other air pollutants to achieve reductions of
atmospheric chemicals believed to cause acid rain. IESU, WP&L and IPC have met
the provisions of Phase I of the Act and are in the process of meeting the
requirements of Phase II of the Act (effective in the year 2000). The Act also
governs SO2 allowances, which are defined as an authorization for an owner to
emit one ton of SO2 into the atmosphere. The companies are reviewing their
options to ensure they will have sufficient allowances to offset their emissions
in the future. The companies believe that the potential costs of complying with
these provisions of Title IV of the Act will not have a material adverse impact
on their financial position or results of operations.
A-22
<PAGE>
The Act and other federal laws also require the EPA to study and
regulate, if necessary, additional issues that potentially affect the electric
utility industry, including emissions relating to ozone transport, mercury and
particulate control as well as modifications to the polychlorinated biphenyl
(PCB) rules. In July 1997, the EPA issued final rules that would tighten the
National Ambient Air Quality Standards for ozone and particulate matter
emissions and in June 1998, the EPA modified the PCB rules. IEC cannot predict
the long-term consequences of these rules on its results of operations or
financial condition.
In October 1998, the EPA issued a final rule requiring 22 states,
including Wisconsin, to modify their State Implementation Plans (SIPs) to
address the ozone transport issue. The implementation of the rule will likely
require WP&L to reduce its NOx emissions at all of its plants to .15 lbs/mmbtu
by 2003. WP&L is currently evaluating various options to meet the emission
levels. These options include fuel switching, operational modifications and
capital investments. Based on existing technology, the preliminary estimates
indicate that capital investments will be approximately $150 million. Refer to
the "Liquidity and Capital Resources - Rates and Regulatory Matters" section for
a discussion of a filing WP&L made with the PSCW regarding rate recovery of
these costs.
Revisions to the Wisconsin Administrative Code have been proposed that
could have a significant impact on WP&L's operation of the Rock River Generating
Station in Beloit, Wisconsin. The proposed revisions will affect the amount of
heat that the Generating Station can discharge into the Rock River. WP&L cannot
presently predict the final outcome of the rule, but believes that, as the rule
is currently proposed, the capital investments and/or modifications required to
meet the proposed discharge limits could be significant.
A global treaty has been negotiated that could require reductions of
greenhouse gas emissions from utility plants. In November 1998, the United
States signed the treaty and agreed with the other countries to resolve all
remaining issues by the end of 2000. At this time, management is unable to
predict whether the United States Congress will ratify the treaty. Given the
uncertainty of the treaty ratification and the ultimate terms of the final
regulations, management cannot currently estimate the impact the implementation
of the treaty would have on IEC's operations.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates
that each state must take responsibility for the storage of low-level
radioactive waste produced within its borders. The States of Iowa and Wisconsin
are members of the six-state Midwest Interstate Low-Level Radioactive Waste
Compact (Compact) which is responsible for development of any new disposal
capability within the Compact member states. In June 1997, the Compact
commissioners voted to discontinue work on a proposed waste disposal facility in
the State of Ohio because the expected cost of such a facility was comparably
higher than other options currently available. Dwindling waste volumes and
continued access to existing disposal facilities were also reasons cited for the
decision. A disposal facility located near Barnwell, South Carolina continues to
accept the low-level waste and IESU and WP&L currently ship the waste each
produces to such site, thereby minimizing the amount of low-level waste stored
on-site. In addition, given technological advances, waste compaction and the
reduction in the amount of waste generated, DAEC and Kewaunee each have on-site
storage capability sufficient to store low-level waste expected to be generated
over at least the next ten years, with continuing access to the Barnwell
disposal facility extending that on-site storage capability indefinitely.
See Notes 11(f) and 11(g) of the "Notes to Consolidated Financial
Statements" for a further discussion of IEC's environmental issues.
A-23
<PAGE>
Power Supply
The power supply concerns of 1997 have raised awareness of the electric
system reliability challenges facing Wisconsin and the Midwest region. As a
result, Wisconsin enacted electric reliability legislation in April 1998
(Wisconsin Reliability Act). The legislation has the goal of assuring reliable
electric energy for Wisconsin. The new law, effective May 12, 1998, requires
Wisconsin utilities to join a regional independent system operator for
transmission by the year 2000, allows the construction of merchant power plants
in the state and streamlines the regulatory approval process for building new
generation and transmission facilities. As a requirement of the legislation, the
PSCW completed a regional transmission constraint study. The PSCW is authorized
to order construction of new transmission facilities, based on the findings of
its constraint study, through December 31, 2004.
On September 24, 1997, the PSCW ordered WP&L and two other Wisconsin
utilities to arrange for additional electric capacity to help maintain reliable
service for their customers. In July 1998, IEC and Polsky Energy Corp. (Polsky)
announced an agreement whereby Polsky would build, own and operate a power plant
in southeastern Wisconsin capable of producing up to 450 megawatts (MW) of
electricity (reduced from earlier estimates of 525 MW due to NOx emissions
limitations imposed by the Wisconsin Department of Natural Resources (WDNR)).
Under the agreement, IEC will purchase the capacity to meet the electric needs
of its utility customers, as outlined by the Wisconsin Reliability Act. It is
expected that this new power plant will be operational in June 2000. The PSCW
issued an order dated December 18, 1998 approving the project.
Utility officials noted that it will take time for new transmission and
power plant projects to be approved and built. While utility officials fully
expect to meet customer demands in 1999, problems still could arise if there are
unexpected power plant outages, transmission system outages or extended periods
of extremely hot weather.
A-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowners of Wisconsin Power and Light Company:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Wisconsin Power and Light Company (a Wisconsin
corporation) and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, retained earnings and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Wisconsin Power and
Light Company and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 1999
A-25
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Operating revenues:
<S> <C> <C> <C>
Electric utility $ 614,704 $ 634,143 $ 589,482
Gas utility 111,737 155,883 165,627
Water 5,007 4,691 4,166
----------------- ----------------- -----------------
731,448 794,717 759,275
----------------- ----------------- -----------------
Operating expenses:
Electric production fuels 120,485 116,812 114,470
Purchased power 113,936 125,438 81,108
Cost of gas sold 61,409 99,267 104,830
Other operation 143,666 131,398 140,339
Maintenance 49,912 48,058 46,492
Depreciation and amortization 119,221 104,297 84,942
Taxes other than income taxes 30,169 30,338 29,206
----------------- ----------------- -----------------
638,798 655,608 601,387
----------------- ----------------- -----------------
Operating income 92,650 139,109 157,888
----------------- ----------------- -----------------
Interest expense and other:
Interest expense 36,584 32,607 31,472
Allowance for funds used during construction (3,049) (2,775) (3,208)
Miscellaneous, net (1,129) (3,796) (6,669)
----------------- ----------------- -----------------
32,406 26,036 21,595
----------------- ----------------- -----------------
Income before income taxes 60,244 113,073 136,293
----------------- ----------------- -----------------
Income taxes 24,670 41,839 53,808
----------------- ----------------- -----------------
Net income 35,574 71,234 82,485
----------------- ----------------- -----------------
Preferred dividend requirements 3,310 3,310 3,310
----------------- ----------------- -----------------
Earnings available for common stock $ 32,264 $ 67,924 $ 79,175
================= ================= =================
<CAPTION>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 320,386 $ 310,805 $ 297,717
Net income 35,574 71,234 82,485
Cash dividends declared on common stock (58,341) (58,343) (66,087)
Cash dividends declared on preferred stock (3,310) (3,310) (3,310)
----------------- ----------------- -----------------
Balance at end of year $ 294,309 $ 320,386 $ 310,805
================= ================= =================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
A-26
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------------
1998 1997
---- ----
(in thousands)
ASSETS
Property, plant and equipment:
Utility -
Plant in service -
<S> <C> <C>
Electric $ 1,839,545 $ 1,790,641
Gas 244,518 237,856
Water 26,567 24,864
Common 219,268 195,815
----------------- ------------------
2,329,898 2,249,176
Less - Accumulated depreciation 1,168,830 1,065,726
----------------- ------------------
1,161,068 1,183,450
Construction work in progress 56,994 42,312
Nuclear fuel, net of amortization 18,671 19,046
----------------- ------------------
1,236,733 1,244,808
Other property, plant and equipment, net of accumulated
depreciation and amortization of $44 for both years 630 684
----------------- ------------------
1,237,363 1,245,492
----------------- ------------------
Current assets:
Cash and temporary cash investments 1,811 2,492
Accounts receivable:
Customer 13,372 20,928
Associated companies 3,019 5,017
Other 8,298 11,589
Production fuel, at average cost 20,105 18,857
Materials and supplies, at average cost 20,025 19,274
Gas stored underground, at average cost 10,738 12,504
Prepaid gross receipts tax 22,222 22,153
Other 6,987 4,824
----------------- ------------------
106,577 117,638
----------------- ------------------
Investments:
Nuclear decommissioning trust funds 134,112 112,356
Other 15,960 14,877
----------------- ------------------
150,072 127,233
----------------- ------------------
Other assets:
Regulatory assets 133,501 120,826
Deferred charges and other 57,637 53,415
----------------- ------------------
191,138 174,241
----------------- ------------------
$ 1,685,150 $ 1,664,604
================= ==================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
A-27
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31,
----------------------------------------
1998 1997
---- ----
(in thousands)
CAPITALIZATION AND LIABILITIES
Capitalization (See Consolidated Statements of Capitalization):
<S> <C> <C>
Common stock $ 66,183 $ 66,183
Additional paid-in capital 199,438 199,170
Retained earnings 294,309 320,386
------------------ -----------------
Total common equity 559,930 585,739
------------------ -----------------
Cumulative preferred stock, not mandatorily redeemable 59,963 59,963
