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File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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IES Industries Inc. Interstate Power Company WPL Holdings, Inc.
200 First Street S.E. 1000 Main Street 222 West Washington Avenue
Cedar Rapids, Iowa 52401 Dubuque, Iowa 52004 Madison, Wisconsin 53703
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(Name of companies filing this statement
and address of principal executive offices)
None
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(Name of top registered holding company, parent of each applicant or declarant)
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Lee Liu Wayne H. Stoppelmoor Erroll B. Davis, Jr.
Chairman of the Board, President Chairman of the Board, President President and
& Chief Executive Officer and Chief Executive Officer Chief Executive Officer
IES Industries Inc. Interstate Power Company WPL Holdings, Inc.
200 First Street S.E. 1000 Main Street 222 West Washington Avenue
Cedar Rapids, Iowa 52401 Dubuque, Iowa 52004-0769 Madison, Wisconsin 53703-0192
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(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
Benjamin F. Garmer, III, Esq. Kent Ragsdale, Esq.
Foley & Lardner Staff Counsel
777 East Wisconsin Avenue Interstate Power Company
Milwaukee, Wisconsin 53202 1000 Main Street
P.O. Box 769
Dubuque, Iowa 52004-0769
Barbara J. Swan, Esq. Stephen W. Southwick, Esq.
Vice President and General Counsel Vice President, General
Wisconsin Power and Light Company Counsel & Secretary
222 West Washington Avenue IES Industries Inc.
Madison, Wisconsin 53703-0192 200 First Street S.E.
Cedar Rapids, Iowa 52401
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TABLE OF CONTENTS
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Item 1. Description of Proposed Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. General Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Overview of the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
B. Description of the Parties to the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1. General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
a. WPLH (to be renamed Interstate Energy Corporation) and its Subsidiaries . . . . . . . . . 4
i. WPLH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ii. Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
iii. Interstate Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
iv. New Interstate Energy Non-Utility Subholding Company . . . . . . . . . . . . . . 8
b. IES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
c. IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Description of Energy Sales and Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
a. WP&L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
i. Energy Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ii. Electric Generating Facilities and Resources . . . . . . . . . . . . . . . . . . 12
iii. Electric Transmission Facilities . . . . . . . . . . . . . . . . . . . . . . . . 14
iv. Gas Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
v. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
b. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
i. Energy Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ii. Electric Generating Facilities and Resources . . . . . . . . . . . . . . . . . . 16
iii. Electric Transmission Facilities . . . . . . . . . . . . . . . . . . . . . . . . 17
iv. Gas Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
v. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
c. IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
i. Energy Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ii. Electric Generating Facilities and Resources . . . . . . . . . . . . . . . . . . 18
iii. Electric Transmission Facilities . . . . . . . . . . . . . . . . . . . . . . . . 19
iv. Gas Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
v. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3. Electric Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4. Gas Coordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5. Non-Utility Interests of WPLH, IES and IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
a. WPLH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
b. IES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
c. IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
C. Description of Transaction and Statement as to Consideration . . . . . . . . . . . . . . . . . . . . . . . 28
1. Background and Negotiations Leading to the Proposed Transaction . . . . . . . . . . . . . . . . . 28
2. Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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3. Management of Interstate Energy Following the Merger . . . . . . . . . . . . . . . . . . . . . . 35
D. Dividend Reinvestment Plan, Long-Term Equity Incentive Plan and other Employee Benefit Plans. . . . . . . 35
1. Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
a. Purpose of the DRIP and Eligibility of Participants . . . . . . . . . . . . . . . . . . . 36
b. Sources of Common Stock and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 36
2. Long-Term Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3. Other Stock-Based Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
E. Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 3. Applicable Statutory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
A. Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
1. Section 10(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
a. Section 10(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
i. Interlocking Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ii. Concentration of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
b. Section 10(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
i. Fairness of Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ii. Reasonableness of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
c. Section 10(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2. Section 10(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
a. Section 10(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
i. Retention of Gas Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ii. Retention of Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . . 69
b. Section 10(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
i. Efficiencies and Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
ii. Integrated Public Utility System . . . . . . . . . . . . . . . . . . . . . . . . 81
I. Electric System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
II. Gas Utility System . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
3. Section 10(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
4. Other Applicable Provisions - Sections 6, 7, 9(a)(1) and 12 . . . . . . . . . . . . . . . . . . . 87
B. Intra-system Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
C. Interstate Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
D. Other Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
A. Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
B. Federal Power Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
C. Atomic Energy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
D. State Public Utility Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
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Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Item 6. Exhibits and Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
A. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
B. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Item 7. Information as to Environmental Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
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Item 1. Description of Proposed Transaction
A. Introduction
This Application/Declaration seeks approvals relating to the
proposed combination of WPL Holdings, Inc. ("WPLH"), IES Industries Inc.
("IES") and Interstate Power Company ("IPC"), pursuant to which IES' utility
subsidiary, IES Utilities Inc. ("Utilities"), and IPC will become subsidiaries
of WPLH (the "Transaction"). WPLH will be renamed Interstate Energy
Corporation ("Interstate Energy") at or prior to such time. Following the
consummation of the Transaction, Interstate Energy will register with the
Securities and Exchange Commission (the "Commission") as a holding company
under the Public Utility Holding Company Act of 1935 (the "Act").
WPLH, IES and IPC believe that their combination offers
significant strategic and financial benefits to each company and to their
respective shareowners, as well as to their employees and customers. These
benefits include, among others: (i) maintenance of competitive rates that will
improve the combined entity's ability to meet the challenges of the
increasingly competitive environment in the utility industry, (ii) reduced
operating costs and expenditures resulting from integration of corporate and
administrative functions, including the elimination of duplicative positions,
limiting duplicative capital expenditures for administrative and customer
service programs and information systems, and savings in areas such as legal,
audit and consulting fees, (iii) reduced electric production costs through the
joint dispatch of systems and natural gas supply savings through combined
purchasing, (iv) greater purchasing power for items such as fuel and
transportation services, general and operational goods and services and the
reduction of inventories, (v) more controlled expansion into non-core utility
businesses, (vi) increased customer diversity and geographic diversity of
service territories, reducing exposure to local changes in economic,
competitive or climatic conditions, and (vii) expanded management resources and
ability to select leadership from a larger and more diverse management pool.
In addition, WPLH, IES and IPC believe that synergies created by the
Transaction will generate substantial cost savings to Interstate Energy which
would not be available to the separate companies absent the Transaction. WPLH,
IES and IPC have estimated the dollar value of certain synergies resulting from
the Transaction to be approximately $749 million on a nominal dollar basis, net
of costs to achieve the savings, over the 10-year period from 1997 to 2006.
The expected Transaction benefits are discussed in further detail in Item
3.A.2.b.i. below.
The Transaction is subject to approval by the shareholders of
WPLH, IES and IPC at their respective meetings scheduled to be held on
September 5, 1996. WPLH, IES and IPC have submitted or will be submitting
applications requesting approval of the Transaction and/or related matters to
(i) the Public Service Commission of Wisconsin (the "PSCW"), (ii) the Iowa
Utilities Board (the "IUB"), (iii) the Minnesota Public Utilities Commission
(the "MPUC"), (v) the Illinois Commerce Commission ("ICC"), (vi) the Federal
Energy Regulatory Commission (the "FERC") and (vii) the Nuclear Regulatory
Commission (the "NRC"). Finally, the three companies have made the required
filings with the Antitrust Division of the U.S. Department of Justice (the
"DOJ") and the Federal Trade Commission (the "FTC") under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). See Item 4
below for additional detail regarding these regulatory approvals. Apart from
the approval of
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the Commission under the Act, the foregoing approvals are the only regulatory
approvals required for the Transaction. In order to permit timely consummation
of the Transaction and the realization of the substantial benefits it is
expected to produce, the applicants request that the Commission's review of
this Application/Declaration commence and proceed as expeditiously as
practicable.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, the applicants
hereby request authorization and approval of the Commission for WPLH to
acquire, by means of the direct mergers or the reincorporation mergers
described below, all of the issued and outstanding common stock of IPC and
Utilities. The applicants also hereby request that the Commission approve (i)
the transfer of certain of Interstate Energy's non- utility interests to a
subsidiary of Interstate Energy ("Interstate Hold") which will be formed prior
to consummation of the Transaction to serve as a holding company for
substantially all of Interstate Energy's non-utility subsidiaries under Section
9(a)(1) of the Act; (ii) the establishment of Interstate Services, Inc.
("Interstate Services") as a subsidiary service company of Interstate Energy in
accordance with the provisions of Rule 88 of the Act; (iii) the Service
Agreement and the Non-Utility Service Agreement (described in Item 1.B.1.a.iii.
below) as a basis for Interstate Services to comply with Section 13 of the Act
and the Commission's rules thereunder; (iv) the retention by Interstate Energy
of the gas properties of its utility subsidiaries and the continuation of such
subsidiaries as combination gas and electric utilities; (v) the retention by
Interstate Energy of the non-utility businesses of WPLH, IES and IPC and of the
non-utility affiliates of WPLH, IES and IPC; (vi) all outstanding intra-system
obligations and guarantees; (vii) the issuance of shares of Interstate Energy
Common Stock, $.01 per share, (the "Interstate Energy Common Stock") in
connection with the Transaction; (viii) authority, through a period ending five
years after the date of the Commission's Order approving the matters requested
hereby, for Interstate Energy to issue (and/or acquire in open-market
transactions) up to 11 million shares of Interstate Energy Common Stock under
dividend reinvestment and stock-based management incentive and employee benefit
plans; (ix) the issuance of rights to purchase shares of Interstate Energy
Common Stock pursuant to the terms of the Rights Agreement between WPLH and
Morgan Shareholder Services Trust Company, as Rights Agent thereunder, dated as
of February 22, 1989 (the "Rights Agreement"), the sale and issuance of
Interstate Energy Common Stock upon exercise of the Rights and certain other
transactions contemplated by the Rights Agreement; and (x) exemption from the
at cost standards of certain transactions.
2. Overview of the Transaction
Pursuant to an Agreement and Plan of Merger dated as of
November 10, 1995, as amended (together with a related Plan of Merger, the
"Merger Agreement") and subject to possible implementation of an alternative
structure described below, (i) IES will be merged with and into WPLH, with WPLH
as the surviving corporation (the "IES Merger"), and (ii) WPLH Acquisition Co.,
a wholly-owned subsidiary of WPLH incorporated under the laws of the State of
Wisconsin ("Acquisition"), will be merged with and into IPC (the "IPC Direct
Merger"),
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which will result in IPC becoming a subsidiary of WPLH. Immediately prior to
or upon consummation of the transactions described in the Merger Agreement,
WPLH will be renamed Interstate Energy Corporation.
The Merger Agreement provides, however, that if, prior to the
consummation of the transactions described above, the companies determine that
certain Wisconsin regulatory requirements mandate that the utility subsidiaries
of Interstate Energy be Wisconsin corporations, the transactions will be
consummated in a manner designed to comply with such regulatory requirements.
In that event, the IES Merger will be effected as described above and Utilities
will be merged with and into IES Utilities Inc., a wholly-owned subsidiary of
IES to be incorporated under the laws of the State of Wisconsin ("New
Utilities") (the "Utilities Reincorporation Merger"), with New Utilities
continuing as the surviving corporation. In addition, the merger involving
IPC will be reconstituted to provide for: (i) the merger of IPC with and into
Interstate Power Company, a wholly-owned subsidiary of IPC incorporated under
the laws of the State of Wisconsin ("New IPC") (the "IPC Reincorporation
Merger") and (ii) the merger of Acquisition with and into New IPC (the "IPC
Merger"), which will result in New IPC becoming a subsidiary of Interstate
Energy. (The Utilities Reincorporation Merger and the IPC Reincorporation
Merger are collectively referred to herein as the "Reincorporation Mergers".)
In such event immediately prior to the Utilities Reincorporation Merger, WP&L
will transfer to New Utilities the assets necessary to provide water utility
services in and adjacent to the City of Beloit, Wisconsin, for Wisconsin
regulatory reasons. Similarly, immediately prior to the IPC Reincorporation
Merger, WP&L will transfer to New IPC the assets necessary to provide water
utility services in and adjacent to the City of Ripon, Wisconsin, for Wisconsin
regulatory reasons.
As a result of either (i) the IES Merger and the IPC Direct
Merger or (ii) the IES Merger, the Utilities Reincorporation Merger, the IPC
Reincorporation Merger and the IPC Merger, Utilities or New Utilities and IPC
or New IPC, as applicable, will become operating utility subsidiaries of
Interstate Energy, and WPLH's existing operating utility subsidiary, Wisconsin
Power & Light Company ("WP&L"), will remain a subsidiary of Interstate Energy.
Accordingly, upon consummation of the Transaction, Interstate Energy will own
three combination electric and gas public utility companies.
All references in this Application/Declaration to Utilities
and IPC following completion of the Transaction shall refer to New Utilities
and New IPC, respectively, in the event the Reincorporation Mergers are
effected, unless the context requires otherwise.
Upon consummation of the Transaction, Interstate Services will
become a wholly-owned service company subsidiary of Interstate Energy and
subsequent to the consummation of the Transaction the non-utility subsidiaries
of WPLH and IES will become subsidiaries of Interstate Hold, which will serve
as a holding company for substantially all of the non-utility subsidiaries of,
and will be wholly-owned by, Interstate Energy. Applicants are also requesting
approval of the terms of (1) the Service Agreement among Interstate Services
and the operating utility subsidiaries of Interstate Energy and (2) the
Non-Utility Service Agreement between
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Interstate Services and the non-utility subsidiaries of Interstate Energy. A
chart of the proposed corporate structure of Interstate Energy following
consummation of the Transaction is attached hereto as Exhibit A.
The common shareholders of IES and IPC will receive shares of
Interstate Energy Common Stock in exchange for their shares of IES and IPC
Common Stock (as defined below), respectively, and, thus, will become common
shareholders of Interstate Energy. The exchange ratios applicable to the
conversion of IES and IPC common stock into Interstate Energy Common Stock are
described in Item 1.C.2. below. If the Reincorporation Mergers are effected in
order to comply with Wisconsin regulatory requirements as described above, then
it is anticipated that each share of cumulative preferred stock, $50 par value,
of Utilities ("Utilities Preferred Stock") currently outstanding will be
redeemed by Utilities prior to consummation of the Utilities Reincorporation
Merger, and each share of preferred stock, $50 par value, of IPC ("IPC
Preferred Stock") (other than shares held by IPC preferred stockholders who
perfect dissenter's rights under applicable state law ("IPC Dissenting
Shares")) will be converted into one share of preferred stock, $50 par value,
of New IPC ("New IPC Preferred Stock") with terms (including dividend rates)
and designations substantially identical to those of IPC Preferred Stock. If
the Reincorporation Mergers are not effected, the Transaction will have no
effect on the shares of Utilities Preferred Stock and IPC Preferred Stock
issued and outstanding at the time of the consummation of the Transaction, each
series of which and each share of which will remain unchanged (other than IPC
Dissenting Shares). A copy of the Merger Agreement is incorporated by
reference as Exhibit B hereto.
B. Description of the Parties to the Transaction
1. General Description
a. WPLH (to be renamed Interstate Energy Corporation) and
its Subsidiaries
i. WPLH
WPLH was incorporated under the laws of the State of Wisconsin
in 1981 and is a public utility holding company exempt from regulation under
the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the
Act and by order of the Commission in WPL Holdings, Holding Co. Act Release No.
24590 (February 26, 1988), as reaffirmed in Holding Co. Act Release No. 25377
(September 18, 1991). As stated above, WPLH will change its name to Interstate
Energy Corporation at or prior to consummation of the Transaction.
WPLH owns all of the issued and outstanding common stock of
WP&L, and WP&L owns all of the issued and outstanding common stock of South
Beloit Water, Gas and Electric Company, an Illinois corporation ("South
Beloit"). South Beloit has been a wholly-owned subsidiary of WP&L since prior
to 1930. WP&L also owns 33 1/3% of Wisconsin River Power Company ("WRPC"), a
public utility which owns and operates two hydro-electric facilities on the
Wisconsin River. WP&L, incorporated under the laws of the State of Wisconsin
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on February 21, 1917, is a public utility holding company exempt from
regulation by the Commission under the Act (except for Section 9(a)(2) thereof)
pursuant to Section 3(a)(2) of the Act and Rule 2 thereunder. WP&L and South
Beloit are combination electric and gas public utility companies under the Act.
WP&L is engaged principally in generating, purchasing, distributing and selling
electric energy in 35 counties in southern and central Wisconsin. As of
December 31, 1995, WP&L furnished retail electric service to approximately
370,000 customers in 663 cities, villages and towns, and wholesale service to
27 municipal utilities, one privately-owned utility, three rural electric
cooperatives and the Wisconsin Public Power Incorporated SYSTEM ("WPPI"), which
provides retail service to nine communities. WP&L also purchases, distributes
and sells natural gas to retail customers in 22 counties in southern and
central Wisconsin; it also supplies water to customers in two Wisconsin
communities, including the cities of Ripon and Beloit and areas adjacent
thereto. As of December 31, 1995, WP&L provided natural gas to approximately
141,000 customers and water to 31,620 customers. South Beloit supplies retail
electric, gas and water service to customers in South Beloit and Rockton,
Illinois and the rural areas adjacent to such cities. As of December 31, 1995,
South Beloit provided electric utility service to 7,005 customers, gas utility
service to 5,128 customers, and water service to 1,598 customers. The service
territory of South Beloit is located in Illinois and is adjacent to the
territory served by WP&L in Wisconsin. A map of the combined service territory
of WP&L and South Beloit is attached as Exhibit C-1.
WP&L is subject to regulation as a public utility as to retail
electric, gas and water rates, service rules, issuance of securities,
construction of new facilities, transactions with affiliates and various other
matters by the PSCW. South Beloit is subject to regulation as a public utility
as to retail electric, gas and water rates, accounts, issuance of securities
and other matters by the ICC. WP&L and South Beloit are also subject to
regulation by the FERC with respect to the classification of accounts, rates
for any wholesale sales of electricity, wheeling rates for the interstate
transmission of electric power and energy, interconnection agreements,
issuances of securities not regulated by state commissions and acquisitions and
sales of certain utility properties under the Federal Power Act. WP&L is also
currently subject to regulation by the NRC in connection with its ownership
interest in the Kewaunee Nuclear Plant.
WPLH owns 98.1% of the issued and outstanding common stock of
Heartland Development Corporation, a Wisconsin corporation ("HDC"), which is a
holding company for all of WPLH's non-utility businesses other than the water
systems (which are regulated utilities under state law) and certain other
minor investments held by its utility subsidiary described in Item 1.B.5.a.
below. HDC owns all of the issued and outstanding common stock of five
corporations, and 93.9% of a sixth corporation, each of which is engaged,
directly or indirectly through subsidiaries and affiliates, in non-utility
businesses which are described in more detail in Item 1.B.5.a. below. For the
year ended December 31, 1995, approximately 15% of WPLH's consolidated
operating revenues were derived from its non-utility investments. As of
December 31, 1995, less than 13.34% of WPLH's consolidated assets were invested
in non-utility businesses.
WPLH, as a public utility holding company (a "holding
company") under the Wisconsin Holding Company Act (the "Wisconsin Act"), is
(and, following consummation of
5
<PAGE> 10
the Transaction, Interstate Energy will continue to be) subject to the
jurisdiction of, and regulation by, the PSCW. The following is a brief summary
of certain provisions of the Wisconsin Act that currently apply to WPLH and
will apply to Interstate Energy.
The PSCW may order the utility affiliate to limit or cease
payment of dividends to the holding company if it finds the capital of any
public utility affiliate of a holding company will be impaired by payment of a
dividend. Various transactions by a public utility affiliate with others in
the holding company system are prohibited, including: lending money,
guaranteeing obligations, combining advertising, providing utility service on
terms different from those for other consumers in the same class, and, selling
or leasing certain real property and using the services of utility employees
after establishing that the utility affiliate will be paid at fair market
value, unless the PSCW approves the transaction. The Wisconsin Act prohibits
(i) any public utility affiliate from providing any non-utility product or
service in a manner or at a price that unfairly discriminates against any
competing provider, (ii) any non-utility activity from being subsidized
materially by the customers of any public utility in the system, (iii) the
operation of the system in any way which materially impairs any public utility
affiliate's credit, ability to acquire capital on reasonable terms or ability
to provide safe, reasonable, reliable and adequate utility service, (iv) any
transfer by a public utility affiliate to any other system company of any
confidential public utility information, including customer lists, for any
non-utility purpose unless the PSCW has approved the transfer and (v) any
termination of the system's interest in a public utility affiliate without PSCW
approval.
The Wisconsin Act also limits non-utility diversification.
The Wisconsin Act generally provides that the net book value of the assets
(other than investment in system affiliates) of all non-utility affiliates may
not exceed the sum of 25% of the net book value of all electric utility
affiliates and a percentage, to be determined by the PSCW (but not less than
25%), of the net book value of all other public utility affiliates (the PSCW
has fixed that percentage at 25% for book value of WP&L's gas utility
business). If the PSCW interprets the Wisconsin Act to require that the
prescribed limits be measured as a percentage of the utility assets of
Wisconsin corporations owning public utility assets in Wisconsin, then in order
to ensure that Interstate Energy meets such limits at the time Utilities and
IPC become subsidiaries of Interstate Energy, the Reincorporation Mergers will
be effected and the water systems (which are regulated public utility
properties under the Wisconsin Act) serving the areas of Beloit and Ripon,
Wisconsin will be transferred to New Utilities and New IPC, respectively.
Further, the Wisconsin Act requires the PSCW periodically to investigate the
impact of the operation of every holding company system on every public utility
affiliate in the system and to determine whether each non-utility affiliate
does, or can reasonably be expected to do, at least one of the following: (a)
substantially retain, attract or promote business activity or employment or
provide capital to businesses within the service territory of any public
utility affiliate or certain other businesses, (b) increase or promote energy
conservation or develop, produce or sell renewable energy products or
equipment, (c) conduct a business that is functionally related to providing
utility service or to developing or acquiring energy resources or (d) develop
or operate commercial or industrial parks in the service territory of any
public utility affiliate. The PSCW is also authorized to order a holding
company to terminate its interest in a public utility affiliate if the
6
<PAGE> 11
PSCW finds that, based upon clear and convincing evidence, termination of the
interest is necessary to protect the interests of utility investors in a
financially healthy utility and the interests of consumers in reasonably
adequate utility service at a just and reasonable price.
The common stock, par value $.01 per share, of WPLH ("WPLH
Common Stock") is listed on the New York Stock Exchange ("NYSE"), the Boston
Stock Exchange ("BSE"), the Chicago Stock Exchange ("CSE") and the Pacific
Stock Exchange ("PSE"). As of July 10, 1996, there were 30,795,260 shares of
WPLH Common Stock outstanding. WPLH has no shares of preferred stock
outstanding. As of July 10, 1996, there were 1,049,225 shares of WP&L
preferred stock outstanding. The rights of holders of WP&L's outstanding
preferred stock will not be impacted by the Transaction. WPLH's principal
executive office is located at 222 West Washington Avenue, Madison, Wisconsin
53703. Copies of the Restated Articles of Incorporation of WPLH and WP&L are
incorporated by reference as Exhibits C-2 and C-3, respectively.
For the year ended December 31, 1995, WPLH's operating
revenues on a consolidated basis were approximately $811 million, of which
approximately $550 million were derived from electric operations, $139 million
from gas operations and $122 million from other operations. Consolidated
assets of WPLH and its subsidiaries at December 31, 1995 were approximately
$1.875 billion, consisting of approximately $1.23 billion in identifiable
electric utility property, plant and equipment; approximately $250 million in
identifiable gas utility property, plant and equipment; and approximately $395
million in other corporate assets.
More detailed information concerning WPLH and its subsidiaries
is contained in the Annual Reports on Form 10-K of WPLH and WP&L for the year
ended December 31, 1995, copies of which are incorporated by reference as
Exhibits C-4 and C-5, respectively, and Quarterly Reports on Form 10-Q of WPLH
and WP&L for the quarter ended March 31, 1996 copies of which are incorporated
by reference as Exhibits C-6 and C- 7, respectively.
ii. Acquisition
Acquisition has been incorporated under the laws of the State
of Wisconsin solely for the purpose of facilitating the Transaction. The
authorized capital stock of Acquisition consists of 9,000 shares of common
stock, $.01 par value ("Acquisition Common Stock"), all the outstanding shares
of which are held by WPLH. Acquisition has not had, and prior to the
consummation of the Transaction will not have, any operations other than the
activities contemplated by the Merger Agreement necessary to accomplish the
combination of Acquisition and IPC or New IPC, as applicable, as herein
described.
iii. Interstate Services
Prior to the consummation of the Transaction, Interstate
Services will be incorporated in Wisconsin as a subsidiary of WPLH to serve as
the service company for the Interstate Energy system after consummation of the
Transaction. Interstate Services will provide
7
<PAGE> 12
WP&L, Utilities, IPC, South Beloit, and the other companies of the Interstate
Energy system with a variety of administrative, management and support
services.
Interstate Services will enter into a service agreement with
WP&L, Utilities, IPC and South Beloit (the "Service Agreement"). A copy of the
form of Service Agreement as well as an appendix thereto entitled "Description
of Services and Determination of Charges for Services" is filed as Exhibit D-1.
In addition, to facilitate the joint dispatch of the combined generating
facilities of the Interstate Energy system, Interstate Services will enter into
a System Coordination and Operating Agreement with WP&L, Utilities and IPC (the
"Coordination Agreement") which will be filed with, and approved by, FERC. A
copy of the form of the Coordination Agreement is filed as Exhibit D-2 hereto.
For certain of the non-utility affiliates of Interstate
Energy, Interstate Services may enter into one or more separate service
agreements (the "Non-Utility Service Agreement"). A copy of the form of
Non-Utility Service Agreement as well as an appendix thereto entitled
"Description of Services and Determination of Charges for Services" is filed as
Exhibit D-3.
The authorized capital stock of Interstate Services will
consist of 9,000 shares of common stock, par value $.01 per share.
iv. New Interstate Energy Non-Utility Subholding Company
Prior to consummation of the Transaction, Interstate Hold will
be incorporated in Wisconsin as a wholly-owned subsidiary of WPLH to serve as a
holding company for (and to acquire the outstanding capital stock of) certain
of the non-utility subsidiary companies of WPLH and IES after consummation of
the Transaction. Such non-utility subsidiary companies are described below in
Item 1.B.5. The resulting corporate structure is set forth in Exhibit A.
b. IES
IES, incorporated under the laws of the State of Iowa in 1986,
is a public utility holding company exempt from regulation under the Act
(except for Section 9(a)(2) of the Act) pursuant to Section 3(a)(1) of the Act
and Rule 2 thereunder. Pursuant to Rule 2, IES has filed a statement with the
Commission on Form U-3A-2 for the year ended December 31, 1995 which is
incorporated by reference as Exhibit E-1 hereto.
IES owns all of the issued and outstanding common stock of
Utilities, a public utility company under the Act. Utilities is an Iowa
corporation engaged primarily in providing electric energy, natural gas and, to
a limited extent, steam used for heating and industrial purposes, in Cedar
Rapids, Iowa. As of December 31, 1995, Utilities provided retail electric
service to approximately 333,000 customers in 525 communities and natural gas
to 174,000 retail customers in 222 communities across Iowa and provided
wholesale electric service to 30 Iowa municipalities. A map of Utilities'
service territory is attached as Exhibit E-2.
8
<PAGE> 13
Utilities is subject to regulation as a public utility by the
IUB as to its retail, electric and gas rates, services, accounts, depreciation,
acquisitions and sales of utility properties, and in other respects. Utilities
is also subject to regulation by the FERC with respect to borrowings and the
issuance of securities, the classification of accounts, rates for any wholesale
sale of electricity, the interstate transmission of electric power and energy,
interconnection agreements, and acquisitions and sales of certain utility
properties under the Federal Power Act. Utilities is also subject to
regulation by the NRC as a result of its ownership interest in and operation of
the Duane Arnold Energy Center.
IES also owns all of the issued and outstanding common stock
of IES Diversified Inc. ("Diversified"), an Iowa corporation, which serves as
the holding company for certain of IES' non-utility businesses. Diversified
owns all of the issued and outstanding common stock of four corporations
engaged, directly or indirectly through subsidiaries and affiliates, in
non-utility businesses, which are described in more detail in Item 1.B.5.b.
below. In addition, Utilities owns 100% of the issued and outstanding common
stock of IES Ventures Inc. ("Ventures"), an Iowa corporation, which is
engaged, indirectly through subsidiaries, in non-utility businesses described
in Item 1.B.5.b. below. For the year ended December 31, 1995, approximately
12% of IES' consolidated operating revenues were derived from its non-utility
investments. As of December 31, 1995, approximately 20% of IES' consolidated
assets were invested in non-utility businesses.
Solely for the purpose of facilitating the Transaction
proposed herein, if the Reincorporation Mergers are required to be effected,
New Utilities will be incorporated under the laws of the State of Wisconsin
prior to the consummation of the Transaction. The authorized capital stock of
New Utilities will consist of the same number of shares of common stock ("New
Utilities Common Stock") as were authorized for Utilities, all the outstanding
shares of which will be held by IES. Prior to the consummation of the
Transaction, New Utilities will not have had any operations other than the
activities contemplated by the Merger Agreement necessary to accomplish the
combination of New Utilities and Utilities as herein described. If the
Reincorporation Mergers are required to be effected, immediately prior to
consummation thereof WP&L will transfer to New Utilities the properties
constituting the water system serving Beloit, Wisconsin and two adjacent towns.
The common stock, no par value, of IES (the "IES Common
Stock") is listed on the NYSE, the BSE, the CSE and the PSE. As of July 10,
1996, there were 29,923,233 shares of IES Common Stock outstanding. IES has no
shares of preferred stock outstanding. As of such date there were 120,000
shares of Utilities 4.30% Preferred Stock, 146,354 shares of Utilities 4.80%
Preferred Stock and 100,000 shares of Utilities 6.10% Preferred Stock
outstanding. If the Utilities Reincorporation Merger is effected, it is
currently anticipated that the shares of Utilities Preferred Stock will be
redeemed by Utilities prior to such merger. The principal executive office of
IES and Utilities is located at IES Tower, 200 First Street S.E., Cedar Rapids,
Iowa 52401. Copies of the Restated Articles of Incorporation of IES and the
Amended and Restated Articles of Incorporation of Utilities are incorporated by
reference as Exhibits E-3 and E-4, respectively.
9
<PAGE> 14
For the year ended December 31, 1995 IES' operating revenues
on a consolidated basis were approximately $851 million, of which approximately
$560 million were derived from electric operations, $190 million from gas
operations and $100 million from other operations. Consolidated assets of IES
and its subsidiaries at December 31, 1995 were approximately $1.986 billion
consisting of approximately $1.396 billion in identifiable electric utility
property, plant and equipment, approximately $199 million in identifiable gas
utility property, plant and equipment and approximately $391 million in other
corporate assets.
More detailed information concerning IES and its subsidiaries
is contained in the Annual Reports on Form 10-K, as amended, of IES and
Utilities for the year ended December 31, 1995, copies of which are
incorporated by reference as Exhibits E-5 and E-6, respectively, and the
Quarterly Reports on Form 10-Q of IES and Utilities for the quarter ended March
31, 1996, copies of which are incorporated by reference as Exhibits E-7 and
E-8, respectively.
c. IPC
IPC, incorporated under the laws of the State of Delaware in
1925, is a public utility company. IPC is engaged primarily in generating,
purchasing, transmitting, distributing and selling electric energy in portions
of twenty-five counties in northern and northeastern Iowa, twenty-two counties
in southern Minnesota and four counties in northwestern Illinois. IPC also
engages in distribution and sale of natural gas in 41 communities, including:
Albert Lea, Minnesota; Clinton, Mason City and Clear Lake, Iowa; Fulton and
Savanna, Illinois; and a number of smaller Minnesota, Iowa and Illinois
communities. As of December 31, 1995, IPC provided electric service to 163,344
retail customers and 19 full and partial requirements wholesale customers, and
natural gas to 48,823 retail customers. In addition, IPC engages in the
transportation of natural gas within Iowa, Minnesota and in interstate
commerce. A map of IPC's service territory is attached as Exhibit F-1.
IPC is subject to regulation as a public utility by the IUB,
the MPUC and the ICC as to its retail, electric and gas rates, services,
accounts, depreciation, acquisitions and sales of utility properties, and in
other respects. The ICC also regulates the issuance of securities and the MPUC
regulates IPC with respect to the appropriateness of IPC's capital structure.
IPC is also subject to regulation by the FERC with respect to borrowings and
the issuance of securities, the classification of accounts, rates for any
wholesale sale of electricity, the interstate transmission of electric power
and energy, interconnection agreements, and acquisitions and sales of certain
utility properties under the Federal Power Act. IPC also owns jurisdictional
facilities subject to regulation by FERC under the Natural Gas Act.
IPC owns all of the issued and outstanding common stock of IPC
Development Company, Inc., an Iowa corporation ("IPC Development"), which owns
certain non-utility investments described in more detail in Item 1.B.5.c.
below. For the year ended December 31, 1995, none of IPC's operating revenues
were derived from its non-utility investments, and such investments constituted
less than 0.2% of its assets as of such date.
10
<PAGE> 15
New IPC has been incorporated under the laws of the State of
Wisconsin solely for the purpose of facilitating the Transaction proposed
herein, if the Reincorporation Mergers are required to be effected. The
authorized capital stock of New IPC consists of 9,000 shares of common stock,
$.01 par value ("New IPC Common Stock"), all the outstanding shares of which
are held by IPC. In the event the Reincorporation Mergers are required to be
effected, the articles of incorporation of New IPC will be amended to authorize
the same number of shares of Common Stock, Preferred Stock and Preference Stock
that are currently authorized by the Restated Certificate of Incorporation of
IPC. New IPC has not had, and prior to the closing of the Transaction will not
have, any operations other than the activities contemplated by the Merger
Agreement necessary to accomplish the combination of IPC with and into New IPC
followed by the combination of New IPC and Acquisition, as herein described.
If the Reincorporation Mergers are required to be effected, immediately prior
to consummation thereof WP&L will transfer to New IPC the properties
constituting the water system serving the City of Ripon, Wisconsin and an
adjacent town.
The common stock, $3.50 par value of IPC (the "IPC Common
Stock"), is listed on the NYSE, the CSE and the PSE. As of July 10, 1996,
there were 9,595,028 shares of IPC Common Stock and 761,381 shares of IPC
Preferred Stock outstanding. If the IPC Reincorporation Merger is effected, it
is currently anticipated that each share of IPC Preferred Stock (other than IPC
Dissenting Shares) will be converted into one share of New IPC Preferred Stock,
as described in Item 1.A.2. above, prior to such merger. The principal
executive office of IPC is located at 1000 Main Street, Dubuque, Iowa
52004-0769. A copy of the Restated Certificate of Incorporation of IPC is
incorporated by reference as Exhibit F-2.
For the year ended December 31, 1995, IPC's operating revenues
were approximately $319 million, of which approximately $275 million were
derived from electric operations and $44 million from gas operations. Assets
of IPC at December 31, 1995 were approximately $634 million, consisting of
approximately $459 million in identifiable net electric utility property, plant
and equipment, approximately $39 million in identifiable net gas utility
property, plant and equipment and approximately $135 million in other corporate
assets.
More detailed information concerning IPC is contained in IPC's
Annual Report on Form 10-K for the year ended December 31, 1995, a copy of
which is incorporated by reference as Exhibit F-3, and IPC's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996, which is incorporated by
reference as Exhibit F-4.
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<PAGE> 16
2. Description of Energy Sales and Facilities
a. WP&L
i. Energy Sales
For the year ended December 31, 1995, WP&L and its utility
subsidiary, South Beloit, sold the following amounts of electric energy (at
retail or wholesale, including amounts delivered in interchange) and
distributed the following amounts of natural or manufactured gas at retail:
<TABLE>
<S> <C>
WP&L
Kwh of electric energy sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,745,961,496
Mcf of gas distributed at retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,942,546
South Beloit
Kwh of electric energy sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,740,052
Mcf of gas distributed at retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,434
</TABLE>
ii. Electric Generating Facilities and Resources
As of December 31, 1995, WP&L had a total net generating
capability of approximately 2,200 MW available from the following units:
12
<PAGE> 17
<TABLE>
<CAPTION>
Name and Location Major Fuel WP&L's Share of Nameplate
of Station Type Generating Capacity (MW)
---------------------------------------------------- ---------------- ----------------------------------
<S> <C> <C>
Kewaunee: Town of Carlton, Wisconsin Nuclear 219 *
Nelson Dewey: Cassville, Wisconsin Coal 200
Edgewater: Sheboygan, Wisconsin Coal 570 **
Columbia Energy Center: Portage, Wisconsin Coal 473 ***
Rock River: Beloit, Wisconsin Coal & Gas 294
Sheepskin: Edgerton, Wisconsin Gas 40
South Fond du Lac: Fond du Lac, Wisconsin Gas 172 ****
Blackhawk: Beloit, Wisconsin Gas & Hydro 52
Prairie du Sac: Prairie du Sac, Wisconsin Hydro 29
Wisconsin River Power Co.: Petenwell, Wisconsin Hydro 12 *****
Kilbourne: Wisconsin Dells, Wisconsin Hydro 10
Janesville: Janesville, Wisconsin Hydro 1
Shawano: Shawano, Wisconsin Hydro 1
- ---------------------
</TABLE>
* Represents WP&L's 41% ownership interest in this 535 MW plant. The
plant is operated by an unaffiliated utility.
** Represents WP&L's 100%, 68.2% and 75% ownership interest in each of
the three generating units, respectively, in this 770 MW plant. The
plant is operated by WP&L.
*** Represents WP&L's 46.2% ownership interest in this 1,023 MW plant.
The plant is operated by WP&L.
**** Represents WP&L's ownership interest in two of the four generating
units in this 344 MW plant. The plant is operated by WP&L.
***** Represents WP&L's 33-1/3% ownership interest in this facility. The
facility is operated by an unaffiliated utility.
WP&L and South Beloit purchase capacity and energy from
various regional utilities as well as Qualifying Facilities ("QFs"), as that
term is defined in the Public Utility Regulatory Policies Act of 1978 ("PURPA")
in order to meet energy needs of their customers.
13
<PAGE> 18
Together, WP&L and South Beloit purchased approximately 18% of the total
electric system energy input for 1995.
WP&L's 1995 summer peak load, which occurred on July 31, 1995,
was 2,197 MW and its 1995 winter peak load, which occurred on December 11,
1995, was 1,913 MW.
South Beloit generates approximately 3% of its electric energy
needs from its hydro-electric generating facility located in Rockton, Illinois,
which has an installed gross capacity of 2 MW and a net dependable capacity of
2 MW. South Beloit purchases all of its remaining electric energy requirements
from WP&L.
The electric operations of WP&L and South Beloit are fully
integrated and all generating units are centrally dispatched by WP&L. The
electric production and transmission costs of WP&L and South Beloit are shared
by the companies under a Contract for Electricity, dated January 1, 1983. For
the year ended December 31, 1995, the combined energy (Kwh) production of WP&L
and South Beloit was produced 81.1% by coal-fired generation, 15.3% by nuclear
generation, 2.2% by hydroelectric generation and 1.4% from other generation.
For the year ended December 31, 1995, approximately 66.6% of the combined Kwh
sales of WP&L and South Beloit was obtained from coal-fired generation,
approximately 12.6% from nuclear generation, 17.9% from purchases and
approximately 2.7% from renewable resources.
iii. Electric Transmission Facilities
WP&L's transmission system is located entirely within the
State of Wisconsin. As of December 31, 1995, WP&L's electric transmission
system consisted of approximately 1,755 circuit miles of 69 kV overhead lines;
2 circuit miles of 69 kV underground lines; 737 circuit miles of 138 kV
overhead lines; 1 circuit mile of 138 kV underground lines; 1 circuit mile of
161 kV overhead lines; 107 circuit miles of 345 kV overhead lines; and 190
circuit miles of transmission lines under 69 kV. A map of WP&L's major
electric transmission lines is filed as Exhibit G-1.
As of December 31, 1995, South Beloit owned a 69 kV overhead
transmission line segment which is approximately 13.75 miles in length and a
345 kV overhead line segment which is approximately .25 miles in length.
iv. Gas Facilities
As of December 31, 1995, WP&L provided natural gas service at
retail to approximately 141,000 customers in 227 cities, villages and towns
located in 22 counties in southern and central Wisconsin and South Beloit
provided natural gas service in South Beloit, Illinois and adjacent areas in
the Town of Rockton and Town of Roscoe, Illinois. The gas delivery operations
of WP&L and South Beloit are managed out of Madison, Wisconsin, pursuant to a
Contract for Gas, dated February 22, 1980 between WP&L and South Beloit.
14
<PAGE> 19
Under this agreement, WP&L manages the pressures of the various pipelines owned
by these companies and the inflow and outflow of natural gas from these
pipelines.
The gas property of WP&L at December 31, 1995 consisted
chiefly of approximately 2,989 miles of distribution mains, ranging in size
from 0.75 to 16 inches, and operating at pressures from 5 psig to 975 psig, and
related equipment. The U.S. Department of Transportation classifies 34 miles
of the mains as transmission.
The gas property of South Beloit at December 31, 1995
consisted chiefly of approximately 103 miles of distribution/ transmission
mains, ranging in size from 0.50 to 8 inches, and related equipment.
v. Other
WP&L also owns two water utility systems which are regulated
as public utilities under Wisconsin law, one serving the City of Ripon and
adjacent Town of Ripon, Wisconsin (the "Ripon Water System") and the other
serving the City of Beloit and adjacent Towns of Beloit and Turtle, Wisconsin
(the "Beloit Water System"). The Ripon Water System consists primarily of a
350,000 gallon elevated storage tank, four drilled wells, 330 hydrants and 38
2/3 miles of distribution pipes and related equipment and serves approximately
5,375 customers. The Beloit Water System consists primarily of three elevated
storage tanks with a combined capacity of 2.25 million gallons, seven drilled
wells, two booster stations, 1,045 hydrants and 167 3/4 miles of distribution
pipes and related equipment and serves approximately 26,250 customers. In the
event the Reincorporation Mergers are required to be effected for Wisconsin
regulatory reasons, WP&L's water utility assets comprising the Ripon Water
System will be transferred to New IPC, and WP&L's water utility assets
comprising the Beloit Water System will be transferred to New Utilities as part
of the Transaction. South Beloit owns a water utility system which is
regulated as a public utility under Illinois law and provides water to
customers in the City of South Beloit and the adjacent Towns of Roscoe and
Rockton, Illinois (the "South Beloit Water System"). The South Beloit Water
System consists primarily of one drilled well, 325 hydrants and 23 2/3 miles of
distribution pipes and related equipment and serves approximately 1,600
customers.
Other assets owned by WP&L and South Beloit include electric
distribution systems located throughout its service area, property, plant and
equipment owned or leased supporting their electric, gas and water utility
functions. WP&L and South Beloit also own or lease other physical properties,
including real property, and other facilities necessary to conduct their
operations.
15
<PAGE> 20
b. Utilities
i. Energy Sales
For the year ended December 31, 1995, Utilities sold the
following amount of electric energy (at retail and wholesale, including amounts
delivered in interchange) and distributed the following amount of natural or
manufactured gas at retail:
Kwh of electric energy sold . . . . . . 10,869,635,000
Mcf of gas distributed at retail . . . . 29,458,000
ii. Electric Generating Facilities and Resources
At December 31, 1995 Utilities had a total net generating
capability of approximately 1,869 MW from the following units:
<TABLE>
<CAPTION>
Name and Location Major Fuel Utilities' Share of
of Station Type Generating Capacity (MW)
------------------------------------------------------- -------------- ---------------------------------
<S> <C> <C>
Duane Arnold Energy Center: Palo, Iowa Nuclear 364 *
Ottumwa Generating Station: Ottumwa, Iowa Coal 343 **
Prairie Creek Station: Cedar Rapids, Iowa Coal 212
Sutherland Station: Marshalltown, Iowa Coal 143
Sixth Street Station: Cedar Rapids, Iowa Coal 71
Burlington Generating Station: Burlington, Iowa Coal 212
George Neal Unit 3: Sioux City, Iowa Coal 144 ***
Peaking Turbines: Marshalltown, Iowa Oil 162
Centerville Cumbustion Turbines: Centerville, Iowa Oil 48
Diesel Stations: all in Iowa Oil 12
Grinnell Station: Grinnell, Iowa Gas 47
Agency Street Combustion Turbines: West Burlington,
Iowa Gas 64
Burlington Combustion Turbines: Burlington, Iowa Gas 47
</TABLE>
- ---------------------------
* Represents Utilities' 70% ownership interest in this 520 MW plant.
The plant is operated by Utilities.
16
<PAGE> 21
** Represents Utilities' 48% ownership interest in this 715.5 MW plant.
The plant is operated by Utilities.
*** Represents Utilities' 28% ownership interest in this 515 MW plant.
The plant is operated by an unaffiliated utility.
Utilities purchases capacity and energy from various regional
utilities as well as QFs, in order to meet energy needs of its customers.
Utilities purchased approximately 26.3% of the total electric system energy
input for 1995.
Utilities' summer peak load for the calendar year 1995, which
occurred on July 12, 1995, was 1,824 MW and its 1995 winter peak load, which
occurred on December 11, 1995, was 1,533 MW.
The electric operations of Utilities and Central Iowa Power
Cooperative ("CIPCO") are integrated and all generating units are centrally
dispatched by Utilities. The electric production and transmission costs of
Utilities and CIPCO are allocated between the two companies on the basis of an
Operating and Transmission Agreement dated January 1991. For the year ended
December 31, 1995, the energy (Kwh) production of Utilities was produced 67.0%
by coal-fired generation, 31.1% by nuclear generation, 0.1% by hydroelectric
generation and 1.8% from other generation. For the year ended December 31,
1995, approximately 50.5% of the Kwh sales of Utilities was obtained from
coal-fired generation, approximately 22.9% from nuclear generation, 26.3% from
purchases and approximately 0.3% from renewable resources.
iii. Electric Transmission Facilities
Utilities' transmission system is located entirely within the
State of Iowa. A map of Utilities' major electric transmission lines is filed
as Exhibit G-2. As of December 31, 1995, Utilities' transmission system
consisted of 1,043 miles of 69 kV transmission lines, 376 miles of 115 kV
transmission lines, 650 miles of 161 kV transmission lines and 67 miles of 345
kV transmission lines. CIPCO's transmission system consisted of 533 miles of
69 kV transmission lines, 58 miles of 115 kV transmission lines and 250 miles
of 161 kV transmission lines.
iv. Gas Facilities
As of December 31, 1995, Utilities provided natural gas
service to approximately 174,000 customers in 222 Iowa communities.
Residential customers, general service customers and large general service
customers make up 87%, 11% and 2% of the company's natural gas customers,
respectively. As of such date, the gas properties consisted primarily of
approximately 3,638 miles of main in Iowa ranging in size from 2 to 12 inches
with pressure ranging from 5 psig to 975 psig, 118 miles of which are
classified as transmission. Utilities currently has no operable propane air
peak shaving plants.
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<PAGE> 22
v. Other
Utilities owns a steam system which has provided steam service
to downtown Cedar Rapids residences and businesses since the turn of the
century. This system currently delivers low- and high-pressure steam to more
than 200 residential and business customers. Residential customers use the
steam for home heating while business customers use the steam in production
processes. Steam sales make up approximately 1.7% of Utilities' operating
revenues.
Other assets owned by Utilities include electric distribution
systems located throughout its service area, and property, plant and equipment
owned or leased supporting its electric, gas and water utility functions.
Utilities also owns or leases other physical properties, including real
property, and other facilities necessary to conduct its operations.
c. IPC
i. Energy Sales
For the year ended December 31, 1995, IPC sold the following
amount of electric energy (at retail or wholesale, including amounts delivered
in interchange) and sold and transported the following amount of natural or
manufactured gas at retail:
<TABLE>
<S> <C>
Kwh of electric energy sold . . . . . . . . . . . . . . 5,771,043,000
Mcf of gas sold and transported at retail . . . . . . . 35,320,000
</TABLE>
ii. Electric Generating Facilities and Resources
As of December 31, 1995, IPC had a total net generating
capability of approximately 1,028 MW available from the following units:
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<PAGE> 23
<TABLE>
<CAPTION>
Name and Location Major Fuel Company Share of Nameplate
of Station Type Generating Capacity (MW)
------------------------------------------------------- -------------- ---------------------------------
<S> <C> <C>
Dubuque: Dubuque, Iowa Coal 73
M. L. Kapp Plant: Clinton, Iowa Coal 227
Lansing: Lansing, Iowa Coal 312
Fox Lake Plant: Sherburn, Minnesota Coal 98
George Neal Unit 4: Sioux City, Iowa Coal 126 *
Louisa Unit 1: Louisa County, Iowa Coal 27 **
Montgomery: Montgomery, Minnesota Gas 27
Fox Lake Plant: Sherburn, Minnesota Gas 27
Lime Creek Plant: Mason City, Iowa Gas 75
Dubuque: Dubuque, Iowa Oil 4
Hills: Hills, Minnesota Oil 2
Lansing: Lansing, Iowa Oil 2
New Albin: New Albin, Iowa Oil .6
Rushford: Rushford, Minnesota Oil 2
</TABLE>
- -----------------------
* Represents IPC's 21.5% ownership interest in this 585 MW plant. The
plant is operated by an unaffiliated utility.
** Represents IPC's 4% ownership interest in this 685 MW plant. The
plant is operated by an unaffiliated utility.
IPC purchases capacity and energy from various regional
utilities as well as QFs, in order to meet energy needs of its customers. IPC
purchased approximately 38.3% of the total electric system energy input for
1995.
IPC is a summer peaking system; its summer peak load of 1011
MW occurred on July 14, 1995.
For the year ended December 31, 1995, the energy (Kwh)
production of IPC was produced 90.9% by coal-fired generation and 9.1% from
other generation. For the year ended December 31, 1995, approximately 56.1% of
the Kwh sales of IPC was obtained from coal-fired generation, 38.3% from
purchases and 5.6% from other generation.
iii. Electric Transmission Facilities
IPC's transmission system is located within the States of
Iowa, Illinois and Minnesota. As of December 31, 1995, IPC's electric
transmission system consisted of 1,043 miles of kV transmission lines, 731
miles of 161 kV transmission lines and 135 miles of 345 kV transmission lines.
A map of IPC's major electric transmission lines is filed as Exhibit G-3.
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<PAGE> 24
iv. Gas Facilities
The gas property of IPC at December 31, 1995, consisted of
approximately 210 miles of gas main in Illinois, 553 miles of gas main in Iowa
and 209 miles of gas main in Minnesota ranging in size from .75 inches to 16
inches and operating at various pressures from 1/4 psig to 600 psig.
Seventy-seven miles of IPC's main are classified as transmission, as reported
to the U.S. Department of Transportation.
IPC operates three propane air LPG peak shaving plants, which
are located in Albert Lea, Minnesota; Clinton, Iowa; and Mason City, Iowa to
meet firm customer demand during extreme peak winter weather conditions. The
respective daily output and storage capacity of these facilities are: 5,000
MMBtu/Day - 357,000 gallons (Albert Lea); 4,000 MMBtu/Day - 306,000 gallons
(Clinton); and 9,600 MMBtu/Day - 561,000 gallons (Mason City).
v. Other
Other assets owned by IPC include electric distribution
systems located throughout its service area, and property, plant and equipment
owned or leased supporting its electric, gas and water utility functions. IPC
also owns or leases other physical properties, including real property, and
other facilities necessary to conduct their operations.
3. Electric Coordination
The following table sets forth certain information with
respect to the electric operations of Interstate Energy pro forma as of
December 31, 1995, adjusted to give effect to the Transaction (before
intercompany eliminations).
<TABLE>
<CAPTION>
Electric Operating
Revenues Kwh of Electric Energy Sales (including amounts
($ in millions) delivered in interchange)
--------------- -----------------------------------------------
<S> <C> <C>
WP&L (including South $546 11,747,178,000
Beloit)
Utilities $560 10,869,635,000
IPC $275 5,771,043,000
---- -------------
TOTAL $1,381 28,387,856,000
</TABLE>
Utilities and IPC are already directly physically
interconnected through numerous transmission lines that they own, including
three 161 kV lines, and the East 345 kV Line which runs from Minneapolis/St.
Paul to St. Louis, in which Utilities and IPC participate along with Northern
States Power, Union Electric Company ("UE") and Mid-American Energy (the "East
20
<PAGE> 25
345 kV Line"). WP&L and South Beloit are directly interconnected by a 69 kV
transmission line. WP&L is a member of the Mid-America Interconnected Network,
Inc. ("MAIN"), an interstate network of transmission facilities which are owned
by public entities and investor-owned utilities. MAIN is the regional
reliability council providing planning and coordination for member electric
power systems in the North-Central United States. However, WP&L has notified
MAIN that it intends to withdraw from MAIN effective December 31, 1997. WP&L
is also an associate member, and Utilities and IPC are full members, of the
Mid-America Power Pool ("MAPP") which is an economic power pool that operates
an electronic bulletin board and acts as a clearinghouse for bulk power
transactions among over 28 member utilities and marketers. WP&L, Utilities and
IPC intend to operate Interstate Energy as a single system, economically
dispatched pursuant to the Coordination Agreement.
WP&L, Utilities and IPC are also each directly interconnected
to numerous other neighboring utilities. In addition to its direct
interconnection with Utilities, IPC is also directly interconnected with six
neighboring utilities: Commonwealth Edison ("ComEd"), CIPCO, Corn Belt Power
Cooperative ("Corn Belt"), Dairyland Power Cooperative ("DPC"), Mid-American
Energy Company ("MAEC"), Northern States Power Company ("NSP"), Southern
Minnesota Municipal Power Agency and Cooperative Power Associates. In addition
to its direct interconnection with IPC, Utilities is directly interconnected
with nine neighboring utilities: CIPCO, Corn Belt, MAEC, Western Area Power
Authority, Muscatine Power and Water, Associated Electric Cooperative, UE,
Central Illinois Public Service and Northeast Missouri Power Cooperative.
Utilities is also a party to a coordination agreement with CIPCO which provides
for the joint dispatch of the Utilities and CIPCO resources and coordinated
operation of a portion of Utilities' transmission system with the facilities of
CIPCO. WP&L and South Beloit are directly interconnected with six neighboring
utilities: ComEd, DPC, Madison Gas & Electric Company, NSP, Wisconsin Electric
Power Company and Wisconsin Public Service Corporation. Through these
interconnections with neighboring utilities and others, WP&L, Utilities and IPC
can wheel electric energy throughout the combined Interstate Energy system.
As discussed in Item 3.A.2.b.ii. below, WP&L and IPC also plan
to construct two direct interconnections between their systems across the
Mississippi River within five years of consummation of the Transaction,
including a 69 kV tie-line between Prairie du Chien, Wisconsin and MacGregor,
Iowa and a 161 kV line connecting WP&L's Nelson Dewey generating plant on the
east side of the river to IPC's Turkey River substation on the west side.
All of the above interconnections are depicted on maps
attached as Exhibit G-4.
4. Gas Coordination.
The following table sets forth certain information with
respect to the gas operations of Interstate Energy pro forma as of December 31,
1995, adjusted to give effect to the Transaction (before intercompany
eliminations).
21
<PAGE> 26
<TABLE>
<CAPTION>
Gas Operating Revenues Mcf of Gas Distributed
($ in millions) (including natural and
--------------- manufactured gas)
-------------------------
<S> <C> <C>
WP&L (including South $139 24,727,980
Beloit)
Utilities $137 29,458,000
IPC $ 44 35,320,000
---- ----------
TOTAL $320 89,505,980
</TABLE>
WP&L presently provides natural gas service at retail in
Wisconsin. South Beloit provides gas service in the area of South Beloit,
Illinois which is adjacent to and interconnected with the WP&L system. IPC
presently provides gas service in northern Iowa and southern Minnesota and in
northwestern Illinois and eastern Iowa. Utilities presently provides gas
service throughout Iowa. Upon consummation of the Transaction, the WP&L, South
Beloit, IPC and Utilities gas operations will continue to serve this contiguous
four state area. The combined gas service territories of WP&L, South Beloit,
IPC and Utilities after the Transaction are shown in Exhibit G-5.
The gas systems of (i) WP&L and South Beloit, (ii) IPC and
(iii) Utilities, respectively, each presently operates as a single coordinated
system. While the WP&L, IPC and Utilities gas systems are not physically
interconnected, they will functionally perform as a coordinated system through
purchase of natural gas from common sources of supply, delivery through common
interstate pipelines (all of which are open access transportation-only
pipelines under FERC Order 636) and storage of gas in common underground
storage facilities.
WP&L, IPC and Utilities are served through a "grid" of
interstate pipelines that serve the four state region. Underground storage
providers are also attached to such grid. A map of this grid is shown as
Exhibit G-6. This grid allows the coordination of gas purchases and delivery
in a manner analogous to the coordination created by the electric generation
and transmission grid.
22
<PAGE> 27
WP&L, IPC and Utilities purchase interstate gas transmission
and/or storage services from the following:
<TABLE>
<CAPTION>
Provider WP&L/South Beloit IPC Utilities
-------- ----------------- --- ---------
<S> <C> <C> <C>
ANR Pipeline Company X X
Northern Natural Gas Company X X X
Northern Border Pipeline Company X X X
LG&E/Llano Inc. X X
Great Lakes Gas Transmission Company X
Viking Gas Transmission Company X
Natural Gas Pipeline Company of X X
America
</TABLE>
As a result of FERC Order 636 regarding restructuring, WP&L, IPC and Utilities
are now able to directly purchase wholesale natural gas at the wellhead (or
processing plant outlet, hub, or gathering system outlet) from numerous
independent "third party" suppliers. However, WP&L, IPC and Utilities purchase
significant quantities of natural gas from common supply fields.
WP&L, IPC and Utilities purchase gas in the following major
supply fields or basins:
<TABLE>
<CAPTION>
Field/Basin WP&L/South Beloit IPC Utilities
----------- ----------------- --- ---------
<S> <C> <C> <C>
Gulf Coast X X X
Permian Basin X X
Canada X X X
Texas/Oklahoma X X X
</TABLE>
The three companies procure some gas supplies from common producers. However,
there are hundreds of natural gas producers available in the marketplace.
Since restructuring of gas supply under FERC Order 636 was designed to allow
local distribution companies ("LDCs") to directly contract with any producers
they wish, and allow the three companies to use competitive bidding procedures
to select their respective suppliers, the fact that WP&L, IPC and Utilities
purchase supplies from different suppliers within the common pools simply
indicates that FERC's policy objective of robust supply competition is being
achieved.
23
<PAGE> 28
5. Non-Utility Interests of WPLH, IES and IPC
a. WPLH
WPLH's non-utility subsidiaries and investments constituted
less than 13.34% of WPLH's assets on a consolidated basis as of December 31,
1995. Operating revenues from WPLH's non-utility subsidiaries and investments
were approximately 15% of WPLH's consolidated total operating revenues for the
year ended December 31, 1995. A corporate chart of WPLH and its subsidiaries,
including their non-utility interests, is filed herewith as Exhibit H-1.
WPLH has one direct non-utility subsidiary, HDC. WPLH owns
98.1% of HDC; the remaining 1.9% is owned by two officers of HDC. Following
consummation of the Transaction, HDC (and Diversified) will be merged with and
into Interstate Hold and the minority interest of the two officers of HDC will
be eliminated prior to or as part of such transaction. HDC is engaged in
environmental consulting services and the sale of related products,
development, ownership, management and consulting services in respect to
affordable multi-family housing, and various energy-related services through
its majority owned subsidiary, Heartland Environmental Holding Company
("HEHC"), and its wholly owned subsidiaries, Heartland Properties, Inc.
("HPI"), Capital Square Financial Corp. ("Capital Square"), Entec, Inc.
("Entec") and Heartland Energy Group, Inc. ("HEG").
HEHC was formed in 1991 to act as a holding company for all of
HDC's existing and future interests in the environmental consulting and
engineering industry. HDC owns 93.9% of HEHC, while certain HEHC employees own
the remaining 6.1% interest. HEHC wholly-owns RMT, Inc. ("RMT"), an
environmental consulting and engineering service firm which was originally
acquired by WP&L in 1983; RMT in turn owns 100% of (i) RMT/Jones & Neuse, Inc.
("J&N"), a diversified environmental consulting and engineering services
company, (ii) Quality Environmental Services, Inc. ("QES"), an inactive
corporation originally created to market technology products to reduce and
control pollution and hazardous wastes, and (iii) RMT North Carolina, Inc. and
RMT New York, Inc., subsidiaries organized to carry-on RMT's business in North
Carolina and New York, respectively. HDC also owns 20% of Advanced
Environmental Management Ltd. ("AEM"), a Finnish start-up environmental
consulting and engineering business.
HPI was formed to provide development, underwriting, sales and
asset management services in respect to affordable multi-family housing. HPI,
directly and through its wholly-owned subsidiary, Heartland Affordable Housing,
Inc. ("HAH") and its 47% owned subsidiary Heartland Capital Company, L.L.C.
provides construction and permanent financing and acquires tax credit
multi-family housing developments through relationships with developers as well
as through direct development activities. HPI, through its wholly-owned
subsidiary Heartland Asset Management, Inc. ("HAM"), also manages a number of
real estate properties. HPI also sells the properties to corporate investors
through a variety of funds and through HAM provides asset management oversight
to ensure the integrity of its long-term investments.
24
<PAGE> 29
Capital Square was incorporated in 1992 to provide financing
services that include originating, selling, and servicing mortgages for tax
advantaged affordable housing properties.
HEG is a holding company that was formed in 1995 to manage
HDC's energy related businesses through its subsidiaries, Heartland Energy
Services ("HES") and Enserv, Inc. ("Enserv"). HES brokers and markets natural
gas and provides gas supply and fuel management services. In 1994, HES became
the first utility affiliate to receive a power marketing license from FERC.
HES also operates a 24-hour energy scheduling and coordination center and buys
and sells electricity through most of the United States. Enserv performs
turnkey energy project development and implementation for customer energy
supply projects. Enserv services include feasibility studies, engineering,
financing, construction, management and project ownership.
Entec is a consulting firm specializing in developing,
marketing and maintaining power generation computer software programs, models
and options for the electric utility industry.
In addition, WPLH has indirect interests in certain other
non-utility businesses through its public utility affiliates WP&L and South
Beloit. WP&L owns and operates the Ripon Water System and the Beloit Water
System (which are regulated as public utilities under Wisconsin law), and South
Beloit owns and operates the South Beloit Water System (which is regulated as a
public utility under Illinois law). Reac, Inc. is a wholly owned subsidiary of
WP&L that purchases and holds real property primarily for use in WP&L's public
utility operations. WP&L also owns a 13% interest in Wisconsin Valley
Improvement Company which manages and controls water flow through a series of
reservoirs and dams on the upper Wisconsin River. The Board of Directors of
WP&L also elects annually the directors of The Wisconsin Power and Light
Foundation, a Wisconsin non-stock, non-profit corporation (the "WP&L
Foundation") organized in 1983 to receive contributions from WP&L for use in
charitable, scientific, literary or scientific purposes.
b. IES
As of December 31, 1995, IES' non-utility subsidiaries and
investments constituted approximately 20% of IES' assets on a consolidated
basis. Operating revenues from IES' non-utility subsidiaries and investments
were approximately 12% of IES' consolidated total operating revenues for the
year ended December 31, 1995. A corporate chart of IES and its subsidiaries,
including its non-utility interests, is filed herewith as Exhibit H-2.
IES wholly owns one direct non-utility subsidiary,
Diversified, which was formed in 1992 as a holding company for substantially
all of IES' non-utility businesses. Diversified has four direct, wholly-owned
subsidiaries, IES Transportation Inc. ("Transportation"), IES Energy Inc.
("Energy"), IES Investments Inc. ("Investments") and IES International Inc.
("International").
25
<PAGE> 30
Transportation was formed in 1991 as a holding company for
IES' transportation subsidiaries. Transportation owns the following: Cedar
Rapids and Iowa City Railway Company ("CRANDIC"), a wholly-owned subsidiary
which owns and operates a shortline railway providing rail freight service
between Cedar Rapids, Iowa City and Amana, Iowa; IEI Barge Services Inc. ("IEI
Barge"), a 75% owned subsidiary that provides private harbor barge terminal
facilities for rail car and barge loading and unloading; and IES Transfer
Services Inc. ("Transfer Services"), a wholly-owned subsidiary which owns and
operates a warehouse and outdoor storage facility linked to CRANDIC. CRANDIC,
in addition, owns 33.8% of Heartland Rail Corporation ("Rail Corporation"),
which owns and operates rail lines running between Council Bluffs, Iowa and
Bureau, Illinois, and operates trackage rights between Bureau and Chicago,
Illinois through its majority-owned subsidiary, Iowa Interstate Railroad, Ltd.
CRANDIC also owns a less than 10% non-voting preferred stock interest in Iowa
Northern Railway Company ("Iowa Northern"), a short-line railway providing rail
service from northern Iowa to Cedar Rapids.
Energy was formed in 1991 as a holding company for IES'
non-regulated energy subsidiaries, which include the following: Industrial
Energy Applications Inc. ("IEA"), a wholly-owned subsidiary that brokers and
markets various types of energy and designs, builds and operates various types
of generation facilities; Whiting Petroleum Corporation ("Whiting"), a
wholly-owned subsidiary that purchases, develops and produces crude oil and
natural gas in part through its subsidiaries, Whiting Programs Inc. and WOC
Acquisition Company; and Ely, Inc., an inactive majority-owned subsidiary with
no significant assets.
Investments was formed in 1991 as a holding company for IES'
telecommunications, real estate and other miscellaneous investments. The
subsidiaries and investments of Investments are as follows: Iowa Land and
Building Company ("Iowa Land"), a wholly-owned real estate holding company
subsidiary which acquires, manages and sells real estate primarily within
Utilities' service area (primarily for economic development), including
ownership of a 70% equity interest in Prairie Ridge Business Park L.C. which is
developing a business park in Cedar Rapids; 2001 Development Corporation
("2001"), a 54.5% owned subsidiary that was organized to promote economic
development in downtown Cedar Rapids through its affiliates' real estate
investments, including Center Place Limited, a limited partnership organized to
construct and operate multifamily rental apartments in downtown Cedar Rapids in
which IES owns a majority interest, directly and through 2001, and the Five
Seasons Hotel, a downtown hotel and conference center in which 2001 and IES
together hold a minority interest; Village Lakeshares, Inc., a wholly-owned
holding company for affiliates that manage and sell resort properties,
including Village Lakeshore L.P., a limited partnership in which it owns a
32.9% interest and in which Investments directly owns the remaining 67.1%
interest; IES Investco Inc., a wholly-owned holding company for certain equity
investments including a 1.4% equity interest in DLJ Partners, an investment
fund, and McLeod, Inc., a provider of integrated local and long distance
telecommunications services ("McLeod") in which Investments holds less than a
20% voting interest. Investments also has equity and debt holdings in certain
economic development and venture capital investments located in Utilities'
service territory.
26
<PAGE> 31
International was formed in 1996 as a holding company for IES'
foreign utility investments. The sole subsidiary of International is IES New
Zealand Inc., a wholly-owned subsidiary that owns interests in two New Zealand
utility distribution companies, Powerco Limited ("Powerco") and Central Power
Limited ("Central Power"), in which IES New Zealand Inc. owns equity
investments of 6% and 7%, respectively.
IES, in addition, has indirect interests in certain other
non-utility investments through Utilities and Utilities' wholly- owned
subsidiary, Ventures. The subsidiaries of Ventures are: IES Midland
Development Inc., a wholly-owned subsidiary that owns and operates a landfill
in Ottumwa, Iowa, and Aqua Ventures L.C., a 35% owned subsidiary that operates
an aquaculture facility which raises fish for human consumption. Utilities
also owns a 33.3% interest in Unitrain Services which is a coal car management
company.
Utilities has provided steam service to downtown Cedar Rapids
residences and businesses since the turn of the century. Utilities currently
delivers low- and high-pressure steam to more than 200 residential and business
customers. Residential customers use the steam for home heating while business
customers use the steam in production processes. Steam sales make up
approximately 1.7% of Utilities' operating revenues.
IES is also a member of the Cedar Rapids Electric
Transportation Consortium ("CRETC"), a joint venture with the City of Cedar
Rapids, Iowa, Westinghouse Electric Corp. and Blue Bird Co. formed to evaluate
electric mass transit vehicle technology in northern climates. CRETC is
partially funded through federal grants.
IES Industries Charitable Foundation (the "IES Foundation")
was founded in 1987 as a non-profit corporation. The purpose of the IES
Foundation is to fund a broad spectrum of agencies and institutions in the
educational, arts, health and social concern fields.
c. IPC
IPC's non-utility subsidiary and investments constituted less
than 0.2% of IPC's assets on a consolidated basis as of December 31, 1995. For
the year ended December 31, 1995, there were no operating revenues from IPC's
non-utility subsidiary and investments. A corporate chart of IPC and its
non-utility subsidiary is filed herewith as Exhibit H-2.
IPC has one direct wholly-owned non-utility subsidiary, IPC
Development, which acquires and disposes of real estate on behalf of IPC and
owns less than 1% of McLeod. IPC Development's real estate operations consist
principally of buying homes from IPC employees who have been relocated by the
company and purchasing real estate intended for future use in IPC's public
utility operations.
27
<PAGE> 32
C. Description of Transaction and Statement as to Consideration
1. Background and Negotiations Leading to the Proposed
Transaction
Each of WPLH, IES and IPC believes that fundamental changes in
the regulatory structure of the electric utility industry are inevitable and
that such changes will likely occur in the near future. Recently enacted
federal laws and actions by federal and state regulatory commissions are
facilitating the changes to bring more competition to various segments of the
industry.
The Energy Policy Act of 1992 (the "1992 Act") granted FERC
the authority to order electric utilities to provide transmission service to
other utilities and to other buyers and sellers of electricity in the wholesale
market. The 1992 Act also created a new class of power producers, exempt
wholesale generators ("EWGs"), which are exempt from regulation under the Act.
The exemption from regulation under the Act of EWGs has increased the number of
entrants into the wholesale electric generation market, thus increasing
competition in the wholesale segment of the electric utility industry.
Commencing in December 1993, pursuant to its authority under
the 1992 Act, FERC issued a number of orders in specific cases directing
utilities to provide transmission services. Under FERC's evolving transmission
policies, utilities are being required to offer transmission services to third
parties on a basis comparable to services that the utilities provide
themselves. FERC is in the process of rulemaking pursuant to which it is
seeking to implement, on a comprehensive basis, the comparable transmission
service policies it has set forth in these specific cases. FERC's actions to
date and its transmission rulemaking proceeding have increased the availability
of transmission services, thus creating greater competition in the wholesale
power market.
In addition, state regulatory bodies in over thirty states,
including, among others, Wisconsin, Illinois, Iowa and Minnesota, have
initiated proceedings to review the basic structure of the industry. These
bodies are considering, or may soon consider, proposals to require some measure
of competition in the retail portion of the industry. The PSCW requested
comment regarding how the industry might be restructured in order to create a
more competitive environment. Following receipt of responses, the PSCW created
a task force to analyze how the industry might be restructured in Wisconsin to
allow consumers to receive the benefits of increased competition. On December
19, 1995, following receipt of the report of the task force, the PSCW agreed to
take steps to further increase competition in Wisconsin's electric utility
industry within five years. While the outcome of the actions described above
is uncertain, it remains the view of the management of WPLH, IES and IPC that
there will ultimately be increased competition in the retail segment of the
business.
The changes to the electric industry that have occurred and
that are occurring are bringing increased competition to various sectors of the
business and are putting pressure on utilities to lower their costs. Each of
WPLH, IES and IPC recognized that a combination with
28
<PAGE> 33
one or more appropriate utilities would enable the combined entity to generate
and deliver energy more cheaply and efficiently and thereby remain a
competitive supplier of energy in an increasingly competitive industry.
Over the last several years, the management of WPLH has
periodically analyzed various potential strategic options that might be
available to WPLH, including possible business combinations or alliances with
other utilities. WPLH management considered the possibility of pursuing
business combinations with a number of the utilities with service areas
proximate to the service area of WP&L, as well as other utilities with
Midwestern operations, and periodically briefed the WPLH Board on such matters.
Based on a cost-benefit analysis of the potential strategic options considered,
WPLH management determined the options studied were not in the best interests
of WPLH and its shareholders. In early February 1995, during the continuation
of one of its reviews of various strategic alternatives, WPLH management
concluded that, among others, both IES and IPC were prospective merger partners
that would provide a good overall strategic fit. WPLH's management based its
conclusions on various factors, including low-cost structure, competitive
energy rates, potential merger-related cost savings, economies of scale,
marketing potential and similar shareholder and common stock trading
characteristics. These reasons, combined with the physical proximity of the
respective companies' service areas and the compatibility of and similarity
between the companies' operations and management, made IES and IPC natural
combination partners for WPLH.
IES has believed for many years that consolidation of electric
utilities within the State of Iowa would be both desirable and inevitable. In
July 1991, Iowa Southern Inc. and IE Industries Inc. merged to form IES. The
utilities in that merger, Iowa Southern Utilities Company and Iowa Electric
Light and Power Company, merged in December 1993 to form Utilities. Since the
1991 merger, management of IES has continued to assess other possible
combination transactions both in the State of Iowa and generally in the
Midwest. In December 1992, IES acquired certain electric utility assets and
properties in Iowa from Union Electric Company. Preliminary discussions with
respect to consolidation transactions were held from time to time between
representatives of IES and other utilities in the Midwest, including IPC. IES
management recognized that in the increasingly competitive market for electric
power, important criteria would include low cost production, efficiencies of
scale, transmission capability, as well as cultural fit between possible
partners and resolution of corporate governance and other issues. In December
1994, IES determined to pursue aggressively process reengineering to reduce
costs and create efficiencies in its electric and gas utility businesses.
Management of IES continued to consider potential combination transactions both
as an additional means of realizing higher efficiency levels and as a means to
increase shareholder value.
For the past several years, IPC has been monitoring the
changes occurring in the electric and gas utility industry and conducting
strategic planning in an effort to remain competitive in the changing
environment. During that time, IPC has been approached by representatives of
other utilities (including IES) in connection with potential business
combinations, but has not held substantive discussions on any specific proposed
combination.
29
<PAGE> 34
During the eighteen months prior to the execution of the Merger Agreement, the
management of IPC analyzed various potential strategic options that might be
available to IPC, including possible business combinations or strategic
alliances with other utilities, as well as options that could be pursued by IPC
on a stand-alone basis. In examining these potential strategic initiatives,
IPC management determined that, at that time, and based upon the circumstances
then existing, IPC and its stockholders would be best served by a strengthening
of IPC on a stand-alone basis. This determination was made by IPC management
based upon its subjective assessment of the potential benefits and potential
risks of each of the alternatives considered. In April 1995, IPC management
proposed to the IPC Board, and the IPC Board approved, a series of strategic
steps to be pursued by IPC on an independent basis. These strategic steps
included initiatives to: increase energy sales consistent with efficient
energy usage; enhance efforts to improve productivity and efficiency; leverage
existing skills and resources to increase revenues and earnings through new
service offerings; focus the core energy service business to be customer
driven; prepare the generation segment for potential unregulated market;
intensify efforts to earn the allowed rate of return in all jurisdictions in
which IPC does business; and investigate the potential for diversification into
non-core businesses.
Over the last several years, as the foregoing issues were
being considered by the management of each of WPLH, IES and IPC, Lee Liu,
Chairman of the Board, President & Chief Executive Officer of IES ("Mr. Liu")
and Erroll B. Davis, Jr., President and Chief Executive Officer of WPLH ("Mr.
Davis"), and Mr. Liu and Wayne H. Stoppelmoor, Chairman of the Board, President
and Chief Executive Officer of IPC ("Mr. Stoppelmoor"), held general
discussions concerning the evolving nature of the electric utility industry.
In May 1995, Mr. Davis called Mr. Liu to schedule a meeting to discuss in a
more focussed manner the views of WPLH and IES regarding the future of the
utility industry. That call resulted in a meeting on May 18, 1995 at which the
concept of a business combination between WPLH and IES and a subsequent
combination between the combined WPLH/IES and IPC were discussed in a very
preliminary fashion. At that meeting, Messrs. Davis and Liu also identified
the issues of management succession, board composition and various utility
integration strategies as significant points in any such business combination
to be agreed upon, and agreed that discussions between representatives of WPLH
and IES should be initiated. Such discussions commenced shortly thereafter.
WPLH subsequently engaged Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") as its exclusive financial advisor to
assist WPLH in analyzing, structuring, negotiating, and effecting the possible
transaction. In addition, WPLH engaged Foley & Lardner, its outside law firm,
to advise it with respect to the potential business combination.
IES engaged Morgan Stanley & Co. Incorporated ("Morgan
Stanley") as its financial advisor in connection with this possible transaction
and also retained its outside law firm, Winthrop, Stimson, Putnam & Roberts, to
assist it in the potential business combination. In addition, Arthur Andersen
Economic Consulting was engaged to assist the IES Board and management in their
consideration of strategic alternatives, particularly in the area of possible
synergies and/or cost savings that could be obtained from various alternative
combination
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transactions and as compared to cost savings which management of IES believed
could be obtained on a stand-alone basis through process reengineering.
During the time that discussions were being held between
representatives of WPLH and IES, representatives of IPC were contacted to
determine if IPC was interested in discussing a potential business combination.
The IPC Board subsequently authorized its representatives to meet with
representatives of IES and WPLH to discuss a potential business combination
among the companies.
IPC subsequently engaged Salomon Brothers Inc ("Salomon
Brothers") as its financial advisor to assist IPC in analyzing, structuring,
negotiating and effecting the possible three-way transaction and engaged the
law firm of Milbank, Tweed, Hadley & McCloy to advise it with respect thereto.
In addition, IPC engaged the Deloitte & Touche Consulting Group ("Consulting
Group") to assist IPC's management in identifying other potential combination
partners and in assessing the relative attractiveness of each of these
potential partners, including WPLH and IES, from the standpoint of the
potential synergies described by management which could be realizable from such
a transaction. IPC management, with the assistance of Consulting Group,
identified certain financial factors, such as financial strength and earnings
growth, and certain operational factors, such as customer mix and capacity mix,
that would be relevant to the IPC Board's assessment of the relative
attractiveness of other potential combination partners. This information,
based only on publicly available information and certain attributes regarding
the financial and operational profile of these potential partners, was
presented to the IPC Board to describe potential areas of synergies.
Consulting Group was subsequently retained to assist the
senior managements of all three companies and certain employees designated by
them in identifying and quantifying the potential cost savings from synergies
resulting from the proposed three-way merger. The scope of Consulting Group's
engagement (as with its earlier engagement by IPC) was limited to assisting
such managements and designated employees in the identification and
quantification of potential combination synergies, including personnel
reductions, non-labor savings, field operations, electric dispatch, capacity
deferral and gas supply savings; the assessment of impacts of current
stand-alone cost reduction initiatives on merger-related savings;
quantification of costs to achieve identified savings; and developing summary
presentation materials and supporting documentation. Managements of the three
companies were responsible for the assumptions and conclusions made in the
synergy study. While Consulting Group assisted such managements in the synergy
identification and estimation process, the determination of synergy estimates
were the sole responsibility of the managements of the three companies.
Consistent with its assignment, Consulting Group did not prepare any financial
projections, feasibility studies or reports, or assist the three companies with
financial evaluation or modeling of potential combination scenarios.
To facilitate consideration of the proposed business
combination, the three companies formed task forces to review and evaluate
issues associated with the transaction. During the following months, the
various task forces continued their work with respect to the
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synergistic analyses, business plans, legal structures, regulatory plans, due
diligence and employee benefits. In addition, discussions continued between
WPLH management and Merrill Lynch, IES management and Morgan Stanley, and IPC
management and Salomon Brothers with respect to negotiation of the exchange
ratios, and between counsel for the three companies with respect to the terms
of drafts of the mergers and stock option agreements. Numerous briefings were
also made by management and the outside advisors to the respective Boards of
Directors of WPLH, IES and IPC.
Prior to November 10, 1995, the three companies with the
assistance of their respective financial and legal advisors agreed on the
proposed structure for the Transaction and negotiated the terms of the Merger
Agreement, including the conditions to closing, the termination provisions, the
break-up fees, the covenants which would govern the operations of WPLH, IES and
IPC prior to the completion of the Transaction and various other matters, such
as employee benefits and workforce matters. Discussions were also held among
Mr. Davis, Mr. Liu and Mr. Stoppelmoor and among Merrill Lynch, Morgan Stanley
and Salomon Brothers regarding the exchange ratios to be applied to the IES
Common Stock and the IPC Common Stock. After consulting and reviewing with
Merrill Lynch the range of exchange ratios previously presented by Merrill
Lynch and discussed with the WPLH Board, as well as the discussions among the
companies and their financial advisors regarding the exchange ratios, WPLH
management proposed ratios to IES and IPC which would result in each share of
WPLH Common Stock remaining outstanding as one share of Interstate Energy
Common Stock, each share of IES Common Stock being converted into 0.98 of a
share of Interstate Energy Common Stock and each share of IPC Common Stock
being converted into 1.11 shares of Interstate Energy Common Stock.
On November 10, 1995, the Boards of Directors of WPLH, IES and
IPC each approved the Merger Agreement, and certain related agreements and the
transactions contemplated thereby. The Merger Agreement and certain related
agreements were executed on that date.
In mid-April 1996, Morgan Stanley, on behalf of IES, contacted
Merrill Lynch and informed Merrill Lynch that IES desired to discuss certain
issues regarding the Merger Agreement and specifically IES' investment in
McLeod. Morgan Stanley noted that the potential value of IES' stake in McLeod
might be above that contemplated at the time the parties originally entered
into the Merger Agreement. Following the passage of the Telecommunications Act
of 1996, in April 1996, McLeod had filed a registration statement with the
Commission with respect to an initial public offering of its Class A common
stock.
During the following weeks, the parties, in consultation with
their financial and legal advisors, discussed proposals to provide for an
adjustment of the IES exchange ratio. On May 7, 1996, the Boards of Directors
of WPLH and IES approved a proposed amendment to the Merger Agreement which,
among other things, provided for an adjustment of the IES exchange ratio from
0.98 to 1.01 in the event certain contingencies were satisfied relative to the
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McLeod initial public offering. The Board of Directors of IPC approved the
amendment on May 10, 1996. The amendment to the Merger Agreement was executed
by the parties on May 22, 1996.
On June 14, 1996, McLeod completed its initial public offering
and the conditions precedent to an adjustment of the IES exchange ratio were
satisfied. As a result, the IES exchange ratio was automatically adjusted to
1.01.
Additional information regarding the background of the
Transaction is set forth in the Joint Registration Statement on Form S-4 of
WPLH and New IPC which is attached as Exhibit I-1 hereto.
2. Merger Agreement
Subject to the possible implementation of an alternative
structure described below, the Merger Agreement provides for IES to be merged
with and into WPLH (at or prior to which time WPLH will change its name to
Interstate Energy), and Acquisition to be merged with and into IPC. However,
if the parties determine that certain Wisconsin regulatory requirements mandate
that the utility subsidiaries of Interstate Energy be Wisconsin corporations,
the transactions will be consummated in a manner designed to comply with such
requirements. In that event, the IES Merger will be effected as described
above and Utilities will be merged with and into New Utilities pursuant to the
Utilities Reincorporation Merger, with New Utilities continuing as the
surviving corporation. In addition, the merger involving IPC will be
reconstituted to provide for: (i) the merger of IPC with and into New IPC
pursuant to the IPC Reincorporation Merger and (ii) the merger of Acquisition
with and into New IPC, which merger will result in New IPC becoming a
wholly-owned subsidiary of Interstate Energy. Immediately prior to the
Utilities Reincorporation Merger and for state regulatory reasons, WP&L will
transfer to New Utilities the assets comprising the Beloit Water System.
Similarly, immediately prior to the IPC Reincorporation Merger and for
Wisconsin regulatory reasons, WP&L will transfer to New IPC the assets
comprising the Ripon Water System. The Merger Agreement is incorporated by
reference as Exhibit B.
Under the terms of the Merger Agreement, upon consummation of
the Transaction: (i) each outstanding share of IES Common Stock (other than
shares owned directly or indirectly by WPLH, IES or IPC and IES Dissenting
Shares) will be converted into the right to receive 1.01 shares of Interstate
Energy Common Stock; (ii) each outstanding share of IPC Common Stock (other
than shares owned directly or indirectly by WPLH, IES or IPC) will ultimately
be converted into the right to receive 1.11 shares of Interstate Energy Common
Stock; (iii) each outstanding share of IPC Preferred Stock (other than shares
owned directly or indirectly by WPLH, IES or IPC and other than IPC Dissenting
Shares) will remain outstanding and unchanged or, in the event that the IPC
Reincorporation Merger is to be effected, will be converted into one share of
New IPC Preferred Stock with terms (including dividend rights) and designations
under the New IPC charter substantially identical to those of the converted
shares of IPC Preferred Stock under the IPC charter; (iv) each outstanding
share of WPLH Common
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Stock will remain outstanding and unchanged as one share of Interstate Energy
Common Stock; and (v) if the Utilities Reincorporation Merger is effected, each
outstanding share of Utilities Common Stock will be converted into one share of
New Utilities Common Stock. If the Utilities Reincorporation Merger is to be
consummated, it is currently anticipated that shares of Utilities Preferred
Stock then outstanding will be redeemed by Utilities prior to the consummation
of such merger. As a result of the Transaction, the common shareholders of
WPLH, IES and IPC immediately prior to the Transaction (except for holders of
IES Dissenting Shares) will all be common shareholders of Interstate Energy.
Based on the capitalization of WPLH, IES and IPC on July 10, 1996 and the
exchange ratios for the IES Common Stock and the IPC Common Stock, holders of
WPLH Common Stock, IES Common Stock and IPC Common Stock would have held
approximately 43%, 42.2% and 14.8%, respectively, of the aggregate number of
shares of Interstate Energy Common Stock that would have been outstanding if
the Transaction had been consummated as of such date.
Except as set forth below, if any holder of IES Common Stock
or IPC Common Stock would be entitled to receive a number of shares of
Interstate Energy Common Stock that includes a fraction, then in lieu of a
fractional share, such holder will be entitled to receive a cash payment
determined by multiplying the fractional share interest by the average of the
last reported sales price, regular way, per share of WPLH Common Stock on the
New York Stock Exchange Composite Tape for the ten business days prior to and
including the last business day prior to the consummation of the Transaction,
without any interest thereon. Fractional shares of IES Common Stock and IPC
Common Stock held in accounts under the dividend reinvestment plans and
employee benefit plans of IES and IPC may be converted into the applicable
number of shares (or fractional shares) of Interstate Energy Common Stock in
accordance with the respective exchange ratios.
The Transaction is subject to customary closing conditions,
including the receipt of shareholder approvals of WPLH, IES and IPC and all
necessary governmental approvals, including the approval of the Commission.
The Transaction is designed to qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended. WPLH, IES and IPC believe that the Transaction will be treated as a
"pooling of interests" for accounting purposes.
The Merger Agreement contains certain covenants relating to
the conduct of business by the parties pending the consummation of the
Transaction, which are customarily contained in merger transactions generally.
As a general matter, the parties must carry on their businesses in the ordinary
course consistent with past practice, may not increase dividends beyond
specified levels, and may not issue capital stock except as otherwise
specified. The Merger Agreement also contains customary restrictions on, among
other things, charter and bylaw amendments, capital expenditures, acquisitions,
dispositions, incurrence of indebtedness, certain increases in employee
compensation and benefits and affiliate transactions.
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3. Management of Interstate Energy Following the Merger.
Following consummation of the Transaction, the headquarters of
Interstate Energy will be in Madison, Wisconsin. Pursuant to the Merger
Agreement, upon consummation of the Transaction, the Interstate Energy Board of
Directors will consist of fifteen members: six designated by IES (including
Mr. Liu), six designated by WPLH (including Mr. Davis) and three designated by
IPC (including Mr. Stoppelmoor). As of the date hereof, WPLH, IES and IPC have
not determined which individuals, in addition to Messrs. Liu, Davis and
Stoppelmoor, will be designated to serve as directors of Interstate Energy upon
consummation of the Transaction.
Upon consummation of the Transaction, Mr. Liu will serve as
Chairman of the Board of Directors of Interstate Energy for a period of two
years and thereafter will retire as an officer of Interstate Energy but may
continue as a director of Interstate Energy. Mr. Davis will serve as
President and Chief Executive Officer of Interstate Energy for a period of two
years following the effective date of the Transaction and, for the three-year
period thereafter and following Mr. Liu's retirement, Mr. Davis will serve as
Chairman, President and Chief Executive Officer of Interstate Energy. Mr.