Long-term debt (excluding current portion) 414,579 354,540
------------------ -----------------
1,034,472 1,000,242
------------------ -----------------
Current liabilities:
Current maturities - 8,899
Variable rate demand bonds 56,975 56,975
Commercial paper - 81,000
Notes payable 50,000 -
Notes payable to associated companies 26,799 -
Accounts payable 84,754 85,617
Accounts payable to associated companies 20,315 -
Accrued payroll and vacations 5,276 12,221
Accrued interest 6,863 6,317
Other 14,600 25,162
------------------ -----------------
265,582 276,191
------------------ -----------------
Other long-term liabilities and deferred credits:
Accumulated deferred income taxes 245,489 251,709
Accumulated deferred investment tax credits 33,170 35,039
Customer advances 34,367 34,240
Environmental liabilities 11,683 13,738
Other 60,387 53,445
------------------ -----------------
385,096 388,171
------------------ -----------------
Commitments and contingencies (Note 11)
$1,685,150 $ 1,664,604
================== =================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
A-28
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 35,574 $ 71,234 $ 82,485
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 119,221 104,297 84,942
Amortization of nuclear fuel 5,356 3,534 4,845
Deferred taxes and investment tax credits (7,529) 3,065 6,306
(Gain) loss on disposition of other property and equipment 38 710 (5,676)
Other (2,127) (2,033) (2,270)
Other changes in assets and liabilities:
Accounts receivable 12,845 (3,314) (250)
Production fuel (1,248) (3,016) (1,216)
Materials and supplies (751) 641 696
Gas stored underground 1,766 (2,512) (3,673)
Prepaid gross receipts tax (69) (2,764) (1,087)
Accounts payable 19,452 (7,102) 10,291
Benefit obligations and other (5,207) (12,809) 16,834
--------------- ---------------- ----------------
Net cash flows from operating activities 177,321 149,931 192,227
--------------- ---------------- ----------------
Cash flows used for financing activities:
Common stock dividends (58,341) (58,343) (66,087)
Preferred stock dividends (3,310) (3,310) (3,310)
Proceeds from issuance of long-term debt 60,000 105,000 -
Reductions in long-term debt (8,899) (55,000) (5,000)
Net change in short-term borrowings (4,201) 11,500 (3,000)
Other (1,966) (2,601) -
--------------- ---------------- ----------------
Net cash flows used for financing activities (16,717) (2,754) (77,397)
--------------- ---------------- ----------------
Cash flows used for investing activities:
Construction expenditures (117,143) (119,232) (123,942)
Nuclear decommissioning trust funds (14,297) (11,427) (9,986)
Additions to nuclear fuel (4,981) (3,212) (5,344)
Proceeds from sale of other property and equipment 53 4 36,613
Shared savings expenditures (24,355) (17,610) (5,196)
Other (562) 2,625 (7,479)
--------------- ---------------- ----------------
Net cash flows used for investing activities (161,285) (148,852) (115,334)
--------------- ---------------- ----------------
Net decrease in cash and temporary cash investments (681) (1,675) (504)
--------------- ---------------- ----------------
Cash and temporary cash investments at beginning of period 2,492 4,167 4,671
--------------- ---------------- ----------------
Cash and temporary cash investments at end of period $ 1,811 $ 2,492 $ 4,167
=============== ================ ================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 33,368 $ 32,955 $ 29,092
=============== ================ ================
Income taxes $ 31,951 $ 37,407 $ 48,622
=============== ================ ================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
A-29
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
-----------------------------------------
1998 1997
---- ----
(in thousands, except share amounts)
Common equity:
<S> <C> <C>
Common stock - $5.00 par value - authorized 18,000,000 shares;
13,236,601 shares outstanding $ 66,183 $ 66,183
Additional paid-in capital 199,438 199,170
Retained earnings 294,309 320,386
------------------- -------------------
559,930 585,739
------------------- -------------------
Cumulative preferred stock:
Cumulative, without par value, not mandatorily redeemable - authorized
3,750,000 shares, maximum aggregate stated value $150,000,000:
$100 stated value - 4.50% series, 99,970 shares outstanding 9,997 9,997
$100 stated value - 4.80% series, 74,912 shares outstanding 7,491 7,491
$100 stated value - 4.96% series, 64,979 shares outstanding 6,498 6,498
$100 stated value - 4.40% series, 29,957 shares outstanding 2,996 2,996
$100 stated value - 4.76% series, 29,947 shares outstanding 2,995 2,995
$100 stated value - 6.20% series, 150,000 shares outstanding 15,000 15,000
$25 stated value - 6.50% series, 599,460 shares outstanding 14,986 14,986
------------------- -------------------
59,963 59,963
------------------- -------------------
Long-term debt:
First Mortgage Bonds:
Series L, 6.25%, retired in 1998 - 8,899
1984 Series A, variable rate (3.85% at December 31, 1998), due 2014 8,500 8,500
1988 Series A, variable rate (4.20% at December 31, 1998), due 2015 14,600 14,600
1990 Series V, 9.3%, due 2025 27,000 27,000
1991 Series A, variable rate (5.15% at December 31, 1998), due 2015 16,000 16,000
1991 Series B, variable rate (5.15% at December 31, 1998), due 2005 16,000 16,000
1991 Series C, variable rate (5.15% at December 31, 1998), due 2000 1,000 1,000
1991 Series D, variable rate (5.15% at December 31, 1998), due 2000 875 875
1992 Series W, 8.6%, due 2027 90,000 90,000
1992 Series X, 7.75%, due 2004 62,000 62,000
1992 Series Y, 7.6%, due 2005 72,000 72,000
------------------- -------------------
307,975 316,874
Debentures, 7%, due 2007 105,000 105,000
Debentures, 5.7%, due 2008 60,000 -
------------------- -------------------
472,975 421,874
------------------- -------------------
Less:
Current maturities - (8,899)
Variable rate demand bonds (56,975) (56,975)
Unamortized debt premium and (discount), net (1,421) (1,460)
------------------- -------------------
414,579 354,540
------------------- -------------------
$ 1,034,472 $ 1,000,242
=================== ===================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
A-30
<PAGE>
WISCONSIN POWER AND LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) General -
The Consolidated Financial Statements include the accounts of Wisconsin
Power and Light (WP&L) and its consolidated subsidiaries. WP&L is a subsidiary
of Interstate Energy Corporation (IEC). IEC is currently doing business as
Alliant Energy Corporation. Nearly all of WP&L's retail customers are located in
south and central Wisconsin. WP&L's principal consolidated subsidiary is South
Beloit Water, Gas and Electric Company.
IEC resulted from the April 1998 merger between WPL Holdings, Inc. (WPLH),
IES Industries Inc. (IES) and Interstate Power Company (IPC) (refer to Note 2
for a discussion of the merger). IEC is an investor-owned holding company
currently doing business as Alliant Energy Corporation whose subsidiaries are
IES Utilities Inc. (IESU), WP&L, IPC, Alliant Energy Resources, Inc. (Alliant
Energy Resources) and Alliant Energy Corporate Services, Inc. (Alliant Energy
Corporate Services). IESU, WP&L and IPC are engaged principally in the
generation, transmission, distribution and sale of electric energy; the
purchase, distribution, transportation and sale of natural gas; and water and
steam services in selective markets. The principal markets of IESU, WP&L and IPC
are located in Iowa, Wisconsin, Minnesota and Illinois. Alliant Energy Resources
(through its numerous direct and indirect subsidiaries) provides energy products
and services to domestic and international markets; provides industrial services
including environmental, engineering and transportation services; invests in
affordable housing initiatives; and invests in various other strategic
initiatives. Alliant Energy Corporate Services is the subsidiary formed to
provide administrative services to IEC and its subsidiaries as required under
the Public Utility Holding Company Act of 1935 (PUHCA).
The consolidated financial statements reflect investments in controlled
subsidiaries on a consolidated basis. All significant intercompany balances and
transactions, other than certain energy-related transactions affecting IESU,
WP&L and IPC, have been eliminated from the Consolidated Financial Statements.
Such energy-related transactions are made at prices that approximate market
value and the associated costs are recoverable from customers through the rate
making process. The financial statements are prepared in conformity with
generally accepted accounting principles, which give recognition to the rate
making and accounting practices of the Federal Energy Regulatory Commission
(FERC) and state commissions having regulatory jurisdiction.
Unconsolidated investments for which IEC has at least a 20% voting
interest are generally accounted for under the equity method of accounting.
These investments are stated at acquisition cost, increased or decreased for
IEC's equity in net income or loss, which is included in "Miscellaneous, net" in
the Consolidated Statements of Income and decreased for any dividends received.
Investments that do not meet the criteria for consolidation or the equity method
of accounting are accounted for under the cost method.
The preparation of the financial statements requires management to make
estimates and assumptions that affect: 1) the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and 2) the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain prior period amounts have been reclassified on a basis consistent
with the current year presentation.
A-31
<PAGE>
(b) Regulation -
IEC is a registered public utility holding company subject to regulation
by the Securities and Exchange Commission (SEC) under the PUHCA. IESU, WP&L and
IPC are subject to regulation by the FERC and their respective state regulatory
commissions (Iowa Utilities Board (IUB), Public Service Commission of Wisconsin
(PSCW), Minnesota Public Utilities Commission (MPUC) and Illinois Commerce
Commission (ICC)).
(c) Regulatory Assets -
IESU, WP&L and IPC are subject to the provisions of Statement of Financial
Accounting Standards, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). SFAS 71 provides that rate-regulated public utilities
record certain costs and credits allowed in the rate making process in different
periods than for unregulated 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. At December 31, 1998 and 1997,
IEC's regulatory assets of $368.8 million and $388.7 million, respectively, were
comprised of the following items (in millions):
<TABLE>
<CAPTION>
IESU WP&L IPC
-------------------- --------------------- ------------------
1998 1997 1998 1997 1998 1997
---------- --------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax-related (Note 1(d)) $81.4 $80.3 $49.3 $55.5 $29.8 $29.7
Energy efficiency program costs 39.8 59.4 53.5 29.5 25.9 30.0
Environmental liabilities (Note 11(f)) 35.2 42.9 19.5 22.2 17.5 6.2
Other 5.0 17.0 11.2 13.6 0.7 2.4
---------- --------- ---------- ---------- -------- ---------
Total $161.4 $199.6 $133.5 $120.8 $73.9 $68.3
========== ========= ========== ========== ======== =========
</TABLE>
Refer to the individual notes referenced above for a further discussion of
certain items reflected in regulatory assets. Regulators allow IESU and IPC to
earn a return on energy efficiency program costs but not on the other regulatory
assets. In Wisconsin, WP&L is allowed to earn a return on all regulatory assets
other than those associated with manufactured gas plants (MGP).