Stoppelmoor will serve as Vice Chairman of Interstate Energy for a period of
two years following the effective date of the Transaction and thereafter will
retire as an officer of Interstate Energy but may continue as a director of
Interstate Energy. Messrs. Liu, Davis, Stoppelmoor and Michael R. Chase
(Executive Vice President of IPC) will each have an employment agreement with
Interstate Energy following the consummation of the Transaction. The forms of
these employment agreements are attached as Annexes H, I, J and K to the Joint
Registration Statement on Form S-4 and are incorporated by reference herein as
Exhibit I-2.
Following consummation of the Transaction, the activities of
Interstate Energy will be governed by its Amended and Restated Articles of
Incorporation and Restated Bylaws, attached hereto as Exhibits J-1 and J-2,
respectively.
D. Dividend Reinvestment Plan, Long-Term Equity Incentive Plan and other
Employee Benefit Plans.
Interstate Energy proposes, from time to time during a period
of five years from the date of an Order issued by the Commission, to issue
and/or acquire in open market transactions or through privately-negotiated
transactions up to 11 million shares of Interstate Energy Common Stock under
Interstate Energy's dividend reinvestment and stock purchase plan, long-term
equity incentive plan and certain other employee benefit plans described below.
1. Dividend Reinvestment Plan
Each of WPLH, IES and IPC has in place a dividend reinvestment
and stock purchase plan. Following consummation of the Transaction, the IES
and IPC plans will cease to exist and participants in such plans will be
eligible to become participants in the WPLH plan,
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which is referred to below as the "DRIP" and which will become (subject to
certain proposed modifications as described below) the Interstate Energy plan.
Set forth below is a description of the principal terms of the
DRIP:
a. Purpose of the DRIP and Eligibility of Participants.
The purpose of the DRIP is to provide eligible participants
with a convenient and economical method of investing cash dividends and/or
optional cash payments in shares of Interstate Energy Common Stock. To be
eligible to participate in the DRIP, a person will need to be: (i) a
shareholder of record of Interstate Energy Common Stock, (ii) a shareholder of
record of Preferred Stock of WP&L or (iii) an employee of Interstate Energy or
one of its majority-owned subsidiaries. Directors of Interstate Energy or any
majority-owned subsidiary will also be eligible to participate in the DRIP. It
is anticipated that prior to the consummation of the Transaction, the DRIP will
be modified to permit other investors who are not shareholders or employees of
Interstate Energy to make an original purchase of Interstate Energy Common
Stock under the DRIP, whereupon they will become shareholders of Interstate
Energy and will be entitled to participate in the DRIP like other shareholders.
It is also expected that the DRIP will be modified to allow (following
consummation of the Transaction) the reinvestment of dividends paid on shares
of Preferred Stock of Utilities and IPC.
The DRIP is designed to encourage and facilitate broader
ownership of Interstate Energy Common Stock. Full investment of funds will be
possible under the DRIP, subject to minimum and maximum purchase limits,
because the DRIP will permit fractional as well as whole shares to be credited
to a participant's account. The DRIP will also provide Interstate Energy with
a means to raise equity capital and to increase ownership by small, long-term
investors.
b. Sources of Common Stock and Use of Proceeds.
Any shares of Interstate Energy Common Stock purchased under
the DRIP with optional cash payments or reinvested dividends will be, at the
discretion of Interstate Energy, authorized but unissued shares, treasury
shares or shares purchased on the open market or in privately negotiated
transactions by the DRIP's independent plan administrator (the
"Administrator"). As of the date of this Application, the Administrator is
purchasing shares in the open market for the WPLH plan. Following consummation
of the Transaction, the decision as to whether shares are to be purchased
directly from Interstate Energy, or in the open market or in privately
negotiated transactions, will be based on Interstate Energy's need for common
equity and other factors considered by Interstate Energy to be relevant. Any
determination by Interstate Energy to alter the manner in which shares will be
purchased for the DRIP, and implementation of any such change, will comply with
applicable law and Commission interpretations then in effect.
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Net proceeds from the sale of newly issued shares of
Interstate Energy Common Stock will be added to Interstate Energy's general
funds to be available for general corporate purposes. Interstate Energy will
not receive any proceeds from shares acquired by the Administrator in the open
market or in privately negotiated transactions.
Interstate Energy will not use any proceeds from newly issued
shares to acquire the securities of or any interest in any EWG or foreign
utility companies (as those terms are defined in Sections 32(e) and 33(a) of
the Act, as amended by the Energy Policy Act of 1992), until such time as such
use shall be approved by regulation or order of the Commission, to the extent
such approval is required under the Act.
A full statement of the current provisions of the DRIP is
included in WPLH's Registration Statement on Form S-3 (Exhibit I-3 hereto).
2. Long-Term Equity Incentive Plan.
WPLH currently has in effect the Long-Term Equity Incentive
Plan (the "Long-Term Plan") which will remain in effect following the
consummation of the Transaction. In addition to providing the opportunity for
awards to key employees of Interstate Energy and its subsidiaries following the
consummation of the Transaction, the Long-Term Plan is expected to replace the
IES Long-Term Incentive Plan (the "IES Long-Term Plan") (except with respect to
obligations incurred thereunder prior to the consummation of the Transaction).
Pursuant to the Merger Agreement, (i) each outstanding option to purchase
shares of IES Common Stock under the IES Long-Term Plan along with tandem stock
appreciation rights will be modified such that the option will constitute at
the effective time of the Transaction the right to acquire (on the same terms
and conditions as were applicable under such option) shares of Interstate
Energy Common Stock based on the same number of shares of Interstate Energy
Common Stock as the holder of such IES stock option would have been entitled to
receive in the Transaction had such holder exercised such option in full
immediately prior to the consummation of the Transaction; and (ii) each other
outstanding award under the IES Long-Term Plan shall be modified to constitute
an award based upon the same number of shares of Interstate Energy Common Stock
as the holder of such award would have been entitled to receive in the
Transaction had such holder been the owner, immediately before the consummation
of the Transaction, of the shares of IES Common Stock on which such award is
based, and otherwise on the same terms and conditions as govern such award
immediately before the consummation of the Transaction. IES also has in effect
the Whiting Stock Option Plan pursuant to which one remaining participant
thereunder has an option to acquire IES Common Stock. It is anticipated that
prior to the consummation of the Transaction such option will be exercised or
such Plan will be amended to provide that the option will be exercisable for
shares of Interstate Energy Common Stock based on the IES exchange ratio.
Set forth below is a summary of certain features of the
Long-Term Plan, which summary is qualified by reference to such plan (Exhibit
I-4 hereto):
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The Long-Term Plan is required to be administered by a
committee of the Interstate Energy Board of Directors (the "Committee")
consisting of not less than two directors who are eligible to administer the
Long-Term Plan pursuant to Rule 16b-3 under the Securities Exchange Act of
1934. The Compensation and Personnel Committee of the WPLH Board is currently
serving as the administrator of the Long-Term Plan. Among other functions, the
Committee has the authority to establish rules for the administration of the
Long-Term Plan; to select the employees of Interstate Energy and its
subsidiaries to whom awards will be granted; to determine the types of awards
to be granted to employees and the number of shares covered by such awards; to
set the terms and conditions of such awards; to determine whether, to what
extent and when awards may be settled in cash or shares; and to amend the terms
and conditions of any outstanding awards to the extent authorized under the
Long-Term Plan. Except as otherwise provided in the Long-Term Plan,
determinations and interpretations with respect to the Long-Term Plan and any
award agreements will be in the sole discretion of the Committee, whose
determination and interpretations will be binding on all parties. Any nonunion
employee of Interstate Energy or any subsidiary, including any executive
officer or employee-director of Interstate Energy, is eligible to receive
awards under the Long-Term Plan.
The Long-Term Plan authorizes the granting to employees of:
(a) stock options, which may be either incentive stock options ("ISOs") meeting
the requirements of Section 422 of the Internal Revenue Code (the "Code") or
nonqualified stock options; (b) restricted stock; and (c) performance shares
and performance units. The Long-Term Plan provides that up to a total of
1,000,000 shares of Interstate Energy Common Stock (subject to adjustment as
described below) will be available for the granting of awards. Of this number,
up to 300,000 shares may be granted as restricted stock. If any shares subject
to awards granted under the Long-Term Plan, or to which any award relates, are
forfeited or if an award otherwise terminates, expires or is cancelled prior to
the delivery of all of the shares or other consideration issuable or payable
pursuant to the award, such shares (assuming the holder of the award did not
receive dividends on the shares or exercise other indicia of ownership) will be
available for the granting of new awards under the Plan. Any shares delivered
pursuant to an award may be either authorized and unissued shares of Interstate
Energy Common Stock or shares reacquired and held by Interstate Energy.
Options may be granted to employees at such times and in such
amounts as determined by the Committee, provided that the maximum number of
shares subject to options that may be granted to any single participant during
the term of the Long-Term Plan is 150,000. The exercise price per share of
Interstate Energy Common Stock subject to an option granted under the Long-Term
Plan will be determined by the Committee, provided that the exercise price may
not be less than 100% of the fair market value of a share of Interstate Energy
Common Stock on the date of grant. In addition, the Committee may grant
options with exercise prices that increase over time. The term of an option
granted under the Long-Term Plan will be as determined by the Committee, but
cannot exceed ten years. Options granted under the Long-Term Plan will become
exercisable in such manner and within such period or periods and in such
installments or otherwise as determined by the Committee; provided, that no
option may be exercised within six months of its grant. All ISOs granted under
the Long-Term Plan will
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also be required to comply with all other terms of Section 422 of the Code. At
the time an option is granted, the Committee may also grant dividend
equivalents. Dividend equivalents give the participant a contingent right to
receive an amount equal to the dividends declared on a share of Interstate
Energy Common Stock on all record dates during the related option exercise
period. Payout of the value of a dividend equivalent will be made in cash
within 30 days following the exercise of the related option, provided the
option is in-the-money on the exercise date.
In the event a participant's employment is terminated by
reason of death, disability or retirement, all outstanding options granted to
the participant will become fully vested and remain exercisable prior to their
expiration or for one year (three years in the case of retirement), whichever
period is shorter. If a participant's employment is terminated for any other
reason (other than for cause), unvested options held by the participant will be
forfeited, unless otherwise determined by the Committee, and vested options may
be exercised during the three month period following termination. If a
participant's employment is terminated for cause, all options held by the
participant will be forfeited.
Shares of restricted common stock granted to employees under
the Long-Term Plan will be subject to such restrictions as the Committee may
impose, including a requirement that participants pay a stipulated purchase
price for each share. The restrictions imposed on the shares may lapse
separately or in combination at such time or times, or in such installments or
otherwise, as the Committee may deem appropriate; provided, that no
restrictions will lapse prior to six months after award, except in the case of
death. Upon termination of an employee's employment for any reason other than
death, disability or retirement during the applicable restriction period, all
shares of restricted stock still subject to restriction will be subject to
forfeiture by the employee. In the event an employee's employment is
terminated by reason of death, disability or retirement, all shares of
restricted stock still subject to restriction will become fully vested. Under
the Long-Term Plan, the Committee will have the authority at its discretion to
waive in whole or in part any or all remaining restrictions with respect to
shares of restricted stock granted to an employee.
During the period of restriction, participants may exercise
full voting rights with respect to restricted shares and are entitled to
receive all regular cash dividends paid with respect to those shares. All
other cash dividends and distributions may be credited to participants subject
to the same restrictions on transferability and forfeitability as the
restricted shares with respect to which they are paid. If any dividends or
distributions are paid in shares, the shares will be subject to the same
restrictions on transferability as the shares on which the dividends or
distributions are paid.
The Long-Term Plan also provides for the granting of
performance shares and performance units to employees. The Committee will
determine the number of performance units and shares granted to participants;
provided that so long as the Committee determines that a grant of performance
units or performance shares should qualify for the "performance-based"
exemption under Section 162(m) of the Code, the maximum payout to any executive
officer
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named in the proxy statement compensation table with respect to performance
units and/or performance shares granted in any fiscal year is $400,000. The
Committee will determine the applicable performance period, which, in all
cases, will exceed six months, the performance goal or goals to be achieved
during any performance period, the proportion of payments, if any, to be made
for performance between the minimum and full performance levels and any other
terms, conditions and rights relating to the grant of performance shares or
performance units. Interstate Energy and subsidiary performance goals
established by the Committee under the Long-Term Plan will be chosen from
return on equity, total shareholder return, net income, earnings per share and
cash flow. The Committee will establish the specific goals each year prior to
the commencement of the period to which the compensation relates. Payment on
performance shares and performance units held by employees will be made in cash
or shares of Interstate Energy Common Stock (which, at the discretion of the
Committee, may be shares of restricted stock) (or in a combination thereof),
which have an aggregate fair market value equal to the value of the earned
performance shares and performance units. Payments will be made in a single
lump sum within seventy-five days following the close of the applicable
performance period, unless the participant elects to defer payment.
In the event a participant's employment is terminated by
reason of death, disability, retirement or involuntary termination without
cause, the participant will receive a prorated payout of the performance shares
and/or performance units as determined by the Committee based on the length of
time the awards were held and the achievement of the preestablished performance
goals. Upon termination of a participant's employment for any other reason,
all performance shares and performance units will be forfeited.
Participants will be entitled to receive dividends with
respect to shares earned in connection with grants of performance shares and
performance units, subject to the same accrual, forfeiture and payout
restrictions which apply with respect to shares of restricted stock. In
addition, participants may, at the discretion of the Committee, be entitled to
exercise voting rights with respect to shares which have been earned in
connection with grants of performance units and performance shares.
In the event of any stock dividend, stock split, merger,
consolidation, reorganization, recapitalization, share combination, liquidation
or any other change affecting the Interstate Energy Common Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the
Long-Term Plan, then the Committee will generally have the authority, in such
manner as it deems equitable, to adjust (i) the number and type of shares of
stock that may be issued under the Long-Term Plan, (ii) the number and type of
shares of stock subject to outstanding awards, and (iii) the grant, purchase or
exercise price with respect to any award.
No award granted under the Long-Term Plan may be assigned,
sold, pledged, transferred or encumbered by any participant, otherwise than by
will, or by the laws of descent and distribution.
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<PAGE> 45
The Interstate Energy Board may amend, suspend or terminate
the Long-Term Plan at any time, provided that no amendment which requires
shareholder approval in order for the Long-Term Plan to continue to comply with
Rule 16b-3 under the Securities Exchange Act of 1934 will be effective without
approval of shareholders. Further, no termination, amendment or modification
of the Long-Term Plan will adversely affect in any material way any outstanding
award without the consent of the holder of such award.
The Committee may permit a participant to defer receipt of the
payment of cash or delivery of shares due with respect to an award, subject to
such rules and procedures as the Committee may establish.
Upon the occurrence of a Change in Control (as defined in the
Rights Agreement) of Interstate Energy (i) all outstanding options will become
immediately exercisable; (ii) any restriction periods and related restrictions
on restricted stock will lapse; (iii) the target payout opportunity attainable
under all outstanding performance units and shares will be deemed fully earned
for the entire performance period and a pro rata portion of the performance
share or unit, based on the portion of the performance period which has
elapsed, will be paid out in cash; and (iv) the Committee may make any other
modifications to outstanding awards, except, in all cases, unless otherwise
specifically prohibited by the Plan.
3. Other Stock-Based Employee Benefit Plans
Each of WPLH, IES and IPC currently has plans, in addition to
the Long-Term Plan, the IES Long-Term Plan and the Whiting Stock Option Plan,
that provide for the issuance of shares of its common stock to participating
employees. It is currently anticipated that such plans, the Wisconsin Power
and Light Company Employees' Retirement Savings Plan, the IES Employee Savings
Plan, the IES Employee Stock Purchase Plan, the IES Bonus Stock Ownership Plan
and the Interstate Power Company 401(k) Plan, will remain in effect following
the consummation of the Transaction, except that such plans will be modified to
provide for the acquisition of Interstate Energy Common Stock. Each of the
Wisconsin Power and Light Company Employees' Retirement Savings Plan, the IES
Employee Savings Plan and the Interstate Power Company 401(k) Plan allows
participating employees to elect to defer a portion of their compensation and
have such funds invested in designated investment media selected by the
participants, including a common stock fund of the sponsoring company. In
connection with the Transaction, shares of IES Common Stock held in the IES
Employee Savings Plan and shares of IPC Common Stock held in the Interstate
Power Company 401(k) Plan will be converted into shares of Interstate Energy
Common Stock and following the consummation of the Transaction the employer
common stock fund of each of the plans will provide for the issuance of
Interstate Energy Common Stock. Each of the plans is a qualified plan for
purposes of Section 401(a) of the Code. The IES Employee Stock Purchase Plan
allows eligible IES employees to purchase stock at a discount to fair market
value and the IES Bonus Stock Ownership Plan provides a mechanism to award
stock bonuses to nonmanagement employees of IES and its subsidiaries.
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<PAGE> 46
E. Rights Agreement
Applicants seek authorization to implement the following
transactions, which are permitted by the terms of the Rights Agreement: (i)
the issuance of the Rights (as defined below); (ii) the sale and issuance of
Interstate Energy Common Stock or other Interstate Energy securities or assets
upon the exercise of the Rights; (iii) the redemption of the Rights or the
issuance of Interstate Energy Common Stock or other Interstate Energy
securities in exchange for the Rights; and (iv) the amendment of the Rights
Agreement as permitted by the terms thereof.
Set forth below is a description of the principal terms of the
Rights Agreement. Such description is qualified in its entirety by reference
to the text of the Rights Agreement, which is attached hereto as Exhibit I-5.
The Rights Agreement provides that each outstanding share of
Interstate Energy Common Stock will have attached thereto one Common Stock
Purchase Right ("Right") and each share subsequently issued by Interstate
Energy prior to the expiration of the Rights Agreement, including the shares
issued pursuant to the Transaction, will have attached thereto one Right.
Under certain circumstances described below, the Rights will entitle the holder
thereof to purchase additional shares of Interstate Energy Common Stock.
Currently the Rights are not exercisable and trade with the
WPLH Common Stock. In the event the Rights become exercisable, each Right
(unless held by a person or group which beneficially owns more than 20% of the
outstanding Interstate Energy Common Stock) will initially entitle the holder
to purchase one-half share of Interstate Energy Common Stock at a price of $60
per full share (equivalent to $30 per each one-half share), subject to
adjustment. The Rights will only become exercisable if a person or group has
acquired, or announced an intention to acquire, 20% or more of the outstanding
shares of Interstate Energy Common Stock. Under certain circumstances,
including the existence of a 20% acquiring party, each holder of a Right, other
than the acquiring party, will be entitled to purchase at the exercise price
Interstate Energy Common Stock having a market value of two times the exercise
price. In the event of the acquisition of Interstate Energy by another
corporation subsequent to a person acquiring 20% or more of the Interstate
Energy Common Stock, each holder of a Right will be entitled to receive the
acquiring corporation's common shares having a market value of two times the
exercise price. The Rights may be redeemed at a price of $.01 per Right prior
to the existence of a 20% acquiring party and may thereafter be exchanged for
one share of Interstate Energy Common Stock per Right until the existence of a
50% acquiring party. The Rights will expire on February 22, 1999. Under the
Rights Agreement, the Interstate Energy Board will be able to reduce the
thresholds applicable to the Rights from 20% to not less than 10%. Rights do
not have voting or dividend rights and, until they become exercisable, have no
dilutive effect on the earnings of WPLH.
Shareholder rights plans, such as the Rights Agreement, have
become a widely accepted means of maximizing shareholder value by reducing the
risk of nonrealization of
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<PAGE> 47
shareholder value due to opportunistic takeover proposals. The Rights
Agreement would encourage potential acquirors to negotiate with the Interstate
Energy Board and would be intended to assist the Interstate Energy Board in
obtaining the highest value for the shareholders of Interstate Energy,
especially in a hostile or unwanted takeover situation. The Rights Agreement
may, in certain circumstances, permit the Interstate Energy Board to thwart an
offer the Interstate Energy Board determines to be inadequate. The Rights
Agreement also provides the Interstate Energy Board with a role (supplemental
to the role of the Commission under the Act) in discouraging implicitly
coercive takeover tactics and is intended to enable the Interstate Energy Board
to provide holders of Interstate Energy Common Stock adequate time to properly
assess a takeover bid without undue pressure. A shareholder rights plan, such
as the Rights Agreement, may enhance the probability that a higher competing
bid will emerge. Over 1,700 American public companies have adopted shareholder
rights plans. The Commission has authorized registered holding companies to
adopt shareholder rights plans substantially similar to the Rights Agreement.
National Fuel Gas Company, Holding Co. Act Release No. 26532 (June 12, 1996);
Consolidated Natural Gas Company, Holding Co. Act Release No. 26434 (December
19, 1995).
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<PAGE> 48
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred,
directly or indirectly, in connection with the Transaction, including the
solicitation of proxies, registration of securities of the applicants under the
Securities Act of 1933, and other related matters, are estimated as follows:
<TABLE>
<S> <C>
Commission filing fee relating to
Application/Declaration on Form U-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000.00
Commission filing fee for the
Registration Statement on Form S-4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,367.00
Accountants' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Legal fees and expenses relating to the Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Other legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Shareholder communication and proxy solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
NYSE listing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Exchanging, printing, and engraving of
stock certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Investment bankers' fees and expenses
Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Salomon Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Consulting fees related to human
resource issues, public relations,
regulatory support, and other
matters relating to the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Expenses related to integrating
the operations of the merged company
and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
TOTAL
</TABLE>
- --------------
* To be filed by amendment.
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<PAGE> 49
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules
thereunder are or may be directly or indirectly applicable to the proposed
Transaction:
<TABLE>
<CAPTION>
Section of the Act Transactions to which section or rule is or may be applicable
- ------------------ -------------------------------------------------------------
<S> <C>
4, 5 Registration of Interstate Energy as a holding company following the
consummation of the Transaction
6(a), 7 Issuance of Interstate Energy Common Stock in the Transaction in exchange
for shares of IES and IPC Common Stock; issuance of Rights; issuance of
Interstate Energy Common Stock or other securities in connection with the
Rights Agreement; issuance of Interstate Energy Common Stock under
certain employee benefit and savings plans of WPLH, IES and IPC and the
Interstate Energy Dividend Reinvestment Plan; approval of all outstanding
intra-system debt, including guarantees
9(a)(2), 10 Acquisition by Interstate Energy of common stock of Utilities (or New
Utilities) and IPC (or New IPC)
9(a)(1), 10 Acquisition by Interstate Hold of certain non-utility subsidiaries of
WPLH and IES; acquisition of Interstate Energy Common Stock in open-
market transactions under certain benefit and savings plans
8, 11(b), 21 Retention by Interstate Energy of gas operations and other businesses of
WPLH, IES and IPC and their direct and indirect subsidiaries
13 Approval of the Service Agreement and services provided to utility
affiliates thereunder by Interstate Services; approval of incidental
services among WP&L, South Beloit, Utilities and IPC; approval of the
Non-Utility Service Agreement and services provided to non-utility
affiliates thereunder by Interstate Services; approval of the performance
of certain services between the Interstate Energy system companies
13(b)(1) Exemption from at-cost standards with respect to certain services.
</TABLE>
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<PAGE> 50
<TABLE>
<CAPTION>
Rules
- -----
<S> <C>
42 Open-market purchases of Interstate Energy Common Stock pursuant to the
Interstate Energy Dividend Reinvestment Plan
80-92 Interstate Services charges to Interstate Energy system companies; WP&L
charges to Utilities and IPC and vice-versa; certain Interstate Energy
system companies' charges to other Interstate Energy system companies
83(a) Exemption from at-cost standards with respect to certain services
87(a)(3) Incidental services among Interstate Energy system utility companies
88 Approval of Interstate Services as a subsidiary service company
93, 94 Accounts, records and annual reports by Interstate Services
</TABLE>
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Transaction, such sections and rules
should be considered to be set forth in this Item 3.
A. Transaction
Section 9(a)(2) makes it unlawful, without approval of the
Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public utility company, if such person is an
affiliate [under Section 2(a)(11)(A) of the Act] . . . of such company and of
any other public utility or holding company, or will by virtue of such
acquisition become such an affiliate." Under the definition set forth in
Section 2(a)(11)(A), an "affiliate" of a specified company means "any person
that directly or indirectly owns, controls, or holds with power to vote, 5 per
centum or more of the outstanding voting securities of such specified company."
WP&L, South Beloit, Utilities and IPC are public utility
companies as defined in Section 2(a)(5) of the Act. Because WPLH, an
"affiliate" of WP&L and South Beloit within the meaning of Section 2(a)(11) of
the Act, will acquire more than five percent of the voting securities of each
of Utilities and IPC as a result of the Transaction, and because WPLH will
thereby become an affiliate of Utilities and IPC, WPLH must obtain the approval
of the Commission for the Transaction under Sections 9(a)(2) and 10 of the Act.
The statutory standards to be considered by the Commission in evaluating the
proposed transaction are set forth in Section 10 of the Act.
As set forth more fully below, the Transaction complies with
all of the applicable provisions of Section 10 of the Act and should be
approved by the Commission. Thus:
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<PAGE> 51
<TABLE>
<S> <C>
- - the Transaction will not create detrimental interlocking relations or concentration of control;
- - the consideration to be paid in the Transaction is fair and reasonable;
- - the Transaction will not result in an unduly complicated capital structure for the Interstate Energy system;
- - the Transaction is in the public interest and the interests of investors and consumers;
- - the Transaction is not unlawful under Section 8 and is not detrimental to the carrying out of the provisions of Section 11
of the Act;
- - The Transaction tends toward the economical and efficient development of an integrated electric utility system; and
- - the Transaction will comply with all applicable state laws.
</TABLE>
The Transaction and the requests contained in this
Application/Declaration are well within the precedent of transactions approved
by the Commission as consistent with the Act. In addition, a number of the
recommendations made by the Division of Investment Management (the "Division")
in the report issued by the Division in June 1995 entitled "The Regulation of
Public Utility Holding Companies" (the "1995 Report") support the applicants'
analysis. The Commission's approval of the Transaction would be consistent
with previous Commission rulings1 and would also be consistent with the
Division's overall recommendation in the 1995 Report that the Commission "act
administratively to modernize and simplify holding company regulation. . . and
minimize regulatory overlap, while protecting the interests of consumers and
investors,"2 since, as demonstrated below, the Transaction will benefit both
consumers and shareholders of Interstate Energy, and the other federal and
state regulatory authorities with jurisdiction over this Transaction will have
approved it as in the public interest. In addition, although discussed in more
detail in each applicable item below, the Transaction is consistent with the
specific recommendations of the Division with regard to financing
transactions,3 utility ownership4 and diversification.5
1. Section 10(b)
Section 10(b) provides that, if the requirements of Section
10(f) are satisfied, the Commission shall approve an acquisition under Section
9(a) unless:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public utility companies,
of a kind or to an extent detrimental to the public interest or the
interests of investors or consumers;
(2) in case of the acquisition of securities or utility
assets, the consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital
structure of the holding company system of the applicant or will be
detrimental to the public interest or the
47
<PAGE> 52
interests of investors or consumers or the proper functioning of such
holding company system.
a. Section 10(b)(1)
i. Interlocking Relationships
Section 10(b)(1) was primarily aimed at preventing business
combinations unrelated to operating synergies and was never intended to
prohibit mergers that otherwise made operational sense and were permissible
under other provisions of the Act.
As described in Item 1.C.3. above, the Merger Agreement
provides for the Board of Directors of Interstate Energy to be composed of
fifteen members, six designated by each of WPLH and IES and three designated by
IPC.6 In addition, each of the utility subsidiaries of Interstate Energy is
expected to enter into a service agreement with Interstate Services, which is
necessary to integrate WPLH, IES and IPC into a single Interstate Energy
system. These actions are subject to approval of the Commission under Section
13 and state regulatory authorities and will, therefore, be closely monitored
to insure that they are in the public interest and the interests of investors
and consumers. Forging such relations is beneficial to the protected interests
under the Act and thus is not prohibited by Section 10(b)(1). Moreover, the
projected benefits that will accrue to the public, investors and consumers from
the combination of WPLH, IES and IPC demonstrate that the combination is not
detrimental to the protected interests under the Act.
ii. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of
concentration and bigness" while preserving the "opportunities for economies of
scale, the elimination of duplicate facilities and activities, the sharing of
production capacity and reserves and generally more efficient operations"
afforded by the coordination of local utilities into an integrated system.
American Electric Power Co., 46 S.E.C. 1299, 1309 (1978). In applying Section
10(b)(1) to utility acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations at which the
Act was specifically directed." Vermont Yankee Nuclear Corp., 43 S.E.C. 693,
700 (1968). As discussed below, the WPLH-IES-IPC combination alliance will not
create a "huge, complex, and irrational system" of a type at which the Act is
directed, but rather will afford the opportunity to achieve economies of scale
and efficiencies which are expected to benefit investors and consumers.
American Electric Power Co., 46 S.E.C. 1299, 1307 (1978).
Size: If approved, the Interstate Energy system will serve
approximately 873,000 retail electric customers and 369,000 natural gas
customers in four states. As of and for the year ended December 31, 1995: (1)
the combined assets of WPLH, IES and IPC would have totaled approximately
$4.492 billion; (2) combined utility revenues of WPLH, IES and IPC would have
totaled approximately $1.755 billion; and (3) combined owned generating
capacity would have totaled approximately 5,469 MW.
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<PAGE> 53
By comparison, the Commission has approved a number of
acquisitions involving significantly larger operating utilities. See, e.g.,
CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994) (combination of
Cincinnati Gas & Electric Co. and PSI Resources; combined assets at time of
acquisition of approximately $7.9 billion); Entergy Corp., Holding Co. Act
Release No. 25952 (Dec. 17, 1993) (acquisition of Gulf States Utilities;
combined assets at time of acquisition in excess of $21 billion); Northeast
Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990) (acquisition of
Public Service of New Hampshire; combined assets at time of acquisition of
approximately $9 billion).
In the states to be served by the Interstate Energy system,
several public utilities are larger than Interstate Energy's utility operations
will be following the Transaction. Union Electric Company has total assets of
approximately $6.625 billion, revenues of $2.117 billion, electricity sales of
39.688 million MWH and 1.116 million customers. Northern States Power Company
has total assets of approximately $5.950 billion, revenues of $2.034 billion,
electricity sales of 39.829 million MWH and 1.389 million customers. Wisconsin
Energy Company has total assets of $4.408 billion, total revenues of $1.389
billion, electricity sales of 26.911 million MWH and 937,968 customers.
As the following table demonstrates, nine of the currently
registered electric utility holding company systems are larger than Interstate
Energy will be following the Transaction in terms of assets, operating
revenues, customers and/or sales of electricity:
<TABLE>
<CAPTION>
Total Operating Sales in
Assets Revenues Customers MWH
System Total ($ Billions) ($ Billions) (Millions)
<S> <C> <C> <C> <C>
Southern $27.042 $8.426 3,478,889 157.5
Entergy $22.622 $6.707 2,358,992 120.1
AEP $15.779 $6.096 2,813,177 142.6
CSW $11.066 $3.076 1,643,143 60.2
Northeast Utilities $10.585 $4.242 1,680,349 48.0
GPU $9.210 $3.644 1,935,832 44.2
NEES $5.251 $3.508 1,292,628 45.6
Allegheny Power
System, Inc. $6.711 $2.625 1,348,832 52.0
Cinergy $8.150 $2.584 1,331,548 31.4
Interstate Energy $4.080 $1.322 855,394 28.9
</TABLE>
In addition, Interstate Energy will be smaller than the
registered holding companies to be formed as a result of recently announced
proposed mergers, specifically the mergers of Wisconsin Energy Corporation and
Northern States Power Company (combined 1995 year-end assets of approximately
$10.649 billion and operating revenues of $4.339 billion), Union Electric
Company and CIPSCO, Inc. (combined 1994 year-end assets of approximately $8.402
billion and operating revenues of $2.850 billion) and Public Service Company of
Colorado and Southwestern Public Service Company (combined 1994 year-end assets
of approximately $6.018 billion and operating revenues of $2.881 billion.)
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<PAGE> 54
Interstate Energy will be a small- to mid-size registered holding
company, and its operations would not exceed the economies of scale of current
electric generation and transmission technology or provide undue power or
control to Interstate Energy in the region in which it will provide service.
Efficiencies and economies: The Commission has rejected a mechanical
size analysis under Section 10(b)(1) in favor of assessing the size of the
resulting system with reference to the efficiencies and economies that can be
achieved through the integration and coordination of utility operations.
American Electric Power Co., 46 S.E.C. 1299, 1309. More recent pronouncements
of the Commission confirm that size is not determinative. Thus, in Centerior
Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986), the
Commission stated flatly that a "determination of whether to prohibit
enlargement of a system by acquisition is to be made on the basis of all the
circumstances, not on the basis of size alone." See also Entergy Corporation,
Holding Co. Act Release No. 25952 (December 17, 1993). In addition, the
Division recommended in the 1995 Report that the Commission approach its
analysis of merger and acquisition transactions in a flexible manner with
emphasis on whether the Transaction creates an entity subject to effective
regulation and is beneficial for shareholders and customers as opposed to
focusing on rigid, mechanical tests.7
By virtue of the Transaction, Interstate Energy will be in a position
to realize the "opportunities for economies of scale, the elimination of
duplicate facilities and activities, the sharing of production capacity and
reserves and generally more efficient operations" described by the Commission
in American Electric Power Co., 46 S.E.C. at 1309. Among other things, the
Transaction is expected to yield significant production cost savings from
integrated economic dispatch; savings through greater purchasing power; labor
cost savings; savings through consolidation of corporate and administrative
programs; and savings from integrated gas operations through optimization of
transportation capacity, shortening storage withdrawal periods and avoidance of
duplicative reserve margins. These expected economies and efficiencies from
the combined utility operations are described in greater detail in Item
3.A.2.b.i. below and are projected to result in net savings of approximately
$749 million over the first ten years alone.
Competitive Effects: As the Commission noted in Northeast Utilities,
Holding Co. Act Release No. 25221 (Dec. 21, 1990), the "antitrust ramifications
of an acquisition must be considered in light of the fact that public utilities
are regulated monopolies and that federal and state administrative agencies
regulate the rates charged consumers." It is a condition to the consummation
of the Transaction that the applicable waiting periods under the HSR Act shall
have expired or been terminated. On June 7, 1996, WPLH, IES and IPC filed a
Notification and Report Form with the DOJ and FTC pursuant to the HSR Act
describing the effects of the Transaction on competition in the relevant
market. The 30-day waiting period with respect to such Notification and Report
Form expired on July 7, 1996 without the issuance of a request for additional
information from the DOJ or FTC. No further requirements consequently remain
to be satisfied under the HSR Act for the consummation of the Transaction.
In addition, the competitive impact of the Transaction will be fully
considered by the FERC before it approves the Transaction. A detailed
explanation of the reasons why the Transaction will not threaten competition in
even the most narrowly drawn geographic and product markets is set forth in the
prepared testimony of Rodney Frame, filed with the FERC
50
<PAGE> 55
on behalf of WPLH, IES and IPC, a copy of which is filed as Exhibit K-1. The
application filed by WPLH, IES and IPC with the FERC is filed as Exhibit K-2.
The Commission may appropriately rely upon the FERC with respect to such
matters. Entergy Corporation, supra citing, City of Holyoke Gas & Electric
Department et al. v. S.E.C., 972 F.2d 358, 363-64 quoting Wisconsin
Environmental Decade, Inc. v. S.E.C., 882 F.2d 523, 527 (D.C. Cir. 1989).
For these reasons, the Transaction will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
b. Section 10(b)(2)
As noted above, Section 10(b)(2) requires the Commission to determine
whether the consideration to be paid in connection with the combination of
WPLH, IES and IPC, including all fees, commissions and other remunerations, is
reasonable and whether it bears a fair relation to investment in and earning
capacity of the utility assets underlying the securities being acquired.8
i. Fairness of Consideration
For the reasons set forth below, the requirements of Section 10(b)(2)
regarding consideration are satisfied in this Transaction.
First, the Transaction is a pure stock-for-stock exchange and
qualifies for treatment as a pooling of interests for accounting purposes. As
set forth more fully above, each share of IES Common Stock will be converted
into the right to receive 1.01 shares of Interstate Energy Common Stock, each
share of IPC Common Stock will be converted into the right to receive 1.11
shares of Interstate Energy Common Stock and each share of WPLH Common Stock
will continue as one share of Interstate Energy Common Stock. Each share of
IPC Preferred Stock and Utilities Preferred Stock will remain unchanged unless
the Reincorporation Mergers are effected, in which case it is anticipated that
all of the Utilities Preferred Stock will be redeemed by Utilities prior to
consummation of the Utilities Reincorporation Merger and each share of IPC
Preferred Stock (other than IPC Dissenting Shares) will be converted into one
share of New IPC Preferred Stock with terms and designations substantially
identical to those of the IPC Preferred Stock. The Transaction will,
therefore, involve no "acquisition adjustment" or other write-up of the assets
of WPLH, IES or IPC.
Second, the exchange ratios are the product of extensive and vigorous
arms-length negotiations between WPLH, IES and IPC. These negotiations were
preceded by extensive due diligence, analysis and evaluation of the assets,
liabilities and business prospects of each of the respective companies. See
"Background of the Mergers" at pages 31 to 45 of the WPLH Registration
Statement on Form S-4 (Exhibit I-1 hereto). As recognized by the Commission in
Ohio Power Co., 44 S.E.C. 340, 346 (1970), prices arrived at through
arms-length negotiations are particularly persuasive evidence that Section
10(b)(2) is satisfied.
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<PAGE> 56
Finally, nationally-recognized investment bankers for each of WPLH, IES
and IPC have reviewed extensive information concerning the companies and
analyzed the exchange ratios employing a variety of valuation methodologies,
and have opined that the exchange ratios are fair, from a financial point of
view, to the respective holders of WPLH Common Stock, IES Common Stock and IPC
Common Stock. The investment bankers' opinions are attached as Annexes L, M
and N to WPLH's Registration Statement on Form S-4 and are described on pages
53 to 69 of the Form S-4 (Exhibit I-1 hereto). The assistance of independent
consultants in setting consideration has been recognized by the Commission as
evidence that the requirements of Section 10(b)(2) have been met. The Southern
Company; SV Ventures, Inc., Holding Co. Act Release 24579 (February 12, 1988).
ii. Reasonableness of Fees
WPLH, IES and IPC believe that the overall fees, commissions and
expenses incurred and to be incurred in connection with the Transaction are
reasonable and fair in light of the size and complexity of the Transaction
relative to other transactions and the anticipated benefits of the Transaction
to the public, investors and consumers; that they are consistent with recent
precedent; and that they meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, WPLH, IES and
IPC together expect to incur a combined total of approximately $14 million9 in
fees, commissions and expenses in connection with the Transaction. By
contrast, Cincinnati Gas & Electric Company and PSI Resources incurred $47.1
million in fees, commissions and expenses in connection with their
reorganization as subsidiaries of CINergy, Northeast Utilities alone incurred
$46.5 million in fees, commissions and expenses in connection with its
acquisition of Public Service Company of New Hampshire and Entergy alone
incurred approximately $38 million in fees, commissions and expenses in
connection with its recent acquisition of Gulf States Utilities -- all of which
amounts were approved as reasonable by the Commission. See CINergy, Holding
Co., Act Release No. 26146 (Oct. 21, 1994); Northeast Utilities, Holding Co.
Act Release No. 25548 (June 3, 1992); Entergy Corp., Holding Co. Act Release
No. 25952 (Dec. 17, 1993).
With respect to financial advisory fees, WPLH, IES and IPC believe
that the fees payable to their investment bankers are fair and reasonable for
similar reasons. Pursuant to the terms of an engagement letter dated June 29,
1995, WPLH has agreed to pay Merrill Lynch (i) a $100,000 retainer fee, payable
as of the date of the engagement letter, (ii) $200,000 payable upon the
execution of the Merger Agreement, (iii) $200,000 payable upon the delivery by
Merrill Lynch of its fairness opinion and (iv) a transaction fee payable only
upon consummation of the Mergers equal to 0.40% of the product of the closing
price of WPLH Common Stock on November 6, 1995, which was $30.75, multiplied by
the sum of (a) 10,616,359, the number of outstanding shares of IPC Common Stock
as set forth in the Merger Agreement multiplied by the IPC Ratio, and (b)
29,639,029, the number of outstanding shares of IES Common Stock as set forth
in the Merger Agreement multiplied by the IES Ratio (approximately $4,951,413),
against which the amounts referred to in clauses (i) - (iii) above will be
credited. WPLH has also agreed to reimburse Merrill Lynch for its reasonable
out-of-pocket expenses, including all reasonable fees and disbursements of its
legal counsel, and to indemnify Merrill Lynch and
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certain related persons against certain liabilities in connection with its
engagement, including certain liabilities under the federal securities laws.
Pursuant to a letter agreement dated June 30, 1995 between IES and
Morgan Stanley, Morgan Stanley is entitled to (i) an advisory fee for its time
and efforts expended in connection with the engagement which is estimated to be
between $100,000 and $250,000, which is payable in the event the transaction is
not consummated, (ii) an announcement fee of $1,000,000, which has been paid,
and (iii) a transaction fee equal to the product of 0.472562% multiplied by the
Aggregate Value of the transaction (as such term is defined in such letter
agreement), or approximately $4,370,228, which is payable only upon
consummation of the transaction. Any amounts paid or payable to Morgan Stanley
as advisory or announcement fees will be credited against the transaction fee.
IES has agreed to reimburse Morgan Stanley for its expenses, including
reasonable fees and expenses of its counsel, and to indemnify Morgan Stanley
and its affiliates against certain liabilities and expenses, including
liabilities under federal securities laws.
Pursuant to a letter agreement dated September 13, 1995, between IPC
and Salomon Brothers, Salomon Brothers agreed to act as financial advisor to
IPC in connection with the Mergers. IPC is obligated to pay Salomon Brothers a
monthly fee of $25,000 during the term of the engagement and an additional fee
equal to the product of 0.75% multiplied by the aggregate consideration paid
for IPC's common equity (approximately $2,448,000). This additional fee is due
Salomon Brothers as follows: 25% contingent upon and payable following
execution of the Merger Agreement; 25% contingent upon and payable following
approval by the IPC stockholders; and the remainder (less all monthly fees paid
or payable) contingent upon and only payable following consummation of the
Mergers. IPC also agreed to reimburse Salomon Brothers for its reasonable
out-of-pocket expenses, including fees and disbursements of counsel, and to
indemnify Salomon Brothers and its affiliates, their respective directors,
officers, agents and employees and each person, if any, controlling Salomon
Brothers or any of its affiliates against certain liabilities, including
liabilities under the federal securities laws, relating to, or arising out of,
its engagement.
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will unduly complicate Interstate Energy's capital structure or
will be detrimental to the public interest, the interests of investors or
consumers or the proper functioning of Interstate Energy's system.
Capital structure: The corporate capital structure of Interstate
Energy after the Transaction will not be unduly complicated and will be
substantially similar to capital structures of existing registered holding
company systems approved by the Commission in other orders. See, e.g.,
CINergy, Holding Co. Act Release No. 26146 (Oct. 21, 1994); Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986); Midwest Resources,
et al., Holding Co. Act Release No. 25159 (Sept. 26, 1990); Entergy Corp.,
Holding Co. Act Release No. 25952 (Dec. 17, 1993); Northeast Utilities, Holding
Co. Act Release No. 25548 (June 3, 1992).
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In the Transaction, the common shareholders of IES and IPC will
receive Interstate Energy Common Stock in exchange for their share of IES
Common Stock and IPC Common Stock, respectively. Interstate Energy will own
100% of the common stock of WP&L, Utilities (or New Utilities) and IPC (or New
IPC) and there will be no minority common stock interest remaining in any of
the three companies. Each share of IPC Preferred Stock outstanding at the time
of the consummation of the Transaction (other than IPC Dissenting Shares) will
remain outstanding preferred stock of IPC. However, if the Reincorporation
Mergers are effected as described more fully in Item 1.A.2 above, it is
currently anticipated that the shares of Utilities preferred stock currently
outstanding will be redeemed by Utilities prior to consummation of the
Utilities Reincorporation Merger and each share of IPC preferred stock
currently outstanding will be converted into one share of preferred stock of
New IPC with terms (including dividend rates) substantially identical to those
of IPC's preferred stock under IPC's Restated Certificate of Incorporation
(Exhibit F-2 hereto).
The debt securities of Utilities, IPC and WP&L outstanding at the time
of the consummation of the Transaction will likewise remain outstanding without
change except that, if the Reincorporation Mergers are effected, the debt of
Utilities and IPC will become the debt of New Utilities and New IPC,
respectively.
The only voting securities of Interstate Energy which will be publicly
held after the transaction will be Interstate Energy Common Stock. With
respect to the direct non-utility subsidiaries of Interstate Energy and
Interstate Hold, the only class of voting securities of such subsidiaries will
be common stock, and Interstate Energy or Interstate Hold will hold all of the
issued and outstanding shares of such common stock other than a minority
interest in HEHC owned by certain employees as described in Item 1.B.5.a above.
Set forth below are summaries of the historical capital structure of
WPLH, IES and IPC as of December 31, 1995 and the pro forma consolidated
capital structure of Interstate Energy (assuming the Transaction had occurred
at December 31, 1995):
<TABLE>
<CAPTION>
WPLH, IES and IPC Historical Capital Structures
(dollars in millions)
(as of December 31, 1995)
WPLH IES IPC
---- --- ---
<S> <C> <C> <C>
Common Stock $597.5 $612.3 $197.8
Preferred Stock 60.0 18.3 34.9
Long-term Debt 430.4 601.7 188.9
Short-term Debt 109.5 101.0 39.3
------ ------ -----
Total $1,197.4 $1,333.3 $460.9
</TABLE>
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Interstate Energy Pro Forma Consolidated Capital Structure
(dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Without With
Reincorporation Mergers Reincorporation Mergers
----------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock $1,399 46.9% $1,399 47.2%
Preferred Stock 113 3.8% 95 3.2%
Long-Term Debt 1,221 40.9% 1,221 41.2%
Short-Term Debt 250 8.4% 250 8.4%
----- ---- ---- ----
Total $2,983 100.0% $2,965 100.0%
</TABLE>
Interstate Energy's pro forma consolidated common equity to total
capitalization ratio of 46.9% is significantly higher than the common equity
position approved by the Commission for Northeast Utilities (27.6%) and CINergy
(39.5%) and comfortably exceeds the "traditionally acceptable 30% level."
Northeast Utilities, Holding Co. Act Release 25221 (December 21, 1990).
Protected interests: As set forth more fully in Item 3.A.2.b.i
(Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility
System) and elsewhere in this Application/ Declaration, the Transaction is
expected to result in substantial, otherwise unavailable, cost savings and
benefits to the public and to consumers and investors of WPLH, IES and IPC, and
will integrate and improve the efficiency of the WPLH, IES and IPC utility
systems. Moreover, as noted by the Commission in Entergy Corporation, Holding
Co. Act Release 25952 (December 17, 1993), "concerns with respect to investors'
interests have been largely addressed by developments in federal securities
laws and the securities market themselves." WP&L, Utilities and IPC (or New
IPC) will be reporting companies subject to the continuous disclosure
requirements of the Securities Exchange Act of 1934 (the "1934 Act") following
completion of the Transaction. The various reports previously filed by WPLH,
IES and IPC under the 1934 Act contain readily available information concerning
the Transaction. The Transaction will, therefore, be in the public interest
and the interests of investors and consumers, and will not be detrimental to
the proper functioning of the resulting holding company system.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any
other interest, which is unlawful under the provisions of Section 8 or
is detrimental to the carrying out of the provisions of Section 11; 10
or
(2) the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending
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towards the economical and the efficient development of an integrated public
utility system . . . .
a. Section 10(c)(1)
Section 10(c)(1) requires that an acquisition be lawful under Section
8. Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if prohibited by state law. Following the
Transaction, the utility subsidiaries of Interstate Energy will provide
electric and gas services in Wisconsin, Illinois, Iowa and Minnesota. Since
Wisconsin, Iowa, Illinois and Minnesota laws all permit combination gas and
electric utilities serving the same area, the Transaction does not raise any
issue under Section 8 or, accordingly, the first clause of Section 10(c)(1).
Indeed, Section 8 indicates that a registered holding company may own both gas
and electric utilities where, as here, the relevant state utility commissions
support such an arrangement.
Section 10(c)(1) also requires that transactions not be detrimental to
carrying out the provisions of Section 11. Section 11(a) of the Act requires
the Commission to examine the corporate structure of registered holding
companies to ensure that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. As described above in Item
3.A.1.c., the Transaction will not result in unnecessary complexities or unfair
voting powers.
Although Section 11(b)(1) generally requires a registered holding
company system to limit its operations "to a single integrated public utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system," a combination integrated gas and electric system within
a registered holding company is permissible under Section 8. Additionally,
Section 11(b)(1) provides that "one or more additional integrated public
utility systems" may be retained if, as here, certain criteria are met.
Section 11(b)(2) directs the Commission "to ensure that the corporate structure
or continued existence of any company in the holding company system does not
unduly or unnecessarily complicate the structure, or unfairly or inequitably
distribute voting power among security holders, of such holding company
system."
As detailed below, the Transaction will not be detrimental to the
carrying out of the provisions of Section 11.
i. Retention of Gas Operations
WP&L and South Beloit have provided retail gas distribution service
for more than 68 years. Initially, this service provided gas that was derived
from coal through local manufactured gas or "town gas" plants. From the late
1930's to the early 1980's, interstate natural gas pipelines (primarily by ANR
Pipeline Company) were constructed to provide natural gas delivery to WP&L gas
distribution systems in each significant city served by WP&L and South Beloit.
WP&L and South Beloit also responded to FERC's efforts from 1983 to
1993 to restructure the interstate pipeline industry. In 1987, WP&L and South
Beloit were among the
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first LDCs in the United States to convert from firm pipeline "full
requirements" sales service to firm transportation-only service in accordance
with open access provisions of FERC Order 436. In 1986, WP&L and South Beloit
began offering "open access" retail transportation service to eligible large
customers.
WP&L and South Beloit currently purchase transportation service from
five United States pipeline carriers and storage from three underground storage
service providers. WP&L and South Beloit procure natural gas supplies from
numerous suppliers located in North America. As a result of this "grid"
approach to gas supply acquisition, WP&L and South Beloit have retail gas rates
which are among the lowest in the region and well below the national average.
Moreover, the diversity of supply and delivery routes provide for increased
reliability for firm customers. Approximately 30% of the gas delivered by WP&L
and South Beloit is third party gas purchased directly by large industrial
retail customers. Under rate designs approved by the various regulatory
agencies, WP&L and South Beloit are financially indifferent to whether a
customer purchases sales or transportation only service.
Utilities and its predecessor companies have provided gas service to
customers throughout Iowa since the late 1940s. Prior thereto, Utilities'
predecessor companies provided manufactured gas to their customers from coal
gasification facilities operated by such predecessor companies. Utilities
historically grew by purchasing municipal gas systems and other utilities.
Utilities also responded to FERC's efforts in the mid 1980's to
restructure the interstate pipeline industry. In 1985, Utilities offered open
access transportation to eligible customers on its distribution system. At the
same time, Utilities began purchasing a portion of its natural gas from
suppliers other than the pipeline companies which supplied gas and used the
pipelines for transportation only. Utilities currently purchases
transportation services on three interstate pipelines and storage services from
three pipelines. Natural gas is procured from a number of different suppliers
located in the mid-continent, Gulf Coast and Canadian production areas.
Utilities continues to offer competitively priced natural gas sales
service to customers who prefer delivered gas service. It also provides
transportation and balancing services to a number of commercial and industrial
customers who prefer to purchase their own gas and transport their gas on
pipelines and through the Utilities distribution system. Under this
transportation service, approximately 27% of all gas delivered by Utilities is
third party gas owned by customers. Under rate designs approved by the various
regulatory agencies, Utilities is financially indifferent to whether a customer
purchases sales or transportation only service.
IPC and its predecessor companies have provided gas service to
customers in Iowa, Minnesota and Illinois since its incorporation in 1925.
Initially, IPC and its predecessor companies provided manufactured gas to their
customers from coal gasification facilities. Since 1951, all of IPC's gas
sales have predominantly been natural gas.
IPC also responded to FERC's efforts in the mid 1980's to restructure
the interstate pipeline industry. In 1986, IPC offered open access
transportation to eligible customers on its distribution system. At the same
time, IPC began purchasing a portion of its
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natural gas from suppliers other than the pipeline companies which supplied gas
and used the pipelines for transportation only. IPC currently purchases
transportation services on two interstate pipelines and storage services from
two pipelines. IPC also contracts for synthetic storage services, which act
like a financial hedge, from one company. Natural gas is procured from a
number of different suppliers located in the Gulf Coast, Canadian and
Texas/Oklahoma production areas. The propane-air LPG peak shaving plants
continue to provide gas service to customers on the coldest days of the year
while reducing pipeline demand charges.
IPC continues to offer competitively priced natural gas sales service
to customers who prefer delivered gas service. It also provides transportation
and balancing services to a number of commercial and industrial customers who
prefer to purchase their own gas and transport their gas on pipelines and
through IPC's distribution system. Under this transportation service, over 70%
of all gas delivered by IPC is third party gas owned by customers. Under rate
designs approved by the various regulatory agencies, IPC is financially
indifferent to whether a customer purchases sales or transportation only
service.
For more general information regarding the gas operations of WP&L,
South Beloit, Utilities and IPC, See Items I.B.2.a.iv., I.B.2.b.iv. and
I.B.2.c.iv. above.
Currently, WPLH and IES are energy service companies which are also
exempt holding companies, and IPC is a public-utility company primarily engaged
in the energy services business. Following consummation of the Transaction,
WP&L, Utilities (or New Utilities) and IPC (or New IPC) will continue to be
energy services companies. In today's changing energy markets, consumers and
regulators must be -- and are -- more careful with limited energy resources
than was ever contemplated in 1935. Increasingly, customers select among
different forms of energy to perform the same or similar tasks depending upon
environmental and economic factors. As energy service companies, WP&L,
Utilities and IPC offer, and the Interstate Energy system will offer, diverse
forms of energy to customers, thereby allowing choices among different forms of
energy, which, in turn, fosters efficiency and conservation. By providing such
choices, energy companies assist in the allocation of scarce national
resources, under the supervision of local regulators who are most familiar with
the needs of the local constituencies. This modern energy business, with a
high level of state scrutiny, is a far cry from the marketplace and regulatory
situation perceived by the drafters of the Act and the then-perceived abuses
that arose from combination companies. The fears expressed at that time, the
"favoring of one of these competing forms of energy over the other," S.E.C. v.
New England Electric System, 384 U.S. 176, 183 (1966), are no longer realistic
in today's market.
For the reasons set forth below and in the accompanying memorandum
attached as Exhibit L-1, Interstate Energy's retention of the gas operations of
WP&L (including South Beloit), Utilities and IPC should be approved by the
Commission. Retention of such gas operations is lawful under, and is
consistent with the congressional intent behind, Section 8 of the Act and would
not be detrimental to the carrying out of Section 11 of the Act.
Section 8: Section 8 of the Act provides that "[w]henever a State law
prohibits, or requires approval or authorization of, the ownership or operation
by a single company of the utility assets of an electric utility company and a
gas utility company serving substantially the same territory, it shall be
unlawful for a registered holding company, or any subsidiary company
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<PAGE> 63
thereof . . . (1) to take any step, without the express approval of the state
commission of such state, which results in its having a direct or indirect
interest in an electric utility company and a gas company serving substantially
the same territory; or (2) if it already has any such interest, to acquire,
without the express approval of the state commission, any direct or indirect
interest in an electric utility company or gas utility company serving
substantially the same territory as that served by such companies in which it
already has an interest." (emphasis added)
On its face, Section 8 indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both electric and gas utility systems. A careful reading of the
section indicates that the thrust of the section is to preclude the use of the
registered holding company form to circumvent any state law restrictions on the
ownership of gas and electric assets by the same company. Thus, combination
registered holding companies, or a registered holding company system that
includes combination companies, are implicitly acceptable under the statute
absent an objection by the affected state(s).
WPLH, IES and IPC believe it is consistent with both the Act and its
policy objectives to permit combination companies to exist and operate provided
such combination companies are permitted by the affected states. Indeed, over
time the Commission has emphasized different aspects of Section 8 and its
interplay with Section 11 -- initially allowing registered holding companies to
own both gas and electric systems under Section 8, then focusing on Section 11
as controlling determinations regarding combination companies, and requiring
the second system to meet a strict interpretation of the requirements set forth
in clauses A, B and C of Section 11(b)(1) which is discussed below.
While the Commission has focused on Section 11 and adopted a narrow
interpretation of the standards contained therein as the controlling factor
with regard to combination registered holding companies since the early 1940s,
both the legislative history of the Act and recent changes in the utility
industry indicate that it is now appropriate and necessary for the Commission
to reemphasize the provisions of Section 8 of the Act and allow combination
registered holding companies where they are permitted under relevant state law,
as they are in this case.11
The legislative history of Section 8 supports a policy of allowing
combination utilities where they are permitted by state law. As noted in the
Senate Interstate Commerce Committee "[Section 8] is concerned with competition
in the field of distribution of gas and electric energy -- a field which is
essentially a question of State policy, but which becomes a proper subject of
Federal action where the extra-State device of a holding company is used to
circumvent state policy." S. Rep. No. 2796, 74th Cong., 1st Sess., pt 1 at 31
(1935) (the "Senate Report"). Nothing in the legislative history indicates a
Congressional desire to prohibit combination companies where state approvals
can be obtained.
Much more recently, the Division noted in the 1995 Report, "it does
not appear that the SEC's precedent concerning additional systems precludes the
SEC from relaxing its interpretation of Section 11(b)(1)(A)" and "that the
utility industry is evolving toward the creation of one-source energy companies
that will provide their customers with whatever type of energy supply they
want, whether electricity or gas." The Division recommended that the
Commission interpret Section 11(b)(1) of the Act to allow registered holding
companies to hold
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both gas and electric operations as long as each affected state utility
regulatory commission approves of the existence of such a company.12
Local regulators are in the best position to assess the needs of their
communities. The Act was never intended to supplant local regulation but,
rather, was intended to create conditions under which local regulation was
possible. Section 21 of the Act, which further codifies this legislative
intent, states: "Nothing in [the Act] shall affect . . . the jurisdiction of
any other commission, board, agency, or officer of . . . any State, or
political subdivision of any State, over any person, security, or contract,
insofar as such jurisdiction does not conflict with any provision of [the Act]
. . . ."
The legislative history reveals that Section 21 of the Act was further
intended "to insure the autonomy of state commissions [and] nothing in the
[Act] shall exempt any public utility from obedience to the requirements of
state regulatory law." Senate Report at p. 10. Thus, the Act should not be
used as a tool to override state policy, particularly when the holding company
involved is subject to both state and federal regulation and when the affected
state regulatory commissions have supported combined electric and gas
operations in one holding company system.
Finally, this analysis and focus fits within the overall regulatory
scheme of the Act. First, Section 11 of the Act is flexible and was designed
to change as the policy concerns over the regulation of utility holding
companies changed.13 As discussed below, the utility industry and the
regulation of that industry has changed dramatically in recent years. Second,
a registered holding company would still be required to demonstrate that any
acquisition or transaction by which it would become a combination company would
not be detrimental to the carrying out of the provisions of Section 11 of the
Act. In other words, its electric system would have to constitute an
integrated electric system and its gas system would have to constitute an
integrated gas system and both systems must be capable of being operated
efficiently. Thus, the standards of Section 11 would still have to be met, but
the application of those standards should take into account the fundamental
policy of the Act and allow local regulators to make the threshold
determination with regard to combination companies.
Each of WP&L (including South Beloit), Utilities and IPC is
permissible as a combination company pursuant to the terms of Section 8 of the
Act because the affected states are expected to approve the continued combined
activities and each is in the public interest. Moreover, as required by
Section 11, the electric systems of WP&L, South Beloit, Utilities and IPC
constitute an integrated electric system and the gas systems of each together
will constitute an integrated gas system as explained in detail below under
Item 3.A.2.b.ii.
Interstate Energy as a combination company is permissible pursuant to
the terms of Section 8 of the Act and is in the public interest. First, the
combination of electric and gas operations in WP&L (including South Beloit),
Utilities and IPC is lawful under all applicable state laws and has been
considered and tacitly approved on numerous occasions by Wisconsin, Iowa,
Minnesota and Illinois regulators who have, and will continue to have, direct
jurisdiction over the Interstate Energy electric and gas operations.
Interstate Energy will not be using its holding company structure to circumvent
any state regulations since the gas utility operations of WP&L, South Beloit,
Utilities and IPC, respectively, will continue to be regulated by the
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relevant state jurisdictions. In addition, in connection with their
applications for approval of the Transaction submitted or to be submitted to
the Wisconsin, Iowa, Illinois and Minnesota regulatory commissions -- who have,
and will continue to have, direct jurisdiction over the Interstate Energy
system's gas operations located in their respective states -- WP&L, South
Beloit, Utilities and IPC expect these commissions to either order or express
approval for WP&L, South Beloit, Utilities and IPC to continue as combination
electric and gas utility companies through the retention of their respective
gas operations and for Interstate Energy to operate as a holding company for
WP&L, Utilities and IPC. Such actions by the applicable state commissions will
reflect their recognition that the existence of both gas and electric systems
in the Interstate Energy holding company system will allow Interstate Energy's
customers greater choice to meet their energy needs, especially given the fact
that the electric and gas systems operate in substantially the same territory
while sharing in the synergies that result from the Transaction. Moreover, the
prior fear that a holding company such as Interstate Energy would be able to
greatly emphasize one form of energy over the other based on its own agenda has
dissipated both because of the competitive nature of the energy market, which
requires utilities to meet customer demand for energy supply requirements or
risk losing the customer to a competing supplier, and because state regulators
will have sufficient control over, and would be unlikely to approve, a
combination company that attempts to undertake such practices.
Furthermore, the Commission has reviewed and approved the combination
gas and electric operations of WPLH and IES in several prior orders. IES
Industries Inc., Holding Co. Act Release No. 25325 (June 3, 1991), (IES'
Section 3(a)(2) exemption continued by the Commission virtually without
discussion in connection with the merger of two exempt holding companies with
combination electric and gas utilities); WPL Holdings, Inc., Holding Co. Act
Release No. 24590 (February 26, 1988) (the Commission reviewed its prior
decisions on ownership of electric and gas utilities by exempt holding
companies and noted that the PSCW staff had advised the Commission "that it had
experienced no problems regulating combined electric and gas companies and was
opposed to separating such operations into separate companies"); Wisconsin
Power and Light Co., 1 S.E.C. 362 (1936).
For all of the foregoing reasons, the Commission should approve the
retention by WP&L (including South Beloit), Utilities and IPC of their
respective gas properties as contemplated by the Transaction. No policy would
be furthered by requiring divestiture, and, in fact, state policy would be
thwarted by such a requirement.
Section 11: Even if the Act were not interpreted as generally
permitting combination gas and electric systems upon state approval, Section 11
contains additional provisions that permit the retention by WP&L, Utilities and
IPC of their respective gas systems. Section 11(b)(1) of the Act permits a
registered holding company to control one or more additional integrated public
utility systems -- i.e., gas as well as electric -- if:
(A) each of such additional systems cannot be operated as
an independent system without the loss of substantial economies which
can be secured by the retention of control by such holding company of
such system;
(B) all of such additional systems are located in one
state, adjoining states, or a contiguous foreign country; and
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(C) the continued combination of such systems under the
control of such holding company is not so large (considering the state
of the art and the area or region affected) as to impair the
advantages of localized management, efficient operation, or the
effectiveness of regulation.
Each of these requirements is satisfied in this Transaction.
Retention is, therefore, appropriate on the basis of Section 11(b)(1).
In the 1995 Report, the Division recommended that the Commission
"liberalize its interpretation of the `A-B-C' clauses." 14 The Commission has
historically given consideration to four ratios as a "guide" to determining
whether lost economies are "substantial" under Section 11(b)(1)(A). These
ratios measure the projected loss of economies as a percentage of: (1) total
gas operating revenues; (2) total gas expense or "operating revenue
deductions"; (3) gross gas income; and (4) net gas income or net gas utility
operating income. Although the Commission has declined to draw a bright-line
numerical test under Section 11(b)(1)(A), it has indicated that cost increases
resulting in a 6.78% loss of operating revenues, a 9.72% increase in operating
revenue deductions, a 25.44% loss of gross income and a 42.46% loss of net
income would afford an "impressive basis for finding a loss of substantial
economies." Engineers Public Service Co., 12 S.E.C. 41, 59 (1942).
In this case, the lost economies that would be experienced if the gas
properties of WP&L (including the gas properties owned by WP&L and South
Beloit, which are both part of a single inter-connected gas system), Utilities
and IPC were each to be operated on a stand-alone basis exceed these numbers,
without any increase in benefits to consumers. These lost economies result
from the need to replicate services, the loss of economies of scale, the costs
of reorganization, and other factors, and are described more fully in the
Analysis of the Economic Consequences of Divestiture of Wisconsin Power and
Light's and South Beloit Water, Gas and Electric's Natural Gas Operations,
Analysis of the Economic Impact of a Divestiture of IES Utilities Inc.'s Gas
Operations and Analysis of the Economic Impact of a Divestiture of Interstate
Power Company's Gas Operations (collectively, the "Gas Studies") (attached as
Exhibits L-2 to L-4 hereto). In the absence of rate relief, these lost
economies would substantially injure the shareholders of WPLH, IES and IPC upon
the divestiture of those gas operations. As the Gas Studies further show, if
rate relief were granted with respect to the lost economies, then consumers
would bear those substantial costs over what they would have to pay if the
properties were retained as contemplated by the Transaction.
As set forth in the Gas Studies, divestiture of the gas operations of
WP&L, Utilities and IPC into stand-alone companies would result in lost
economies of $15,558,000 for WP&L, $14,205,142 for Utilities and $5,048,533 for
IPC. The table below shows the gas operating revenues, gas operating revenue
deductions, gas gross income and gas net income of WP&L, Utilities and IPC.
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<TABLE>
<CAPTION>
GAS OPERATING GAS OPERATING REVENUE GAS GROSS
COMPANY REVENUES DEDUCTIONS INCOME GAS NET INCOME
------- ---------- -------------- ------ ------
<S> <C> <C> <C> <C>
WP&L 144,000,000 133,242,000 19,199,000 10,758,000
Utilities 144,377,806 130,359,782 14,018,024 9,751,955
IPC 43,669,329 34,148,636 9,520,693 5,798,949
</TABLE>
As a percentage of 1995 gas net income, the lost economies amount to
144.62% in the case of WP&L, 145.66% in the case of Utilities and 87.06% in the
case of IPC. These percentage losses in gas net income, as described in the
Gas Studies, that will be suffered by the WP&L, Utilities and IPC gas systems,
respectively, if operated on a stand-alone basis are far in excess of the loss
of net income in UNITIL Corp., Holding Co. Act Release No. 25524, (Apr. 24,
1992), where the Commission allowed the retention of the gas utility
operations, and the 30% loss in the New England Electric System case that the
Commission has described as the highest loss of net income in any past
divestiture order.15 As a percentage of 1995 gas operating revenues, the lost
economies described in the Gas Studies would equal 10.80% in the case of WP&L,
9.84% in the case of Utilities and 11.56% in the case of IPC, which in each
case substantially exceeds the percentage loss in any past divestiture order
issued by the Commission and exceeds the losses in UNITIL and Entergy
Corporation, Holding Co. Act Release No. 25952 (December 17, 1993), another
case in which the Commission authorized the retention of gas operations. As a
percentage of 1995 expenses or operating revenue deductions, the lost economies
described in the Gas Studies would equal 11.68% in the case of WP&L, 10.90% in
the case of Utilities and 14.78% in the case of IPC, which in each case
substantially exceeds the percentage loss in any past divestiture order issued
by the Commission and the losses in UNITIL and Entergy. As a percentage of
1995 gas gross income, the lost economies described in the Gas Studies amount
to 81.04% in the case of WP&L, 101.33% in the case of Utilities and 53.03% in
the case of IPC, which in each case exceeds the highest loss of gross income in
any divestiture order. The applicable percentages here and in past cases are
summarized in Exhibit L-5.
In order to recover these lost economies, the WP&L gas system would
need to increase its revenue from rates by $14.024 million or 9.74%, the
Utilities gas system would need to increase its revenue from rates by $14.205
million or 9.84% and the IPC gas system would need to increase its revenue from
rates by $5,048,533 and 11.56%. These increases in rate revenues would have a
direct and immediate negative impact on the rates charged to consumers for gas
services. In addition, the customers of the WP&L, Utilities and IPC gas
businesses who are also customers of their respective electric utility
businesses will experience a doubling of their postage costs to pay two
separate monthly bills. The total estimated increase in such postage costs is
$900,000 in the aggregate for the gas customers of the three companies.
Divestiture would also result in the loss to consumers of the
economies offered by the "energy services" approach of WP&L, Utilities and IPC
to the utility business. While the losses cannot be fully quantified, they are
clearly substantial. For the energy services company, providing gas and
electric products is only the start of the utility's job. The utility must
also provide enhanced service to the consumer by providing an entire package of
both
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energy products and services. In this regard, the efforts of WP&L, Utilities
and IPC reflect a trend by utilities to organize themselves as energy service
companies which provide a total package of energy services rather than
merely supplying gas and electric products. The goal of an energy service
company is to retain its current customers and obtain new customers in an
increasingly competitive environment by meeting customers' needs better than
the competition. An energy service company can provide the customer with a low
cost energy (i.e., gas, electricity or conservation) option without inefficient
subsidies.
The energy services company operating combination utilities offers a
wide range of benefits. For customers, an energy service company provides the
convenience and efficiency of service by a single energy provider and reduces
transaction costs incurred in gathering and analyzing information, contacting
energy suppliers, negotiating terms of services and paying bills. For the
communities in which an energy service company operates, combining gas and
electric operations simplifies community planning on energy-related matters.
For society, an energy service company is best able to ensure an
environmentally efficient allocation of energy. For utility shareholders and
employees, an energy service company is better able to respond to a competitive
environment and to remain an attractive investment opportunity for shareholders
and an appealing employer for utility employees.
The Commission has historically looked to the Supreme Court decisions
in S.E.C. v. New England Electric System, et al., 384 U.S. 176 (1966) ("NEES
I") and 390 U.S. 207 (1968) ("NEES II") in interpreting clause (A) of Section
11(b)(1). In NEES I, the Supreme Court accepted the Commission's
interpretation of the "loss of substantial economies" language of clause (A) to
require an applicant seeking to own an electric and gas utility system to show
that the additional system would be incapable of independent economic operation
if separated from the principal system. The Court in NEES I accepted the
Commission's then-current interpretation of clause (A), despite earlier SEC
interpretations permitting the Commission to use business judgment and
expertise to apply the statutory phrase "loss of substantial economies." In
NEES I, the Court specifically recognized that the language of clause (A) was
"admittedly not crystal clear" and deferred to the agency's "expertise on the
total competitive situation." 384 U.S. at 185 (emphasis in original). In NEES
II, the Court reiterated and strengthened its earlier statement of deference to
the Commission. 390 U.S. at 219.
The Division recognized in the 1995 Report that the Commission was no
longer bound by the narrow interpretation of clause (A) under the NEES
decisions. In so doing, the Division stated:
As discussed above, the SEC has generally required electric
registered holding companies that seek to own gas utility
properties to satisfy the requirements of the A-B-C clauses
concerning additional integrated systems. In contrast, exempt
holding companies have generally been permitted to retain or
acquire combination systems so long as combined ownership of
gas and electric operations is permitted by state law and is
supported by the interested regulatory authorities.
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In the past, the SEC has construed the A-B-C clauses narrowly
to permit retention only where the additional system, if
separated from the principal system, would be incapable of
independent economic operations. Although the Supreme Court
upheld the SEC's reading, two justices dissented, contending
that the "serious impairment" standard was at odds with the
wording of the Act, had little basis in the statutory history
or aims of the Act, and could not be sustained by agency or
judicial precedent. The dissenting justices believed that the
statutory language "called for a business judgment of what
would be a significant loss."
Applicants in recent matters have argued that, in a
competitive utility environment, any loss of economies
threatens a utility's competitive position, and even a "small"
loss of economies may render a utility vulnerable to
significant erosion of its competitive position. There is
general support for a more relaxed standard. A number of
commenters emphasize that these are essentially state issues.
It does not appear that the SEC's precedent concerning
additional systems precludes the SEC from relaxing its
interpretation of section 11(b)(1)(A). Indeed, the SEC has
recognized that section 11 does not impose "rigid concepts"
but rather creates a "flexible" standard designed "to
accommodate changes in the electric utility industry."
Congress, in 1935, recognized that competition in the field of
distribution of gas and electric energy is essentially a
question of state policy. The Act was intended to ensure
compliance with state law in this regard. Moreover, it
appears that the utility industry is evolving toward the
creation of one-source energy companies that will provide
their customers with whatever type of energy supply they want,
whether electricity or gas. Accordingly, the Division
believes it is appropriate to reconcile the treatment of
registered and exempt companies in this regard, and so
recommends that the SEC permit registered holding companies to
own gas and electric utility systems pursuant to the A-B-C
clauses of section 11(b)(1), where the affected states
agree.16
In NEES I (and NEES II), the Court accepted the Commission's
interpretation of clause A as a "construction well within the permissible range
given to those who are charged with the task of giving an intricate statutory
scheme practical sense and application." 384 U.S. at 185. However, there is
strong support in Supreme Court case law for the Commission's application in
this case of its current interpretation of clause A, based upon current
competitive facts and current policy, as stated in the 1995 Report. In Chevron
USA, Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984), the
Court outlined the parameters for changing agency interpretations of statutory
language based on policy considerations and agency expertise:
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When a court reviews an agency's construction of the statute
which it administers, it is confronted with two questions.
First, always, is the question whether Congress has directly
spoken to the precise question at issue. If the intent of
Congress is clear, that is the end of the matter; for the
court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress. If, however, the
court determines Congress has not directly addressed the
precise question at issue, the court does not simply impose
its own construction on the statute, as would be necessary in
the absence of an administrative interpretation. Rather, if
the statute is silent or ambiguous with respect to the
specific issue, the question for the court is whether the
agency's answer is based on a permissible construction of the
statute.
467 U.S. at 842 (citations omitted; emphasis added). Justice Scalia pointed
out that the Court's Chevron opinion "announced the principle that the courts
will accept an agency's reasonable interpretation of the ambiguous terms of a
statute that the agency administers." Antonin Scalia, "Judicial Deference to
Administrative Interpretations of Law," 1989 Duke L.J. 511.
In the NEES I opinion, the Supreme Court specifically pointed out that
"[t]he phrase 'without the loss of substantial economies' is admittedly not
crystal clear." 384 U.S. at 185. Thus, the first prong of the analysis under
Chevron is clearly met. As Justice Scalia pointed out, under Chevron:
"the agency is free to give the statute whichever of several
possible meanings it thinks most conducive to accomplishment
of the statutory purpose. Under the latter regime, there is
no apparent justification for holding the agency to its first
answer, or penalizing it for a change of mind."
1989 Duke L.J. at 516. Justice Scalia argues that a primary point of Chevron
is to allow agencies flexibility to change their statutory interpretations
based upon current economic (and even political) considerations. Under
Chevron, therefore, it is appropriate for the Commission to interpret clause A
based on its current "expertise on the total competitive situation." (NEES I
at 185.)
Applicants believe that the Division's recommendation would represent
sound policy by the Commission. From a policy perspective, the Commission's
historic concern underpinning its 1964 NEES decision and a host of earlier
decisions where the retainability of gas properties by registered electric
systems was at issue -- namely, of fostering competition between electric and
gas -- is simply no longer valid given the current "state of the art" in the
electric and gas utility industries. In the generation since the Commission
decided the NEES case, profound economic and regulatory factors have caused
fundamental changes in the gas supply and electric generation industry. These
changes have made the Commission's earlier positions regarding combination
utilities obsolete.
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In the gas area, regulatory changes have introduced competition into
what was formerly a monopoly and have expanded the availability of non-utility
"transportation-only service" as an alternative of sales services from the
local gas utility company. The WP&L, Utilities and IPC gas operations all have
"open access" transportation service tariffs on file with their respective
state commissions, and approximately 47% of the gas delivered by them in 1995
was directly purchased by customers. Combination utilities therefore have less
ability than they did in 1935 to "favor" electric -- the principal policy
concern in decisions ordering the separation of gas and electric systems -- by
curtailing the availability or increasing the price of gas.17 Combination
utilities also have less incentive to favor electric over gas in light of the
increasing importance of demand-side management, the costs and risks involved
in the construction of new generating capacity and the incentives to avoid such
construction, and the emergence of integrated resource planning involving both
gas and electric service as noted in the June 1994 issue of The Electricity
Journal.
In the electric area, the Energy Policy Act of 1992 and the Public
Utility Regulatory Policies Act of 1978 have introduced competition into the
electric utility business. As the chairman of the Senate Banking Committee
stated recently:
"[The Act] was substantially changed by the Energy Policy Act
of 1992. That law restructured the utility industry to
promote greater competition for the benefit of energy
customers. The Energy Policy Act of 1992 was the product of a
cooperative effort on the part of the Banking Committee and
the Energy Committee to create a more market-oriented
regulatory framework for the energy industry."
Hearing on S. 182, The Communications Act of 1994 before the Comm. on Commerce,
Science and Transportation, 103rd Cong. 2nd Sess. 344-345 (1994) (Prepared
Statement of Senator Riegle) (emphasis added). In addition, many states have
"retail wheeling" measures under discussion which are likely to have the effect
of extending electric supply competition to the retail level. Wisconsin, and
to a lesser extent Minnesota, are each in the process of evaluating various
options that could increase electric supply competition at the retail level.18
Instead of relying on the blunt instrument of competition between gas
and electric, national policy has now created direct competition within the gas
and electric utility industries. Thus, combination ownership does not
eliminate competition, since a combination utility now has competitors for both
gas and electric service. Moreover, competition is not an end in itself, but is
merely a means to the end of efficient, cost-effective service. Since
combination ownership creates efficiencies and no longer has the effect of
eliminating competition, there is no reason for the Commission to prohibit
combination ownership, at least under the circumstances presented here.
Nothing in the Supreme Court's NEES decisions compels a different
result. First, as the Commission noted in its Union Electric decision, the
Supreme Court's NEES decisions attached "great weight ... to [the Commission's]
expertise in the administration of the Act." 45 S.E.C. 489, 509, n.77. (1974).
The NEES decisions and the Court's reasoning in Chevron therefore leave the
Commission free to apply its expertise to administer the Act in light of
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<PAGE> 72
changes in legal, regulatory and economic circumstances which were not
foreseen at the time of the NEES decisions, including federal legislation which
has "substantially changed" the Act. See Chevron, 476 U.S. at 842.
Second, as noted by the Commission in Union Electric and later
decisions, the NEES decisions are based on premises and policies that are no
longer operative. See Delmarva Power & Light Co., et. al., 46 S.E.C. 710, 716
(1976) ("the objective of promoting retail competition between gas and
electricity, which was stressed in the NEES opinions, is less critical now.");
Union Electric Co., 45 S.E.C. 489, 510 (1974), City of Cape Girardeau, Missouri
v. S.E.C., 521 F.2d 324 (D.C. Cir. 1974) (describing as "outmoded" the
Commissions' previous policy to "promot[e] the wider...use of gas and electric
energy" and to "foster...variegated competition between gas and electricity and
the attendant promotion of the use of each;" holding that "the maximization of
energy use seems a questionable public policy objective" and that "[i]n today's
world the public interest and the long-run consumer interest seem to call for
prudent conservation and rational allocation" of resources).
(B) and (C) clauses: The remaining requirements of Section 11(b)(1)
are met because the gas operations of WP&L (including South Beloit), Utilities
and IPC are located in adjoining states (Wisconsin, Illinois, Iowa and
Minnesota) and because the combination of the gas operations under Interstate
Energy is not so large (considering the state of the art and the area or region
affected) as to impair the advantages of localized management, efficient
operation or the effectiveness of regulation. The gas systems are confined to
a relatively small area and are not as large as other gas systems in the states
served by the applicants and will preserve the advantages of localized
management, efficient operation and effectiveness of regulation. The
Commission has recognized elsewhere that the determinative consideration is not
size alone or size in an absolute sense, either big or small, but size in
relation to its effect, if any, on localized management, efficient operation
and effective regulation. From these perspectives, it is clear that the
continued combination of the gas operations under Interstate Energy is not too
large. Following the Transaction, the gas operations of WP&L, South Beloit,
Utilities and IPC, with approximately 370,000 customers in four states, will be
smaller than the following companies which have gas operations in such states:
Minnegasco (which has 630,000 customers in Minnesota), Northern Illinois Gas
Company (1,769,800 customers in Illinois), Mid-American Energy (which has
467,547 customers in Iowa), People's Gas Light and Coke Company (which has
842,510 customers in the Chicago area), Utilicorp United (288,093 customers in
Iowa and Minnesota), and the proposed combination of Wisconsin Electric Power
Company and Northern States Power Company (750,000 customers predominately in
Minnesota and Wisconsin). These companies all provide service in the same
states as the applicants.
With respect to localized management, management will remain
geographically close to each of the three gas operations, thereby preserving
the advantages of localized management. WP&L (and South Beloit), Utilities and
IPC will be operated as separate subsidiaries of Interstate Energy for at least
three years after the consummation of the Transaction and will continue to be
headquartered in Madison, Wisconsin, Cedar Rapids, Iowa and Dubuque, Iowa,
respectively. From the standpoint of regulatory effectiveness, each gas
operation is organized as a separate corporation and will continue to be
subject to regulation by the respective state in which such gas operation is
located, which will ensure the continued effectiveness of state regulation.
IPC already operates a multi-jurisdictional (Iowa, Illinois and
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Minnesota) gas utility, as does WP&L directly and through its subsidiary, South
Beloit (Wisconsin and Illinois). Several other gas utilities in the region
serve customers in multiple states. Accordingly, the regulating agencies in
the four state region currently regulate multi- jurisdictional gas utilities
and will be able to effectively regulate the gas utility operations of
Interstate Energy. In addition, it is expected that each relevant state
regulatory authority will indicate its support for or order the retention by
Interstate Energy of the gas system(s) located in such state, thereby
indicating that state regulating authorities can continue to regulate such
system effectively. Finally, as detailed above, the gas operations of WP&L
(including South Beloit), Utilities and IPC enjoy substantial economies as part
of the WPLH, IES and IPC systems, respectively, and will realize additional
economies as a result of the Transaction as part of the Interstate Energy
system. Far from impairing the advantages of efficient operation, the
continued combination of the gas operations under Interstate Energy will
facilitate and enhance the efficiency of gas operations.
ii. Retention of Other Businesses
As a result of the Transaction, the non-utility businesses and
interests of WPLH, IES and IPC described in Item 1.B.5. above will become
businesses and interests of Interstate Energy. Certain of such businesses will
be held directly by Interstate Hold. In addition, the subsidiaries, affiliates
and associates of these non-utility businesses will become indirect
subsidiaries, affiliates and associates, respectively, of Interstate Energy.
As noted above, prior to consummation of the Transaction, a new
wholly-owned subsidiary, Interstate Hold, will be established by WPLH. Upon
consummation of the Transaction, Interstate Hold will be a direct wholly-owned
subsidiary of Interstate Energy which will replace HDC and Diversified as the
holding company for many of the non-utility subsidiaries and interests of WPLH
and IES. To accomplish this new structure, HDC and Diversified will be merged
into Interstate Hold and the existing 1.9% minority interest in HDC will be
eliminated. Corporate charts showing the existing subsidiaries, including
non-utility subsidiaries, of WPLH and IES, are filed as Exhibits M-1 and M-2.
A corporate chart showing the projected arrangement of these subsidiaries under
Interstate Energy is filed as Exhibit A. To simplify further its corporate
structure, Interstate Energy may combine certain of its non-utility businesses
which it is authorized to retain by the Commission following the Transaction.
Standard for retention: Section 11(b)(1) permits a registered holding
company to retain "such other businesses as are reasonably incidental, or
economically necessary or appropriate, to the operations of [an] integrated
public utility system." Under the cases interpreting Section 11, an interest
is retainable if (1) there is an operating or functional relationship between
the operations of the utility system and the non-utility business sought to be
retained, and retention is in the public interest,19 or if (2) the business
evolved out of the system's utility business, the investment is not significant
in relation to the system's total financial resources, and the investment has
the potential to produce benefits for investors and/or consumers.20 In
addition, the Commission has stated that "retainable non-utility interests
should occupy a clearly subordinate position to the integrated system
constituting the primary business of the registered holding company."21
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The majority of Interstate Energy's non-utility businesses would be
considered energy-related companies under the Commission's proposed
Rule 58. Under proposed Rule 58, an energy-related company is a company
that derives or will derive substantially all of its revenues (exclusive of
revenues from temporary investments) from one of the twelve businesses
described in the Rule and from such other activities and investments as the
Commission may approve under Section 10.
In the 1995 Report, in addition to the proposed Rule 58 safe harbor
for energy-related diversification, the Division suggested the adoption of a de
minimus "budget approach" for limited investments in activities which do not
fit within previous orders of the Commission, yet appear to be within the
meaning of the "other businesses" clauses of Section 11. The Division
suggested that this approach would allow registered holding companies to make
minimal investments without regard to the identity of each investment up to a
certain authorized amount, provided certain structural considerations were
observed which limited the potential losses to the amount of the investment and
insulated the other system assets by isolating the activity in a separate
subsidiary.22
Upon the consummation of the Transaction, each of the non-utility
investments retained by Interstate Energy from WPLH and those to be acquired by
Interstate Energy from IES and IPC will become subject to the jurisdiction of,
and regulation by, the PSCW pursuant to the Wisconsin Act as described above in
Item 1.B.1.a. The policy of the Wisconsin Act is set forth in its preamble and
explicitly recognizes that the financial health of a public utility depends
upon the economic well-being of its service area and encourages the conduct of
substantial business by the utility within the service area by, among other
things, providing investment capital for new ventures. To foster these
objectives, and to ensure safe and reliable service at competitive rates, the
Wisconsin Act contains provisions concerning oversight by the PSCW of the
diversification and community investment permitted and encouraged by the
statute.23 As previously described, among other things, the Wisconsin Act
provides for (1) a cap on amounts invested in diversified non-utility
businesses; (2) annual reporting requirements with respect to the total amount
of assets held by non-utility affiliates, amounts located within the state and
number of employees; and (3) periodic investigations by the state commission at
least every three years. Furthermore, the PSCW is required to consider whether
the non- utility affiliates (1) substantially retain, attract or promote
business activities or employment or provide capital to businesses being formed
or operating in the service territory of any public utility affiliate; or (2)
develop or operate commercial or industrial parks in the service territory of
any public utility affiliate. Each non-utility investment retained by
Interstate Energy from WPLH has been subject to analysis by the PSCW in
accordance with these requirements, and each non-utility investment retained
(including those obtained from IES and IPC) will be subject to ongoing
regulation under the Wisconsin Act. Because the extensive regulation to which
these investments will be subject ensures such investments are and will be in
the best interests of investors and consumers, the Commission should allow
retention under Section 11's "other businesses" clause.
As set forth more fully below, the non-utility business interests that
Interstate Energy will hold through Interstate Hold or through utility
subsidiaries meet the Commission's standards for retention.
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Brokering of Energy, Gas, and Related Products and Services (HES and IEA):
As described in Item 1.B.5., HES and IEA engage in natural gas and
electric marketing and brokering activities. These activities are
substantially similar to those approved by the Commission and conducted by
registered holding companies. See, e.g., Northeast Utilities Services Co., et
al., Holding Co. Act Release No. 26359 (Aug. 18, 1995) (authorizing subsidiary
to engage in electric power brokering and marketing transactions and
fuel-for-power transactions within and outside the service areas of affiliated
public-utility companies); Consolidated Natural Gas Co., Holding Co. Act
Release No. 24329 (Feb. 27, 1987) (authorizing establishment of subsidiary
under name CNG Trading to compete with independent gas marketing companies to
maintain and increase system gas sales to LDCs and their end-users which could
not be retained or secured under existing utility tariffs); Entergy
Corporation, et al., Holding Co. Act Release No. 25848 (Jul. 8, 1993)
(authorizing subsidiary to provide consulting services to non-associated
companies, including expertise relating to brokering of power resources). The
Commission has also authorized registered holding company systems to engage in
gas marketing activities designed to ensure fuel for generation of electricity.