If a portion of IESU's, WP&L's or IPC's operations become no longer
subject to the provisions of SFAS 71 as a result of competitive restructuring or
otherwise, a write-down of related regulatory assets would be required, unless
some form of transition cost recovery is established by the appropriate
regulatory body that would meet the requirements under generally accepted
accounting principles for continued accounting as regulatory assets during such
recovery period. In addition, IESU, WP&L or IPC would be required to determine
any impairment to other assets and write-down such assets to their fair value.
(d) Income Taxes -
IEC follows the liability method of accounting for deferred income taxes,
which requires the establishment of deferred tax assets and liabilities, as
appropriate, for all temporary differences between the tax basis of assets and
liabilities and the amounts reported in the financial statements. Deferred taxes
are recorded using currently enacted tax rates as shown in Note 5.
Except as noted below, income tax expense includes provisions for deferred
taxes to reflect the tax effects of temporary differences between the time when
certain costs are recorded in the accounts and when they are deducted for tax
return purposes. As temporary differences reverse, the related accumulated
deferred income
A-32
<PAGE>
taxes are reversed to income. Investment tax credits have been deferred and are
subsequently credited to income over the average lives of the related property.
As part of the affordable housing business, IEC is eligible to claim affordable
housing credits. These tax credits reduce current federal taxes to the extent
IEC has consolidated taxes payable.
Consistent with Iowa rate making practices for IESU and IPC, deferred tax
expense is not recorded for certain temporary differences (primarily related to
utility property, plant and equipment). As the deferred taxes become payable
(over periods exceeding 30 years for some generating plant differences) they are
recovered through rates. Accordingly, IESU and IPC have recorded deferred tax
liabilities and regulatory assets for certain temporary differences, as
identified in Note 1(c). In Wisconsin, the PSCW has allowed rate recovery of
deferred taxes on all temporary differences since August 1991. WP&L established
a regulatory asset associated with temporary differences occurring prior to
August 1991, which is recovered through rates.
(e) Temporary Cash Investments -
Temporary cash investments are stated at cost, which approximates market
value, and are considered cash equivalents for the Consolidated Statements of
Cash Flows. These investments consist of short-term liquid investments that have
maturities of less than 90 days from the date of acquisition.
(f) Depreciation of Utility Property, Plant and Equipment -
IESU, WP&L and IPC use a combination of remaining life and straight-line
depreciation methods as approved by their respective regulatory commissions. The
remaining life of the Duane Arnold Energy Center (DAEC), IESU's nuclear
generating facility, is based on the Nuclear Regulatory Commission (NRC) license
life of 2014. The remaining life of the Kewaunee Nuclear Power Plant (Kewaunee),
of which WP&L is a co-owner, is based on the PSCW approved revised end-of-life
of 2002 (prior to May 1997 the calculation was based on the NRC license life of
2013). Depreciation expense related to the decommissioning of DAEC and Kewaunee
is discussed in Note 11(h). WP&L implemented higher depreciation rates effective
January 1, 1997. The average rates of depreciation for electric and gas
properties of IESU, WP&L and IPC, consistent with current rate making practices,
were as follows:
<TABLE>
<CAPTION>
IESU WP&L IPC
---------------------------------- ---------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Electric 3.5% 3.5% 3.5% 3.6% 3.6% 3.3% 3.6% 3.6% 3.6%
Gas 3.5% 3.5% 3.5% 3.8% 3.8% 3.7% 3.4% 3.4% 3.4%
</TABLE>
(g) Property, Plant and Equipment -
Utility plant (other than acquisition adjustments at IESU of $26.8
million, net of accumulated amortization, recorded at cost) is recorded at
original cost, which includes overhead and administrative costs and an allowance
for funds used during construction (AFUDC). The AFUDC, which represents the cost
during the construction period of funds used for construction purposes, is
capitalized as a component of the cost of utility plant. The amount of AFUDC
applicable to debt funds and to other (equity) funds, a non-cash
A-33
<PAGE>
item, is computed in accordance with the prescribed FERC formula. These
capitalized costs are recovered in rates as the cost of the utility plant is
depreciated. The aggregate gross rates used were as follows:
1998 1997 1996
------------------- ------------------ ------------------
IESU 8.9% 6.7% 5.5%
WP&L 5.2% 6.2% 10.2%
IPC 7.0% 6.0% 5.8%
Other property, plant and equipment is recorded at original cost. Upon
retirement or sale of other property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in "Miscellaneous, net" in the Consolidated Statements of Income.
Normal repairs, maintenance and minor items of utility plant and other property,
plant and equipment are expensed. Ordinary retirements of utility plant,
including removal costs less salvage value, are charged to accumulated
depreciation upon removal from utility plant accounts and no gain or loss is
recognized.
(h) Operating Revenues -
IEC accrues revenues for services rendered but unbilled at month-end in
order to more properly match revenues with expenses.
In accordance with an order from the PSCW, effective January 1, 1998,
off-system gas sales for WP&L are included in the Consolidated Statements of
Income as a reduction of the cost of gas sold rather than as gas revenues. In
1997, off-system gas sales were included in the Consolidated Statements of
Income as gas revenue.
(i) Nuclear Refueling Outage Costs -
The IUB allows IESU to collect, as part of its base revenues, funds to
offset other operating and maintenance expenditures incurred during refueling
outages at DAEC. As these revenues are collected, an equivalent amount is
charged to other operating and maintenance expenses with a corresponding credit
to a reserve. During a refueling outage, the reserve is reversed to offset the
refueling outage expenditures. Operating expenses incurred during refueling
outages at Kewaunee are expensed by WP&L as incurred.
(j) Nuclear Fuel -
Nuclear fuel for DAEC is leased. Annual nuclear fuel lease expenses
include the cost of fuel, based on the quantity of heat produced for the
generation of electric energy, plus the lessor's interest costs related to fuel
in the reactor and administrative expenses. Nuclear fuel for Kewaunee is
recorded at its original cost and is amortized to expense based upon the
quantity of heat produced for the generation of electricity. This accumulated
amortization assumes spent nuclear fuel will have no residual value. Estimated
future disposal costs of such fuel are expensed based on kilowatt-hours
generated.
(k) Comprehensive Income -
On January 1, 1998, IEC adopted SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting of comprehensive income
and its components in a full set of general purpose financial statements. SFAS
130 requires reporting a total for comprehensive income which includes, in
addition to net income: (1) unrealized holding gains/losses on securities
classified as available-for-sale under SFAS 115; (2) foreign currency
translation adjustments accounted for under SFAS 52; and
A-34
<PAGE>
(3) minimum pension liability adjustments made pursuant to SFAS 87. WP&L had no
other comprehensive income in the periods presented.
(l) Derivative Financial Instruments -
From time to time, IEC enters into interest rate swaps to reduce exposure
to interest rate fluctuations in connection with short and variable rate
long-term debt issues. The swap's cash flows correspond with those of the
underlying exposures. The related costs associated with these agreements are
amortized over their respective lives as components of interest expense.
IEC, through its consolidated subsidiaries, currently utilizes derivative
financial and commodity instruments to reduce price risk inherent in its gas and
electric activities on a very limited basis and such instruments may not be used
for trading purposes. The costs or benefits associated with any such hedging
activities are recognized when the related purchase or sale transactions are
completed.
(2) MERGER:
On April 21, 1998, IES, WPLH and IPC completed a three-way merger (Merger)
forming IEC. Each outstanding share of common stock of IES, WPLH and IPC was
exchanged for 1.14, 1.0 and 1.11 shares, respectively, of IEC common stock
resulting in the issuance of approximately 77 million shares of IEC common
stock, $.01 par value per share. The outstanding debt and preferred stock
securities of IEC and its subsidiaries were not affected by the Merger. In
connection with the Merger, the number of authorized shares of IEC common stock
was increased to 200,000,000.
The Merger was accounted for as a pooling of interests and the
accompanying Consolidated Financial Statements, along with the related notes,
are presented as if the companies were combined as of the earliest period
presented. As part of the pooling, the accrued pension liability (and offsetting
regulatory asset), of IES was recomputed using the method used by WPLH and IPC
to recognize deferred asset gains. In addition, IPC adopted unbilled revenues as
part of the pooling to conform to the revenue accounting method used by WPLH and
IES. Neither of these adjustments had any income statement impact for the
periods presented in this report.
Operating revenues and net income for the three months ended March 31,
1998, and for the years ended December 31, 1997, and December 31, 1996, were as
follows (in millions):
<TABLE>
<CAPTION>
WPLH IES IPC IEC
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1998
Operating revenues $229.5 $241.7 $85.1 $556.3
Net income $15.8 $8.1 $5.0 $28.9
Year ended December 31, 1997
Operating revenues $978.7 $990.1 $331.8 $2,300.6
Net income $61.3 $56.6 $26.7 $144.6
Year ended December 31, 1996
Operating revenues $932.8 $973.9 $326.1 $2,232.8
Net income $71.9 $58.0 $25.9 $155.8
</TABLE>
The financial results of IES have been restated for all periods presented
to reflect a change in accounting method for Whiting's oil and gas properties
implemented in the third quarter of 1998 from the full cost method to the
successful efforts method. In addition, the operating revenues of WPLH and IES
for the 1998
A-35
<PAGE>
and 1997 periods presented have been adjusted to reflect the financial results
of a joint venture between the two companies as a consolidated subsidiary.
(3) LEASES:
WP&L's operating lease rental expenses for 1998, 1997 and 1996 were $6.4
million, $5.5 million and $5.3 million, respectively. WP&L's future minimum
lease payments by year are as follows (in thousands):
Operating
Year Leases
-------------- -------------
1999 $ 7,772
2000 6,948
2001 5,925
2002 5,303
2003 4,146
Thereafter 26,042
-------------
$ 56,136
=============
(4) UTILITY ACCOUNTS RECEIVABLE:
Utility customer accounts receivable, including unbilled revenues, arise
primarily from the sale of electricity and natural gas. At December 31, 1998,
IEC was serving a diversified base of residential, commercial and industrial
customers and did not have any significant concentrations of credit risk.
Separate accounts receivable financing arrangements exist for two of IEC's
utility subsidiaries, IESU and WP&L, which are similar in most important
aspects. In both cases, the utility subsidiaries sell up to a pre-determined
maximum amount of accounts receivable to a financial institution on a limited
recourse basis, including sales to customers and to other public, municipal and
cooperative utilities, as well as billings to the co-owners of the jointly-owned
electric generating plants that the utility subsidiaries operate. The amounts
are discounted at the then-prevailing market rate and additional administrative
fees are payable according to the activity levels undertaken. All billing and
collection functions remain the responsibility of the respective utilities.
Specifics of the two agreements include (dollars in millions):
IESU WP&L
-------------- -----------
Year agreement expires 1999 1999
Maximum amount of receivables that can be sold $65 $150
Effective 1998 all-in cost 6.02% 5.95%
Average monthly sale of receivables - 1998 $63 $83
- 1997 $65 $92
Receivables sold at December 31, 1998 $55 $75
A-36
<PAGE>
(5) INCOME TAXES:
The components of federal and state income taxes for WP&L for the years
ended December 31 were as follows (in millions):
1998 1997 1996
------------ ----------- ----------
Current tax expense $ 32.2 $ 38.8 $ 47.5
Deferred tax expense (5.6) 4.9 8.2
Amortization of investment tax credits (1.9) (1.9) (1.9)
------------ ----------- ----------
$ 24.7 $ 41.8 $ 53.8
============ =========== ==========
The overall effective income tax rates shown below for the years ended
December 31 were computed by dividing total income tax expense by income before
income taxes.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefits 7.8 5.7 6.1
Amortization of investment tax credits (3.1) (1.7) (1.4)
Adjustment of prior period taxes - (2.1) 0.4
Merger expenses 2.5 0.3 0.4
Amortization of excess deferred taxes (2.5) (1.3) (1.3)
Other items, net 1.3 1.1 0.3
------------ ------------ -------------
Overall effective income tax rate 41.0% 37.0% 39.5%
============ ============ =============
</TABLE>
The accumulated deferred income taxes (assets) and liabilities as set forth
below on the Consolidated Balance Sheets at December 31 arise from the following
temporary differences (in millions):
1998 1997
--------------- --------------
Property related $ 282.7 $ 287.2
Investment tax credit related (22.2) (23.5)
Decommissioning related (17.5) (16.0)
Other 2.5 4.0
--------------- --------------
$ 245.5 $ 251.7
=============== ==============
(6) BENEFIT PLANS:
(a) Pension Plans and Other Postretirement Benefits -
WP&L adopted SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" in 1998. WP&L has a noncontributory, defined benefit
pension plan covering substantially all employees who are subject to a
collective bargaining agreement. The benefits are based upon years of service
and levels of compensation. Effective in 1998, eligible employees of WP&L that
are not subject to a collective bargaining agreement are covered by the Alliant
Energy Cash Balance Pension Plan, a non-contributory defined benefit pension
plan. The projected unit credit actuarial cost method was used to compute
pension cost and the accumulated and projected benefit obligations. WP&L's
policy is to fund the pension cost in an amount that is
A-37
<PAGE>
at least equal to the minimum funding requirements mandated by the Employee
Retirement Income Security Act of 1974 (ERISA), and that does not exceed the
maximum tax deductible amount for the year.
WP&L also provides certain other postretirement benefits to retirees,
including medical benefits for retirees and their spouses (and Medicare Part B
reimbursement for certain retirees) and, in some cases, retiree life insurance.
WP&L's funding of other postretirement benefits generally approximates the
maximum tax deductible amount on an annual basis.
The weighted-average assumptions as of the measurement date of September
30 are as follows:
<TABLE>
<CAPTION>
Qualified Pension Benefits Other Postretirement Benefits
------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996
------------ ----------- ------------ ------------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets 9% 9% 9% 9% 9% 9%
Rate of compensation increase 3.5% 3.5-4.5% 3.5-4.5% 3.5% 3.5% 3.5-4.5%
Medical cost trend on covered charges:
Initial trend range N/A N/A N/A 8% 8% 9%
Ultimate trend range N/A N/A N/A 5% 5% 5%
The components of WP&L's qualified pension benefits and other postretirement
benefits costs are as follows (in millions):
<CAPTION>
Qualified Pension Benefits Other Postretirement Benefits
------------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
---------- ----------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 3.2 $ 4.8 $ 5.1 $ 1.7 $ 1.8 $ 1.8
Interest cost 8.5 13.9 13.6 2.6 3.3 3.4
Expected return on plan assets (12.8) (19.2) (17.9) (1.5) (1.1) (1.0)
Amortization of:
Transition obligation (asset) (2.1) (2.4) (2.4) 1.3 1.5 1.5
Prior service cost 0.5 0.4 0.3 - - -
Actuarial (gain)/loss - - 0.5 (1.1) (0.3) -
---------- ----------- --------- -------- -------- ---------
Total $ (2.7) $ (2.5) $ (0.8) $ 3.0 $ 5.2 $ 5.7
========== =========== ========= ======== ======== =========
</TABLE>
During 1998 and 1997, WP&L recognized an additional $0.6 million and $1.3
million, respectively, of costs in accordance with SFAS 88. The charges were for
severance and early retirement programs in the respective years. In addition,
during 1998 and 1997, WP&L recognized $3.6 million and $1.7 million,
respectively, of curtailment charges relating to WP&L's other postretirement
benefits. The amounts include a December 1998 early retirement program.
The pension benefit cost shown above (and in the following table) for 1998
represents only the pension benefit cost for bargaining unit employees of WP&L
covered under the bargaining unit pension plan that is sponsored by WP&L. The
pension benefit cost for WP&L's non-bargaining employees who are now
participants in other IEC plans was $3.0 million for 1998, including a special
charge of $3.6 for severance and early retirement window programs. In addition,
Alliant Energy Corporate Services provides services to WP&L. The allocated
pension benefit costs associated with these services was $0.6 million for 1998.
The other postretirement benefit cost shown above for each period (and in the
following tables) represents the other
A-38
<PAGE>
postretirement benefit cost for all WP&L employees. The allocated other
postretirement benefit cost associated with Alliant Energy Corporate Services
for WP&L was $0.2 million for 1998.
The assumed medical trend rates are critical assumptions in determining
the service and interest cost and accumulated postretirement benefit obligation
related to postretirement benefit costs. A one percent change in the medical
trend rates for 1998, holding all other assumptions constant, would have the
following effects (in millions):
<TABLE>
<CAPTION>
1 Percent Increase 1 Percent Decrease
------------------- ----------------------
<S> <C> <C>
Effect on total of service and interest cost components $0.3 ($0.3)
Effect on postretirement benefit obligation $1.7 ($1.7)
</TABLE>
A-39
<PAGE>
<TABLE>
<CAPTION>
A reconciliation of the funded status of WP&L's plans to the amounts
recognized on WP&L's Consolidated Balance Sheets at December 31 is presented
below (in millions):
Qualified Pension Benefits Other Postretirement Benefits
---------------------------- -------------------------------
1998 1997 1998 1997
----------- ------------ -------------- ------------
Change in benefit obligation:
<S> <C> <C> <C> <C>
Net benefit obligation at beginning of year $ 205.1 $ 189.6 $ 47.1 $ 46.6
Transfer of obligations to other IEC plans (91.9) - - -
Service cost 3.2 4.8 1.7 1.8
Interest cost 8.5 13.9 2.6 3.3
Plan participants' contributions - - 0.8 1.0
Plan amendments - 4.4 - -
Actuarial (gain) / loss 12.2 2.9 (9.7) (2.7)
Curtailments - - 0.7 0.6
Special termination benefits 0.6 1.3 - -
Gross benefits paid (5.4) (11.8) (2.9) (3.5)
----------- ------------ -------------- ------------
Net benefit obligation at end of year 132.3 205.1 40.3 47.1
----------- ------------ -------------- ------------
Change in plan assets:
Fair value of plan assets at beginning of year 244.4 218.9 16.1 13.8
Transfer of assets to other IEC plans (100.2) - - -
Actual return on plan assets (1.3) 36.2 1.1 1.9
Employer contributions - 1.1 - 2.9
Plan participants' contributions - - 0.8 1.0
Gross benefits paid (5.4) (11.8) (2.9) (3.5)
----------- ------------ -------------- ------------
Fair value of plan assets at end of year 137.5 244.4 15.1 16.1
----------- ------------ -------------- ------------
Funded status at end of year 5.2 39.3 (25.2) (31.0)
Unrecognized net actuarial (gain) / loss 26.0 0.8 (17.0) (8.3)
Unrecognized prior service cost 5.1 7.8 (0.2) (0.3)
Unrecognized net transition obligation (asset) (7.9) (12.0) 17.2 21.0
----------- ------------ -------------- ------------
Net amount recognized at end of year $ 28.4 $ 35.9 $ (25.2) $ (18.6)
=========== ============ ============== ============
Amounts recognized on the Consolidated Balance
Sheets consist of:
Prepaid benefit cost $ 28.4 35.9 $ 0.4 $ 0.3
Accrued benefit cost - - (25.6) (18.9)
----------- ------------ -------------- ------------
Net amount recognized at measurement date 28.4 35.9 (25.2) (18.6)
----------- ------------ -------------- ------------
Contributions paid after 9/30 and prior to 12/31 - - 2.1 -
=========== ============ ============== ============
Net amount recognized at 12/31/98 $ 28.4 $ 35.9 $ (23.1) $ (18.6)
=========== ============ ============== ============
</TABLE>
IEC sponsors a non-qualified pension plan which covers certain current and
former officers. The pension expense allocated to WP&L for this plan was $0.8
million, $0.5 million and $0.5 million in 1998, 1997 and 1996, respectively.