See, e.g., Central and South West Corp., Holding Co. Act Release No. 25385
(Sep. 26, 1991) (natural gas gathering transmission and marketing). Since the
activities of HES and IEA are substantially similar to those which the
Commission has authorized registered holding companies to conduct, HES and IEA
may be retained. Such activities would also be permitted under proposed Rule
58.
Energy Conservation, Management and Related Services (Enserv, Entec and IEA):
As previously discussed, Enserv, Entec and IEA provide turnkey energy
project development and implementation for customer energy supply projects,
including feasibility studies, engineering, financing, construction, management
and project ownership; develop and sell sales management and productivity
software for the electric utility industry; develop, market and maintain power
generation computer software programs, models and options for the electric
utility industry; design, build and operate various types of generation and
transmission facilities; and provide a variety of other related services
including utility billing analysis, end-use gas marketing, risk management,
construction and energy consulting, and administrative services. The
Commission has authorized numerous registered holding companies to engage in a
variety of similar energy conversation, demand side management and related
services. See Allegheny Power System, Inc., Holding Co. Act, Release No. 26401
(Oct. 27, 1995) (authorizing non-utility subsidiaries to provide energy
management services, including identification of energy cost reduction and
efficiency opportunities, design of facility and process modifications to
realize such efficiencies; management of or the direct construction of energy
conservation equipment; maintenance of energy systems; training of client
personnel; operation of equipment; design, management, construction and
installation of energy management systems and structures; reporting system
results and other similar or related energy management activities); Central and
South West Corp., Holding Co. Act Release No. 26367 (Sep. 1, 1995) (authorizing
Enershop, a non-utility subsidiary, to provide a range of energy-related
products and services to commercial and industrial customers of both associate
and non-associate companies, including consulting and energy analysis, project
management, design and construction, and energy efficient equipment
installation and maintenance); Entergy Corp., et al., Holding Co. Act Release
No. 26342 (Jul. 27, 1995) (authorizing Entergy Systems and Service, Inc. to
provide
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energy consulting services worldwide, with a focus on lighting efficiency, and
removing former 50% limitation on energy management services business);
Northeast Utilities, et al., Holding Co. Act Release No. 26335 (Jul. 19, 1995)
(authorizing subsidiaries of Northeast Utilities to provide, without a 50%
limitation, energy management services and demand-side management services and
to enter into joint ventures with utilities to provide such services. Since
the activities engaged in by Enserv, MAG, Entec and IEA are substantially
similar to those approved by the Commission for registered holding companies,
Interstate Energy may retain these businesses. All such activities would also
be permitted under proposed Rule 58.
Oil and Gas Exploration and Development (Whiting):
As previously discussed, Whiting and its subsidiaries develop and
produce crude oil and natural gas. The Commission has approved the acquisition
of crude oil, natural gas and mineral rights by registered holding company
systems. In Consolidated Natural Gas Co., Holding Co. Act Release No. 22845
(Feb. 7, 1983), the Commission approved the establishment of CNG Development, a
subsidiary of Consolidated Natural Gas Company, a registered holding company,
to engage in natural gas and oil exploration. See also New England Energy
Inc., Holding Co. Act Release No. 23988 (Jan. 13, 1986) and New England Energy
Inc., Holding Co. Act Release No. 21862 (Dec. 13, 1980). Since the activities
of Whiting and its subsidiaries are substantially similar to those permitted by
the Commission in other orders, Interstate Energy may retain its interest in
these businesses. The exploration of natural resources or the holding of
rights to such resources also appears to be authorized under proposed Rule 58
and is an activity which is consistent with the type of business which is
exempt under Rule 16.
Ownership of, Operation of, and Providing Services to Foreign Utility Companies
(International):
International is engaged exclusively in the business of owning,
operating or providing services to entities that, upon making the necessary
filings under Section 33, would be FUCOs. Ownership of FUCOs is expressly
permitted by Section 33 of the Act without the need to seek Commission
approval. Also, with respect to the obligations of International, there is no
recourse to IES, and there will be no recourse to Interstate Energy, with
respect to the investments in any of these projects. Accordingly, Interstate
Energy may retain International.
Real Estate (Reac, Inc., IPC Development and Iowa Land):
As described above, Reac, Inc., IPC Development and Iowa Land
purchase, hold and sell real estate in connection with WP&L's, IPC's and
Utilities' public utility operations. In prior orders, the Commission has
approved the purchase of real estate which is incidentally related to the
operations of a registered holding company. See American Electric Power
Service Co., Holding Co. Act Release No. 19981 (Apr. 12, 1977) (Commission
allowed a subsidiary of American Electric Power to purchase employees' homes in
conjunction with their transfer to a new position in a different geographical
area); UNITIL Corporation et. al., Holding Co. Act Release No. 25524 (Apr. 24,
1992) (Commission noted that UNITIL Realty Corporation, a subsidiary of the
registered holding company, UNITIL, which acquired real estate to support
utility operations, engaged in activities which were within the confines of the
Act). Consequently, since the real estate held by Reac, Inc., IPC Development
and Iowa Land is
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substantially similar to that owned by American Electric Power and UNITIL
Realty Corporation, Interstate Energy may retain its interests in the property
owned by Reac, Inc., IPC Development and Iowa Land.
Telecommunications Facilities and Equipment (McLeod):
As previously discussed, both Investments and IPC Development own
interests in McLeod, a fiber optic telecommunications company. The Commission
has approved the acquisition of interests in telecommunications companies by
registered holding companies. See, e.g., Appalachian Power Co., Holding Co.
Act Release No. 24772 (Dec. 9, 1988) (lease of fiber optic system);
Consolidated Gas Transmission Corp., Holding Co. Act Release No. 23914 (Nov.
20, 1985) (lease of microwave radio facilities); Southern Co., Holding Co. Act
Release No. 26211 (Dec. 30, 1994) (mobile radio system). Since the interests
in McLeod are substantially similar to those allowed by the Commission in other
orders, Interstate Energy may retain the interests it holds in McLeod.
Retention of such interests would also be allowed under proposed Rule 58 and is
consistent with the policy of the Act as evidenced by Section 34 thereof, which
specifically permits ownership of interests in telecommunications companies
engaged exclusively in the business of providing telecommunications service
upon application to the Federal Communications Commission for a determination
of "exempt telecommunications company" status.
Environmental Consulting and Engineering Services (HEHC):
As discussed in Item 1.B.5., HEHC, through its subsidiaries, provides
environmental consulting and engineering services. The Commission has
authorized a number of registered holding companies to engage in consulting
activities similar to those conducted by HEHC. See, e.g., Southern Co.,
Holding Co. Act Release No. 22132 (Jul. 17, 1981) (management, technical and
training services); American Electric Power Co., Inc., Holding Co. Act Release
No. 22468 (Apr. 28, 1982) (financial, management and engineering services);
Middle South Utilities, Holding Co. Act Release No. 22818 (Jan. 11, 1983).
Since the interests in HEHC are substantially similar to those authorized by
the Commission in other orders, Interstate Energy may retain HEHC. Interstate
Energy would also be allowed to retain HEHC under proposed Rule 58.
Low Income Housing (HPI, HCC and Capital Square):
As previously discussed, HPI, directly and through its subsidiaries,
provides construction and permanent financing and acquires tax-credit
multi-family housing developments. Capital Square and HCC provide financing
services for such housing developments. The Commission has already approved
the acquisition by a registered holding company of interests in various limited
partnerships sponsored and managed by HPI. Georgia Power Co., Holding Co. Act
Release No. 26220 (Jan. 24, 1995) (approving investment in one or more limited
partnerships organized and managed by HPI to invest in low income housing).
Since the Commission has already approved the acquisition of interests in such
housing developments, and of HPI developments in particular, by a registered
holding company, Interstate Energy may retain HPI, HCC and Capital Square.
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Transportation, Handling and Storage Facilities (Transportation):
As discussed in Item 1.B.5., Transportation provides rail freight
service between Cedar Rapids, Iowa and various other locations in Iowa and
connecting service to the national rail network. Transportation also provides
freight transfer services between its rail operations and river barges as well
as warehouse and outdoor storage services linked to the Transportation rail
operations. Transportation provides fuel transportation, handling and storage
for a number of Utilities facilities as well as for other customers. The
Commission has approved the acquisition of interests in such businesses by
registered holding companies. See, e.g., Ohio Power Co., Holding Co. Act
Release No. 19594 (Jun. 25, 1976) (rail-to-barge coal handling facility);
Middle South Utilities, Inc., Holding Co. Act Release No. 18221 (Dec. 17, 1973)
(bulk oil storage facilities). Since the business of Transportation is
substantially similar to those which the Commission has allowed registered
holding companies to acquire in prior orders, Interstate Energy may retain
Transportation. Retention of Transportation would also be allowed under
proposed Rule 58.
Economic Development (Investments):
As previously discussed, Investments, through certain of its
subsidiaries, has invested in several economic development and venture capital
ventures located within the service territory of Utilities. The Commission has
approved the acquisition of interests in economic development and venture
capital ventures by registered holding companies. See, e.g., The Potomac
Edison Co., Holding Co. Act Release No. 25312 (May 14, 1991) (acquisition of
interest in economic development venture); East Ohio Gas Co., Holding Co. Act
Release No. 25046 (Feb. 27, 1990) (authorizing $500,000 investment in limited
partnerships engaged in financing development of urban real estate projects
aimed at "impact[ing] favorably upon urban blight"); Georgia Power Co., Holding
Co. Act Release No. 25949 (Dec. 15, 1993) (acquisition of interest in venture
capital venture); Hope Gas, Inc., Holding Co. Act Release No. 25739 (Jan. 26,
1993) (same); Ohio Power Co., Holding Co. Act Release No. 25604 (Aug. 11, 1992)
(authorizing loan to non-profit corporation for construction of building in
service territory); Northeast Utilities, Holding Co. Act Release No. 24585
(Feb. 24, 1988) ($250,000 investment in locally focused venture capital fund);
Consolidated Natural Gas Co., Holding Co. Act Release No. 23799 (Aug. 20, 1985)
($100,000 investment in fund formed to encourage and finance local
entrepreneurial ventures). Since the interests owned by Investments are
substantially similar to those which the Commission has allowed registered
holding companies to acquire, Interstate Energy may retain Investments.
Production and Distribution of Thermal Energy (Steam heating division of
Utilities).
As discussed in Item I.B.5, the steam heating division of Utilities
provides steam service to more than 200 customers in Cedar Rapids. The
retention of this business will further Interstate Energy's ability to be an
energy service company providing consumers with additional options to meet
their energy needs, thereby allowing Interstate Energy to compete more
effectively in the energy-services business. The Commission has previously
approved the retention of such businesses. See, e.g., General Public Utility
Corp., 32 S.E.C. 807, 840-841 (1951) (Commission authorized retention of steam
heating systems. Steam from such systems was used to generate electricity and
sold to customers for heating purposes.) See also The North
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American Co., 11 S.E.C. 194 (Apr. 14, 1942) (Commission authorized retention of
steam heating operations which provided steam heat to customers and was used in
the generation of electricity.) As the Commission has determined that steam
heating operations, whether used for internal generation purposes or for direct
sale to customers, are reasonably incidental to the operation of an electric
utility system, these operations may be retained. The production, conversion
and distribution of thermal energy products, including steam, is also permitted
by proposed Rule 58.
Reservoir, Dam and Related Facilities (Wisconsin Valley Improvement Company):
As discussed in Item 1.B.5., Wisconsin Valley Improvement Company
manages a series of reservoirs and dams on the upper Wisconsin River. The
Commission has approved the acquisition of interests in similar companies by
registered holding companies. See, e.g., Jersey Central Power and Light Co.,
Holding Co. Act Release No. 24664 (Jun. 14, 1988) (reservoir, dam and related
facilities for storage and discharge of water); Wisconsin River Power Company,
27 S.E.C. 539 (1948) (subsidiary of a registered holding company whose business
consisted of "acquiring real estate and flowage rights necessary for the
construction and operation of dams and hydroelectric plants . . . and making
other preparations for such developments," did not violate any sections of the
Act). Since the activities of Wisconsin Valley Improvement Company are
substantially similar to those which the Commission has authorized in prior
orders, Interstate Energy may retain such interests. These interests would
also be retainable under proposed Rule 58.
Water Systems (Beloit, Ripon and South Beloit Water Systems):
As discussed above, WP&L provides water supply to Beloit and Ripon,
Wisconsin and, through South Beloit, to South Beloit, Illinois. These three
systems in the aggregate amount to less than 1% of Interstate Energy's
consolidated pro forma income and assets and have each been operated by WP&L
and South Beloit for more than 60 years. The Commission authorized WPLH to
acquire these water systems at the time WP&L reorganized as a holding company.
WPL Holdings, Holding Co. Act Release No. 24590 (Feb. 26, 1988). The
Commission has also authorized registered holding companies to acquire
interests in water companies. See e.g., Pennsylvania Electric Company and
Ninevah Water Company, Holding Co. Act Release No. 21420 (Feb. 5, 1980)
(authorizing electric utility subsidiary of registered holding company to
provide additional debt financing to water company subsidiary of electric
utility). In addition, other public utilities also operate water companies.
See e.g., Northern States Power Co., Holding Co. Act Release No. 22999 (July 7,
1983). Since the Commission has previously authorized registered holding
companies to retain and acquire further investments in water company
subsidiaries, Interstate Energy may retain the Beloit, Ripon and South Beloit
Water Systems.
Alternative Fuel Technologies (CRETC)
As discussed in Item I.B.5, IES is a member in CRETC, a
federally-funded consortium formed to evaluate electric mass transit vehicle
technology in northern climates. The Commission has approved the acquisition
by registered holding companies of interests in businesses that manufacture,
convert, sell and service electric powered vehicles and the
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ownership and operation of related recharging equipment. See, e.g.,
Consolidated Natural Gas Co., Holding Company Act Release No. 25615 (August 27,
1992); Central Power and Light Co., Holding Company Act Release No. 26160
(November 18, 1994). Since the activities of CRETC are substantially similar
to those which the Commission has authorized in prior orders, this business may
be retained by Interstate Energy. This interest would also be retainable under
proposed Rule 58.
Charitable Foundations (WP&L Foundation and IES Foundation)
As discussed above, the WP&L Foundation and IES Foundation are
nonprofit corporations that evolved out of the public utility operations of
WPLH and IES, respectively. Over the past five years, WP&L has invested $5
million in the WP&L Foundation and IES has invested $2.75 million in the IES
Foundation. Both of these foundations fund a variety of charitable causes
located in the service areas of WP&L and IES. Since the operations of the WP&L
Foundation and the IES Foundation evolved out of the utility businesses of WP&L
and Utilities, are not significant in terms of the amount invested in relation
to the total financial resources of Interstate Energy and have the potential to
produce benefits for investors and consumers, Interstate Energy may retain the
WP&L Foundation and IES Foundation.
Other Businesses (Ventures)
As discussed above, Ventures owns and operates a landfill in Ottumwa,
Iowa through its wholly-owned subsidiary IES Midland Development Inc. ("Midland
Development") and an aquaculture facility that raises fish for human
consumption, through its 35% owned subsidiary AquaVentures L.C. Each of these
businesses evolved out of Utilities' public utility operations. AquaVentures
L.C. uses steam generated by an electric generating plant operated by
Utilities, thereby generating revenue for IES from what would otherwise be
waste steam. Midland Development accepts coal fly ash waste generated by the
electric generating operations of Utilities. Midland Development also receives
revenues from waste it accepts from parties not affiliated with IES, thereby
spreading the cost of disposing of its coal fly ash waste. The Commission has
approved investments by registered holding companies in subsidiaries that
dispose of or process waste generated in the utility operations of the holding
companies. Cf. New England Electric Systems, Holding Co. Act Release No. 26277
(April 26, 1995) (development and commercialization of technologies and
processes which utilize coal waste byproducts as an integral component of such
technologies or processes); New England Electric System, Holding Co. Act
Release No. 26277 (April 26, 1995) (investment in venture that would install
equipment at power stations owned by nonaffiliates to separate unburned carbon
from coal ash). Since the operations of Ventures evolved out of the utility
business of Utilities, are not significant in terms of the amount invested in
relation to the total financial resources of Interstate Energy and have the
potential to produce benefits for investors and consumers, Ventures may be
retained.
In addition to these specific factors in support of retention, a
number of more general considerations support Interstate Energy's retention of
the non-utility businesses of
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WPLH, IES and IPC. First, the businesses in question provide benefits to
customers, investors and the public. Second, the Transaction is, at heart, a
utility combination, in which the non-utility businesses are small and only
incidentally involved, amounting, in the aggregate, to less than 15% of the
consolidated assets and 12% of consolidated revenues of the Interstate Energy
system. Third, this is not a case in which an existing registered holding
company system is acquiring new non-utility interests; rather, Interstate
Energy is only seeking authorization to retain the non-utility interests held
by WPLH, IES and IPC before the Transaction. Finally, state holding company
regulation has developed (such as the Wisconsin Act) which dictates what
investments are "necessary or appropriate in the public interest" and are "not
detrimental to the proper functioning" of a holding company. WPLH's
investments were made in accordance with the rigorous statutory limitations of
the Wisconsin Act applicable to non-utility diversification and continue to be
subject to periodic audits by the PSCW under the Wisconsin Act. When held by
Interstate Energy all of the non-utility businesses of Interstate Energy will
be subject to such review.
Rule 53 requires that aggregate investments in EWGs and FUCOs not
exceed 50% of the system's consolidated retained earnings. As of December 31,
1995, WPLH, IES and IPC had no investments in EWG's and their aggregate
investments in FUCOs was less than 2% of combined retained earnings, well
within the amount permitted.
Proposed Rule 58 would require that the aggregate investment in
"energy related" companies not exceed 15% of the consolidated capitalization of
a registered holding company. As of December 31, 1995, the aggregate
investment in "energy related" companies of WPLH, IES and IPC would come within
that limitation.
b. Section 10(c)(2)
The Transaction will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the public
interest, as required by Section 10(c)(2) of the Act.
i. Efficiencies and Economies
The Transaction will produce economies and efficiencies more than
sufficient to satisfy the standards of Section 10(c)(2), described above.
Although some of the anticipated economies and efficiencies will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met. See American Electric
Power Co., 46 S.E.C. 1299, 1320-21 (1978). Some potential benefits cannot be
precisely estimated; nevertheless they too are entitled to be considered:
"[S]pecific dollar forecasts of future savings are not necessarily required; a
demonstrated potential for economies will suffice even when these are not
precisely quantifiable." Centerior Energy Corp., Holding Co. Act Release No.
24073 (April 29, 1986).
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WPLH, IES and IPC have estimated the nominal dollar net value of
synergies from the Transaction to be approximately $749 million over the first
10-year period from 1997 to 2006. The Transaction is expected to yield several
types of presently quantifiable benefits: (1) corporate and operations labor
cost savings; (2) corporate and administrative programs cost savings; (3)
non-fuel purchasing economies savings; (4) production cost savings; and (5) gas
supply cost savings. The amount of savings currently estimated in each of
these categories, on a nominal dollar basis, is summarized in the table below:
Transaction Synergies
(Nominal Dollars)
Category Amount (Millions)
<TABLE>
<S> <C>
Corporate and Operations Labor Savings $380.5
Corporate and Administrative Programs 149.1
Non-fuel Purchasing Economies Savings 60.2
Production Cost Savings 220.9
Gas Supply Cost Savings 23.6
Less: Costs to Achieve 85.3
Net Total Estimated Savings $749.0
-----
</TABLE>
These expected savings far exceed the savings claimed in a number of
recent acquisitions approved by the Commission. See, e.g., Kansas Power and
Light Co., Holding Co. Act Release No. 25465 (Feb. 5, 1992) (expected savings
of $140 million over five years); IE Industries, Holding Co. Act Release No.
25325 (June 3, 1991) (expected savings of $91 million over ten years); Midwest
Resources, Holding Co. Act Release No. 25159 (Sept. 26, 1990) (estimated
savings of $25 million over five years). These savings categories are
described in greater detail below.
Corporate and Operations Labor Cost Savings: Applicants
estimate that a net reduction in labor costs of approximately $380.5
million on a nominal dollar basis can be achieved as a result of the
Transaction through elimination of approximately 600 full time
equivalent duplicative positions in certain corporate and operations
functions.
Corporate and Administrative Programs Savings: Applicants
estimate that a reduction in non-labor corporate and administrative
expenses totalling approximately $149.1 million on a nominal dollar
basis can be achieved through consolidation of duplicative programs
and spreading expenses over greater asset or customer bases. These
include savings related to information systems, insurance costs,
outside services, shareholder services, benefits administration and
other general and administrative overheads. The aggregate cost of
these items for the companies on a stand-alone basis
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is greater than the cost will be to the combined new company. An
example would be the hiring of one outside professional service
(external auditors, attorneys, consultants, etc.) instead of three.
Non-Fuel Purchasing Economies Savings: These are the savings
which will result from the new, larger company having greater
purchasing power. Interstate Energy will be able to coordinate its
purchasing needs, buy in greater quantity, negotiate with vendors and
receive larger discounts. Applicants estimate cost savings of
approximately $60.2 million on a nominal dollar basis from such
economies.
Production Cost Savings: Applicants estimate that production
cost savings (including fuel savings) of approximately $220.9 million
on a nominal dollar basis will result from the combined operation of
the three companies' generation and transmission systems, including
the integrated economic dispatch of such systems and electric fuel
procurement savings. WPLH, IES and IPC currently commit and dispatch
their respective systems on an "economic dispatch" basis; that is,
each company commits and dispatches its generating system to meet the
load in such manner as to minimize production costs. There are
differences in incremental cost between the three systems, as well as
generation available on each system during most hours. Interstate
Energy will be able to take advantage of these factors by committing
and dispatching the lowest cost generation from WP&L, Utilities and
IPC to serve the total load of Interstate Energy at a cost that is
lower than the combined cost of the three stand-alone companies.
Gas Supply Cost Savings: Applicants estimate savings of
approximately $23.6 million on a nominal dollar basis can be achieved
by the combined companies in gas supply costs by optimization of
transportation capacity on various gas pipelines, improving
utilization of no-notice service, shortening storage withdrawal
periods and avoiding duplication of reserve margins through supply
integration.
(less)
Costs to Achieve: This consists of merger costs such as
investment bankers' fees, attorney and accountant fees, and severance
and other employee reduction-related costs. Item 2 provides details
of some of these components and their amounts.
Additional Expected Benefits: In addition to the benefits
described above, there are other benefits which, while presently
difficult to quantify, are nonetheless substantial. These other
benefits include maintenance of competitive rates and services,
increased size and stability, diversification of service territory,
coordination of diversification programs, complementary operational
functions and complementary management.
Maintenance of Competitive Rates: Interstate Energy will be
more effective in meeting the challenges of the increasingly
competitive environment in the utility industry than any of WPLH, IES
or IPC standing alone due to the economies of scale available
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to Interstate Energy. The impact of these economies of scale, which
are described in greater detail below, will help to position
Interstate Energy to deal effectively with increased competition with
respect to rates. The Mergers, by creating the potential for
increased economies of scale, will create the opportunity for
strategic, financial and operational benefits for customers in the
form of more competitive rates over the long term and for shareowners
in the form of greater financial strength and financial flexibility.
Integration of Corporate and Administrative Functions:
Interstate Energy will be able to consolidate certain corporate and
administrative functions of WPLH, IES and IPC, thereby eliminating
duplicative positions, reducing other non-labor corporate and
administrative expenses and limiting or avoiding duplicative
expenditures for administrative and customer service programs and
information systems. A joint transition task force is examining the
manner in which to best organize and manage the businesses of
Interstate Energy and identify duplicative positions in the corporate
and administrative areas. It is anticipated that, as a result of
combining staff and other functions, Interstate Energy will have
somewhat fewer employees within several years than WPLH, IES and IPC
currently have in the aggregate. WPLH, IES and IPC are committed to
achieve cost savings in the area of personnel reductions through
attrition, strictly controlled hiring, and reassignment and retaining
and, to the extent required, severance and targeted early retirement
programs. In addition, some savings in areas such as insurance and
regulatory costs and legal, audit and consulting fees are expected to
be realized.
Reduced Operating Costs: The combination should result in
decreased electric production costs through the joint dispatch of the
systems. Natural gas supply savings through combined purchasing are
also anticipated.
Purchasing Economies and Streamlining of Inventories: The
combination of the three companies should result in greater purchasing
power for items such as fuel and transportation services and general
and operational goods and services, and the reduction of inventories
for standardized materials and supplies for construction, operations
and maintenance within the combined generation, transmission and
distribution systems.
Coordination of Diversification Programs: WPLH and IES each
have significant non-utility subsidiaries, and Interstate Energy, as a
stronger financial entity, should be able to manage and pursue such
subsidiary businesses more efficiently and effectively. WPLH and IES
currently engage in a number of diversified businesses, some of which
are complementary. To the extent such complementary businesses are
combined and able to collaborate in the pursuit of market
opportunities, benefits from economies of scale should be obtained and
thereby improve the performance of these businesses. Furthermore, due
to the larger capital base of Interstate Energy, the financial
flexibility will exist to support the existing businesses as well as
to advantage of new business opportunities as they arise.
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More Diverse Service Territory: The combined service
territories of WP&L, Utilities and IPC will be larger and more diverse
than any of the service territories of WP&L, Utilities or IPC as
independent entities. This increased customer and geographical
diversity is expected to reduce the exposure to changes in economic,
competitive or climatic conditions in any given sector of the combined
service territory.
Expanded Management Resources: In combination, WPLH, IES and IPC will
be able to draw on a larger and more diverse mid- and senior-level management
pool to lead Interstate Energy forward in an increasingly competitive
environment for the delivery of energy and should be better able to attract and
retain the most qualified employees. The employees of Interstate Energy should
also benefit from new opportunities in the expanded organization.
ii. Integrated Public Utility System
I. Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants
and/or transmission lines and/or distributing facilities,
whose utility assets, whether owned by one or more electric
utility companies, are physically interconnected or capable of
physical interconnection and which under normal conditions may
be economically operated as a single interconnected and
coordinated system confined in its operation to a single area
or region, in one or more states, not so large as to impair
(considering the state of the art and the area or region
affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation.
On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
public utility system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected
or capable of physical interconnection;
(2) the utility assets, under normal conditions, may be
economically operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area
or region; and
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(4) the system must not be so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
Environmental Action, Inc. v. S.E.C., 895 F.2d 1255, 1263 (9th Cir. 1990)
(citing In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958)). The
Transaction satisfies all four of these requirements. It should be noted that
in the 1995 Report, the Division recommended that the Commission "respond
realistically to the changes in the utility industry and interpret more
flexibly each piece of the integration equation."(24)
First, as described in Item 1.B.3. above, the Utilities system and the
IPC system are physically connected by three 161kV lines and the East 345 kV
Line. In addition, the WP&L system and the combined Utilities/IPC systems are
capable of interconnection through the construction of two new transmission
tie-lines, construction of which is planned for completion within five years of
the effective time of the Transaction. A 69 kV tie-line approximately 3.5
miles in length will be constructed across the Mississippi River connecting
WP&L's Hillside substation near Prairie du Chien, Wisconsin with IPC's 69kV
line at MacGregor, Iowa on the west side of the river. This overhead line will
be constructed on a right-of-way from a previously existing connection between
WP&L and IPC which remains under their control. Also, a 161 kV overhead line
approximately 2.5 miles in length will be constructed across the Mississippi
River from WP&L's Nelson Dewey generating plant on the east to IPC's Turkey
River substation on the west side of the river. The capability of this
interconnection would be approximately 200 MW. It is currently estimated that
the total cost associated with constructing the interconnection lines will be
$4 million (in 1996 dollars).
These additional interconnects will further the economic operation of
the Interstate Energy system by enabling it to achieve additional
production-related synergies. Indeed, the plans for the construction of the
two lines are not related to any requirement of the Act, but rather to the
substantial benefits that will accrue as a result of the lines.
The Commission has previously indicated that a single integrated
system exists even based solely on a planned, future interconnection, provided
that such physical interconnection is "contemplated or . . . possible within
the reasonably near future" and not just something that "might occur in the
remote future, and whose occurrence has not been foreshadowed by any facts
shown in the record."(25) The benefits to be derived by the new transmission
lines are also a factor in determining whether the system is capable of
physical interconnection.(26) The fact that the Commission has indicated that,
absent special circumstances, the "reasonably near future" mentioned above,
should not exceed 10 years, (27) is not an issue in this case as the parties
have definite plans to construct the two interconnections that will be in
service and generating economies within 5 years of the consummation of the
Transaction.
Second, WP&L, Utilities and IPC will be economically operated as a
single interconnected and coordinated system. The combined system will be
centrally and economically
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dispatched and generating units committed as a single integrated system. Upon
consummation of the Transaction, WP&L, Utilities, IPC and Interstate Services
will enter into the Coordination Agreement which will be filed with and
approved by FERC. The Coordination Agreement will provide for joint dispatch
of the combined generating resources of WP&L, Utilities and IPC, and will
contain the terms, conditions and payment provisions associated with energy
exchanges, resource sharing and other transactions among the companies.
Pursuant to the Coordination Agreement, generation and tie-line data of all
three systems will be fed into a common dispatch computer to economically
dispatch the combined system taking into account the existing 1,339 MW of
interconnection capacity between IPC and Utilities and the proposed 250 MW of
interconnection capacity between IPC and WP&L. The studies which projected the
level of production costs savings in this Application/Declaration were based
upon this same interconnection capacity. In order to facilitate joint economic
dispatch throughout the Interstate Energy system, applicants anticipate that
Interstate Energy will enter into one or more contractual arrangements for the
purchase of 200 MW of firm transmission service between the IPC and WP&L
systems from one of three neighboring electric systems, each of which has
indicated that it has such service available for sale to WP&L and/or IPC. Such
purchased transmission service will generally be sufficient to facilitate joint
economic dispatch throughout the Interstate Energy system. However, there may
be instances when transactions in excess of 200 MW between the Iowa and
Wisconsin portions of the Interstate Energy system will be made based upon
economic dispatch opportunities. In such situations, additional non-firm
transmission service would be purchased, subject to availability, from one of
the neighboring electric systems.
As members of MAPP, both IPC and Utilities are subject to the MAPP
transmission use agreement and the MAPP loss reimbursement agreement. These
MAPP agreements identify third party impacts for member transactions and make
the appropriate charges to transacting parties so that third parties within
MAPP receive transmission line use fees and line loss reimbursement.
Transactions between IPC, Utilities and WP&L which are required for joint
economic dispatch purposes will be covered under these MAPP agreements. Thus,
MAPP members will receive compensation for third party impacts caused by the
joint economic dispatch activities of the utility subsidiaries of Interstate
Energy. No such mechanism exists nor is one required for compensation of third
party impacts on non-MAPP utilities.
For integration purposes under the Act, what is relevant is that
Interstate Energy will have sufficient internal transmission capacity to fully
accommodate the anticipated transfers between WP&L, Utilities and IPC under
central economic dispatch, and will obtain transmission service from
neighboring utilities to accommodate any transfers that might exceed the
capabilities of its system.
Third, the integrated Interstate Energy electric system will operate
in a single area or region. The system will operate in four contiguous states
(Wisconsin, Iowa, Illinois and Minnesota) in the north central area of the
United States delineated on Exhibit G-4. In the 1995 Report, the Division has
stated that the evaluation of the "single area or region" portion of the
integration requirement "should be made... in light of the effect of
technological advances on the ability to transmit electric energy economically
over longer distance, and other developments
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in the industry, such as brokers and marketers, that affect the concept of
geographic integration."(28) The 1995 Report also recommends primacy be given
to "demonstrated economies and efficiencies to satisfy the integration
requirements."(29) As set forth in Item 3.A.2.b.i, the Transaction will result
in economies and efficiencies for the utilities and, in turn, their customers.
Fourth, the Interstate Energy electric system will not be so large as
to impair the advantages of localized management, efficient operations, and the
effectiveness of regulation. The Commission's past decisions on "localized
management" show that the Transaction fully preserves the advantages of
localized management. In such cases, the Commission has evaluated localized
management in terms of: (i) responsiveness to local needs, see American
Electric Power Co., Holding Co. Act Release No. 20633 (Jul. 21, 1978)
(advantages of localized management evaluated in terms of whether an enlarged
system could be "responsive to local needs"); General Public Utilities Corp.,
37 S.E.C. 28, 36 (1956) (localized management evaluated in terms of "local
problems and matters involving relations with consumers"); (ii) whether
management and directors were drawn from local utilities, see Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986) (advantages of
localized management would not be compromised by the affiliation of two
electric utilities under a new holding company because the new holding
company's "management [would be] drawn from the present management" of the two
utilities); Northeast Utilities, Holding Co. Act Release No. 25221 (December
21, 1990) (advantages of localized management would be preserved in part
because the board of the New Hampshire Utility, which was to be by an
out-of-state holding company, included "four New Hampshire residents"); (iii)
the preservation of corporate identities, see Northeast Utilities, Holding Co.
Act Release No. 25221 (December 21, 1990) (utilities "will be maintained as
separate New Hampshire corporations... [t]herefore the advantages of localized
management will be preserved"); Columbia Gas System, Inc., Holding Co. Act
Release No. 24599 (March 15, 1988) (benefits of local management maintained
where the utility to be added would be a separate subsidiary); and (iv) the
ease of communications, see American Electric Power Co., Holding Co. Act
Release No. 20633 (Jul. 21, 1978) (distance of corporate headquarters from
local management was a "less important factor in determining what is in the
public interest" given the "present-day ease of communications and
transportation").
The Transaction satisfies all of these factors. WP&L, Utilities and
IPC will continue to operate through regional offices with local service
personnel and line crews available to respond to customers' needs. In
addition, the new management and Board of Directors of Interstate Energy is
expected to be drawn primarily from the existing management and boards of WPLH,
IES, IPC and their subsidiaries.
After the Transaction, WP&L, Utilities and IPC will maintain their
current headquarters as subsidiary headquarters and as local operating
headquarters for the areas they presently serve, while Interstate Energy will
maintain system headquarters in Madison, Wisconsin. Although the location of
the corporate headquarters of Interstate Energy will add distance from
customers who are served by Utilities and IPC, this distance is, as noted by
the Commission in the American Electric Power case, a relatively unimportant
factor given the
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present ease of transportation and communications and the retention of the
headquarters of Utilities and IPC at their present locations. This structure
will preserve all the benefits of localized management WP&L, Utilities and IPC
presently enjoy while simultaneously allowing for the efficiencies and
economies that will derive from their strategic alliance. Furthermore, as
described earlier, the system will facilitate efficient operation.
Additionally, the Interstate Energy system will not impair the
effectiveness of state regulation. WP&L, Utilities and IPC will continue their
separate existence as before and their utility operations will remain subject
to the same regulatory authorities by which they are presently regulated,
namely the PSCW, IUB, ICC, MPUC, the FERC and the NRC. WP&L, Utilities and IPC
are working closely with the PSCW, IUB, ICC and MPUC as well as the FERC and
the NRC to ensure they are well informed about this Transaction, and this
Transaction will not be consummated unless all required regulatory approvals
are obtained. Pursuant to the recommendations contained in the 1995 Report,
this last factor is significant. As the Division stated therein "when the
affected state and local regulators concur, the [Commission] should interpret
the integration standard flexibly to permit non-traditional systems if the
standards of the Act are otherwise met,"(30) especially since this Transaction
will result in a system similar to the traditional registered holding company
system.
II. Gas Utility System
Section 2(a)(29)(B) of the Act defines an "integrated public utility
system" as applied to gas utility companies as:
a system consisting of one or more gas utility companies which
are so located and related that substantial economies may be
effectuated by being operated as a single coordinated system
confined in its operation to a single area or region, in one
or more states, not so large as to impair (considering the
state of the art and the area or region affected) the
advantages of localized management, efficient operation, and
the effectiveness of regulation: provided, that gas utility
companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
The Interstate Energy gas utility system will meet the standard set forth in
Section 2(a)(29)(B) and, therefore, will satisfy the requirements of sections
10(c)(1) and (2) and should be approved by the Commission.
First, both the Commission's limited precedent and current
technological realities indicate that the Interstate Energy gas utility system
will operate as a coordinated system confined in its operation to a single area
or region because it will derive natural gas from common sources of supply,
transportation and storage. The gas utility operations of WP&L (including
South Beloit), Utilities and IPC will operate in a single area or region
covering
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portions of Wisconsin, Iowa, Minnesota and Illinois. See Exhibit G-5 hereto.
The Commission has not traditionally required that the pipeline facilities of
an integrated system be physically interconnected,(31) and instead has looked to
such issues as from whom the distribution companies within the system receive
much, although not all, of their gas supply.(32) The Commission also has
considered obtaining gas from a common pipeline(33) as well as from different
pipelines when the gas originates from the same gas field in determining a
common source of supply.(34) Since the time of most of these decisions, the
state of the art in the industry has developed to allow efficient operation of
systems whose gas supplies derive from many sources.
Because natural gas is made up of naturally occurring elements found
in geologic formations, and is not a refined energy product produced from other
fuels, the natural gas and electricity industries developed in different
structures. The gas industry developed in three separate segments:
FUNCTION OWNERSHIP
Production Independent Producers
Transmission/Storage Interstate Pipelines/Storage Companies
Distribution/Retail Sales Local Distribution Companies (LDCs)
The WP&L, Utilities and IPC gas systems will functionally perform as a
coordinated system through the purchase of natural gas from common sources of
supply, delivery through common interstate pipelines (all of which are open
access transportation only pipelines under FERC Order 636) and storage of gas
in common underground storage facilities. This coordination will also result
in greater, not lesser, efficiency.
As explained previously under Item 1.B.4.: WP&L, Utilities and IPC
all contract for interstate pipeline transportation and storage services from
Northern Natural Gas Company and Northern Border Pipeline Company, and two of
the three companies contract for transportation and/or storage services from
ANR Pipeline Company, LG&E/Llano Inc. and Natural Gas Pipeline Company of
America. In addition, all three companies procure natural gas supplies from
producers in the Gulf Coast and Canadian regions. Less significant volumes are
purchased from non-common supply areas such as the Texas/Oklahoma and Permian
Basin regions.
WP&L, Utilities and IPC all use a "supply grid" approach to gas supply
procurement described in more detail in Item 1.B.4. Integrated WP&L, Utilities
and IPC gas operations would present opportunities to use an expanded supply
grid and more consolidated gas supply procurement to increase competition among
suppliers, transporters and storage providers to capture approximately $23.6
million in delivered gas cost savings. Integrated gas operations could also
offer opportunities for more efficient utilization of IPC peak shaving
operations and more efficient reserve margins. With the cooperation of the
common pipeline interconnections, the ability to engage in swap transactions
will also exist.
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Finally, the system will not be so large as to impair the advantages
of localized management or the effectiveness of regulation. As set forth in
Item 3.A.2.a.(i)., localized management will be preserved. The three utilities
will maintain headquarters in Madison, Cedar Rapids and Dubuque, and local
matters will be handled by several regional offices. Management will,
accordingly, remain close to the gas operations, thereby preserving the
advantages of local management.
As also set forth in Item 3.A.2.a.i., from a regulatory standpoint,
there will be no impairment of regulatory effectiveness. The same regulators
currently overseeing these gas operations will continue to have jurisdiction
after the Transaction. Several states are already regulating
multi-jurisdictional gas utilities since other gas utilities currently operate
in some of the states to be served by Interstate Energy. IPC currently
operates gas utilities in multiple states.
For all of these reasons, the post-Transaction gas operations satisfy
the integration requirements of Section 2(A)(29)(B).
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect to such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
As described in Item 4 of this Application/Declaration, and as
evidenced by the applications before the FERC, PSCW, MPUC and ICC and the
upcoming application before the IUB, all relating to the Transaction,
Interstate Energy intends to comply with all applicable state laws related to
the proposed transaction.
4. Other Applicable Provisions - Sections 6, 7, 9(a)(1) and 12
As noted in Items 1.D. and 1.E., WPLH, IES and IPC have dividend
reinvestment plans, employee benefit plans and 401(k) savings plans, which may
require the issuance, or acquisition in open-market transactions, of common
stock. The dividend reinvestment plans of IES and IPC will be terminated as of
the date of consummation of the Transaction. The dividend reinvestment plan of
WPLH will remain (subject to certain proposed modifications) as the dividend
reinvestment plan of Interstate Energy. In addition, the employee benefits
plans (including the 401(k) plans) of IES and IPC will be amended to provide
for the acquisition or issuance of shares of Interstate Energy Common Stock in
place of IES Common Stock or IPC Common Stock, as the case may be. Additional
information concerning the anticipated terms of the dividend reinvestment plan,
benefit plans and 401(k) plans is set forth
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in Items I.D.1 - .3. To provide for the operation of these existing and
amended or replacement plans after the consummation of the Transaction and the
registration of Interstate Energy as a holding company under the Act, it is
estimated that up to 11 million shares of Interstate Energy Common Stock may
need to be issued and/or acquired in open-market or privately negotiated
transactions through December 31, 2001.
As required by Section 6 of the Act, the issuance by Interstate Energy
of shares of its common stock pursuant to such plans and to effect the
Transaction will comply with the standards of Section 7 of the Act. With
reference to Sections 7(c) and 7(d) of the Act, Interstate Energy Common Stock
will have a par value of $0.01 per share, will be Interstate Energy's only
outstanding voting security and will not be preferred as to dividends or
distributions over any other security of Interstate Energy. Interstate Energy
Common Stock is reasonably adapted to Interstate Energy's capital structure
(common stock being the cornerstone of a registered holding company's capital
structure).
Finally, applicants request authorization under Section 9(a)(1) of the
Act for Interstate Hold to acquire all of the issued and outstanding common
stock of International, Transportation, HEHC, Energy, Investments and
Diversified. As discussed in Item 3.A.2.a.ii above, each of these businesses
may be retained by the Interstate Energy system under the Act. Applicants
believe that the reorganization of the non-utility businesses described above
as subsidiaries of Interstate Hold will be beneficial to ratepayers by
continuing to insulate the operating utilities from the results of operations
of these non-utility business entities.
B. Intra-system Financing
WPLH has entered into agreements with its non-utility subsidiaries
HDC, HPI and Capital Square to provide inter-company loans and other credit
support. Loans made by WPLH to these non-utility subsidiaries are used to
finance the specific activities of the subsidiaries or may be used to fund
activities of entities in which the subsidiaries have an equity interest.
Intercompany loans to subsidiaries bear interest at an intercompany borrowing
rate which is set at slightly above the forecasted WPLH weighted average cost
of capital for the year and is reviewed and reset, if necessary, annually. The
increase over the weighted average cost of capital is intended to cover the
costs of administering the loan agreements with subsidiaries. Intercompany
loans are payable on demand. As of May 31, 1996, WPLH had loans outstanding to
HDC, HPI and Capital Square of $17.0 million, $11.2 million, and $10.4 million,
respectively.
To provide funds for these loans, WPLH has adopted an internal banking
arrangement pursuant to which any excess funds from non-utility subsidiaries
are deposited with WPLH and used to fund loans to other non-utility
subsidiaries and WPLH's own operations. Interest is paid on deposits from
subsidiaries maintained by WPLH at a rate equal to the intercompany borrowing
rate described above.
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WPLH also acquires funds from loans under committed bank lines of
credit, which totalled $45,000,000 as of May 31, 1996, and through long-term
private placements of notes. WPLH periodically issues its notes, with
maturities generally ranging from 5 to 10 years, in private placement
transactions with unaffiliated third parties. Such funds are generally used to
retire short-term debt incurred to finance loans by WPLH to non-utility
subsidiaries, or to finance specific activities of WPLH or its non-utility
subsidiaries.
In addition to making loans to non-utility subsidiaries, WPLH has also
guaranteed the mortgage debt of RMT, with an original principal balance of $7.4
million, and provided credit guarantees on behalf of HES. WPLH guarantees
payment of all obligations incurred by HES in connection with various power
purchase transactions.
In connection with the issuance of mortgage bonds under a master
indenture to finance affordable housing projects by various subsidiaries of
HPI, WPLH entered into a support agreement under which WPLH guarantees the
maintenance of various debt service reserve funds. Under this support
agreement, if the various properties do not provide adequate cash flow to cover
debt service, WPLH is obligated to make certain payments into the reserve
funds. The obligation to make such payments irrevocably decreases as the
reserve funds are funded to specified levels.
In connection with a $40,000,000 revolving credit facility (the "HCC
Facility") provided by a group of banks to HCC, WPLH, HDC, HPI and Capital
Square have entered into support agreements with the banks. The purpose of the
HCC Facility is to provide funds for construction and bridge loans for
affordable housing projects. Loans from the revolving credit facility are
repaid from the proceeds of permanent mortgage financing when the projects are
completed. Under WPLH's support agreement, WPLH must (i) provide lines of
credit to HDC, HPI and Capital Square of $10 million, $25 million, and $10
million, respectively, (ii) maintain HDC's tangible net worth at not less than
$25 million, and (iii) maintain WPLH's quarterly pre-tax interest coverage
ratio and its consolidated leverage ratio within specified limits. In the case
of the lines of credit provided by WPLH to HPI and Capital Square, $15 million
and $5 million, respectively, are reserved solely to fund obligations of the
entities under their respective support agreements.
In connection with the HCC Facility, HPI has entered into a support
agreement with the banks which requires HPI to (i) continue as manager of HCC
unless removed for cause, (ii) maintain quarterly interest coverage ratio
within specified limits, (iii) maintain HPI's $25 million line of credit with
WPLH and (iv) provide HCC with a $15 million line of credit under a revolving
credit agreement.
In connection with the HCC Facility, HDC has entered into a support
agreement with the banks which requires HDC to (i) maintain at least a 51%
ownership interest in HPI and Capital Square, (ii) maintain HDC's line of
credit with WPLH and (iii) provide an irrevocable and unconditional guaranty of
20% of the principal amount of any outstanding loans from the banks to HCC.
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In connection with the HCC Facility, Capital Square has entered into a
support agreement with the banks which requires Capital Square to (i)
repurchase certain loans from the banks or from HCC and (ii) maintain its line
of credit with WPLH.
To support the business activities of the entities in which they
invest, HPI and HDC make loans and/or extend lines of credit to their
respective subsidiaries or entities in which they have substantial investments.
As of May 31, 1996, HPI and HDC had made loans to affiliates totaling 3.655
million and 16.435 million, respectively.
IES maintains a money pool for the benefit of itself, Utilities and
Diversified. The money pool consists of funds available for investment by
these companies. The money pool funds can be borrowed to meet the daily
financing requirements, thereby minimizing the need for external short-term
borrowing. Promissory notes stating the terms of the agreement exist between
IES, Utilities and Diversified.
Investments in the money pool shall earn interest at the rate
determined by IES cash management personnel on the first business day of each
month. The rate of interest is based upon the investments selected for daily
cash liquidity. The rate of interest on money pool loans shall be the same as
on money pool investments.
Diversified also has a variable rate credit facility that extends
through November 9, 1998, with a one-year extension available to Diversified.
The facility also serves as a stand-by agreement for Diversified's commercial
paper program. The agreement provides for a combined maximum of $150 million
of borrowings under the agreement and commercial paper to be outstanding at any
one time. Interest rates and maturities are set at the time of borrowing for
direct borrowings under the agreement and for issuances of commercial paper.
The interest rate options are based upon quoted market rates and the maturities
are less than one year. This agreement is the main source of debt financing
for Diversified.
Diversified maintains a system of advances between itself and its
subsidiaries to supplement their internal cash flows. Long-term financing of
Diversified's subsidiaries is infused into the subsidiaries as equity by
Diversified.
Applicants hereby request that the Commission approve the continuance
of all outstanding and committed intercompany loans, guarantees and support
agreements.
C. Interstate Services
As described in Item 1.B.1.a.iii, Interstate Services may provide WP&L
(including South Beloit), Utilities and IPC, pursuant to the Services Agreement
and the Coordination Agreement, and the non-utility companies of the Interstate
Energy system (including Interstate Hold), pursuant to the Non-Utility Services
Agreement, with a variety of administrative, management and support services.
These services may include, without limitation, services relating to
information systems, meters, transportation, electric system
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maintenance, marketing and customer relations, electric transmission and
distribution engineering and construction, power engineering and construction,
human resources, materials management, facilities, accounting, power planning,
public affairs, legal, rates, finance, right of way, internal auditing,
environmental affairs, fuels, investor relations, planning, executive, gas
system maintenance, gas transmission and distribution engineering and
construction, gas acquisition and dispatch, gas production engineering and
construction, steam system maintenance, steam distribution engineering and
construction, steam supply engineering and construction, steam planning, water
system maintenance, water distribution engineering and construction, water
supply engineering and construction, and water planning. In accordance with
the Service Agreement, services provided by Interstate Services will be
directly assigned or allocated by activity, project, program, work order or
other appropriate basis. To accomplish this objective, employees of Interstate
Services will record transactions utilizing the existing data capture and
accounting systems of each client company. Costs of Interstate Services will
be accumulated in accounts of Interstate Services and directly assigned or
allocated to the appropriate client company in accordance with the guidelines
set forth in the Service Agreement. WPLH, IES and IPC are currently developing
the system and procedures necessary to implement the Service Agreement.
The operation of Interstate Services will allow Interstate Energy to
capture economies of scale from the centralization of administrative and
general services to be provided to system companies. Since the cost of such
services are considered in rate cases, the benefits realized as a result of
Interstate Services will accrue to Interstate Energy's ratepayers. Virtually
every registered holding company has one or more subsidiary service companies
performing many of the same functions that Interstate Services will perform.
The utilization of Interstate Services as a service company subsidiary of
Interstate Energy is in the public interest, will not unduly complicate the
capital structure of Interstate Energy and will not cause the Interstate Energy
system to violate any other provision of the Act.
It is anticipated that Interstate Services will be staffed primarily
by transferring personnel from the current employee rosters of WP&L, IES and
IPC and their subsidiaries. Interstate Services' accounting and cost
allocation methods and procedures are structured so as to comply with the
Commission standards for service companies in registered holding-company
systems and are described in Exhibit N hereto. Interstate Services' billing
system will use the "Uniform System of Accounts for Mutual Service Companies
and Subsidiary Service Companies" established by the Commission for service
companies of registered holding-company systems.
As compensation for services, the Service Agreement provides for the
client companies to: "pay to [Interstate Services] all costs which reasonably
can be identified and related to particular services performed by [Interstate
Services] for or on behalf of" such client company. Where more than one
company is involved in or has received benefits from a service performed, the
Service Agreement provides that "costs of such service will be directly
assigned or allocated. . .between or among such [c]lient [c]ompanies on a basis
reasonably related to the service performed to the extent reasonably
practicable," in accordance with the methods set forth
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in Appendix A to the Service Agreement. Thus, charges for all services
provided by Interstate Services to affiliated utility companies will be on an
"at cost" basis as determined under Rules 90 and 91 of the Act. The
Non-Utility Service Agreement contains provisions similar to those of the
Service Agreement, except that the Non-Utility Service Agreement also permits
charges for certain services to be at fair market value to the extent permitted
under the Act or authorized by the Commission. Thus, except for the requested
exceptions discussed below, services provided by Interstate Services to
non-utility associate companies pursuant to the Non-Utility Service Agreement
will also be charged on an "at cost" basis as determined under Rules 90 and 91
of the Act.
Section 13(b) of the Act allows the Commission to exempt transactions,
by rule, regulation or order, from the provisions of Section 13(b) and the
rules promulgated thereunder if such transactions:
(1) are with any associate company which does not derive,
directly or indirectly, any material part of its income from sources
within the United States and which is not a public utility company
operating within the United States, or
(2) involve special or unusual circumstances or are not
in the ordinary course of business.
The Commission has utilized this exemptive power in the past under certain
circumstances(35) and recently with some frequency to generally allow
non-utility subsidiaries of registered holding companies to provide services to
certain FUCOs at market-based rates.(36) In addition, the Division recommended
in the 1995 Report that "the SEC should also issue exemptive orders under
Section 13 allowing more non-utility subsidiaries to charge market rates to
non-utility affiliates."(37) The Commission's principal concern under Section
13 of the Act is to protect the utility companies in a holding company system
from abusive cross-subsidization transactions with affiliates. Exemptions from
Rules 90 and 91 for purely non-utility transactions will not interfere with
this mandate because all services to utility subsidiaries will be at cost in
accordance with Rules 90 and 91. In addition, exemptions from Rules 90 and 91
will benefit the holding company system by allowing it to offer competitively
priced services based on market considerations. Pursuant to Section 13(b)(1),
the Commission has adopted Rule 83(a), which provides that a subsidiary service
company, "which subsidiary is or is about to become engaged in the performance
of any service, sales, or construction contract for any associate company which
does not derive, directly or indirectly, a material part of its income from
sources within the United States and which is not a public-utility company
operating within the United States, may ...[obtain an] exemption...from the
standards established by Section 13(b) of the Act, and the [Commission's] rules
and regulations promulgated thereunder, relating to the performance of any
service, sales or construction contract for such associate companies." Thus,
applicants hereby request on behalf of Interstate Services that the Commission
grant an exemption from the provisions of Rules 90 and 91, and the at-cost
requirement contained therein, for services provided to FUCOs and associate and
affiliate companies that derive no part
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of their income, directly or indirectly, from the generation, transmission or
distribution of electric energy for sale or the distribution of natural gas at
retail in the United States. (38)
No material change in the organization of Interstate Services, the
type and character of the companies to be serviced, the methods of allocating
costs to associate companies, or in the scope or character of the services to
be rendered subject to Section 13 of the Act, or any rule, regulation or order
thereunder, shall be made unless and until Interstate Services shall first have
given the Commission written notice of the proposed change not less than 60
days prior to the proposed effectiveness of any such change. If, upon the
receipt of any such notice, the Commission shall notify Interstate Services
within the 60-day period that a question exists as to whether the proposed
change is consistent with the provisions of Section 13 of the Act, or of any
rule, regulation or order thereunder, then the proposed change shall not become
effective unless and until Interstate Services shall have filed with the
Commission an appropriate declaration regarding such proposed change and the
Commission shall have permitted such declaration to become effective.
The applicants believe that the Service Agreement and the Non-Utility
Service Agreement are structured so as to comply with Section 13 of the Act and
the Commission's rules and regulations thereunder.
Rule 88: Rule 88(b) provides that "[a] finding by the Commission that
a subsidiary company of a registered holding company . . . is so organized and
conducted or to be conducted, as to meet the requirements of Section 13(b) of
the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by [Rule] 90), will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified in the instructions for that form,
by such company or the persons proposing to organize it." Notwithstanding the
foregoing language, the Commission has on at least two recent occasions made
findings under Section 13(b) based on information set forth in an
Application/Declaration on Form U-1, without requiring the formal filing of a
Form U-13-1. See CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21,
1994); UNITIL Corp., Holding Co. Act Release No. 25524 (April 24, 1992). In
this Application/Declaration, applicants have submitted substantially the same
applicable information as would have been submitted in a Form U-13-1.
Accordingly, it is submitted that it is appropriate to find that
Interstate Services is so organized and its business will be so conducted as to
meet the requirements of Section 13(b), and that the filing of a Form U-13-1 is
unnecessary, or, alternatively, that this Application/Declaration should be
deemed to constitute a filing on Form U-13-1 for purposes of Rule 88.
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D. Other Services
In addition to the services to be provided by Interstate Services,
WP&L, South Beloit, Utilities and IPC may, as permitted by Rule 87(a)(3),
provide one another with certain services incidental to their utility
businesses, such as meter reading, materials management, gas purchasing,
transportation, and services of linemen and gas trouble crews. Such services
will be provided at cost in accordance with the standards of the Act and the
Commission's rules and regulations thereunder.
IES has subsidiaries that may provide services (including operation
and maintenance) and sell goods to entities that will qualify as FUCOs
following the Transaction. The applicants request that the Commission permit
such subsidiaries to enter into such transactions without compliance with the
at cost provisions of Section 13(b) and the rules and regulations thereunder.
The Commission has previously granted authority to provide goods and
services to existing and future FUCOs without compliance with the at cost
provisions to affiliates of registered holding companies that fall within one
of the following categories:
1) the project is a FUCO or an EWG that derives no part
of its income, directly or indirectly, from the generation,
transmission or distribution of electric energy for sale within the
United States;
2) the project is an EWG that sells electricity at
market-based rates which have been approved by the FERC or the
appropriate state public utility commission, provided that the
purchaser is not an Excepted Company;(39)
3) the project is a QF that sells electricity
exclusively at rates negotiated at arms's length to one or more
industrial or commercial customers purchasing such electricity for
their use and not for resale, or to an electric utility company other
than an Excepted Company; or
4) the project is an EWG or a QF that sells electricity
at rates based upon its cost of service, as approved by FERC or any
state public utility commission having jurisdiction, provided that the
purchaser is not an Excepted Company.
Entergy Corp., Holding Co. Act Release No. 26322 (June 30, 1995).
In the Entergy order quoted above, the Commission granted Entergy
Enterprises, a wholly owned subsidiary of Entergy, authority to provide
consulting services to associate companies, including FUCOs, and operations and
management services, either directly or through newly-established subsidiaries
of Entergy or Entergy Enterprises, to associate
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companies, including FUCOs, without complying with the at cost provisions of
Section 13(b) and the rules and regulations thereunder.
In CINergy Corp., Holding Co. Act Release No. 26376 (September 21,
1995), the Commission authorized CINergy and CINergy Investments, a
wholly-owned subsidiary of CINergy, to acquire securities of new special
purpose subsidiaries ("NSPSs") and to make additional investments in existing
special purpose subsidiaries ("ESPSs"). ESPSs and NSPSs acquire, own or hold
securities of, and provide services to, FUCOs. The Commission also authorized
ESPSs and NSPSs and CINergy Services to provide administrative, management and
support services to other ESPSs and NSPSs and their subsidiaries without
complying with the at cost provisions of Section 13(b) and the rules and
regulations thereunder. See also General Public Utilities Corp., Holding Co.
Act Release No. 26457 (January 18, 1996). (Pending completion of the record,
the Commission reserved jurisdiction over whether subsidiaries formed to
directly or indirectly acquire the securities of FUCOs could sell goods and
services to associate FUCOs without complying with the at cost provisions of
Section 13(b) and the rules and regulations thereunder.)
The applicants request that the Commission permit the present and
future subsidiaries of Applicants, which will become subsidiaries of Interstate
Energy, to provide services or sell goods to FUCOs and to entities that will
qualify as FUCOs following the Transaction to the same extent permitted by the
Commission in the above-cited orders.
95
<PAGE> 100
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that the
applicants have obtained or expect to obtain in connection with the
Transaction.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide that
certain transactions (including the Transaction) may not be consummated until
certain information has been submitted to the DOJ and FTC and specified HSR Act
waiting period requirements have been satisfied. The Transaction will not be
consummated unless the applicable waiting period has expired or has been
terminated.
Applicants have fully satisfied the requirements of the HSR Act and
are free to consummate the merger with no further obligations thereunder.
Applicants notified the DOJ and FTC of the proposed merger pursuant to the HSR
Act on June 7, 1996. The HSR Act imposes a 30-day waiting period for the
consummation of each merger subject to the Act's prenotification requirement to
permit the federal antitrust enforcement agencies to evaluate the transaction's
effects on competition and to determine whether additional information or
documentary material relevant to the transaction are required for an evaluation
of the competitive effects. The HSR Act permits the consummation of the merger
unless, prior to the expiration of the waiting period, the DOJ or the FTC
requires the submission of additional information or documentary material
relevant to the competitive effects.
The HSR Act waiting period with respect to the Transaction expired on
July 7, 1996, without the issuance of a request for additional information or
documentary material. Therefore, no further requirements remain to be
satisfied under the HSR Act for the consummation of the Transaction. However,
if the Transaction is not consummated on or prior to July 7, 1997, WPLH, IES
and IPC would be required to submit new information to the DOJ and the FTC, and
a new HSR Act waiting period would have to expire or be earlier terminated,
before the Transaction could be consummated.
B. Federal Power Act
Section 203 of the Federal Power Act of 1935, as amended (the "Federal
Power Act"), provides that no public utility shall sell or otherwise dispose of
its jurisdictional facilities or directly or indirectly merge or consolidate
such facilities with those of any other person or acquire any security of any
other public utility, without first having obtained authorization from the
FERC. On March 1, 1996, WP&L, HES, South Beloit, IPC, Utilities and IEA
submitted a joint application to the FERC for approval of the Transaction under
Section 203 and Part 33 of the FERC's regulations. This filing was
supplemented on June 5, 1996. On March 1, 1996, WP&L, South Beloit, IPC and
Utilities also filed transmission tariffs with FERC offering open access
transmission service over their combined facilities.
96
<PAGE> 101
WP&L, IPC and Utilities plan to file with FERC, under Sections 203 and
205 of the Federal Power Act, a coordination agreement providing for the joint
operation of the electric facilities, including certain exchanges of capacity
and energy among the three companies. In Order 888, FERC has determined that
each public utility must provide comparable, open access transmission service
to all potential wholesale users of its transmission system. WP&L (together
with South Beloit), IPC and Utilities have filed open access tariffs to comply
with the requirements of Order 888. A tariff providing for service over the
combined facilities of WP&L, South Beloit, IPC and Utilities is expected to be
filed in the near future to supersede the March 1, 1996 tariff filing.
C. Atomic Energy Act
Utilities holds an NRC operating license authorizing Utilities to hold
an ownership interest in the Duane Arnold Energy Center and to operate the
facility. WP&L also holds an NRC operating license authorizing WP&L to hold an
ownership interest in the Kewaunee nuclear generating facility. The Atomic
Energy Act provides that no such NRC license or any rights thereunder may be
transferred or in any manner disposed of, directly or indirectly, through
transfer of control of such license to any person unless the NRC finds that
such transfer is in accordance with the Atomic Energy Act and consents to the
transfer. Pursuant to the Atomic Energy Act, Utilities and WP&L will seek
approvals from the NRC to reflect the fact that Utilities and WP&L will
continue to hold their existing NRC licenses as operating company subsidiaries
of Interstate Energy upon consummation of the Transaction.
D. State Public Utility Regulation
The PSCW, IUB, MPUC and ICC have jurisdiction over various aspects of
the Transaction. Reference is made to Exhibits O-1 through 0-4 with respect to
the applications filed or to be filed before such commissions.
Utilities and IPC possess municipal franchise and environmental
permits and licenses that may need to be renewed or replaced as a result of the
Transaction if the Reincorporation Mergers are affected. Utilities and IPC do
not anticipate any difficulties in obtaining such renewals or replacements.
Except as set forth above, no other state or local regulatory body or
agency and no other federal commission or agency has jurisdiction over the
transactions proposed herein.
97
<PAGE> 102
Item 5. Procedure
The Commission is respectfully requested to issue and publish not
later than August 2, 1996 the requisite notice under Rule 23 with respect to
the filing of this Application/Declaration, such notice to specify a date not
later than August 26, 1996 by which comments may be entered and a date not
later than August 26, 1996 as the date after which an order of the Commission
granting and permitting this Application/Declaration to become effective may be
entered by the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
proposed Transaction. The Division of Investment Management may assist in the
preparation of the Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
98
<PAGE> 103
<TABLE>
<S> <C> <C>
Item 6. Exhibits and Financial Statements
A. Exhibits
P Exhibit A Proposed Corporate Structure of Interstate Energy following Transaction.
Exhibit B Agreement and Plan of Merger dated as of November 10, 1995, as amended, by and among
WPLH, IES, IPC, Acquisition and New IPC. [Incorporated by reference to Exhibit 2.1 of
the Joint Registration Statement on Form S-4 (including the Joint Proxy
Statement/Prospectus of WPLH, IES and IPC) filed by WPLH and New IPC (Registration No.
333-07931)]
P Exhibit C-1 Service Territory of WP&L and South Beloit.
Exhibit C-2 Restated Articles of Incorporation of WPLH. [Incorporated by reference to Exhibit (4.1)
to WPLH's Form S-3 Registration Statement (Registration No. 33-59972)]
Exhibit C-3 Restated Articles of Incorporation of WP&L. [Incorporated by reference to Exhibit 3.1 to
WP&L's Quarterly Report on Form 10-K for the quarter ended June 30, 1994]
Exhibit C-4 Annual Report on Form 10-K for the year ended December 31, 1995 of WPLH. [Incorporated
by reference in File No. 1-9894]
Exhibit C-5 Annual Report on Form 10-K for the year ended December 31, 1995 of WP&L. [Incorporated
by reference in File No. 0-337]
Exhibit C-6 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of WPLH.
[Incorporated by reference in File No. 1-9894]
Exhibit C-7 Quarterly Reported on Form 10-Q for the quarter ended March 31, 1996 of WP&L.
[Incorporated by reference in File No. 0-337]
Exhibit D-1 Form of Service Agreement.
Exhibit D-2 Form of System Coordination and Operating Agreement.*
Exhibit D-3 Form of Non-Utility Service Agreement.
Exhibit E-1 Report on Form U-3A-2 for the year ended December 31, 1995 of IES. [Incorporated by
reference in File No. 069-00319]
P Exhibit E-2 Service Territory of Utilities.
Exhibit E-3 Restated Articles of Incorporation of IES. [Incorporated by reference to Exhibit 3(a) to
IES' Annual Report on Form 10-K for the year ended December 31, 1993]
</TABLE>
99
<PAGE> 104
<TABLE>
<S> <C> <C>
Exhibit E-4 Amended and Restated Articles of Incorporation of Utilities. [Incorporated by reference
to Exhibit 3(a) to Utilities' Current Report on Form 8-K, dated January 7, 1994]
Exhibit E-5 Annual Report on Form 10-K for the year ended December 31, 1995 of IES. [Incorporated by
reference in File No. 1-9187]
Exhibit E-6 Annual Report on Form 10-K for the year ended December 31, 1995 of Utilities.
[Incorporated by reference in File No. 0-4117-1]
Exhibit E-7 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of IES. [Incorporated
by reference in File No. 1-9187]
Exhibit E-8 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of Utilities.
[Incorporated by reference in File No. 0-4117-1]
P Exhibit F-1 Service Territory of IPC.
Exhibit F-2 Restated Certificate of Incorporation of IPC. [Incorporated by reference to Exhibit 3.a
to IPC's Annual Report on Form 10-K for the year ended December 31, 1993]
Exhibit F-3 Annual Report on Form 10-K for the year ended December 31, 1995 of IPC. [Incorporated by
reference in File No. 1-3632]
Exhibit F-4 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of IPC. [Incorporated
by reference in File No. 1-3632]
P Exhibit G-1 Major Electric Transmission Lines of WP&L.
P Exhibit G-2 Major Electric Transmission Lines of Utilities.
P Exhibit G-3 Major Electric Transmission Lines of IPC.
P Exhibit G-4 Electric Interconnections of WP&L, Utilities and IPC.
P Exhibit G-5 Combined Gas Service Territory of WP&L, Utilities and IPC.
P Exhibit G-6 Major Gas Supply Pipelines and Underground Storage Facilities in Illinois, Iowa,
Minnesota and Wisconsin.
P Exhibit H-1 Corporate Structure of WPLH and its Subsidiaries.
P Exhibit H-2 Corporate Structure of IES and its Subsidiaries.
Exhibit I-1 Registration Statement on Form S-4 of WPLH and New IPC. [Incorporated by reference to
Registration No. 333-07931]
Exhibit I-2 Employment Agreements with Lee Liu, Erroll B. Davis, Jr., Wayne Stoppelmoor and Michael
Chase [Incorporated by reference to Annexes H-K of the Joint Proxy Statement/Prospectus]
</TABLE>
100
<PAGE> 105
<TABLE>
<S> <C> <C>
Exhibit I-3 Registration Statement on Form S-3 of WPLH [Incorporated by reference to Registration No.
33-21482]
Exhibit I-4 Long Term Plan of Interstate Energy [Incorporated by reference to Exhibit 4.1 to WPLH's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994]
Exhibit I-5 Rights Agreement [Incorporated by reference to Exhibit 4 to WPLH's Current Report on Form
8-K, dated February 27, 1989]
Exhibit J-1 Amended and Restated Articles of Incorporation of Interstate Energy.*
Exhibit J-2 Amended Bylaws of Interstate Energy.*
P Exhibit K-1 Testimony of Rodney Frame before FERC.
P Exhibit K-2 Application filed by WPLH, IES and IPC with FERC.
Exhibit L-1 Memorandum in Support of the Retention by Interstate Energy of the Gas Properties of
WP&L, South Beloit, Utilities and IPC.
P Exhibit L-2 Analysis of Economic Impact of a Divestiture of the Gas Operations of WP&L and South
Beloit.
P Exhibit L-3 Analysis of Economic Impact of a Divestiture of the Gas Operations of Utilities.
P Exhibit L-4 Analysis of Economic Impact of a Divestiture of the Gas Operations of IPC.
Exhibit L-5 Summary of Lost Economies Resulting from SEC Ordered Divestitures of Gas Operations.*
P Exhibit M-1 Corporate Structure of WPLH Subsidiaries, including non-utility subsidiaries.
P Exhibit M-2 Corporate Structure of IES Subsidiaries, including non-utility subsidiaries.
Exhibit N Accounting and Cost Allocation Procedures of Interstate Services.*
P Exhibit O-1 Application filed by WPLH with the PSCW.
P Exhibit O-2 Application filed by IES and IPC with the IUB.*
P Exhibit O-3 Application filed by IPC with the MPUC.
P Exhibit O-4 Application filed by IPC and South Beloit with the ICC.
Exhibit P-1 Preliminary Opinion of Counsel*
Exhibit P-2 Opinion of Counsel (past tense)*
Exhibit Q Proposed Form of Notice
</TABLE>
* to be filed by amendment
101
<PAGE> 106
B. Financial Statements
<TABLE>
<S> <C>
FS-1 Interstate Energy Unaudited Pro Forma Condensed Consolidated Balance Sheets as of March 31, 1996 (see Registration
Statement on Form S-4 of Interstate Energy (Exhibit I-1 hereto).
FS-2 Interstate Energy Unaudited Pro Forma Condensed Consolidated Statements of Income for the years ended December 31,
1995, 1994 and 1993 and the 12 months ended March 31, 1996. (See Registration Statement on Form S-4 of Interstate
Energy (Exhibit I-1 hereto).
FS-3 WPLH Consolidated Balance Sheet as of December 31, 1995 (see Annual Report of WPLH on Form 10-K for the year ended
December 31, 1995 (Exhibit C-4 hereto).
FS-4 WPLH Consolidated Statements of Income for its last three fiscal years (see Annual Report of WPLH on Form 10-K for
the year ended December 31, 1995 (Exhibit C-4 hereto).
FS-7 IES Consolidated Balance Sheet as of December 31, 1995 (see Annual Report of IES on Form 10-K for the year ended
December 31, 1995 (Exhibit E-5 hereto).
FS-8 IES Consolidated Statements of Income for its last three fiscal years (see Annual Report of IES on Form 10-K for
the year ended December 31, 1995 (Exhibit E-5 hereto).
FS-9 IPC Balance Sheet as of December 31, 1995 (see Annual Report of IPC on Form 10-K for the year ended December 31,
1995 (Exhibit F-3 hereto).
FS-10 IPC Statements of Income for its last three fiscal years (see Annual Report of IPC on Form 10-K for the year ended
December 31, 1995 (Exhibit F-3 hereto).
</TABLE>
102
<PAGE> 107
Item 7. Information as to Environmental Effects
The Transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. The only federal actions related to the Transaction pertain
to the Commission's declaration of the effectiveness of Registration Statement
of WPLH and IPC on Form S-4, the approvals and actions described under Item 4
and Commission approval of this Application/Declaration. Consummation of the
Transaction will not result in changes in the operations of WP&L, Utilities or
IPC that would have any impact on the environment. No federal agency is
preparing an environmental impact statement with respect to this matter.
103
<PAGE> 108
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this
Application/Declaration of to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: July 25, 1996
WPL HOLDINGS, INC.
By: /s/ Erroll B. Davis, Jr.
--------------------------
Erroll B. Davis, Jr.
President and Chief
Executive Officer
IES INDUSTRIES INC.
By: /s/ Lee Liu
------------
Lee Liu
Chairman of the Board, President &
Chief Executive Officer
INTERSTATE POWER COMPANY
By: /s/ Wayne H. Stoppelmoor
-------------------------
Wayne H. Stoppelmoor
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 109
1. See, e.g., CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21,
1994).
2. Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
3. E.g., the reduced regulatory burdens associated with routine
financings. 1995 Report at 50.
4. E.g., the Commission should apply a more flexible interpretation of
the integration requirements under the Act; interconnection through
power pools, reliability councils and wheeling arrangements can
satisfy the physical interconnection requirement of section
2(a)(29); the geographic requirements of section 2(a)(29) should be
interpreted flexibly, recognizing technical advances consistent with
the purposes and provisions of the Act; the Commission's analysis
should focus on whether the resulting system will be subject to
effective regulation; the Commission should liberalize its
interpretation of the "A-B-C" clauses and permit combination
systems where the affected states agree, and the Commission should
"watchfully defer" to the work of other regulators. 1995 Report at
71-7.
5. E.g., the Commission should promulgate rules to reduce the
regulatory burdens associated with energy-related diversification
and the Commission should adopt a more flexible approach in
considering all other requests to enter into diversified activities.
1995 Report at 88-90.
6. The applicants acknowledge the requirements of Section 17(c) of
the Act and Rule 70 thereunder with respect to limitations upon
directors and officers of registered holding companies and
subsidiary companies thereof having affiliations with commercial
banking institutions and investment bankers, and undertake that,
upon completion of the Transaction, they will be in compliance
with the applicable provisions thereof.
7. 1995 Report at 73-4.
8. The shares of Utilities Preferred Stock and IPC Preferred Stock
outstanding at the time of the consummation of the Transaction will
remain outstanding preferred stock of Utilities and IPC respectively;
provided that, if Reincorporation Mergers are effected, the Utilites
Prepared Stock will be redeemed, and each share of IPC Preferred Stock
(other than IPC Dissenting Shares) will be converted into one share of
New IPC Preferred Stock with terms and designations substantially
identical to those of the IPC Preferred Stock.
9. This number is a preliminary estimate only, and will be updated as
necessary.
10. By their terms, Sections 8 and 11 only apply to registered holding
companies and are therefore inapplicable at present to WPLH, since it
is not now a registered holding company. The following discussion of
Sections 8 and 11 is included only because, under the present
transaction structure, Interstate Energy will register as a holding
company after consummation of the Transaction.
<PAGE> 110
11. See, e.g., In re Columbia Gas & Electric Corp., 8 S.E.C. 443 at 463
(1941); In re United Gas Improvement Co., Holding Co. Act Release No.
2692 (April 15, 1941); S.E.C. v. New England Electric System, 384 U.S.
176 (1966). It should be noted that the Commission continued to give
primacy to state utility commission determinations in making decisions
regarding combination exempt holding companies. See, e.g., In re
Northern States Power Co., Holding Co. Act Release No. 12655 (Sept. 16,
1954); Delmarva Power & Light Co., 46 S.E.C 710 (1976); WPL Holdings,
Holding Co. Act Release No. 24590 (Feb. 26, 1988).
12. 1995 Report at 15-6.
13. Mississippi Valley Generating Co., 36 S.E.C. 159 (1955) (noting that
Congress intended the concept of integration to be flexible); UNITIL
Corp., Holding Co. Act Release No. 25524 (April 24, 1992) (noting that
section 11 contains a flexible standard designed to accommodate changes
in the industry).
14. 1995 Report at 74.
15. New England Electric System, 41 S.E.C. 888 (1964), aff'd, 384 U.S. 176
(1966) and 390 U.S. 207 (1968).
16. 1995 Report at 74, 75, 76. Footnotes omitted.
17. See e.g., S.E.C. v. New England Electric System, et al., 384 U.S. 176,
183-184 (1966). It is important to note that this issue - basically an
anti-trust issue - was the principal concern in previous decisions
ordering the separation of gas and electric systems and clearly is no
longer applicable to the changed utility competitive environment.
18. On December 12, 1995, the PSCW announced a determination outlining the
general direction of electric utility regulation in Wisconsin. It
includes a restructuring of the industry providing choice of
electricity provider for all consumers by the year 2000 as well as
establishment of a competitive generation business. The transmission
and distribution functions would remain regulated. In a February 22,
1996 report to the Wisconsin legislature, the PSCW identified a 32 step
plan that it would follow for electric utility restructuring in
Wisconsin. In the plan, the PSCW indicated that during 1996 it will
begin activities on 12 of these steps, some of which would seek changes
in applicable administrative rules under its jurisdiction, including
affiliated interest standards and quality of service standards. The
PSCW expects to present an electric utility restructuring plan to the
Wisconsin Legislature in 1997.
The PSCW also continued a generic investigation of the natural gas
industry in Wisconsin and addressed the extent to which traditional
regulations should be replaced with a different approach. In
conjunction with this generic investigation, the PSCW staff is
reviewing the use of the current purchased gas adjustment ("PGA")
mechanism which is designed to pass on to gas customers increases or
decreases in the cost of natural gas purchased for resale. A separate
docket has been established to review the PGA.
<PAGE> 111
19. See, e.g., Michigan Consolidated Gas Co., 44 S.E.C. 361, 365 (1970),
aff'd, 444 F.2d 913 (D.C. Cir. 1971) (quoting General Public Utilities
Corp., 32 S.E.C. 807, 839 (1951)); United Light and Railways Co., 35
S.E.C. 516, 519 (1954).
20. CSW Credit, Inc., Holding Co. Act Release No. 25995 (1994); Jersey
Central Power & Light Co., Holding Co. Act Release No. 24348 (March 18,
1987).
21. United Light and Railways Co., 35 S.E.C. at 519.
22. 1995 Report at 89-90. The Division also recommended a flexible
approach with respect to investments which neither met the
energy-related test of proposed Rule 58 and exceeded the de minimums
amount.
23. In the 1995 Report, the Division noted a comment by Wisconsin Electric
Power Company regarding the scope of the Wisconsin Act. 1995 Report at
91.
24. 1995 Report at 71.
25. In re North American Co. and Its Subsidiaries, Holding Co. Act Release
No. 4505 (Apr. 15, 1942). See also, In re Hudson River Power Corp.,
Holding Co. Act Release No. 2415 (Dec. 9, 1940) (integration standard
not met where "the record discloses no definite plan for bringing about
any such interconnection"); In re Cities Service Power & Light Corp.,
Holding Co. Act Release No. 5256 (Aug. 30, 1944) (integration standard
met where "Derby contemplates the construction of such interconnection
facilities").
26. In one instance, the Commission noted that while "we are not aware of
any plans for undertaking these interconnections in the near future ...
[w]e find ... no occasion to doubt the validity of the estimates of
benefits to be derived therefrom," in its holding that such facilities
were considered capable of interconnection. In re Cities Service Power
& Light Co., Holding Co. Act Release No. 4489 (Aug. 18, 1943).
27. See In re Union Electric Co., Holding Co. Act Release No. 18368 (Apr.
10, 1974) (holding that in the absence of special circumstances,
physical interconnection that might be built in ten years if economical
does not meet integration requirement).
28. 1995 Report at 72-74.
29. 1995 Report at 73.
30. 1995 Report at 74.
31. See In re Penzoil Co., 43 S.E.C. 709 (1968) (finding an integrated
system where facilities both connected with an unaffiliated
transmission company but not each other). See also, American Natural
Gas Co., 43 S.E.C. 203 (1966) ("It is clear the integrated or
coordinated operations of a gas system under the Act may exist in the
absence of such interconnection").
<PAGE> 112
32. See, e.g., In re Philadelphia Co. and Standard Power and Light Co., 28
S.E.C. 35 (1948) ("most of the gas used by these companies in their
operations is obtained from common sources of supply"); Consolidated
Natural Gas Co., Release No. 35-25040 (February 14, 1990) (finding
integrated system where each company derived natural gas from two
transmission companies, although one such company also received gas
from other sources).
33. In re North American Co., 31 S.E.C. 463 (1950) (finding Panhandle
Eastern pipeline to be a common source of supply).
34. See In re Central Power Co. and Northwestern Public Service Co., 8
S.E.C. 425 (1941), in which the Commission declared an integrated
system to exist where two entities purchase from different pipeline
companies since "both pipelines run out of the Otis field, side by
side, and are interconnected at various points in their transmission
system; and that they are within two miles of each other at Kearney."
35. See, e.g., New England Electric System, Holding Co. Act Release No.
22309 (Dec. 9, 1981) (utility permitted to enter into lease with
affiliated joint venture with lease payments based on market price);
EUA Cogenex Corp., Holding Co. Act Release No. 263731 (Sept. 14, 1995)
(authorizing service companies of two registered holding companies to
provide services to affiliated joint venture at market based rates in
certain circumstances).
36. See, e.g., Entergy Corp., Holding Co. Act Release No. 26322 (June 30,
1995); General Public Utilities Corp., Holding Co. Act Release No.
26307 (June 14, 1995) and Southern Co., Holding Co. Act Release No.
26212 (Dec. 30, 1994).
37. 1995 Report at 102.
38. IES International currently has investment in two FUCOs, Powerco and
Central Power.
39. An Excepted Company was defined as any subsidiary whose activities and
operations were primarily related to the domestic sale of electric
energy at retail or at wholesale to affiliates or providing goods and
services to such affiliates.
<PAGE> 113
EXHIBIT D-1
SERVICE AGREEMENT
(Public-Utility Companies)
This Service Agreement is made and entered into this ______ day of
_____________, 199__, by and among WISCONSIN POWER & LIGHT COMPANY, SOUTH
BELOIT WATER, GAS AND ELECTRIC COMPANY, IES UTILITIES INC. and INTERSTATE POWER
COMPANY (individually, a "Client Company" and collectively, the "Client
Companies"), and INTERSTATE SERVICES, INC. (the "Service Company") a service
company subsidiary of Interstate Energy Corporation.
WITNESSETH
WHEREAS, the Securities and Exchange Commission (hereinafter referred
to as the "SEC") has approved and authorized as meeting the requirements of
Section 13(b) of the Public Utility Holding Company Act of 1935 (hereinafter
referred to as the "Act"), the organization and conduct of the business of the
Service Company in accordance herewith, as a wholly owned subsidiary service
company of Interstate Energy Corporation; and
WHEREAS, the Service Company and the Client Companies desire to enter
into this Service Agreement whereby the Service Company agrees to provide and
the Client Companies agree to accept and pay for various services as provided
herein at cost, determined in accordance with applicable rules and regulations
under the Act, which require the Service Company to fairly and equitably
allocate costs among all associate companies to which it renders services,
including the Client Companies and other associate companies which are not a
party to this Service Agreement; and
WHEREAS, any services provided to companies other than Client
Companies will be charged at not less than the cost of providing such services,
such that there will be no subsidization of other associate companies through
the Service Company by the Client Companies; and
WHEREAS, economies and efficiencies benefiting the Client Companies
will result from the performance by Service Company of services as herein
provided;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties to this Service Agreement covenant and
agree as follows:
ARTICLE I - SERVICES
Section 1.1 The Service Company shall furnish to the Client
Companies, upon the terms and conditions hereinafter set forth,
1
<PAGE> 114
such of the services described in Appendix A hereto, at such times, for such
periods and in such manner as the Client Companies may from time to time
request and which the Service Company concludes it is able to perform. The
Service Company shall also provide each Client Company with such special
services, in addition to those services described in Appendix A hereto, as may
be requested by such Client Company and which the Service Company concludes it
is able to perform. In supplying such services, the Service Company may
arrange, where it deems appropriate, for the services of such experts,
consultants, advisers and other persons with necessary qualifications as are
required for or pertinent to the performance of such services.
Section 1.2 Each Client Company shall take from the Service Company
such of the services described in Section 1.1, and such additional general or
special services, whether or not now contemplated, as are requested from time
to time by such Client Company and which the Service Company concludes it is
able to perform.
Section 1.3 The services described herein shall be directly assigned
or allocated by activity, project, program, work order or other appropriate
basis. A Client Company shall have the right from time to time to amend, alter
or rescind any activity, project, program or work order provided that (i) any
such amendment or alteration which results in a material change in the scope of
the services to be performed or equipment to be provided is agreed to by the
Services Company, (ii) the cost for the services covered by the activity,
project, program or work order shall include any expense incurred by the
Service Company as a direct result of such amendment, alteration or rescission
of the activity, project, program or work order, and (iii) no amendment,
alteration or rescission of an activity, project, program or work order shall
release a Client Company from liability for all costs already incurred by or
contracted for by the Service Company pursuant to the activity, project,
program or work order, regardless of whether the services associated with such
costs have been completed.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered
hereunder, each Client Company shall pay to the Service Company all costs which
reasonably can be identified and related to particular services performed by
the Service Company for or on behalf of such Client Company. Where more than
one Client Company is involved in or has received benefits from a service
performed, the costs of such service will be directly assigned or allocated, as
set forth in Appendix A hereto between or among
2
<PAGE> 115
such Client Companies on a basis reasonably related to the service performed to
the extent reasonably practicable.
Section 2.2 It is the intent of this Agreement that charges for
services shall be distributed among the Client Companies, to the extent
possible, based upon direct assignment. The amounts remaining after direct
assignment shall be allocated among the Client Companies (and other affiliate
companies of Interstate Energy Corporation for which services are rendered by
the Service Company, where applicable) using the method identified in Appendix
A. The method of assignment or allocation of costs shall be subject to review
annually, or more frequently if appropriate. Such method of assignment or
allocation of costs may be modified or changed by the Service Company without
the necessity of an amendment to this Service Agreement; provided that, in each
instance, all services rendered hereunder shall be at actual cost thereof,
fairly and equitably assigned or allocated, all in accordance with the
requirements of the Act and any orders promulgated thereunder. The Service
Company shall advise the Client Companies from time to time of any material
change in the method of assignment or allocation of costs hereunder, and no
such material change shall be made unless and until the Service Company shall
have first given written notice to the SEC not less than 60 days prior to the
proposed effective date thereof.
Section 2.3 The Service Company shall render a monthly bill to each
Client Company which shall reflect the billing information necessary to
identify the costs charged for the preceding month.
Section 2.4 It is the intent of this Service Agreement that the
payment for services rendered by the Service Company to the Client Companies
under this Service Agreement shall cover all the costs of its doing business
(less the cost of services provided to affiliated companies not a party to this
Service Agreement and to other non-affiliated companies, and credits for
miscellaneous income items), including, but not limited to, salaries and wages,
office supplies and expenses, outside services employed, property insurance,
injuries and damages, employee pensions and benefits, miscellaneous general
expenses, rents, maintenance of structures and equipment, depreciation and
amortization, and compensation for use of capital as permitted by Rule 91 of
the SEC under the Act.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective on the date
hereof, subject to the receipt of required regulatory approvals, and shall
continue in force with respect to a Client Company until terminated by the
Service Company with respect to
3
<PAGE> 116
such Client Company, or until terminated by unanimous agreement of all Client
Companies, in each case upon not less than one year's prior written notice to
all other parties unless otherwise mutually agreed. This Service Agreement may
also be subject to termination or modification at any time, without notice, if
and to the extent performance under this Service Agreement may conflict with
the Act or with any rule, regulation or order of the SEC adopted before or
after the date of this Service Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of the Service Company shall be
kept in accordance with the General Rules and Regulations promulgated by the
SEC pursuant to the Act, in particular, the Uniform System of Accounts for
Mutual Service Companies and Subsidiary Services Companies in effect from and
after the date hereof.
Section 4.2 Each Client Company shall cause each of its direct or
indirect domestic utility subsidiaries which may come into existence after the
effective date of this Service Agreement to become an additional Client Company
(collectively, the "New Client Companies") subject to this Service Agreement.
In addition, the parties hereto shall make such changes in the scope and
character of the services to be rendered and the method of assigning or
allocating costs of such services among the Client Companies and the New Client
Companies under this Service Agreement as may become necessary or appropriate.
Section 4.3 The Service Company shall permit each Client Company's
state regulatory commission, and others as required under applicable rule or
regulation, such reasonable access to its accounts and records, including the
basis and computation of allocations, as shall be necessary for such persons to
review such Client Company's operating results.
Section 4.4 This Service Agreement shall be governed by and construed
in accordance with the internal laws of the State of Wisconsin, may be executed
in any number of counterparts with the same effect as if the signatures thereto
and hereto were on the same instrument, and may not be amended except by
written instrument executed by all parties hereto.
4
<PAGE> 117
IN WITNESS WHEREOF, the parties hereto have caused this Service
Agreement to be executed as of the date and year first above written.
INTERSTATE SERVICES, INC
By: ______________________________
Title: ____________________
WISCONSIN POWER & LIGHT COMPANY
By: ______________________________
Title: ___________________
SOUTH BELOIT WATER, GAS AND ELECTRIC COMPANY
By: ______________________________
Title: ___________________
INTERSTATE POWER COMPANY
By: ______________________________
Title: ___________________
IES UTILITIES INC.