A-40
<PAGE>
WP&L employees also participate in defined contribution pension plans
(401(k) plans) covering substantially all employees. WP&L's contributions to the
plans, which are based on the participants' level of contribution, were $2.4
million, $2.8 million and $1.8 million in 1998, 1997 and 1996, respectively.
The benefit obligation and fair value of plan assets for the
postretirement welfare plans with benefit obligations in excess of plan assets
were $33.4 million and $6.2 million as of September 31, 1998 and $40.6 million
and $7.7 million, respectively, as of the prior measurement date.
(b) Long-Term Equity Incentive Plan -
IEC has a long-term equity incentive plan which permits the grant of
non-qualified stock options, incentive stock options, restricted stock,
performance shares and performance units to key employees. As of December 31,
1998, only non-qualified stock options and performance units had been granted to
key employees. The maximum number of shares of IEC common stock that may be
issued under the plan may not exceed one million. Options are granted at the
fair market value of the shares on the date of grant and vest over three years.
Options outstanding will expire no later than 10 years after the grant date. The
first options were granted in 1995 and became exercisable in January 1998. All
options granted prior to the consummation of the Merger were issued by WPLH. A
summary of the stock option activity for 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ----------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 191,800 $28.98 114,150 $29.56 41,900 $27.50
Options granted 636,451 31.32 77,650 28.12 72,250 30.75
Options exercised (8,900) 28.59 - - - -
Options forfeited (68,267) 30.49 - - - -
---------------------- ---------------------- ---------------------
Outstanding at end of year 751,084 $30.83 191,800 $28.98 114,150 $29.56
====================== ====================== =====================
Exercisable at end of year 38,250 $27.50 - -
</TABLE>
The range of exercise prices for the options outstanding at December 31,
1998 was $27.50 to $31.56.
The value of the options at the grant date using the Black-Scholes
pricing method is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Value of options based on Black-Scholes model $4.93 $3.30 $3.47
Volatility 21% 15% 16%
Risk free interest rate 5.75% 6.43% 5.56%
Expected life 10 years 10 years 10 years
Expected dividend yield 7.0% 7.0% 7.0%
</TABLE>
IEC follows Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees," to account for stock options. No compensation cost
is recognized because the option exercise price is equal to the market price of
the underlying stock on the date of grant. Had compensation cost for the plan
been determined based on the Black-Scholes value at the grant dates for awards
as prescribed by
A-41
<PAGE>
SFAS 123 "Accounting for Stock-Based Compensation," pro forma net income and
earnings per share would have been:
1998 1997 1996
----------- ----------- -----------
Net income (in millions) $93.5 $144.3 $155.5
Earnings per share (basic and diluted) $1.22 $1.89 $2.06
The performance units represent accumulated dividends on the shares
underlying the non-qualified stock options and are expensed over a three-year
vesting period based on the annual dividend rate at the grant date. The
performance unit payout is contingent upon three-year performance criteria. The
cost of this program in 1998, 1997 and 1996 was not significant.
(7) COMMON STOCK:
In rate order UR-110, the PSCW ordered that it must approve the payment of
dividends by WP&L to IEC that are in excess of the level forecasted in the rate
order ($58.3 million), if such dividends would reduce WP&L's average common
equity ratio below 52.00% of total capitalization. The dividends paid by WP&L to
IEC since the rate order was issued have not exceeded the level forecasted in
the rate order.
(8) DEBT:
(a) Short-Term Debt -
Information regarding WP&L's short-term debt is as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
As of year end--
<S> <C> <C> <C>
Commercial paper outstanding - $81.0 $59.5
Notes payable outstanding $50.0 - $10.0
Money pool borrowings $26.8 - -
Discount rates on commercial paper N/A 5.82-5.90% 5.35-5.65%
Interest rates on notes payable 5.44% N/A 5.95%
Interest rate on money pool borrowings 5.17% N/A N/A
For the year ended--
Average amount of short-term debt
(based on daily outstanding balances) $48.4 $49.2 $33.9
Average interest rate on short-term debt 5.55% 5.64% 5.86%
</TABLE>
(b) Long-Term Debt -
Substantially all of WP&L's utility plant is secured by its First Mortgage
Bonds. WP&L also maintains an unsecured indenture relating to the issuance of
debt securities.
Debt maturities (excluding periodic sinking fund requirements, which will
not require additional cash expenditures) for 1999 to 2003 are $0, $1.9 million,
$0, $0 and $0, respectively.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (MD&A) for a further discussion of WP&L's debt.
A-42
<PAGE>
(9) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of WP&L's financial instruments:
o Current Assets and Current Liabilities - The carrying amount
approximates fair value because of the short maturity of such
financial instruments.
o Nuclear Decommissioning Trust Funds - The carrying amount represents
the fair value of these trust funds, as reported by the trustee. The
balance of the "Nuclear decommissioning trust funds" as shown on the
Consolidated Balance Sheets included $18.7 million and $16.4 million
of net unrealized gains at December 31, 1998 and December 31, 1997,
respectively, on the investments held in the trust funds. The
accumulated reserve for decommissioning costs was adjusted by a
corresponding amount.
o Cumulative Preferred Stock - Based upon the market yield of similar
securities and quoted market prices.
o Long-Term Debt - Based upon the market yield of similar securities
and quoted market prices.
The following table presents the carrying amount and estimated fair value
of certain financial instruments for WP&L as of December 31 (in millions):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Nuclear decommissioning trust funds $ 134 $ 134 $ 112 $ 112
Cumulative preferred stock 60 55 60 52
Long-term debt, including current portion 472 513 420 449
</TABLE>
Since WP&L is subject to regulation, any gains or losses related to the
difference between the carrying amount and the fair value of its financial
instruments may not be realized by WP&L's parent.
(10) DERIVATIVE FINANCIAL INSTRUMENTS:
IEC, through its consolidated subsidiaries, has historically had only
limited involvement with derivative financial instruments and has not used them
for speculative purposes. They have been used to manage well-defined interest
rate and commodity price risks.
(a) Interest Rate Swaps and Forward Contracts -
At December 31, 1998, Alliant Energy Resources had two interest rate swap
agreements outstanding (both expiring in April 2000 with the bank having a
1-year extension option for one of the agreements) each with a notional amount
of $100 million. WP&L also had two interest rate swap agreements outstanding
(both expiring in 2000) at December 31, 1998, and the combined notional amount
of the two agreements was $30 million. These agreements were entered into in
order to reduce the impact of changes in variable interest rates by converting
variable rate borrowings into fixed rate borrowings thus all agreements require
Alliant Energy Resources and WP&L to pay a fixed rate and receive a variable
rate. Had Alliant Energy Resources and WP&L terminated the agreements at
December 31, 1998, they would have had to make payments of $2.9 million and $0.3
million, respectively.
A-43
<PAGE>
On September 14, 1998, WP&L entered into an interest rate forward contract
related to the anticipated issuance of $60 million of debentures. The securities
were issued on October 30, 1998, and the forward contract was settled, which
resulted in a cash payment of $1.5 million by WP&L.
(b) Gas Commodities Instruments -
WP&L uses gas commodity swaps to reduce the impact of price fluctuations
on gas purchased and injected into storage during the summer months and
withdrawn and sold at current market prices during the winter months. The
notional amount of gas commodity swaps outstanding as of December 31, 1998, was
5.8 million dekatherms. Had WP&L terminated all of the agreements existing at
December 31, 1998, it would have realized an estimated gain of $0.8 million.
(11) COMMITMENTS AND CONTINGENCIES:
(a) Construction and Acquisition Program -
Plans for WP&L's construction and acquisition program can be found
elsewhere in this report in the "Liquidity and Capital Resources - Capital
Requirements" section of MD&A.
(b) Purchased-Power, Coal and Natural Gas Contracts -
WP&L has entered into purchased-power capacity and coal contracts and its
minimum commitments are as follows (dollars in millions, megawatt-hours (MWHs)
and tons in thousands):
Coal
(including transportation
Purchased-Power costs)
--------------------------- --------------------------------
Dollars MWHs Dollars Tons
----------- ------------ ------------- ---------------
1999 $ 62.3 1,290 $ 22.2 6,124
2000 66.0 1,509 10.1 2,986
2001 52.4 864 8.4 1,600
2002 31.8 219 4.4 750
2003 24.3 219 - -
WP&L is in the process of negotiating several new coal contracts. In
addition, it expects to supplement its coal contracts with spot market purchases
to fulfill its future fossil fuel needs.
WP&L also has various natural gas supply, transportation and storage
contracts outstanding. The minimum dekatherm commitments, in millions, for
1999-2003 are 70.3, 59.7, 45.4, 31.5 and 24.5, respectively. The minimum dollar
commitments for 1999-2003, in millions, are $42.8, $32.5, $27.1, $24.7 and
$17.0, respectively. The gas supply commitments are all index-based. WP&L
expects to supplement its natural gas supply with spot market purchases as
needed.
(c) Information Technology Services -
In May 1998, IEC entered into an agreement, expiring in 2004, with
Electronic Data Systems Corporation (EDS) for information technology services.
WP&L's anticipated operating and capital expenditures under the agreement for
1999 are estimated to total approximately $2.8 million. Future costs
A-44
<PAGE>
under the agreement are variable and are dependent upon WP&L's level of usage of
technological services from EDS.
(d) Financial Guarantees and Commitments -
IEC has financial guarantees, which were generally issued to support
third-party borrowing arrangements and similar transactions, amounting to $18.1
million outstanding at December 31, 1998. Such guarantees are not reflected in
the consolidated financial statements. Management believes that the likelihood
of IEC having to make any material cash payments under these agreements is
remote.