By: ______________________________
Title: ___________________
5
<PAGE> 118
Appendix A
Description of Services and Determination
of Charges for Services
I. The Service Company will maintain an accounting system for
accumulating all costs on an activity, project, program, work
order, or other appropriate basis. To the extent practicable, time
records of hours worked by Service Company employees will be kept
by activity, project, program or work order. Charges for salaries
will be determined from such time records and will be computed on
the basis of employees' effective hourly rates, including the cost
of fringe benefits and payroll taxes. Records of employee- related
expenses and other costs will be maintained for each functional
group within the Service Company (hereinafter referred to as
"Function"). Where identifiable to a particular activity, project,
program or work order, such costs will be directly assigned to such
activity, project, program or work order. Any costs not directly
assigned by the Service Company will be allocated monthly in
accordance with this Appendix A.
The Service Company will develop and maintain written guidelines to
govern the methods and procedures for charging and allocating costs
among the affiliated companies of the Service Company and among
Functions within the Service Company. The Service Company will
subject the affiliate transactions to internal auditing procedures
on a periodic basis for compliance with the Service Agreement,
written guidelines and orders and rules of regulatory agencies.
II. Service Company costs accumulated for each activity, project,
program or work order will be directly assigned where possible.
The amounts that cannot be directly assigned shall be allocated to
the Client Companies or other Functions within the Service Company
as described in this Appendix A. To the extent possible, such
allocations shall be based on cost-causal relationships. The
overall process of determining responsibility for Service Company
costs shall be as follows:
1. Direct assignment. Costs accumulated in an activity,
project, program, or work order for services performed
specifically for a single Client Company or Function will
be directly assigned and charged to such Client Company or
Function.
Appendix A 1
<PAGE> 119
2. Allocation based on cost-causal relationship. Costs
accumulated in an activity, project, program or work order
for services performed specifically for two or more (but
not all) Client Companies or Functions and which cannot be
directly assigned will be allocated among and charged to
such Client Companies or Functions by application of one or
more of the allocation ratios described in paragraphs III
and IV of this Appendix A; provided that the denominator
used in determining each such ratio shall include only the
Client Companies or Functions for which the services are
specifically performed.
3. Allocation for services of a general nature. Costs
accumulated in an activity, project, program, or work order
for services of a general nature which are applicable to
all Client Companies or Functions or to a class or classes
of Client Companies or Functions will be allocated among
and charged to such Client Companies or Functions by
application of one or more of the allocation ratios
described in paragraphs III and IV of this Appendix A.
III. The following ratios will be applied, as specified in paragraph IV
of this Appendix A, to allocate costs (a) for services of a general
nature and (b) subject to modification of the denominator as
described in paragraph II, "2" above, for services performed
specifically for two or more (but not all) Client Companies or
Functions. These ratios will be determined annually, or at such
other time as may be required due to a significant change.
1. Units Sold or Transported Ratio
A ratio, based on appropriate Client Company product
specific units of sale and/or transport, excluding
intra-system sales, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for
a Client Company and the denominator of which is for all
Client Companies (and Interstate Energy Corporation's
non-utility and non-domestic utility affiliates for which
the Service Company provides services, where applicable).
Examples of product-specific units of sales include
domestic firm kilowatt-hour electric sales, dekatherms of
gas sales, units of water, or units of steam. A separate
ratio will be calculated and used for each utility type
(electric, gas, water, steam).
2. Electric Peak Load Ratio
Appendix A 2
<PAGE> 120
A ratio, based on the sum of the monthly domestic firm
electric maximum system demands, including or excluding
interruptible loads, as appropriate, for the immediately
preceding twelve consecutive calendar months, the numerator
of which is for a Client Company and the denominator of
which is for all Client Companies.
3. Number of Customers Ratio
A ratio, based on the sum of the firm domestic electric
customers (and/or gas customers, where applicable) at the
end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for
a Client Company and the denominator of which is for all
Client Companies.
4. Number of Employees Ratio
A ratio, based on the sum of the number of employees at the
end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for
a Client Company or Service Company Function and the
denominator of which is for all Client Companies (and
Interstate Energy Corporation's non-utility and
non-domestic utility affiliates for which the Service
Company provides services, where applicable) and/or the
Service Company.
5. Construction Expenditures Ratio
A ratio, based on construction expenditures for the
immediately preceding twelve consecutive calendar months,
the numerator of which is for a Client Company and the
denominator of which is for all Client Companies. To the
extent possible, costs will be segregated by utility type
(i.e., electric, gas, water, steam) as well as by function
(i.e., production, transmission, distribution, and
general). If any remaining construction-related costs are
common to all utility types, such common costs will be
allocated between utility types and functions based on the
total of all construction expenditures.
6. Circuit Miles of Electric Distribution Lines Ratio
A ratio, based on installed circuit miles of domestic
electric distribution lines at the end of the immediately
preceding calendar year, the numerator of
Appendix A 3
<PAGE> 121
which is for a Client Company and the denominator of which
is for all Client Companies.
7. Number of Meters Ratio
A ratio, based on the sum of the number of installed
electric meters (and/or gas, water or steam meters, where
applicable) at the end of each month for the immediately
preceding twelve consecutive calendar months, the numerator
of which is for a Client Company and the denominator of
which is for all Client Companies. A separate ratio will
be calculated and used for each utility type (i.e.
electric, gas, water, steam).
8. Total Assets Ratio
A ratio, based on the sum of the total assets at the end of
each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for a Client
Company and the denominator of which is for all Client
Companies (and Interstate Energy Corporation's non-utility
and non-domestic utility affiliates for which the Service
Company provides services, where applicable).
9. Circuit Miles of Electric Transmission Lines Ratio
A ratio, based on installed circuit miles of electric
transmission lines at the end of the immediately preceding
calendar year, the numerator of which is for a Client
Company and the denominator of which is for all Client
Companies.
10. Number of Central Processing Unit Seconds Ratio
A ratio, based on the number of central processing unit
seconds expended to execute mainframe computer software
applications for the immediately preceding twelve
consecutive calendar months, the numerator of which is for
a Client Company or Service Company Function, and the
denominator of which is for all Client Companies, (and
Interstate Energy Corporation's non-utility and
non-domestic utility affiliates, where applicable) and/or
the Service Company.
11. Gross Plant Ratio
A ratio, based on the sum of direct plant at the end of
each month for the immediately preceding twelve
Appendix A 4
<PAGE> 122
consecutive calendar months, the numerator of which is for
a Client Company and the denominator of which is for all
Client Companies (and Interstate Energy Corporation's
non-utility and non-domestic utility affiliates, where
applicable).
12. Materials, Supplies and Services Ratio
A ratio, based on the sum of materials, supplies and
services, either issued from inventory or directly
purchased, for the immediately preceding twelve consecutive
calendar months, the numerator of which is for a Client
Company or Function and the denominator of which is for all
Client Companies (and Interstate Energy Corporation's
non-utility and non-domestic utility affiliates for which
the Service Company provides services, where applicable)
and/or the Service Company.
13. Tons of Coal Burned Ratio
A ratio, based on the tons of coal burned for the
immediately preceding twelve consecutive calendar months,
the numerator of which is for a Client Company and the
denominator of which is for all Client Companies.
14. Gallons of Oil Burned Ratio
A ratio, based on the gallons of oil burned for the
immediately preceding twelve consecutive calendar months,
the numerator of which is for a Client Company and the
denominator of which is for all Client Companies.
15. Dekatherms of Gas Ratio
A ratio, based on the dekatherms of gas purchased for the
immediately preceding twelve consecutive calendar months,
the numerator of which is for a Client Company and the
denominator of which is for all Client Companies.
16. MCF Peak Load Ratio
A ratio, based on the sum of the monthly gas maximum system
demands, including or excluding interruptible loads, as
appropriate, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for
a Client Company and the denominator of which is for all
Client Companies.
Appendix A 5
<PAGE> 123
17. Feet of Gas Line Ratio
A ratio, based on installed footage of gas lines at the end
of the immediately preceding calendar year, the numerator
of which is for a Client Company and the denominator of
which is for all Client Companies.
18. Feet of Steam Distribution Lines Ratio
A ratio, based on installed footage of steam lines at the
end of the immediately preceding calendar year, the
numerator of which is for a Client Company and the
denominator of which is for all Client Companies.
19. Steam Peak Load Ratio
A ratio, based on the sum of the monthly steam maximum
system demands, including or excluding interruptible loads,
as appropriate, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for
a Client Company and the denominator of which is for all
Client Companies.
20. Feet of Water Distribution Lines Ratio
A ratio, based on installed footage of water lines at the
end of the immediately preceding calendar year, the
numerator of which is for a Client Company and the
denominator of which is for all Client Companies.
21. Water Peak Load Ratio
A ratio, based on the sum of the monthly water maximum
system demands, including or excluding interruptible loads,
as appropriate, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for
a Client Company and the denominator of which is for all
Client Companies.
22. Number of Bills Ratio
A ratio, based on the sum of the number of monthly bills
issued, for the immediately preceding twelve calendar
months, the numerator of which is for a Client Company and
the denominator of which is for all Client Companies (and
Interstate Energy Corporation's non-utility and
non-domestic utility affiliates for which the service
company provides services, where applicable).
23. General Ratio
Appendix A 6
<PAGE> 124
A ratio, based on the sum of all Service Company
expenses directly assigned or allocated, based on
allocators other than this "General Ratio", to Client
Companies (excluding fuel, gas, purchased power and
the cost of goods sold) for the immediately preceding
twelve consecutive calendar months, the numerator of
which is for a Client Company or Function and the
denominator of which is for all Client Companies (and
Interstate Energy Corporation's non-utility and
non-domestic utility affiliates, where applicable)
and/or the Service Company. (As used herein, "cost
of goods sold" represents materials that are resold
to the ultimate consumer.)
IV. A description of each Function's activities, which may be
modified from time to time by the Service Company, is set
forth below. As described in paragraph II, "1" of this
Appendix A, where identifiable, costs will be directly
assigned to the Client Companies or to other Functions of
the Service Company. For costs accumulated in activities,
projects, programs, or work orders which are for services
of a general nature or for services performed specifically
for two or more (but not all) Client Companies or Functions
which cannot be directly assigned, as described in
paragraph II, "2" and "3" of this Appendix A, the method or
methods of allocation will be based upon the applicable
allocation ratios (modified as described in paragraph II,
"2" if applicable) set forth below in brackets
"[Allocator]" for each Function.
1. Information Systems
Provides communications and electronic data processing
services such as:
(1) Development and support of mainframe
computer software applications. [Number of
Central Processing Unit Seconds Ratio, #10]
(2) Procurement and support of personal
computers and related network and software
applications. [Number of Employees Ratio,
#4]
(3) Operation of data center. [Number of
Central Processing Unit Seconds Ratio, #10]
(4) Installation and operation of
communications systems. [Number of
Employees Ratio, #4]
2. Meters
Appendix A 7
<PAGE> 125
Procures and maintains meters. [Number of Meters Ratio, #7]
3. Transportation
Procures and maintains transportation vehicles and
equipment. [Number of Employees Ratio, #4]
4. Electric System Maintenance
Coordinates maintenance of electric transmission and
distribution systems.
1. Transmission systems. [Circuit Miles of Electric
Transmission Lines Ratio, #6]
2. Distribution systems. [Circuit Miles of Electric
Distribution Lines Ratio, #6]
5. Marketing and Customer Relations
Advises the Client Companies on relations with domestic
utility customers. The activities of the Function include:
(1) Design and administration of sales and demand-side
management programs. [Electric Peak Load Ratio, #2,
or MCF Peak Load Ratio, #16, or Steam Peak Load
Ratio, #19, or Water Peak Load Ratio, #21, or Units
Sold or Transported Ratio, #1]
(2) Customer billing and payment processing. [Number of
Bills #22]
(3) Operation of call center. [Number of Customers
Ratio, #3]
(4) Customer Market Research and Product Development and
Testing. [Number of Customers Ratio, #3)
6. Electric Transmission and Distribution Engineering and
Construction.
Designs and monitors construction of electric transmission
and distribution lines and substations. Prepares costs and
schedule estimates, visits construction sites to ensure
that construction activities coincide with plans, and
administers construction contracts. [Construction
Expenditures Ratio, #5]
7. Power Engineering and Construction
Appendix A 8
<PAGE> 126
Prepares specifications and administers contracts for
construction of new electric generating units or
improvements to existing electric generating units.
Prepares costs and schedule estimates and visits
construction sites to ensure that construction activities
coincide with plans. [Construction Expenditures Ratio, #5]
8. Human Resources
Establishes and administers policies and supervises
compliance with legal requirements in the areas of
employment, compensation, benefits and employee health and
safety. Processes payroll and employee benefit payments.
Supervises contract negotiations and relations with labor
unions. [Number of Employees Ratio, #4]
9. Materials Management
Provides services in connection with the procurement of
materials and contract services and management of material
and supplies inventories. [Material, Supplies and Services
Ratio, #12]
10. Facilities
Operates and maintains office and service buildings.
Provides security and housekeeping services for such
buildings and procures office furniture and equipment.
[Gross Plant Ratio, #11]
11. Accounting
Maintains corporate books and records, prepares financial
and statistical reports, processes payments to vendors,
prepares tax filings and supervises compliance with the
laws and regulations. [General Ratio, #23]
12. Power Planning
Coordinates the planning and operation of Client Companies'
electric power systems. The activities of the Function
include:
(1) System Planning - planning of additions to Client
Companies' electric generation, transmission and
distribution systems. [Electric Peak Load Ratio,
#2]
Appendix A 9
<PAGE> 127
(2) System Control Center - coordination of the
operation of Client Companies' electric generating
units and transmission systems. [Units Sold or
Transported Ratio, #1]
(3) Distribution Control Centers - coordination of
Client Companies' electric distribution systems.
[Units Sold or Transported Ratio, #1]
13. Public Affairs
Prepares and disseminates information to employees,
customers, government officials, communities and the media.
Provides graphics, reproduction lithography, photography
and video services. [General Ratio, #23]
14. Legal
Renders services relating to labor and employment law,
litigation, contracts, rates and regulatory affairs,
environmental matters, financing, financial reporting, real
estate and other legal matters. [General Ratio, #23]
15. Rates
Determines the Client Companies' revenue requirements and
rates to electric and gas customers. Administers
interconnection and joint ownership agreements. Researches
and forecast customers' usage. [Number of Customers Ratio,
#3]
16. Finance
Renders services to Client Companies with respect to
investments, financing, cash management, risk management,
claims and fire prevention. Prepares reports to the SEC,
budgets, financial forecast and economic analyses. [General
Ratio, #23]
17. Land and Right of Way
Purchases, surveys, records, and sells real estate
interests for Client Companies. [Gross Plant Ratio, #11]
18. Internal Auditing
Reviews internal controls and procedures to ensure that
assets are safeguarded and that transactions are properly
authorized and recorded. [General Ratio, #23]
Appendix A 10
<PAGE> 128
19. Environmental Affairs
Establishes policies and procedures for compliance with
environmental laws and regulations. Studies emerging
environmental issues, monitors compliance with
environmental requirements and provides training to the
Client Companies' personnel. [Units Sold or Transported
Ratio, #1]
20. Fuels
Procures coal, gas and oil for the Client Companies.
ensures compliance with price and quality provisions of
fuel contracts and arranges for transportation of the fuel
to the generating stations. [Tons of Coal Burned Ratio,
#13; or Gallons of Oil Burned Ratio, #14; or Dekatherms of
Gas Ratio, #15; or MCF Peak Load Ratio, #16]
21. Investor Relations
Provides communications to investors and the financial
community, performs transfer agent and shareholder
recordkeeping functions, administers stock plans and
performs stock-related regulatory reporting. Total Assets
Ratio, #8]
22. Planning
Facilitates preparation of strategic and operating plans,
monitors trends and evaluates business opportunities.
[General Ratio, #23]
23. Executive
Provides general administrative and executive management
services. [General Ratio, #23]
24. Gas System Maintenance
Coordinates maintenance of Client Companies' gas
transmission and distribution systems (Feet of Gas Lines
Ratios, #17)
25. Gas Transmission and Distribution Engineering and
Construction
Designs and monitors construction of gas transmission and
distribution plant. Prepares costs and schedule estimates,
visits construction sites to ensure that construction
activities coincide with plans, and
Appendix A 11
<PAGE> 129
administers construction contracts. (Construction
Expenditures Ratio, #5)
26. Gas Acquisition and Dispatch
Coordinates the planning and operation of Client Companies'
gas systems. The activities of the Function include:
(1) System Planning - planning of additions to Client
Companies' gas production, transmission, and
distribution systems. (Units Sold or Transported
Ratio, #1; or MCF Peak Load Ratio, #16; or
Dekatherms of Gas Ratio, #15)
(2) Distribution Control Centers - coordination of
Client Companies' gas distribution systems. (Units
Sold or Transported Ratio, #1; or MCF Peak Load
Ratio, #16)
27. Gas Production Engineering & Construction
Prepares specifications and administers contracts for
construction of new gas production and/or storage units.
Prepares specifications and administers contracts for
improvements to existing units. Prepares costs and
schedule estimates and visits construction sites to ensure
that construction activities coincide with plans.
(Construction Expenditures Ratio, #5)
28. Steam System Maintenance
Coordinates maintenance of Client Companies' steam
distribution systems. [Feet of Steam Distribution Lines
Ratio, #18]
29. Steam Distribution Engineering & Construction
Designs and monitors construction of steam distribution
systems. Prepares costs and schedule estimates, visits
construction sites to ensure that construction activities
coincide with plans, and administers construction
contracts. (Construction Expenditures Ratio, #5)
30. Steam Supply Engineering & Construction
Prepares specifications and administers contracts for
construction of new steam supply units or improvements to
existing steam supply units. Prepares costs and schedule
estimates and visits
Appendix A 12
<PAGE> 130
construction sites to ensure that construction activities
coincide with plans. (Construction Expenditures Ratio, #5;
or Steam Peak Load Ratio, #19)
31. Steam Planning
Coordinates the planning and operation of Client Companies'
steam systems. The activities of the Function include:
(1) System Planning - planning of additions to Client
Companies' steam supply units and distribution
systems. (Units Sold or Transported Ratio, #1; or
Steam Peak Load Ratio, #19)
(2) Distribution Control Centers - coordination of
Client Companies' steam distribution systems.
(Units Sold or Transported Ratio, #1; or Steam Peak
Load Ratio, #19)
32. Water System Maintenance
Coordinates maintenance of Client Companies' water
distribution systems. (Feet of Water Distribution Lines
Ratio, #20)
33. Water Distribution Engineering & Construction
Designs and monitors construction of water distribution
systems. Prepares costs and schedule estimates, visits
construction sites to ensure that construction activities
coincide with plans, and administers construction
contracts. (Construction Expenditures Ratio, #5)
34. Water Supply Engineering & Construction
Prepares specifications and administers contracts for
construction of new water supply units or improvements to
existing water supply units. Prepares costs and schedule
estimates and visits construction sites to ensure that
construction activities coincide with plans. (Construction
Expenditures Ratio, #5)
35. Water Planning
Coordinates the planning and operation of Client Companies'
water systems. The activities of the Function include:
Appendix A 13
<PAGE> 131
(1) System Planning - planning of additions to Client
Companies' water supply units and distribution
systems. (Units Sold or Transported Ratio, #1; or
Water Peak Load Ratio, #21)
(2) Distribution Control Centers - coordination of
Client Companies' water distribution systems.
(Units Sold or Transported Ratio, #1; or Water Peak
Load Ratio, #21)
Appendix A 14
<PAGE> 132
EXHIBIT D-3
SERVICE AGREEMENT
(Non-Utility Companies)
This Service Agreement is made and entered into this
_____________ day of ________________, by and among INTERSTATE ENERGY
CORPORATION, [non-domestic utility subsidiaries] (individually, a "Client
Company" and collectively the "Client Companies"), and INTERSTATE SERVICES,
INC., (the "Service Company") a service company subsidiary of Interstate Energy
Corporation.
WITNESSETH
WHEREAS, the Securities and Exchange Commission (hereinafter
referred to as the "SEC") has approved and authorized as meeting the
requirements of Section 13(b) of the Public Utility Holding Company Act of 1935
(hereinafter referred to as the "Act"), the organization and conduct of the
business of the Service Company in accordance herewith, as a wholly owned
subsidiary service company of Interstate Energy Corporation; and
WHEREAS, the Service Company and the Client Companies desire
to enter into this Service Agreement whereby the Service Company agrees to
provide, and the Client Companies agree to accept and pay for, various services
as provided herein in accordance with applicable rules and regulations under
the Act, which require the Service Company to fairly and equitably allocate
costs among all associate companies to which it renders services, including the
Client Companies and other associate companies which are not a party to this
Service Agreement; and
WHEREAS, economies and efficiencies benefiting the Client
Companies will result from the performance by Service Company of services as
herein provided;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein contained, the parties to this Service Agreement
covenant and agree as follows:
ARTICLE I - SERVICES
Section 1.1 The Service Company shall furnish to a Client
Company, if requested by such Client Company, upon the terms and conditions
hereinafter set forth, such of the services described in Appendix A hereto, at
such times, for such periods and in such manner as the Client Company may from
time to time request and which the Service Company concludes it is able to
perform. The Service Company shall also provide a Client Company with such
special services, in addition to those services described in Appendix A hereto,
as may be requested by such Client Company and which the Service Company
concludes it is able to perform. In supplying such services, the Service
Company may arrange, where it deems appropriate, for the services of such
experts, consultants, advisers and other persons with necessary qualifications
as are required for or pertinent to the performance of such services.
<PAGE> 133
Section 1.2 Each Client Company shall take from the
Service Company such of the services described in Section 1.1, and such
additional general or special services, whether or not now contemplated, as are
requested from time to time by such Client Company and which the Service
Company concludes it is able to perform.
Section 1.3 The services described herein shall be
directly assigned or allocated by activity, project, program, work order or
other appropriate basis. A Client Company shall have the right from time to
time to amend, alter or rescind any activity, project, program or work order
provided that (i) any such amendment or alteration which results in a material
change in the scope of the services to be performed or equipment to be provided
is agreed to by the Services Company, (ii) the cost for the services covered by
the activity, project, program or work order shall include any expense incurred
by the Service Company as a direct result of such amendment, alteration or
rescission of the activity, project, program or work order, and (iii) no
amendment, alteration or rescission of an activity, project, program or work
order shall release a Client Company from liability for all costs already
incurred by or contracted for by the Service Company pursuant to the activity,
project, program or work order, regardless of whether the services associated
with such costs have been completed.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be
rendered hereunder, each Client Company shall pay to the Service Company all
costs which reasonably can be identified and related to particular services
performed by the Service Company for or on behalf of such Client Company;
provided that in respect to services performed for a Client Company which is a
foreign associate which qualifies for exemption under Rule 83(a), such Client
Company shall pay the fair market value of such services, but in any event no
less than the cost thereof. Where more than one Client Company is involved in
or has received benefits from a service performed, the costs of such service
will be directly assigned or allocated, as set forth in Appendix A hereto,
between or among such Client Companies on a basis reasonably related to the
service performed to the extent reasonably practicable.
Section 2.2 It is the intent of this Agreement that charges for
services shall be distributed among the Client Companies, to the extent
possible, based upon direct assignment. The amounts remaining after direct
assignment shall be allocated among the Client Companies (and other affiliates
of Interstate Energy Corporation for which services are rendered by the Service
Company, where applicable) using the method identified in Appendix A. The
method of assignment or allocation of costs shall be subject to review
annually, or more frequently if appropriate. Such method of assignment or
allocation of costs may be modified or changed by the Service Company without
the necessity of an amendment to this Service Agreement; provided that, in each
instance, all services rendered hereunder shall be at actual cost thereof,
fairly and equitably assigned or allocated, all in accordance with the
requirements of the Act and any orders promulgated thereunder; provided further
that services rendered to foreign affiliates which qualify for exemption under
Rule 83(a) under the Act may be furnished by Service Company at the fair market
value thereof (but not less than the cost thereof). The Service
2
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Company shall advise the Client Companies from time to time of any material
change in the method of assignment or allocation of costs hereunder, and no
such material change shall be made unless and until the Service Company shall
have first given written notice to the SEC not less than 60 days prior to the
proposed effective date thereof.
Section 2.3 The Service Company shall render a monthly
bill to each Client Company which shall reflect the billing information
necessary to identify the costs charged for the preceding month.
Section 2.4 It is the intent of this Service Agreement
that the payment for services rendered by the Service Company to the Client
Companies under this Service Agreement shall cover all the costs of its doing
business (less the cost of services provided to affiliated companies not a
party to this Service Agreement and to other non-affiliated companies, and
credits for miscellaneous income items), including, but not limited to,
salaries and wages, office supplies and expenses, outside services employed,
property insurance, injuries and damages, employee pensions and benefits,
miscellaneous general expenses, rents, maintenance of structures and equipment,
depreciation and amortization, and compensation for use of capital as permitted
by Rule 91 of the SEC under the Act.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective
on the date hereof, subject to the receipt of required regulatory approvals,
and shall continue in force with respect to a Client Company until terminated
by the Client Company, or by the Service Company with respect to such Client
Company, or until terminated by unanimous agreement of all Client Companies, in
each case upon not less than one year's prior written notice to all other
parties unless otherwise mutually agreed. This Service Agreement shall also be
subject to termination or modification at any time, without notice, if and to
the extent performance under this Service Agreement may conflict with the Act
or with any rule, regulation or order of the SEC adopted before or after the
date of this Service Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of the Service
Company shall be kept in accordance with the General Rules and Regulations
promulgated by the SEC pursuant to the Act, in particular, the Uniform System
of Accounts for Mutual Service Companies and Subsidiary Services Companies in
effect from and after the date hereof.
Section 4.2 New direct or indirect non-utility
subsidiaries of Interstate Energy Corporation, which may come into existence
after the effective date of this Service Agreement, may become additional
Client Companies (collectively, the "New Client Companies") subject to this
Service Agreement. In addition, the parties hereto shall make such changes in
the scope and character of the services to be rendered and the method of
assigning or allocating costs of
3
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such services among the Client Companies and the New Client Companies under
this Service Agreement as may become necessary or appropriate.
Section 4.3 The Service Company shall permit each Client
Company access to the accounts and records of the Service Company relating to
the services performed by Service Company for such Client Company hereunder,
including the basis and computation of allocations.
Section 4.4 This Service Agreement shall be governed by
and construed in accordance with the internal laws of the State of Wisconsin,
may be executed in any number of counterparts with the same effect as if the
signatures thereto and hereto were on the same instrument, and may not be
amended except by written instrument executed by all parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this
Service Agreement to be executed as of the date and year first above written.
INTERSTATE ENERGY CORPORATION
By:
------------------------------------
Title:
[NON-DOMESTIC UTILITY SUBSIDIARIES]
By:
------------------------------------
Title:
INTERSTATE SERVICES, INC.
By:
-----------------------------------
Title:
4
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APPENDIX A
Description of Services and Determination
of Charges for Services
I. The Service Company will maintain an accounting system for
accumulating all costs on an activity, project, program, work order or
other appropriate basis. To the extent practicable, time records of
hours worked by Service Company employees will be kept by activity,
project, program or work order. Charges for salaries will be
determined from such time records and will be computed on the basis of
employees' effective hourly rates, including the cost of fringe
benefits and payroll taxes. Records of employee-related expenses and
other costs will be maintained for each functional group within the
Service Company (hereinafter referred to as "Function"). Where
identifiable to a particular activity, project, program or work order,
such costs will be directly assigned to such activity, project,
program or work order. Any costs not directly assigned by the Service
Company will be allocated monthly in accordance with this Appendix A.
The Service Company will develop and maintain written guidelines to
govern the methods and procedures for charging and allocating costs
among the affiliated companies of the Service Company and among
Functions within the Service Company. The Service Company will
subject the affiliate transactions to internal auditing procedures on
a periodic basis for compliance with the Service Agreement, written
guidelines and orders and rules of regulatory agencies.
II. Service Company costs accumulated for each activity, project, program
or work order will be directly assigned where possible. The amounts
that cannot be directly assigned shall be allocated to the Client
Companies or other Functions within the Service Company as described
in this Appendix A. To the extent possible, such allocations shall be
based on cost-causal relationships. The overall process of
determining responsibility for Service Company costs shall be as
follows:
1. Direct assignment. Costs accumulated in an activity, project,
program or work order for services performed specifically for
a single Client Company or Function will be directly assigned
and charged to such Client Company or Function.
2. Allocation based on cost-causal relationships. Costs
accumulated in an activity, project, program or work order for
services specifically performed for two or more (but not all)
Client Companies or Functions and which cannot be directly
assigned will be allocated among and charged to such Client
Companies or Functions by application of one or more of the
allocation ratios described in paragraphs III and IV of this
Appendix A; provided that the denominator used in
Appendix A Page 1
<PAGE> 137
determining each such ratio shall include only the Client
Companies or Functions for which the services are specifically
performed.
3. Allocation for services of a general nature. Costs
accumulated in an activity, project, program or work order for
services of a general nature which are applicable to all
Client Companies or Functions or to a class or classes of
Client Companies or Functions will be allocated among and
charged to such Client Companies or Functions by application
of one or more of the allocation ratios described in
paragraphs III and IV of this Appendix A.
III. The following ratios will be applied, as specified in paragraph IV of
this Appendix A, to allocate costs (a) for services of a general
nature and (b) subject to modification of the denominator as described
in paragraph II, "2" above, for services performed specifically for
two or more (but not all) Client Companies or Functions. These ratios
will be determined annually, or at such other time as may be required
due to a significant change.
1. Number of Employees Ratio
A ratio, based on the sum of the number of employees at the
end of each month for the immediately preceding twelve
consecutive months, the numerator of which is for a Client
Company or Service Company Function and the denominator of
which is for all Client Companies (and all other Interstate
Energy Corporation affiliates for which the Service Company
provides services, where applicable) and/or the Service
Company.
2. Total Assets Ratio
A ratio, based on the sum of the total assets at the end of
each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for a Client
Company and the denominator of which is for all Client
Companies (and all other Interstate Energy Corporation
affiliates for which the Service Company provides services,
where applicable).
3. General Ratio
A ratio, based on the sum of all Service Company expenses
directly assigned or allocated, based on allocators other than
this "General Ratio", to Client Companies (excluding fuel,
gas, purchased power and the cost of goods sold) for the
immediately preceding twelve consecutive calendar months, the
numerator of which is for a Client Company or Function and the
denominator of which is for all Client Companies (and all
other Interstate Energy Corporation affiliates for which the
Service Company provides services, where applicable) and/or
the
Appendix A Page 2
<PAGE> 138
Service Company. (As used herein, "cost of goods sold"
represents materials that are resold to the ultimate consumer.)
4. Number of Central Processing Unit Seconds Ratio
A ratio, based on the sum of the number of central processing
unit seconds expended to execute mainframe computer software
applications for the immediately preceding twelve consecutive
calendar months, the numerator of which is for a Client
Company or Service Company Function, and the denominator of
which is for all Client Companies (and all other Interstate
Energy Corporation affiliates for which the Service Company
provides services, where applicable) and/or the Service
Company.
5. Gross Plant Ratio
A ratio, based on the sum of direct plant at the end of each
month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for a Client
Company and the denominator of which is for all Client
Companies (and all other Interstate Energy Corporation
affiliates for which the Service Company provides services,
where applicable).
6. Units Sold or Transported Ratio
A ratio, based on appropriate Client Company product specific
units of sale and/or transport, excluding intra-system sales,
for the immediately preceding twelve consecutive calendar
months, the numerator of which is for a Client Company and the
denominator of which is for all Client Companies (and all
other Interstate Energy Corporation affiliates for which the
Service Company provides services, where applicable).
Examples of product-specific units of sales include domestic
firm kilowatt- hour electric sales, dekatherms of gas sales,
units of water, or units of steam. A separate ratio will be
calculated and used for each utility type (electric, gas,
water, steam).
IV. A description of each Function's activities, which may be modified
from time to time by the Service Company, is set forth below. As
described in paragraph II, "1" of this Appendix A, where identifiable,
costs will be directly assigned to the Client Companies or to other
Functions of the Service Company. For costs accumulated in
activities, projects, programs or work orders which are for services
of a general nature or for services performed specifically for two or
more (but not all) Client Companies or Functions which cannot be
directly assigned, as described in paragraph II, "2" and "3"
Appendix A Page 3
<PAGE> 139
of this Appendix A, the method or methods of allocation will be based
upon the applicable allocation ratios (modified as described in
paragraph II, "2" if applicable) set forth below in brackets
"[Allocator]" for such Function.
1. Information Systems
Provides communications and electronic data processing
services such as:
(1) Development and support of mainframe computer
software applications. [Number of Central
Processing Unit Seconds Ratio, #4]
(2) Procurement and support of personal computers
and related network and software
applications. [Number of Employees Ratio, #1]
(3) Operation of data center. [Number of Central Processing Unit
Seconds Ratio, #4]
(4) Installation and operation of communications systems. [Number
of Employees Ratio, #1]
2. Transportation
Procures and maintains transportation vehicles and equipment.
[Number of Employees Ratio, #1]
3. Human Resources
Establishes and administers policies and supervises compliance
with legal requirements in the areas of employment,
compensation, benefits and employee health and safety.
Processes payroll and employee benefit payments. Supervises
contract negotiations and relations with labor unions. [Number
of Employees Ratio, #1]
4. Facilities
Operates and maintains office and service buildings. Provides
security and housekeeping services for such buildings and
procures office furniture and equipment. [Gross Plant Ratio,
#5]
Appendix A Page 4
<PAGE> 140
5. Accounting
Maintains corporate books and records, prepares financial and
statistical reports, processes payments to vendors, prepares
tax filings and supervises compliance with the laws and
regulations. [General Ratio, #2]
6. Public Affairs
Prepares and disseminates information to employees, customers,
government officials, communities and the media. Provides
graphics, reproduction lithography, photography and video
services. [General Ratio, #3]
7. Legal
Renders services relating to labor and employment law,
litigation, contracts, rates and regulatory affairs,
environmental matters, financing, financial reporting, real
estate and other legal matters. [General Ratio, #3]
8. Finance
Renders services to Client Companies with respect to
investments, financing, cash management, risk management,
claims and fire prevention. Prepares reports to the SEC,
budgets, financial forecast and economic analyses. [General
Ratio, #3]
9. Internal Auditing
Reviews internal controls and procedures to ensure that assets
are safeguarded and that transactions are properly authorized
and recorded. [General Ratio, #3]
10. Environmental Affairs
Establishes policies and procedures for compliance with
environmental laws and regulations. Studies emerging
environmental issues, monitors compliance with environmental
requirements and provides training to the Client Companies'
personnel. [Units Sold or Transported Ratio, #6]
11. Investor Relations
Provides communications to investors and the financial
community, performs transfer agent and shareholder
recordkeeping functions, administers stock plans and performs
stock-related regulatory reporting. [Total Assets Ratio, #2]
Appendix A Page 5
<PAGE> 141
12. Planning
Facilitates preparation of strategic and operating plans,
monitors trends and evaluates business opportunities. [General
Ratio, #3]
13. Executive
Provides general administrative and executive management
services. [General Ratio, #3]
Appendix A Page 6
<PAGE> 142
EXHIBIT L-1
MEMORANDUM IN SUPPORT OF THE RETENTION
BY INTERSTATE ENERGY OF THE GAS PROPERTIES
OF WP&L, SOUTH BELOIT, UTILITIES AND IPC
<PAGE> 143
EXHIBIT L-1
MEMORANDUM IN SUPPORT OF THE RETENTION
BY INTERSTATE ENERGY OF THE GAS PROPERTIES
OF WP&L, SOUTH BELOIT, UTILITIES AND IPC
INTRODUCTION
The combination of WPL Holdings, Inc. ("WPLH"), IES Industries
Inc. ("IES") and Interstate Power Company ("IPC") (collectively, the
"Applicants"), in a merger transaction (the "Transaction") will result in IPC,
Wisconsin Power & Light Company ("WP&L"), and IES Utilities, Inc., operating
public utility subsidiaries of WPLH and IES, respectively, and South Beloit
Water Gas and Electric Company ("South Beloit"), a wholly owned operating
public utility subsidiary of WP&L, becoming subsidiaries of Interstate Energy
Corporation ("Interstate Energy"), a holding company which will be registered
under the Public Utility Holding Company Act of 1935 (the "Act"). Interstate
Energy has filed an Application/Declaration on Form U-1 ("U-1" or the
"Application") seeking the approval of the Securities and Exchange Commission
(the "Commission") under the Act for the Transaction and related matters. In
addition, the Application seeks the Commission's authorization for Applicants
to retain their gas utility systems following the consummation of the
Transaction. This memorandum supplements the Application with respect to legal
issues related to Interstate Energy's request for authority to retain these gas
systems following its registration as a holding company under the Act.
SUMMARY
Both the legislative history of the Act and the Commission's
early interpretation of the Act indicate that the purpose of the Act is to
facilitate the process by which state utility regulatory commissions determine
whether or not registered combination gas and electric holding company systems
are permissible, and not to impose a federal ban on such systems. As the
Commission noted in a number of early decisions, the Act is intended to provide
for a flexible regulatory scheme that is capable of adapting to changes in the
utility industry as the industry evolves. That evolution has reached a point
where the industry is now in the process of its most significant change (from
regulation to competition) since that which occurred as a result of the
adoption of the Act. It is clear that the industry is currently evolving in a
direction that requires utility company systems to offer their customers a
range of energy options in order to remain competitive.
Thus, the Commission should analyze the retention of
Applicants' gas systems by focusing on those sections of the Act (Sections 8
and 21) that give primacy to state utility commission decisions with regard to
combination registered holding companies. It is best for the Commission to
"watchfully defer" to such local decision-makers who are in the best position
to regulate the combination utility. Under such analysis, the Commission must
allow Interstate Energy to retain the gas systems of WP&L, South Beloit,
Utilities and IPC as long as the Minnesota Public Utilities Commission (the
"MPUC"), the Public Service Commission of
<PAGE> 144
Wisconsin (the "PSCW"), the Iowa Utilities Board ("IUB") and Illinois Common
Commission ("ICC"), who have, and will continue to have, direct jurisdiction
over Interstate Energy's gas operations in their respective states, permit the
continued existence of a combination system. See U-1 at Item 3.A.2.(b).(i).
Even if the Commission chooses not to focus on state
commission determinations, Section 11 of the Act contains additional provisions
that permit the retention of the Applicants' gas systems -- the case-specific
A-B-C clauses (the "A-B-C Clauses") of Section 11(b)(1). Under these clauses
the Commission in the past has permitted the retention of an additional gas or
electric utility system by a larger electric utility system within a particular
registered holding company system. Again, the standards set forth in this
section should be read in light of the current changes in the utility industry.
Read this way, Interstate Energy meets the standards with regard to the
retention of the gas operations discussed herein and in the U-1 at Item
3.A.2.(b)(ii).
DISCUSSION
I. SECTION 8
1. GENERAL
Section 8 of the Act states:
Whenever a state law prohibits, or requires approval or authorization
of, the ownership or operation by a single company of the utility
assets of an electric utility company and a gas utility company
serving substantially the same territory, it shall be unlawful for a
registered holding company, or any subsidiary company thereof . . .
(1) to take any step, without the express approval of the State
commission of such State, which results in its having a direct or
indirect interest in an electric utility company and a gas utility
company serving substantially the same territory, or (2) if it already
has any such interest, to acquire, without the express approval of the
State commission, any direct or indirect interest in an electric
utility company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest.
On its face, this section indicates that, with the approval of the relevant
state utility commissions, a registered holding company can include a
combination of electric and gas utility systems. A careful reading of the
section indicates that the thrust of the section is to preclude the use of the
registered holding company form to circumvent any state law restrictions on the
ownership of gas and electric assets by the same company. Over time the
Commission has emphasized different aspects of Section 8 and its interplay with
Section 11 -- initially allowing registered holding companies to own both gas
and electric systems under Section 8, then focusing on Section 11 as
controlling determinations regarding combination companies and requiring the
second system to meet a strict interpretation of the A-B-C Clauses of Section
11(b)(1). The Applicants believe that a re-emphasis by the Commission on the
initial
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interpretation of Section 8, which would allow registered combination companies
if, as is the case here, they are permitted by the affected states, is
consistent both with the Act and its policy objectives.
2. EARLY CASES
In its early decisions, the Commission adhered to the concept
that the decision whether to allow combination companies was one that the
states should make (although the Commission might have to implement it in
certain cases). Where such systems were permissible, the role of the
Commission was to ensure that both such systems were integrated as defined in
the Act.
The Commission's most notable decision in this line is
American Water Works and Electric Co. Inc., Holding Co. Act Release No. 949, 2
S.E.C. 972 (Dec. 30, 1937). In that case, the Commission approved the
applicant's voluntary reorganization plan under Section 11(e) of the Act and
permitted the newly reorganized registered holding company to retain both its
electric and its gas operations. While specifically noting that the Act does
not contain a definition of single integrated utility in the context of a
combined company, the Commission stated that:
We believe, however, that it is proper to regard such a combined
property as a single integrated system, provided that all of the
electric properties are integrated and all of the properties, both gas
and electric, are in fairly close geographic proximity and are so
related that substantial economies may be effectuated by their
coordination under common control. The question of public policy as
to the common ownership of gas and electric facilities in the same
territory is apparently left by the statute to the decision of the
states.
Id. at 983 & n.3.
Thus, since the combination company did not violate state
policy, there was no need for the Commission to exercise jurisdiction to
implement state policy by requiring divestiture of gas and electric operations.
In that case, the Commission's concern under the Act was that each system was
an integrated system and otherwise met the standards of Section 11 of the Act.
3. OTHER CASES
By the 1940s the Commission, faced with further perceived
abuses, de-emphasized its role as the implementer of state policy on
combination companies. Instead, it focused on a narrow interpretation of the
standards of Section 11 as the basis for a policy, adopted and implemented in
simplification proceedings, that the Commission should not allow registered
holding companies to own both gas and electric companies unless the smaller
system qualified for retention under the A-B-C Clauses. The Commission
revisited and reinterpreted its American Water Works decision by noting that
the case would have reached the same result
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under the A-B-C Clauses.(1) Thus, most Section 11 proceedings involving the
question of combination companies after that time discussed retention of the
gas system solely in the context of whether or not it was a permissible
"additional system" meeting the requirements of the A-B-C Clauses.2
In connection with this analysis, the Commission noted a
policy concern existing at that time that favored separating the management of
gas utility operations from the management of electric utility operations.
This policy originated in the belief that gas utilities benefitted from having
a separate management focusing their entire efforts on the gas business, as
opposed to being part of a combination company where management might focus on
electric utility operations at the expense of the gas utility operations.(3) In
other words, there was a perception of competition in internal management
between gas and electric operations that could be detrimental to the gas
operations and, in turn, to consumers.
The Supreme Court addressed the interplay between Sections 8
and 11 of the Act in its decision S.E.C. v. New England Electric System ("NEES
I"), 384 U.S. 176 (1966). In Nees I, the Court noted:
To some extent, local policy was expected to govern, with Section 8
serving to prevent circumvention of that policy . . . . At the same
time, Section 11 was expected to assist in imposing restrictions with
regard to the combination of gas and electricity in one system.
Discussing the interplay between Section 8 and Section 11, the Senate
Committee noted that Section 8 only applied to future acquisition . .
. [and] "the policy upon which this section was based was essential in
the formulation of any Federal legislation on utility holding
companies, it did not think that the section should make it unlawful
to retain (up to the time that Section 11 may require divestment)
interests in businesses in which the companies were lawfully engaged
on the date of enactment of the title."
Id. at 183 n.14.(4)
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(1) See, e.g., Columbia Gas & Electric Corp., Holding Co. Act Release No.
2477, 8 S.E.C. 443, 463 (Jan. 10, 1941); United Gas Improvement Co., Holding
Co. Act Release No. 2692, 9 S.E.C. 52 (Apr. 24, 1941).
(2) See, e.g., North American Co., Holding Co. Act Release No. 3446, 11
S.E.C. 194, 216 (Apr. 14, 1942); Engineers Public Service Co., Holding Co.
Act Release No. 3796, 12 S.E.C. 41, 56 (Sept. 16, 1942); Unitil Corp.,
Holding Co. Act Release No. 25524, 51 S.E.C. Docket 562 (Apr. 24, 1992).