In addition, as part of IEC's electricity trading joint venture with
Cargill Incorporated (Cargill), Cargill has made guarantees to certain
counterparties regarding the performance of contracts entered into by the joint
venture. Guarantees of approximately $50 million have been issued of which
approximately $5 million were outstanding at December 31, 1998. Under the terms
of the joint venture agreement, any payments required under the guarantees would
be shared by IEC and Cargill on a 50/50 basis to the extent the joint venture is
not able to reimburse the guarantor for payments made under the guarantee.
As of December 31, 1998, Alliant Energy Resources had extended commitments
to provide $7.2 million in nonrecourse, fixed rate, permanent financing to
developers which are secured by affordable housing properties. IEC anticipates
other lenders will ultimately finance these properties.
(e) Nuclear Insurance Programs -
Public liability for nuclear accidents is governed by the Price Anderson
Act of 1988, which sets a statutory limit of $9.8 billion for liability to the
public for a single nuclear power plant incident and requires nuclear power
plant operators to provide financial protection for this amount. As required,
IESU provides this financial protection for a nuclear incident at DAEC through a
combination of liability insurance ($200 million) and industry-wide
retrospective payment plans ($9.6 billion). Under the industry-wide plan, each
operating licensed nuclear reactor in the United States is subject to an
assessment in the event of a nuclear incident at any nuclear plant in the United
States. The owners of DAEC could be assessed a maximum of $88.1 million per
nuclear incident, with a maximum of $10 million per incident per year (of which
IESU's 70 % ownership portion would be approximately $61.7 million and $7
million, respectively) if losses relating to the incident exceeded $200 million.
These limits are subject to adjustments for changes in the number of
participants and inflation in future years. On a similar note, WP&L, as a 41%
owner of Kewaunee, is subject to an overall assessment of approximately $36.1
million per incident, not to exceed $4.1 million payable in any given year.
IESU and WP&L are members of Nuclear Electric Insurance Limited (NEIL).
NEIL provides $1.9 billion of insurance coverage for IESU and $1.8 billion for
WP&L on certain property losses for property damage, decontamination and
premature decommissioning. The proceeds from such insurance, however, must first
be used for reactor stabilization and site decontamination before they can be
used for plant repair and premature decommissioning. NEIL also provides separate
coverage for additional expense incurred during certain outages. Owners of
nuclear generating stations insured through NEIL are subject to retroactive
premium adjustments if losses exceed accumulated reserve funds. NEIL's
accumulated reserve funds are currently sufficient to more than cover its
exposure in the event of a single incident under the primary and excess property
damage or additional expense coverages. However, IESU could be assessed annually
a maximum of $1.9 million for NEIL primary property, $3.5 million for NEIL
excess property and $0.7 million for NEIL additional expenses if losses exceed
the accumulated reserve funds. WP&L could be assessed
A-45
<PAGE>
annually a maximum of $1.1 million for NEIL primary property, $2.0 million for
NEIL excess property and $0.6 million for NEIL additional expense coverage. IESU
and WP&L are not aware of any losses that they believe are likely to result in
an assessment.
In the unlikely event of a catastrophic loss at Kewaunee or DAEC, the
amount of insurance available may not be adequate to cover property damage,
decontamination and premature decommissioning. Uninsured losses, to the extent
not recovered through rates, would be borne by IEC and could have a material
adverse effect on IEC's financial position and results of operations.
(f) Environmental Liabilities -
WP&L has recorded environmental liabilities of approximately $12.3 million
on its Consolidated Balance Sheets at December 31, 1998. IEC's significant
environmental liabilities are discussed below.
Manufactured Gas Plant Sites
IESU, WP&L and IPC all have current or previous ownership interests in
properties previously associated with the production of gas at MGP sites for
which they may be liable for investigation, remediation and monitoring costs
relating to the sites. A summary of information relating to the sites is as
follows:
<TABLE>
<CAPTION>
IESU WP&L IPC
---- ---- ----
<S> <C> <C> <C>
Number of known sites for which liability may exist 34 14 9
Liability recorded at December 31, 1998 (millions) $26.6 $7.7 $17.5
Regulatory asset recorded at December 31, 1998 (millions) $26.6 $14.1 $17.5
</TABLE>
The companies are working pursuant to the requirements of various federal
and state agencies to investigate, mitigate, prevent and remediate, where
necessary, the environmental impacts to property, including natural resources,
at and around the sites in order to protect public health and the environment.
The companies each believe that they have completed the remediation at various
sites, although they are still in the process of obtaining final approval from
the applicable environmental agencies for some of these sites.
Each company records environmental liabilities based upon periodic
studies, most recently updated in the fourth quarter of 1998, related to the MGP
sites. Such amounts are based on the best current estimate of the remaining
amount to be incurred for investigation, remediation and monitoring costs for
those sites where the investigation process has been or is substantially
completed, and the minimum of the estimated cost range for those sites where the
investigation is in its earlier stages. It is possible that future cost
estimates will be greater than current estimates as the investigation process
proceeds and as additional facts become known. The amounts recognized as
liabilities are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation obligations
are not discounted to their fair value.
Management currently estimates the range of remaining costs to be incurred
for the investigation, remediation and monitoring of all IEC sites to be
approximately $35 million to $66 million. IESU, WP&L and IPC currently estimate
their share of the remaining costs to be incurred to be approximately $17
million to $36 million, $5 million to $9 million and $13 million to $21 million,
respectively.
Under the current rate making treatment approved by the PSCW, the MGP
expenditures of WP&L, net of any insurance proceeds, are deferred and collected
from gas customers over a five-year period after new rates are implemented. The
MPUC also allows the deferral of MGP-related costs applicable to the Minnesota
sites and IPC has been successful in obtaining approval to recover such costs in
rates in Minnesota. While the
A-46
<PAGE>
IUB does not allow for the deferral of MGP-related costs, it has permitted
utilities to recover prudently incurred costs. As a result, regulatory assets
have been recorded by each company which reflect the probable future rate
recovery, where applicable. Considering the current rate treatment, and assuming
no material change therein, IESU, WP&L and IPC believe that the clean-up costs
incurred for these MGP sites will not have a material adverse effect on their
respective financial positions or results of operations.
In April 1996, IESU filed a lawsuit against certain of its insurance
carriers seeking reimbursement for its MGP-related costs. Settlement has been
reached with all its carriers and all issues have been resolved. In 1994, IPC
filed a lawsuit against certain of its insurance carriers to recover its
MGP-related costs. Settlements have been reached with eight carriers. IPC is
continuing its pursuit of additional recoveries but is unable to predict the
amount of any additional recoveries they may realize. Amounts received from
insurance carriers are being deferred by IESU and IPC pending a determination of
the regulatory treatment of such recoveries. WP&L has settled with all of its
carriers.
National Energy Policy Act of 1992
The National Energy Policy Act of 1992 requires owners of nuclear power
plants to pay a special assessment into a "Uranium Enrichment Decontamination
and Decommissioning Fund." The assessment is based upon prior nuclear fuel
purchases. IESU is recovering the costs associated with this assessment through
its electric fuel adjustment clauses over the period the costs are assessed.
IESU's 70% share of the future assessment at December 31, 1998 was $7.8 million
and has been recorded as a liability with a related regulatory asset for the
unrecovered amount. WP&L had a regulatory asset and a liability of $5.4 million
and $4.6 million recorded at December 31, 1998, respectively. IEC continues to
pursue relief from this assessment through litigation.
(g) Spent Nuclear Fuel -
The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S.
Department of Energy (DOE) to establish a facility for the ultimate disposition
of high level waste and spent nuclear fuel and authorized the DOE to enter into
contracts with parties for the disposal of such material beginning in January
1998. IESU and WP&L entered into such contracts and have made the agreed
payments to the Nuclear Waste Fund held by the U.S. Treasury. The companies were
subsequently notified by the DOE that it was not able to begin acceptance of
spent nuclear fuel by the January 31, 1998 deadline. Furthermore, the DOE has
experienced significant delays in its efforts and material acceptance is now
expected to occur no earlier than 2010 with the possibility of further delay
being likely. IEC has participated in several litigation proceedings against the
DOE on this issue and the respective courts have affirmed the DOE's
responsibility for spent nuclear fuel acceptance. IEC is evaluating its options
for recovery of damages due to the DOE's delay in accepting spent nuclear fuel.
The Nuclear Waste Policy Act of 1982 assigns responsibility for interim
storage of spent nuclear fuel to generators of such spent nuclear fuel, such as
IESU and WP&L. In accordance with this responsibility, IESU and WP&L have been
storing spent nuclear fuel on site at DAEC and Kewaunee, respectively, since
plant operations began. IESU will have to increase its spent fuel storage
capacity at DAEC to store all of the spent fuel that will be produced before the
current license expires in 2014. To provide assurance that both the operating
and post-shutdown storage needs are satisfied, construction of a dry cask
modular facility is being contemplated. With minor modifications, Kewaunee would
have sufficient fuel storage capacity to store all of the fuel it will generate
through the end of the license life in 2013. No decisions have been made
concerning post-shutdown storage needs. Legislation is being considered on the
federal level that would, among other
A-47
<PAGE>
provisions, expand the DOE's permanent spent nuclear fuel storage to include
interim storage for spent nuclear fuel as early as 2002. This legislation has
been submitted in the U.S. House. The prospects for passage by the U.S.
Congress, and subsequent successful implementation by the DOE, are uncertain at
this time.
(h) Decommissioning of DAEC and Kewaunee -
Pursuant to the most recent electric rate case order, the IUB and PSCW
allow IESU and WP&L to recover $6 million and $16 million annually for their
share of the cost to decommission DAEC and Kewaunee, respectively.
Decommissioning expense is included in "Depreciation and amortization" in the
Consolidated Statements of Income and the cumulative amount is included in
"Accumulated depreciation" on the Consolidated Balance Sheets to the extent
recovered through rates.
Additional information relating to the decommissioning of DAEC and
Kewaunee includes (dollars in millions):
<TABLE>
<CAPTION>
DAEC Kewaunee
------------------------- --------------------------
<S> <C> <C>
Assumptions relating to current rate recovery figures:
IEC's share of estimated decommissioning cost $252.8 $189.7
Year dollars in 1993 1998
Method to develop estimate NRC minimum formula Site-specific study
Annual inflation rate 4.91% 5.83%
Decommissioning method Prompt dismantling and Prompt dismantling and
removal removal
Year decommissioning to commence 2014 2013
Average after-tax return on external investments 6.82% 6.21%
External trust fund balance at December 31, 1998 $91.7 $134.1
Internal reserve at December 31, 1998 $21.7 -
After-tax earnings on external trust funds in 1998 $2.7 $5.2
</TABLE>
The rate recovery figures for DAEC only included an inflation estimate
through 1997. Both IESU and WP&L are funding all rate recoveries for
decommissioning into external trust funds and funding on a tax-qualified basis
to the extent possible. All of the rate recovery assumptions are subject to
change in future regulatory proceedings. In accordance with their respective
regulatory requirements, IESU and WP&L record the earnings on the external trust
funds as interest income with a corresponding entry to interest expense at IESU
and to depreciation expense at WP&L. The earnings accumulate in the external
trust fund balances and in accumulated depreciation on utility plant.
(i) Legal Proceedings -
IEC is involved in legal and administrative proceedings before various
courts and agencies with respect to matters arising in the ordinary course of
business. Although unable to predict the outcome of these matters,
A-48
<PAGE>
IEC believes that appropriate reserves have been established and final
disposition of these actions will not have a material adverse effect on its
financial position or results of operations.
(12) JOINTLY-OWNED ELECTRIC UTILITY PLANT:
Under joint ownership agreements with other Iowa and Wisconsin utilities, IESU,
WP&L and IPC have undivided ownership interests in jointly-owned electric
generating stations and related transmission facilities. Each of the respective
owners is responsible for the financing of its portion of the construction
costs. Kilowatt-hour generation and operating expenses are divided on the same
basis as ownership with each owner reflecting its respective costs in its
Consolidated Statements of Income. Information relative to IESU's, WP&L's and
IPC's ownership interest in these facilities at December 31, 1998 is as follows
(dollars in millions):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ------------------------------
Accumulated Accumulated
Plant Provision Plant Provision
Ownership In-service MW Plant in for in for
Interest % Date Capacity Service Depreciation CWIP Service Depreciation CWIP
- - -------------------- ----------- --------- --------- -- --------- ------------- -------- -- -------- ------------- -------
IESU
Coal:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ottumwa Unit 1 48.0 1981 716 $193.1 $102.7 $0.8 $191.6 $96.6 $-
Neal Unit 3 28.0 1975 515 59.0 32.4 0.1 60.8 30.6 0.1
Nuclear:
DAEC 70.0 1974 520 507.1 247.2 1.4 500.6 230.8 2.8
--------- ------------- -------- -------- ------------- -------
Total IESU $759.2 $382.3 $2.3 $753.0 $358.0 $2.9
WP&L
Coal:
Columbia Energy 1975 &
Center 46.2 1978 1,023 $161.5 $93.8 $1.4 $161.4 $89.2 $0.8
Edgewater Unit 4 68.2 1969 330 52.4 30.8 0.4 51.5 29.5 1.0
Edgewater Unit 5 75.0 1985 380 229.0 85.9 0.2 229.4 79.8 0.1
Nuclear:
Kewaunee Nuclear
Power Plant 41.0 1974 535 132.2 93.7 6.4 132.0 86.6 0.3
--------- ------------- ------- --------- ------------ -------
Total WP&L $575.1 $304.2 $8.4 $574.3 $285.1 $2.2
IPC
Coal:
Neal Unit 4 21.5 1979 640 $82.1 $48.4 $1.5 $82.2 $45.8 $-
Louisa Unit 1 4.0 1983 738 24.7 11.7 - 24.7 10.9 -
--------- ------------- ------- --------- ------------ -------
Total IPC $106.8 $60.1 $1.5 $106.9 $56.7 $-
--------- ------------- ------- --------- ------------ -------
Total IEC $1,441.1 $746.6 $12.2 $1,434.2 $699.8 $5.1
========= ============= ======= ========= ============ =======
</TABLE>
A-49
<PAGE>
(13) SEGMENTS OF BUSINESS:
In 1998, IEC adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." IEC's principal business segments are:
o Regulated domestic utilities - consists of IEC's three regulated
utility operating companies (IESU, WP&L, and IPC) serving customers
in Iowa, Wisconsin, Minnesota and Illinois. The regulated domestic
utility business is broken down into three segments which are: 1)
electric operations; 2) gas operations; and 3) other, which includes
the water and steam businesses as well as the unallocated portions
of the utility business.
o Nonregulated businesses - represents the operations of Alliant
Energy Resources and its subsidiaries. This includes the company's
domestic and international energy products and services businesses;
industrial services, which includes environmental, engineering and
transportation services; investments in affordable housing
initiatives; and investments in various other strategic initiatives.
o Other - includes the operations of IEC's parent company and Alliant
Energy Corporate Services, as well as any reconciling/eliminating
entries.
Intersegment revenues were not material to IEC's operations and there was
no single customer whose revenues exceeded 10% or more of IEC's consolidated
revenues.
A-50
<PAGE>
Certain financial information relating to IEC's significant business segments
and products and services is presented below:
<TABLE>
<CAPTION>
Regulated Domestic Utilities Nonregulated IEC
-----------------------------------------------
Electric Gas Other Total Businesses Other Consolidated
- - -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1998
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $1,567,442 $295,590 $31,235 $1,894,267 $238,676 ($2,069) $2,130,874
Depreciation and
amortization expense 219,364 23,683 2,623 245,670 33,835 - 279,505
Operating income (loss) 271,511 16,027 5,598 293,136 (8,608) (1,226) 283,302
Interest expense, net 96,951 96,951 23,298 2,302 122,551
Preferred and preference
dividends 6,699 6,699 - - 6,699
Net (income) loss from equity
method subsidiaries (858) (858) 2,197 - 1,339
Miscellaneous, net (other than
equity income/loss) 3,545 3,545 (7,973) 2,353 (2,075)
Income tax expense (benefit) 77,257 77,257 (17,232) (1,912) 58,113
Net income (loss) 109,542 109,542 (8,898) (3,969) 96,675
Total assets 3,202,837 458,832 469,822 4,131,491 869,261 (41,415) 4,959,337
Investments in equity method
subsidiaries 5,189 5,189 49,446 - 54,635
Construction and acquisition
expenditures 233,638 33,200 2,295 269,133 102,925 - 372,058
1997
Operating revenues $1,515,753 $393,907 $30,882 $1,940,542 $361,961 ($1,876) $2,300,627
Depreciation and amortization
expense 201,742 21,553 2,432 225,727 33,936 - 259,663
Operating income (loss) 316,880 29,330 2,169 348,379 (6,818) (5,178) 336,383
Interest expense, net 95,734 95,734 23,197 (1,642) 117,289
Preferred and preference
dividends 6,693 6,693 - - 6,693
Net (income) loss from equity
method subsidiaries (32) (32) 849 - 817
Miscellaneous, net (other than
equity income/loss) (8,257) (8,257) (8,282) 1,812 (14,727)
Income tax expense (benefit) 101,739 101,739 (18,616) (1,390) 81,733
Net income (loss) 152,502 152,502 (3,966) (3,958) 144,578
Total assets 3,142,910 448,845 485,225 4,076,980 838,504 8,066 4,923,550
Investments in equity method
subsidiaries 5,694 5,694 39,175 - 44,869
Construction and acquisition
expenditures 217,023 33,984 5,753 256,760 71,280 - 328,040
</TABLE>
A-51
<PAGE>
<TABLE>
<CAPTION>
Regulated Domestic Utilities
----------------------------------------------- Nonregulated IEC
Electric Gas Other Total Businesses Other Consolidated
- - -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1996
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $1,440,375 $375,955 $24,008 $1,840,338 $393,963 ($1,461) $2,232,840
Depreciation and amortization
expense 180,989 18,124 1,891 201,004 31,359 - 232,363
Operating income (loss) 326,370 40,521 7,001 373,892 (6,666) (1,787) 365,439
Interest expense, net 86,084 86,084 17,859 3,804 107,747
Preferred and preference
dividends 6,687 6,687 - - 6,687
Net (income) loss from equity
method subsidiaries (372) (372) 18 - (354)
Miscellaneous, net (other than
equity income/loss) (1,390) (1,390) (9,968) (131) (11,489)
Income tax expense (benefit) 115,033 115,033 (12,724) 3,451 105,760
Net income (loss) from
continuing operations 167,850 167,850 (1,851) (8,911) 157,088
Discontinued operations - - (1,297) - (1,297)
Net income (loss) 167,850 167,850 (3,148) (8,911) 155,791
Total assets 3,122,761 511,110 452,885 4,086,756 546,690 6,380 4,639,826
Investments in equity method
subsidiaries 6,110 6,110 11,163 - 17,273
Construction and acquisition
expenditures 247,323 34,738 15,135 297,196 115,078 - 412,274
</TABLE>
Products and Services
<TABLE>
<CAPTION>
Revenues
----------------------------------------------------------------------------------------------------------------------
Regulated Domestic Utilities Nonregulated Businesses
------------------------------------ ---------------------------------------------------------------------------------
Environmental Transportation, Total
and Engineering Oil and Nonregulated Rents and Nonregulated
Year Electric Gas Other Services Production Energy Other Businesses
- - -------------------------------------------- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $1,567,442 $295,590 $31,235 $72,616 $64,622 $40,536 $60,902 $238,676
1997 1,515,753 393,907 30,882 78,105 68,922 151,128 63,806 361,961
1996 1,440,375 375,955 24,008 84,859 65,724 192,217 51,163 393,963
</TABLE>
(14) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA - WP&L:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- --------------- ----------------- ------------------
(in thousands)
1998*
<S> <C> <C> <C> <C>
Operating revenues $202,803 $172,509 $176,130 $180,006
Operating income 33,651 10,828 29,696 18,475
Net income (loss) 17,598 (1,233) 12,677 6,532
Earnings available for common stock 16,770 (2,061) 11,850 5,705
* Earnings for 1998 were impacted by the recording of approximately $3
million, $11 million, $2 million and $1 million of pre-tax merger-related
expenses in the first, second, third and fourth quarters, respectively.
A-52
<PAGE>
<CAPTION>
------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- --------------- ----------------- ------------------
(in thousands)
1997
<S> <C> <C> <C> <C>
Operating revenues $231,005 $176,065 $180,192 $207,455
Operating income 45,413 20,882 34,158 38,656
Net income 23,351 11,044 15,236 21,603
Earnings available for common stock 22,523 10,216 14,409 20,776
</TABLE>
SHAREOWNER INFORMATION
Market Information
The 4.50% series of preferred stock is listed on the American Stock
Exchange, with the trading symbol of Wis Pr. All other series of preferred stock
are traded on the over-the-counter market. Seventy-seven percent of the
Company's individual preferred shareowners are Wisconsin residents.
Dividend Information
Preferred stock dividends paid per share for each quarter during 1998 were
as follows:
Series Dividend Series Dividend
------ -------- ------ --------
4.40% $1.1000 4.96% $ 1.2400
4.50% $1.1250 6.20% $ 1.5500
4.76% $1.1900 6.50% $0.40625
4.80% $1.2000
As authorized by the Wisconsin Power and Light Company Board of Directors,
preferred stock dividend record and payment dates normally are as follows:
Record Date Payment Date
----------- ------------
February 26 March 15
May 28 June 15
August 31 September 15
November 30 December 15
Stock Transfer Agent and Registrar
Interstate Energy Corporation
Shareowner Services
P.O. Box 2568
Madison, WI 53701-2568
Form 10-K Information
A copy of Form 10-K as filed with the Securities and Exchange Commission
will be provided without charge upon request. Requests may be directed to
Shareowner Services at the above address.
A-53
<PAGE>
EXECUTIVE OFFICERS OF WP&L
Erroll B. Davis, Jr., 54, was elected Chief Executive Officer effective
April 1998. He previously served as President and Chief Executive Officer of
WP&L since 1988 and has been a board member of WP&L since 1984. Mr. Davis is
also an officer of IEC and IESU.
William D. Harvey, 49, was elected President effective April 1998. He
previously served as Senior Vice President since 1993 at WP&L. Mr. Harvey is
also an officer of IEC and IESU.
Eliot G. Protsch, 45, was elected Executive Vice President-Energy Delivery
effective October 1998. He previously served as Senior Vice President from 1993
to 1998 at WP&L. Mr. Protsch is also an officer of IEC and IESU.
Barbara J. Swan, 47, was elected Executive Vice President and General
Counsel effective October 1998. She previously served as Vice President-General
Counsel from 1994 to 1998 at WP&L. Ms. Swan is also an officer of IEC and IESU.
Thomas M. Walker, 51, was elected Executive Vice President and Chief
Financial Officer effective October 1998. Mr. Walker is also on officer of IEC
and IESU
Pamela J. Wegner, 51, was elected Executive Vice President-Corporate
Services effective October 1998. She previously served as Vice
President-Information Services and Administration from 1994 to 1998 at WP&L. Ms.
Wegner is also an officer of IEC and IESU.
Dale R. Sharp, 58, was elected Senior Vice President-Engineering and
Standards effective October 1998. He previously served as Vice
President-Engineering since 1996, Vice President-Power Production from 1995 to
1996 and Director-Electrical Engineering from 1980 to 1995 at IPC. Mr. Sharp is
also an officer of IESU.
Daniel A. Doyle, 40, was elected Vice President-Manufacturing and Energy
Portfolio Services effective October 1998. He previously served as Vice
President-Fossil Plants since April 1998, Vice President-Power Production from
1996 to 1998 and Vice President-Finance, Controller and Treasurer from 1994 to
1996 at WP&L. Mr. Doyle is also an officer of IESU.
John E. Ebright, 55, was elected Vice President-Controller effective April
1998. Mr. Ebright is also an officer of IEC and IESU.
Dean E. Ekstrom, 51, was elected Vice President-Sales and Services
effective April 1998. Mr. Ekstrom is also an officer of IESU.
John F. Franz, Jr., 59, was elected Vice President-Nuclear effective April
1998. Mr. Franz is also an officer of IESU.
Edward M. Gleason, 58, was elected Vice President-Treasurer and Corporate
Secretary effective April 1998. He previously served as Controller, Treasurer,
and Corporate Secretary of WP&L since 1996 and Corporate Secretary of WP&L from
1993 to 1996. Mr. Gleason is also an officer of IEC and IESU.
Dundeana K. Langer, 40, was elected Vice President-Customer Services
effective October 1998. Ms. Langer is also an officer of IESU.
Daniel L. Mineck, 50, was elected Vice President-Performance Engineering
and Environmental effective April 1998. Mr. Mineck is also an officer of IESU.
A-54
<PAGE>
Kim K. Zuhlke, 45, was elected Vice President-Customer Operations
effective April 1998. He previously served as Vice President-Customer Services
and Sales since 1993 at WP&L. Mr. Zuhlke is also an officer of IESU.
David L. Wilson, 52, was elected Assistant Vice President-Nuclear
effective April 1998. Mr. Wilson is also an officer of IESU.
Linda J. Wentzel, 50, was appointed Assistant Corporate Secretary
effective May 1998. She previously served as Executive Administrative Assistant
since 1995 and Administrative Assistant from 1992 to 1995 at IEC. Ms. Wentzel is
also an officer of IEC and IESU.
Enrique Bacalao, 49, was appointed Assistant Treasurer effective November
1998. Prior to joining WP&L, he was Vice President, Corporate Banking at the
Chicago Branch from 1995 to 1998, and Manager and Head of the Customer Dealing
Group at the London Branch from 1993 to 1995, of The Industrial Bank of Japan,
Limited. Mr. Bacalao is also an officer of IEC and IESU.
Steven F. Price, 46, was elected Assistant Treasurer effective April 1998.
He previously served as Assistant Corporate Secretary since 1992 at IEC and WP&L
and as Assistant Treasurer since 1992 at IEC. Mr. Price is also an officer of
IESU.
Robert A. Rusch, 36, was elected Assistant Treasurer effective April 1998.
He previously served as Assistant Treasurer since 1995 and Financial Analyst
from 1989 to 1995 at WP&L. Mr. Rusch is also an officer of IESU.
NOTE: None of the executive officers listed above is related to any member
of the Board of Directors or nominee for director or any other executive
officer.
Mr. Davis has employment agreements with IEC pursuant to which his term of
office is established. All other executive officers have no definite terms of
office and serve at the pleasure of the Board of Directors.
A-55
<PAGE>
Wisconsin Power & Light P.O. Box 2568
Madison, WI 53701-2568
ANNUAL MEETING OF SHAREOWNERS - MAY 26, 1999
The undersigned appoints William D. Harvey and Edward M. Gleason, or
either of them, attorneys and proxies, with the power of substitution to vote
all shares of stock of Wisconsin Power and Light Company held of record in the
name of the undersigned at the close of business on April 7, 1999, at the 1999
Annual Meeting of Shareowners of the Company to be held in room 1A at the
General Office, 222 W. Washington Avenue, Madison, Wisconsin, on May 26, 1999,
at 1:00 p.m., and at all adjournments thereof, upon all matters that properly
come before the meeting, including the matters described in the Company's Notice
of Annual Meeting of Shareowners dated April 12, 1999, and accompanying Proxy
Statement, subject to any directions indicated on the reverse side of this card.
This proxy is solicited on behalf of the Board of Directors of Wisconsin Power
and Light Company. This proxy when properly executed will be voted in the manner
directed herein by the shareowner. If no direction is made, the proxy will be
voted "FOR" the election of all listed nominees.
(continued and to be signed and dated on the other side)
<PAGE>
WisconsinPower & Light
PROXY CARD
Indicate your vote by an (x) in the appropriate boxes.
1. ELECTION OF DIRECTORS:
Nominees for terms Withhold For All
ending in 2002: For All For All Except(*)
[ ] [ ] [ ]
Alan B. Arends
Rockne G. Flowers
Katharine C. Lyall
Robert D. Ray
Anthony R. Weiler
Please date and sign your name(s) exactly as shown above
and return this proxy card in the enclosed envelope.
________________________ DATED: ________________ (*) TO WITHHOLD
AUTHORITY TO VOTE
________________________ DATED: ________________ FOR ANY INDIVIDUAL
Signature(s) NOMINEE, STRIKE A
LINE THROUGH THE
NOMINEE'S NAME IN
THE LIST ABOVE AND
MARK AN (x) ON THE
"For All Except"
BOX.
IMPORTANT: When signing as attorney,
executor, administrator, trustee or guardian,
please give your full title as such. In the
case of JOINT HOLDERS, all should sign.
Please FOLD here and DETACH Proxy Card
To All Wisconsin Power and Light Company Shareowners:
You are invited to attend the Annual Meeting of Shareowners on Wednesday, May
26, 1999, at 1:00 p.m. in the General Office, in room 1A at 222 West Washington
Ave., Madison, Wisconsin.
Above is your 1999 Wisconsin Power and Light Company Proxy Card. Please read
both sides of the Proxy Card, note your election, sign and date it. Detach and
return it promptly in the self-addressed enclosed envelope. Whether or not you
are attending, we encourage you to vote your shares.
SHAREOWNER INFORMATION NUMBERS
Local (Madison) 1-608-252-3110
All Other Areas 1-800-296-5343