(3) See Philadelphia Co., Holding Co. Act Release No. 8242, 28 S.E.C.
35, 48 (June 1, 1948); North American Co., Holding Co. Act Release No. 10320,
32 S.E.C. 169, 179-80 (Dec. 28, 1950); Illinois Power Co., Holding Co. Act
Release No. 16574, 44 S.E.C. 140, 144 (Jan. 2, 1970).
(4) The dissenting opinion in NEES I specifically disputed this
conclusion, noting that "[t]he House and Senate Committees in identical
language expressly stated that common ownership of competing forms of energy
was 'a field which is essentially a question of state policy'; the present
Section 8 . . . was enacted to support this approach by using federal power
to limit common ownership only where it is contrary to state law." Id. at
190 (Harlan, J., dissenting).
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<PAGE> 147
The Commission's policy with regard to exempt combination
holding companies, however, gave, and continues to give, primacy to state
determinations. In prior cases, the Commission has considered whether or not
it could approve transactions and grant exemptions to combination holding
companies under the Act as being in the public interest in light of the
dictates of Section 11(b)(1) and its single integrated utility requirement. In
a 1954 decision, the Commission considered whether or not the holding company
was eligible for the exemption because it conducted both gas and electric
utility operations and such operations could be considered detrimental to the
public interest as violative of Section 11(b)(1). The Commission first decided
that "the mere existence of the combined gas and electric operations does not
of itself require denial of an exemption." Northern States Power Co., Holding
Co. Act Release No. 12655, 36 S.E.C. 1, 7-8 (Sept. 16, 1954).
The final decision on whether or not the combined system was
in the public interest was based on the concept that:
competition in the field of distribution of gas and electric energy is
"essentially a question of State policy." The considered conclusions
of the local authorities, deriving their power from specific State
legislation, should be given great weight in determining whether the
public interest would in fact be adversely affected by the retention
of combined operations. In the absence of a compelling showing in the
record to the contrary, we would not be warranted in rejecting the
appraisal of such authorities that the local public interest . . . is
served by retention of the combined operation.
Id. at 8 (citations omitted).
The Commission made a number of similar determinations in
subsequent decisions relating to exempt holding companies.(5) In a 1988 case
involving Section 9(a)(2) approval of an acquisition and subsequent exemption,
for example, the Commission reviewed its precedent and determined:
the judgment of a state's legislature and public service commission as
to what will benefit their constituents is entitled to considerable
deference . . . . [W]e do not believe that the pro-competitive thrust
of the Act expresses an absolute Federal policy against combination
gas and electric operations . . . . Neither the Act nor the NEES
decisions require that the [S.E.C.] adopt such an inflexible rule.(6)
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(5) See, e.g., Delmarva Power & Light Co., Holding Co. Act Release No.
19717, 46 S.E.C. 7, 10 (Oct. 19, 1976); Wisconsin Energy Corp., Holding Co.
Act Release No. 24267, 37 S.E.C. Docket 296 (Dec. 18, 1986).
(6) WPL Holdings, Inc., Holding Co. Act Release No. 24590, 40 S.E.C. Docket
491, 497, 498 (Feb. 26, 1988).
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4. LEGISLATIVE HISTORY AND RECENT DEVELOPMENTS
The legislative history of the Act together with the recent
evolution of the utility industry and the regulatory environment in which it
operates, indicates that it is now appropriate for the Commission to revisit
its interpretations and allow combination registered holding companies where
permitted under relevant state law.
As embodied throughout Section 1 of the Act, one of the
principal evils that the Act was designed to remedy was that multistate holding
companies with activities "extending over many States are not susceptible of
effective control by any State and make difficult, if not impossible, effective
State regulation of public utility companies." Thus, the Act attempts to
simplify the corporate structures of holding company systems to enable states
to regulate the production and distribution of energy. The Act is generally
not concerned with those types of holding companies that can indeed be
effectively regulated on the state level and provides exemptions for them in
Sections 3(a)(1)(7) and Section 3(a)(2).(8) The Act creates federal jurisdiction
to regulate those holding companies that could otherwise escape state and local
regulation, but there is no indication in the Act that it should be used to
override effective state policy.(9)
Section 8 in particular provides for the use of the Act as a
tool to further state policy with regard to combination companies within
registered holding company systems. It prohibits such companies where state
law prohibits them and implicitly allows such companies where state law and
state regulatory officials do not object. The legislative history of Section 8
clarifies this intent. In its 1935 report, the Senate Committee on Interstate
Commerce noted that the provision in Section 8 concerning combination gas and
electric companies "is concerned with competition in the field of distribution
of gas and electric energy -- a field which is essentially a question of State
policy, but which becomes a proper subject of Federal action where the
extra-State device of a holding company is used to circumvent state policy."(10)
Conversely, when the holding company is not attempting to circumvent state
policy, there does not appear to be any need for the federal government to
exercise its jurisdiction. As noted in the report of the National Power Policy
Committee on Public-Utility Holding Companies, which is attached to the Senate
report cited above, the policy of Section 8 is:
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(7) This exemption applies where the holding company and all material
utility subsidiaries are incorporated in and operate predominantly in the same
state.
(8) This exemption applies where the holding company is predominantly a
utility company whose operations do not extend beyond the state in which it is
incorporated and states contiguous thereto.
(9) Indeed, Section 21 of the Act specifically indicates that "nothing
in [the Act] shall affect . . . the jurisdiction of any other commission,
board, agency, or officer of . . . any State . . . insofar as such jurisdiction
does not conflict with any provision of [the Act]."
(10) S. Rep. No. 2796, 74th Cong., 1st Sess., pt. 1 (Report of Sen.
Wheeler from the Committee on Interstate Commerce) (the "1935 Senate Report")
at 29-30 (1935).
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Unless approval of a State commission can be obtained, the [S.E.C.]
should not permit the use of the holding-company form to combine a gas
and an electric utility servicing the same territory where local law
prohibits their combination in a single entity.
1935 Senate Report at 59. Nothing in the legislative history suggests a
congressional desire to prohibit outright all combination companies where such
approval can be obtained.
Recent changes in the competitive nature of the utility
industry eliminate the need for regulation to ensure that the management of
combination companies not emphasize one form of energy over the other. Market
forces provide customers the ability to select the form and supplier of their
energy needs, which in turn mandates that utility companies offer a range of
options to compete effectively. As the division of investment management
indicated in its recent report entitled The Regulation of Public-Utility
Holding Companies, "[T]he utility industry is evolving toward the creation of
one-source energy companies that will provide their customers with whatever
type of energy supply they want, whether electricity or gas."(11)
The Commission should reemphasize the provisions of Section 8
and the initial policy impetus of the Act to allow combination registered
holding companies to compete in the market, as long as they can be regulated
effectively on the state level. The fundamental restructuring of holding
company systems has been completed.(12) Further, the industry is undergoing
structural changes that will shift control over certain matters from utilities
to consumers able to choose services offered by competing utilities. The
Commission should again use the Act as a tool to implement state policy rather
than as a device to impose additional unneeded and burdensome protections
against evils that no longer exist and are not threatened to recur.
This re-emphasis on Section 8 fits within the overall
regulatory scheme of the Act. Section 11 is flexible and was designed to
change as the policy concerns over the regulation of utility holding companies
changed.(13) The utility industry and the regulation of that industry have
changed dramatically in recent years and it is competitive forces (the very
thing that the Act was designed to promote) that are pushing holding companies
to offer alternative forms of energy.(14) Moreover, a registered holding company
would still be required to demonstrate that any acquisition or transaction by
which it would become a combination company would not be
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(11) The Division of Investment Management, U.S. Securities and Exchange
Commission, The Regulation of Public-Utility Holding Companies (the "1995
Report") at 75-6 (1995).
(12) 1995 Report at 63 (citing the SEC Annual Report of 1952 reporting
that the simplification proceedings required under the Act were nearly
completed).
(13) Mississippi Valley Generating Co., Holding Co. Act Release No. 12794,
36 S.E.C. 159, 186 (Feb. 9, 1955) (noting that Congress intended the concept
of integration to be flexible). See Unitil Corp., supra note 2.
(14) See generally the 1995 Report for a discussion of the recent changes
in the industry and the regulation thereof.
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detrimental to the carrying out of the provisions of Section 11 of the Act. In
other words, its electric system would have to constitute an integrated gas
system and both systems would have to be capable of efficient operation. Thus,
the standards of Section 11 would still have to be met, but the application of
those standards should take into account the fundamental policy of the Act to
allow local regulations to make the threshold determination with regard to
combination companies.
Each of WP&L, South Beloit, Utilities and IPC as a combination
company is permissible pursuant to the terms of Section 8 of the Act because
the affected states are expected to approve the continued combination
activities, and each is in the public interest. Furthermore, as required by
Section 11, in addition to the fact that Applicants' electric systems
constitute an integrated electric system, the gas systems of each together will
constitute an integrated gas system as explained in detail under Item
3.A.2.d.(ii) of the Application.
With respect to Section 8, the combination of electric and gas
operations is lawful under all applicable state laws for each of the
Applicants. The use of Interstate Energy as a holding company for three
combination companies will not circumvent any state regulations by the relevant
jurisdictions. Interstate Energy has applied for approval of the Transaction
by the MPUC, PSCW and ICC regulatory commissions and will apply for approval
with the IUB, commissions which have, and will continue to have, direct
jurisdiction over the Interstate Energy system's gas utility operations located
in their respective states. Applicants expect these commissions to either
order or express approval for WP&L, South Beloit, Utilities and IPC to continue
as combination electric and gas utility companies through the retention of
WP&L's, South Beloit's, Utilities' and IPC's gas operations with Interstate
Energy as a holding company of WP&L, South Beloit, Utilities and IPC. Such
actions will reflect the recognition by these commissions that the existence of
both gas and electric systems in the Interstate Energy holding company system
will allow Interstate Energy's customers greater choice to meet their energy
needs, especially given the fact that the electric and gas systems operate in
substantially the same territory, while sharing in the synergies that result
from the Transaction.
For these reasons, the Commission should approve the retention
by WP&L, South Beloit, Utilities and IPC of their respective gas properties as
contemplated by the Transaction. No policy would be furthered by requiring
divestiture, and, indeed, state policy would be thwarted by such a requirement.
II. SECTION 11(B)(1) IS SATISFIED
Interstate Energy meets the standards for retention of the gas
operations of the Applicants pursuant to Section 11(b)(1) of the Act. Under
the A-B-C Clauses, a registered holding company is entitled to retain one or
more additional integrated public utility systems if:
(A) each of such additional systems cannot be operated as
an independent system without the loss of substantial economies which can be
secured by the retention of control by such holding company of such system;
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(B) all of such additional systems are located in one
state, adjoining states, or in a contiguous foreign country; and
(C) the continued combination of such systems under the
control of such holding company is not so large (considering the state of the
art and the area or region affected) as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation.
In fact, the Commission has held that the retention of
existing gas properties is governed by less stringent standards than the
acquisition of new gas properties.(15) It has allowed at least two registered
electric systems to retain long-standing gas utility properties without a
showing of compliance with the A-B-C clauses, subject to re-examination by the
commission when more information became available.(16)
In their Application and supporting exhibits, the Applicants
have shown that clause (A) above will be satisfied because the gas divisions of
the Applicants will all suffer substantial losses of economy if they are
separated from the Interstate Energy system and forced to operate on a
stand-alone basis. This evidence is presented in the "Analysis of the Economic
Consequences of Wisconsin Power and Light's and South Beloit Water, Gas and
Electric's Natural Gas Operations conducted by the management of WP&L, Exhibit
L-2 to the Application; the "Analysis of the Economic Impact of a Divesture of
IES Utilities Inc.'s Gas Operations" conducted by the management of Utilities,
Exhibit L-3 to the Application; and "Analysis of the Economic Impact of a
Divesture of the Gas Operations of IPC" conducted by the management of IPC.,
Exhibit L-4 to the Application. These studies are referred to collectively as
the "Gas Studies." In addition, following the transaction, Interstate Energy
will satisfy the criteria of clause (B) as its gas utility operations will be
confined to the contiguous states of Illinois, Iowa, Minnesota and Wisconsin.
Finally, the Interstate Energy gas system will not be so large as to impair
local management, efficient operation or effective regulation under clause (C).
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(15) See, e.g., Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d
523, 527-28 (D.C. Cir. 1989) (showing the more stringent standards for
acquisitions); Delmarva Power & Light Co., supra note 5 at 715 (distinguishing
between stricter standards applicable to the acquisition of new combination
properties and the mere "continued existence of a combination company which
had been in operation for thirty years"); Columbia Gas & Electric Corp., supra
note 1, at 462-63; Union Electric Co., Holding Co. Act Release No. 18368, 45
S.E.C. 489, 503-06 (Apr. 10, 1974) ("noting that acquisitions are measured
by standards more stringent than those governing retainability of existing
properties.") aff'd without op. sub nom. City of Cape Girardeau v. S.E.C.,
521 F.2d 324 (D.C. Cir. 1975); American Gas and Electric Co., Holding Co. Act
Release No. 6639, 22 S.E.C. 808, 815 (May 17, 1946).
(16) See Middle South Utilities, Inc., Holding Co. Act Release No. 11782,
35 S.E.C. 1, 14-15 (Mar. 20, 1953) (gas properties retained by New Orleans
Public Service Inc.); North American Co., supra note 3; Union Electric
Company of Missouri, Holding Co. Act Release No. 12262, 35 S.E.C. 483, 493
(Dec. 15, 1953) (retention by Union Electric Company of Missouri of gas
properties of Missouri Edison Company).
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A. THE A-B-C ANALYSIS SHOULD BE LIBERALIZED.
The Commission has since 1968 looked to the Supreme Court
decisions in NEES I, supra, and S.E.C. v. New England Electric System, 390 U.S.
207 (1968) ("NEES II") (collectively the "NEES decisions") in interpreting
clause (A) of Section 11(b). In NEES I, the Supreme Court accepted the
Commission's interpretation of the "loss of substantial economies" language of
clause (A) to require an applicant seeking to own an electric and gas utility
system to show that the additional system, if separated from the principal
system, would be incapable of independent economic operation. The Court in
NEES I accepted the Commission's then-current interpretation of clause (A),
despite earlier S.E.C. interpretations permitting the Commission to use
business judgment and expertise to apply the statutory phrase "loss of
substantial economies." In NEES II, the Court reiterated and strengthened its
earlier statement of deference to the Commission. NEES II, 390 U.S. at 219.
The Division recognized in the 1995 Report that the Commission
was no longer bound by the narrow interpretation of clause (A) under the NEES
decisions. In so doing, the Division stated:
As discussed above, the S.E.C. has generally required electric
registered holding companies that seek to own gas utility properties
to satisfy the requirements of the A-B-C clauses concerning additional
integrated systems.
In contrast, exempt holding companies have generally been permitted to
retain or acquire combination systems so long as combined ownership of
gas and electric operations is permitted by state law and is supported
by the interested regulatory authorities.
In the past, the S.E.C. has construed the A-B-C clauses narrowly to
permit retention only where the additional system, if separated from
the principal system, would be incapable of independent economic
operations. Although the Supreme Court upheld the S.E.C.'s reading,
two justices dissented, contending that the "serious impairment"
standard was at odds with the wording of the Act, had little basis in
the statutory history or aims of the Act, and could not be sustained
by agency or judicial precedent. The dissenting justices believed
that the statutory language "called for a business judgment of what
would be a significant loss."
Applicants in recent matters have argued that, in a competitive
utility environment, any loss of economies threatens a utility's
competitive position, and even a "small" loss of economies may render
a utility vulnerable to significant erosion of its competitive
position. There is a general support for a more relaxed standard. A
number of commenters emphasize that these are essentially state
issues. It does not appear that the S.E.C.'s precedent concerning
additional systems precludes the S.E.C. from relaxing its
interpretation of section 11(b)(1)(A). Indeed, the S.E.C. has
recognized that section 11 does not impose
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"rigid concepts" but rather creates a "flexible" standard designed "to
accommodate changes in the electric utility industry."
Congress, in 1935, recognized that competition in the field of
distribution of gas and electric energy is essentially a question of
state policy. The Act was intended to ensure compliance with state
law in this regard. Moreover, it appears that the utility industry is
evolving toward the creation of one-source energy companies that will
provide their customers with whatever type of energy supply they want,
whether electricity or gas. Accordingly, the Division believes it is
appropriate to reconcile the treatment of registered and exempt
companies in this regard, and so recommends that the S.E.C. permit
registered holding companies to own gas and electric utility systems
pursuant to the A-B-C clauses of section 11(b)(1), where the effected
states agree.(17)
In NEES I (and NEES II), the Court accepted the Commission's
interpretation of clause (A) as a "construction . . . well within the
permissible range given to those who are charged with the task of giving an
intricate statutory scheme practical sense and application." NEES I, 384 U.S.
at 185. However, there is strong support in Supreme Court case law to apply
the Commission's current interpretation of clause (A), based upon current
competitive facts and current policy, as stated in the 1995 Report. In Chevron
USA, Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984), the
Court outlined the parameters for changing agency interpretations of statutory
language based on policy considerations and agency expertise:
When a court reviews an agency's construction of the statute which it
administers, it is confronted with two questions. First, always, is
the question whether Congress has directly spoken to the precise
question at issue. If the intent of Congress is clear, that is the
end of the matter; for the court, as well as the agency, must give
effect to the unambiguously expressed intent of Congress. If,
however, the court determines Congress has no directly addressed the
precise question at issue, the court does not simply impose its own
construction on the statute, as would be necessary in the absence of
an administrative interpretation. Rather, if the statute is silent or
ambiguous with respect to the specific issue, the question for the
court is whether the agency's answer is based on a permissible
construction of the statute.
467 U.S. at 842-43 (citations omitted; emphasis added). Justice Scalia pointed
out that the Court's Chevron opinion clearly "announced the principle that the
courts will accept an agency's reasonable interpretation of the ambiguous terms
of a statute that the agency administers." The Honorable Antonin Scalia,
Judicial Deference to Administrative Interpretations of Law, 1989 Duke L.J.
511, 511 (1989).
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(17) 1995 Report at 74-76 (footnotes omitted).
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In the NEES 1 opinion, the Supreme Court specifically pointed
out that "[t]he phrase 'without the loss of substantial economies' is
admittedly not crystal clear." NEES 1, 384 U.S. at 185. Thus, the first prong
of the analysis under Chevron is clearly met. As Justice Scalia pointed out,
under Chevron:
the agency is free to give the statute whichever of several possible
meanings it thinks most conducive to accomplishment of the statutory
purpose. Under the latter regime, there is no apparent justification
for holding the agency to its first answer, or penalizing it for a
change of mind.
Scalia, supra, 1989 Duke L.J. at 516. Justice Scalia persuasively argues that
a primary point of Chevron is to allow agencies flexibility to change their
statutory interpretations based upon current economic (and even political)
considerations. Under Chevron, it is entirely appropriate for the Commission
to interpret clause (A) based on its current "expertise on the total
competitive situation." NEES 1, 384 U.S. at 185.
Applicants believe that the Division's recommendation would
represent sound policy by the Commission. From a policy perspective, the
Commission's historic concern underpinning New England Electric System, Holding
Co. Act Release No. 15035, 41 S.E.C. 888 (Mar. 19, 1964), and a host of
earlier decisions where the retainability of gas properties by registered
electric systems was at issue -- namely, of fostering competition between
electric and gas -- is simply no longer valid given the current "state of the
art" in the electric and gas utility industries. In the generation since the
Commission decided the NEES case, profound economic and regulatory factors have
wrought a fundamental transformation in the gas supply and electric generation
industry, rendering obsolete the Commission's earlier premises regarding the
primacy of competition between gas and electric service and the lack of
competition within electric and gas service.
In the gas area, regulatory changes have introduced
competition into what was formerly a monopoly and have expanded the
availability of non-utility "transportation-only service" as an alternative to
sales services from the local gas utility company. The WP&L Utilities and IPC
gas operations all have "open access" transportation-only service tariffs on
the file with their respective state commissions. Combination utilities
therefore have less ability than they did in 1935 to "favor" electric -- the
principal policy concern in decisions ordering the separation of gas and
electric systems -- by curtailing the availability or increasing the price of
gas.(18)
In the electric area, the Energy Policy Act of 1992 and the
Public Utility Regulatory Policies Act of 1978 have introduced competition into
the electric utility business. As the chairman of the Senate Banking Committee
stated recently:
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(18) See, e.g. NEES I. It is important to note that this issue --
basically an anti-trust issue -- was the principal concern in previous
decisions ordering the separation of gas and electric systems and clearly
is no longer applicable to the changed utility competitive environment.
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[The Act] was substantially changed by the Energy Policy Act of 1992.
That law restructured the utility industry to promote greater
competition for the benefit of Energy customers. The Energy Policy
Act of 1992 was the product of a cooperative effort on the part of the
Banking Committee and the Energy Committee to create a more
market-oriented regulatory framework for the Energy industry.
Hearing on S. 182, The Communications Act of 1994 Before the Comm. on Commerce,
Science and Transportation, 103d Cong., 2d Sess., 34-345 (1994) (Prepared
Statement of Senator Riegle) (emphasis added).
Instead of relying on the blunt instrument of competition
between gas and electric, national policy has now created direct competition
within the gas and electric utility industries. Thus, combination ownership
does not eliminate competition, since a combination utility now has competitors
for both gas and electric service. Moreover, competition is not an end in
itself, but is merely a means to the end of efficient, cost-effective service.
Since combination ownership creates efficiencies and no longer has the effect
of eliminating competition, there is no reason for the Commission to prohibit
combination ownership, at least under the circumstances presented here.
B. CLAUSE A OF SECTION 11(B)(1) IS SATISFIED.
Historically as a "guide" to determining whether lost
economies are "substantial" under Section 11(b)(1)(A), the Commission had given
consideration to four ratios, which measure the projected loss of economies as
a percentage of: (1) total gas operating revenues; (2) total gas expense or
"operating revenue deductions"; (3) gross gas income and (4) net gas income or
net gas utility operating income. Although the Commission has declined to draw
a bright-line numerical test under Section 11(b)(1)(A), it has indicated that
cost increases resulting in a 6.78% loss of operating revenues, a 9.72%
increase in operating revenue deductions, a 25.44% loss of gross gas income and
a 42.46% loss of net income would afford an "impressive basis for finding a
loss of substantial economies." Engineers Public Service Co., Holding Co. Act
Release No. 3796, 12 S.E.C. 41, 59 (Sept. 16, 1942).
As noted above, WP&L (including South Beloit), Utilities and
IPC have each prepared separate studies of their respective gas utility
operations that analyze the lost economies that their gas utility operations
would suffer upon divestiture when compared to their retention pursuant to the
Transaction. As set forth in the Gas Studies, if the gas operations of WP&L,
Utilities and IPC were operated on a stand-alone basis, lost economies from the
need to replicate services, the loss of economies of scale, the costs of
reorganization, and other factors would be immediate and substantial. In the
absence of rate relief, those lost economies would substantially injure the
shareholders of WP&L, Utilities and IPC. Further, consumers would bear much of
the burden in the form of increased prices.
As set forth in the Gas Studies, divestiture of the gas
operations of WP&L (including South Beloit), Utilities and IPC into stand-alone
companies would result in lost
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<PAGE> 156
economies of $15.558 million for WP&L, $14.205 million for Utilities and $5.048
million for IPC. The lost economies compare with gas operating revenues of
$144.000 million for WP&L (including South Beloit), $144.378 million for
Utilities and $43.669 million for IPC; gas operating revenue deductions of
$133.242 million for WP&L (including South Beloit), $130.360 million for
Utilities and $34.148 million for IPC; gas gross income of $19.199 million for
WP&L (including South Beloit), $14.018 million for Utilities and $9.520 million
for IPC; and gas net income of $10.758 million for WP&L (including South
Beloit), $9.752 million for Utilities and $5.799 million for IPC.
On a percentage basis, the lost economies amount to 144.62% of
1995 gas net income in the case of WP&L, 145.66% of gas net income in the case
of Utilities and 87.06% of gas net income in the case of IPC -- far in excess
of the utility operations, and the 30% loss in New England Electric System that
the Commission has described as the highest loss of net income in any past
divestiture order.(19) As a percentage of 1995 gas operating revenues, these
lost economies described in the Gas Studies amount to 10.80% in the case of
WP&L, 9.84% in the case of Utilities and 11.56% in the case of IPC -- losses
substantially higher than the losses in any past divestiture order.20 As a
percentage of 1995 gas operating revenue deductions, the lost economies
described in the Gas Studies would amount to 11.68% in the case of WP&L, 10.90%
in the case of Utilities, and 13.13% in the case of IPC, higher than the losses
in any past divestiture order. As a percentage of 1995 gross income, the lost
economies described in the Gas Studies amount to 81.04% in the case of WP&L,
101.33% in the case of Utilities and 53.03% in the case of IPC, far in excess
of the highest loss of gross income in any divestiture order.
In order to recover these lost economies, WP&L's gas division
would need to increase rate revenue by $14.024 million or 9.74%. Utilities
would have to increase revenues by $14.205 million or 9.84%. IPC would have to
increase rate revenue by $5.049 million or 11.56%. These increases in rate
revenues would have a direct and immediate negative impact
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(19) See Unitil Corp., supra note 2, at 567 n. 42 ("The Commission has
required divestment where the anticipated loss of income of the stand-alone
company was approximately 30% . . ." or "29.9% of net income before taxes,"
citing S.E.C. v. New England Electric System, 390 U.S. 214 n.11 (1968)).
(20) The highest loss of operating revenues in any case ordering
divestiture is commonly said to be 6.58%. See, e.g., Unitil Corp., supra
note 2, at 567 ("[o]f cases in which the Commission has required divestment,
the highest estimated loss of operating revenues of a stand-alone company was
6.58% . . .," citing Engineers Public Service Co., supra note 2). In fact,
however, the 6.58% ratio is not cited in Engineers and is a post hoc
calculation derived from claimed cost increases which the Commission had
found were "overstated" and "doubtful" in a number of respects. Engineers
Public Service Co., supra note 2 at 80-81. See also Philadelphia Co., supra
note 3, at 51 n.26 (June 1, 1949) (Engineers' "estimate . . . of increased
expenses . . . was overstated in several respects."). While the Commission
made no finding as to actual cost increases or ratio for the Gulf States gas
properties, it found that Engineers' estimate of divestiture-related ratios
cost increases or ratio for certain sister gas properties in Virginia were
also overstated and cut them and the resulting ratios in half. Engineers
Public Service Co., supra, note 2, at 60. Disregarding the 6.58% ratio
incorrectly attributed to the Engineers/Gulf State case, the highest loss of
operating revenues in any past divestiture order was 5.8%. See table of
ratios in New England Electric System, Holding Co. Act Release No. 15035, 41
S.E.C. 888, app. at 905 (Mar. 19, 1964) (The North American Company).
This figure would be even lower if adjusted for the increases in purchased
gas costs since the 1940s.
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<PAGE> 157
on the rates charged to customers for gas services. In addition, the customers
of WP&L and Utilities gas utility businesses who are also customers of their
respective electric utility businesses will experience a doubling of their
postage costs to pay separate bills. The total estimated increase in such
postage costs in the aggregate is more than $900,000 for customers of the three
companies.
Divestiture would also result in the loss to consumers of the
economies offered by the "energy services" approach of the Applicants to the
utility business. While the losses cannot now be fully quantified, they are
substantial. At the center of the energy services company concept is the idea
that providing gas and electric products is only the start of the utility's
job. In addition, the utility must provide enhanced service to the consumer by
providing an entire package of both energy products and services. In this
area, WP&L's, Utilities' and IPC's efforts are part of a trend by utilities to
organize themselves as energy service companies, that is, as providers of a
total package of energy services rather than merely suppliers of gas and
electric products. The goal of an energy service company is to retain its
current customers and obtain new customers in an increasingly competitive
environment by meeting customers' needs better than the competition. An energy
service company can provide the customer with a low cost energy (i.e., gas,
electricity, or conservation) option without inefficient subsidies.
C. CLAUSES (B) AND (C) OF SECTION 11(B)(1) ARE SATISFIED.
The remaining requirements of Section 11(b)(1) are met because
the gas operations of WP&L, Utilities and IPC are located in adjoining states
Wisconsin, Minnesota, Iowa and Illinois. Further, the continued combination of
the gas operations under Interstate Energy is not so large, considering the
state of the art and the area or region affected, as to impair the advantages
of localized management, efficient operation or the effectiveness of
regulation. The gas systems are confined to a relatively small area and are
not as large as other gas systems in the same area. Moreover, as the
Commission has recognized elsewhere, the determinative consideration is not
size alone or size in an absolute sense, either big or small, but size in
relation to its effect, if any, on legalized management, efficient operation
and effective regulation.(21) The Commission must "exercise its best judgment as
to the maximum size of a holding company in a particular area, considering the
state of the art and the area or region affected.(22) From these perspectives,
it is clear that the continued combination of the gas operations under
Interstate Energy is not too large.
With respect to localized management, management will remain
geographically close to each of the three gas operations, thereby preserving
the advantages of localized management. WP&L (and South Beloit), Utilities and
IPC will be operated as separate subsidiaries of Interstate Energy for at least
three years after the consummation of the
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(21) See, e.g., Energy Corp., Holding Co. Act Release No. 25952, 55
S.E.C. Docket 2035, 2040 (Dec. 17, 1993); Centerior Energy Corp., Holding
Co. Act Release No. 24073, 35 S.E.C. Docket 769 771 (Apr. 29, 1986); American
Electric Power Co., Holding Co. Act Release No. 20633, 15 S.E.C. Docket 375,
383-4 (July 21, 1978).
(22) American Electric Power Co., supra note 23, at 381.
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Transaction and will continue to be headquartered in Madison, Cedar Rapids and
Dubuque, respectively. From the standpoint of regulatory effectiveness, each
gas operation is organized as a separate corporation and will continue to be
subject to regulation by the respective state in which such gas operation is
located, which will ensure the continued effectiveness of state regulation.
IPC already operates a multi- jurisdictional (Iowa, Illinois and Minnesota) gas
utility, as does WP&L directly and through its subsidiary, South Beloit
(Wisconsin and Illinois). Several other gas utilities in the region serve
customers in multiple states. Accordingly, the regulating agencies in the four
state region currently regulate multi-jurisdictional gas utilities and will be
able to effectively regulate the gas utility operations of Interstate Energy.
In addition, it is expected that each relevant state regulatory authority will
indicate its support for or order the retention by Interstate Energy of the gas
system(s) located in such state, thereby indicating that state regulating
authorities can continue to regulate such system effectively. Finally, as
detailed above, the gas operations of WP&L (including South Beloit), Utilities
and IPC enjoy substantial economies as part of the WPLH, IES and IPC systems,
respectively, and will realize additional economies as a result of the
Transaction as part of the Interstate Energy system. Far from impairing the
advantages of efficient operation, the continued combination of the gas
operations under Interstate Energy will facilitate and enhance the efficiency
of gas operations.
CONCLUSION
For the reasons set forth above, and in Interstate Energy's
Application and supporting exhibits, it is respectfully submitted that the
Commission should allow Interstate Energy to retain the gas utility operations
of WP&L, Utilities and IPC following the consummation of the Transaction and
the registration of Interstate Energy as a holding company under the Act.
Foley & Lardner
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EXHIBIT P
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35- )
FILING UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
JULY , 1996
WPL HOLDINGS, INC.
IES INDUSTRIES INC.
INTERSTATE POWER COMPANY
WPL Holdings, Inc. ("WPLH"), 222 West Washington Avenue,
Madison, Wisconsin 53703, a Wisconsin holding company exempt from regulation by
the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to
Section 3(a)(1) of the Act and by order of the Commission; IES Industries Inc.
("IES"), 200 First Street S.E., Cedar Rapids, Iowa 52401, an Iowa holding
company exempt from regulation by the Commission under the Act (except for
Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and Rule 2
thereunder; and Interstate Power Company ("IPC"), 1000 Main Street, Dubuque,
Iowa 52004, an Iowa combination electric and gas public-utility company, have
jointly filed an application-declaration under sections 4, 5, 6(a), 7, 8,
9(a)(1), 9(a)(2), 10, 11(b), 13, 13(b)(1) and 21 and rules 42, 80-92, 93 and 94
thereunder.
The application-declaration seeks approval relating to the
proposed combination (the "Transaction") of WPLH, IES and IPC, pursuant to
which IES' utility subsidiary, IES Utilities Inc. ("Utilities"), and IPC will
become subsidiaries of WPLH. WPLH will be renamed Interstate Energy
Corporation ("Interstate Energy") at or prior to such time. Following the
consummation of the Transaction, Interstate Energy will register with the
Commission as a holding company under the Act.
The Applicants also seek approvals in connection with (i) the
transfer of certain of Interstate Energy's non-utility interests to a
subsidiary of Interstate Energy ("Interstate Hold") which will be formed prior
to consummation of the Transaction to serve as a holding company for
substantially all of Interstate Energy's non-utility subsidiaries under Section
9(a)(1) of the Act; (ii) the establishment of Interstate Services, Inc.
("Interstate Services") as a subsidiary service company of Interstate Energy in
accordance with the provisions of Rule 88 of the Act; (iii) the service
agreement and non-utility service agreement as a basis for Interstate Services
to comply with Section 13 of the Act and the Commission's rules thereunder;
(iv) the retention by Interstate Energy of the gas properties of its utility
subsidiaries and the continuation of such subsidiaries as combination gas and
electric utilities; (v) the retention by Interstate Energy of the non-utility
businesses of WPLH, IES and IPC and of the non-utility affiliates of WPLH, IES
and IPC; (vi) all outstanding intra-system obligations and guarantees; (vii)
the issuance of shares of Interstate Energy common stock in connection with the
Transaction; (viii) authority, through a period ending five years after the
date of the Commission's Order approving the matters requested hereby, for
Interstate Energy to issue (and/or acquire in open-market transactions) up to
11 million shares of Interstate Energy common stock under dividend reinvestment
and stock- based management incentive and employee benefit plans; and (ix)
exemption from the at cost standards of certain transactions.
WPLH, which will change its name to Interstate Energy
Corporation at or prior to the Transaction, has one direct public utility
subsidiary, Wisconsin Power & Light Company ("WP&L"). WP&L, in addition, owns
all of the issued and outstanding common stock of South Beloit Water, Gas and
Electric Company ("South Beloit"), and 33-1/3% of Wisconsin River Power
Company, each public
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utility companies. WP&L is engaged principally in generating, purchasing,
distributing and selling electric energy in 35 counties in southern and central
Wisconsin. As of December 31, 1995, WP&L furnished retail electric service to
approximately 370,000 customers in 663 cities, villages and towns, and
wholesale service to 27 municipal utilities, one privately-owned utility, three
rural electric cooperatives and the Wisconsin Public Power Incorporated SYSTEM,
which provides retail service to nine communities. WP&L also purchases,
distributes and sells natural gas to retail customers in 22 counties in
southern and central Wisconsin; it also supplies water to customers in two
Wisconsin communities, including the cities of Ripon and Beloit and areas
adjacent thereto. As of December 31, 1995, WP&L provided natural gas to
approximately 141,000 customers and water to 31,620 customers. South Beloit
supplies retail electric, gas and water service to customers in South Beloit
and Rockton, Illinois and the rural areas adjacent to such cities. As of
December 31, 1995, South Beloit provided electric utility service to 7,005
customers, gas utility service to 5,128 customers, and water service to 1,598
customers.
WPLH common stock is listed on the New York Stock Exchange
("NYSE"), the Boston Stock Exchange ("BSE"), the Chicago Stock Exchange ("CSE")
and the Pacific Stock Exchange ("PSE"). As of July 10, 1996, there were
30,795,260 shares of WPLH common stock outstanding. WPLH has no shares of
preferred stock outstanding. As of July 10, 1996, there were 1,049,225 shares
of WP&L preferred stock outstanding. The rights of holders of WP&L's
outstanding preferred stock will not be impacted by the Transaction. WPLH's
principal executive office is located at 222 West Washington Avenue, Madison,
Wisconsin 53703. For the year ended December 31, 1995, WPLH's operating
revenues on a consolidated basis were approximately $811 million, of which
approximately $550 million were derived from electric operations, $139 million
from gas operations and $122 million from other operations. Consolidated
assets of WPLH and its subsidiaries at December 31, 1995 were approximately
$1.875 billion, consisting of approximately $1.23 billion in identifiable
electric utility property, plant and equipment; approximately $250 million in
identifiable gas utility property, plant and equipment; and approximately $395
million in other corporate assets.
WPLH has one direct non-utility subsidiary, Heartland
Development Corporation ("HDC"). HDC is engaged in environmental consulting
services, affordable multi-family housing, and various energy-related services
through its majority owned subsidiary, Heartland Environmental Holding Company,
and its wholly owned subsidiaries, Heartland Properties, Inc., Capital Square
Financial Corp., Entec, Inc. and Heartland Energy Group, Inc.
IES has one public utility subsidiary, Utilities. Utilities
is engaged primarily in providing electric energy, natural gas and, to a
limited extent, steam used for heating and industrial purposes in Cedar Rapids,
Iowa. As of December 31, 1995, Utilities provided retail electric service to
approximately 333,000 customers in 525 communities and natural gas to 174,000
retail customers in 222 communities across Iowa and provided wholesale electric
service to 30 Iowa municipalities. For the year ended December 31, 1995, IES'
operating revenues on a consolidated basis were approximately $851 million of
which approximately $560 million were derived from electric operations, $190
million from gas operations and $100 million from other operations.
Consolidated assets of IES and its subsidiaries at December 31, 1995 were
approximately $1.986 billion, consisting of approximately $1.396 billion in
identifiable electric utility property, plant and equipment; approximately $199
million in identifiable gas utility property, plant and equipment; and
approximately $391 million in other corporate assets.
IES common stock is listed on the NYSE, the BSE, the CSE and
the PSE. As of July 10, 1996, there were 29,923,233 shares of IES common stock
outstanding. IES has no shares of preferred stock outstanding. As of such
date there were 120,000 shares of Utilities 4.30% Preferred Stock,
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146,354 shares of Utilities 4.80% Preferred Stock and 100,000 shares of
Utilities 6.10% Preferred Stock outstanding. The principal executive office of
IES and Utilities is located at IES Tower, 200 First Street, S.E., Cedar
Rapids, Iowa 52401.
IES wholly owns all the outstanding capital stock of IES
Diversified Inc. ("Diversified"), which was formed in 1992 as a holding company
for substantially all of IES' non-utility businesses. Diversified has four
direct, wholly-owned subsidiaries, IES Transportation Inc. ("Transportation"),
IES Energy Inc. ("Energy"), IES Investments Inc. ("Investments") and IES
International Inc. ("International"). Transportation is a holding company for
IES' transportation subsidiaries. Energy is a holding company for IES' non-
regulated energy subsidiaries. Investments is a holding company for IES'
telecommunications, real estate and other miscellaneous investments.
International is a holding company for IES' foreign utility investments.
IPC is engaged primarily in generating, purchasing,
transmitting, distributing and selling electric energy in portions of 25
counties in northern and northeastern Iowa, 22 counties in southern Minnesota
and four counties in northwestern Illinois. IPC is also engaged in the
distribution and sale of natural gas in 41 communities, including: Albert Lea,
Minnesota; Clinton, Mason City and Clear Lake, Iowa; Fulton and Savannah,
Illinois and a number of smaller Minnesota, Iowa and Illinois communities. As
of December 31, 1995, IPC provided electric services to 163,344 retail
customers and 19 full and partial requirements wholesale customers, and natural
gas to 48,823 retail customers. In addition, IPC engages in the transportation
of natural gas within Iowa, Minnesota and in interstate commerce. For the year
ended December 31, 1995, IPC's operating revenues were approximately $319
million, of which approximately $275 million were derived from electric
operations and $44 million from gas operations. Assets of IPC at December 31,
1995 were approximately $634 million, consisting of approximately $459 million
in identifiable net electric utility property, plant and equipment;
approximately $39 million in identifiable net gas utility property, plant and
equipment; and approximately $135 million in other corporate assets.
IPC common stock is listed on the NYSE, the CSE and the PSE.
As of July 10, 1996, there were 9,595,028 shares of IPC common stock and
761,381 shares of IPC preferred stock outstanding. The principal executive
office of IPC is located at 1000 Main Street Dubuque, Iowa 52004-0769.
IPC has one direct wholly-owned non-utility subsidiary, IPC
Development, which acquires and disposes of real estate on behalf of IPC and
holds certain other non-utility investments of IPC. IPC Development's real
estate operations consist principally of buying homes from IPC employees who
have been relocated by the company and purchasing real estate intended for
future use in IPC's public utility operations.
Pursuant to an Agreement and Plan of Merger dated as of
November 10, 1995, as amended (together with a related Plan of Merger, the
"Merger Agreement") and subject to possible implementation of an alternative
structure described below, (i) IES will be merged with and into WPLH, with WPLH
as the surviving corporation (the "IES Merger"), and (ii) WPLH Acquisition Co.,
a wholly-owned subsidiary of WPLH, will be merged with and into IPC (the "IPC
Direct Merger"), which will result in IPC becoming a wholly-owned subsidiary of
WPLH. Upon or prior to consummation of the transactions described in the
Merger Agreement, WPLH will be renamed Interstate Energy Corporation.
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The Merger Agreement provides, however, that if, prior to the
consummation of the transactions described above, the companies determine that
certain Wisconsin regulatory requirements mandate that the utility subsidiaries
of Interstate Energy be Wisconsin corporations, the transactions will be
consummated in a manner designed to comply with such regulatory requirements.
In that event, the IES Merger will be effected as described above and Utilities
will be merged with and into IES Utilities Inc., a wholly-owned subsidiary of
IES newly incorporated under the laws of the State of Wisconsin ("New
Utilities") (the "Utilities Reincorporation Merger"), with New Utilities
continuing as the surviving corporation. In addition, the merger involving IPC
will be reconstituted to provide for: (i) the merger of IPC with and into
Interstate Power Company, a wholly-owned subsidiary of IPC newly incorporated
under the laws of the State of Wisconsin ("New IPC") (the "IPC Reincorporation
Merger") and (ii) the merger of Acquisition with and into New IPC (the "IPC
Merger"), which will result in New IPC becoming a wholly-owned subsidiary of
Interstate Energy. In such event immediately prior to the Utilities
Reincorporation Merger, WP&L will transfer to New Utilities the assets
necessary to provide water utility services in and adjacent to the City of
Beloit, Wisconsin, for Wisconsin regulatory reasons. Similarly, immediately
prior to the IPC Reincorporation Merger, WP&L will transfer to New IPC the
assets necessary to provide water utility services in and adjacent to the City
of Ripon, Wisconsin, for Wisconsin regulatory reasons.
As a result of either (i) the IES Merger and the IPC Direct
Merger or (ii) the Utilities Reincorporation Merger, the IPC Reincorporation
Merger and the IPC Merger, Utilities or New Utilities and IPC or New IPC, as
applicable, will become operating utility subsidiaries of Interstate Energy,
and WPLH's existing operating utility subsidiary, WP&L, will remain a
subsidiary of Interstate Energy. Accordingly, upon consummation of the
Transaction, Interstate Energy will own three combination electric and gas
public utility companies.
Upon consummation of the Transaction, Interstate Services will
serve as a wholly-owned service company subsidiary of Interstate Energy and
certain of the non-utility subsidiaries of WPLH and IES will become
subsidiaries of Interstate Hold, which will serve as a holding company for
substantially all of the non-utility subsidiaries of, and will be wholly-owned
by, Interstate Energy. Applicants are also requesting approval of the terms of
(1) the Service Agreement among Interstate Services and the operating utility
subsidiaries of Interstate Energy and (2) the Non-Utility Service Agreement
between Interstate Services and the non-utility subsidiaries of Interstate
Energy.
The common shareholders of IES and IPC will receive shares of
Interstate Energy common stock in exchange for their shares of IES and IPC
common stock, respectively, and, thus, will become common shareholders of
Interstate Energy. Each share of IES common stock will be converted into the
right to receive 1.01 shares of Interstate Energy common stock and each share
of IPC common stock will be converted into the right to receive 1.11 shares of
Interstate Energy common stock. If the Utilities Reincorporation Merger and
the IPC Reincorporation Merger (collectively, the "Reincorporation Mergers")
are effected in order to comply with Wisconsin regulatory requirements as
described above, then it is anticipated that each share of cumulative preferred
stock, $50 par value, of Utilities ("Utilities Preferred Stock") currently
outstanding will be redeemed by Utilities prior to consummation of the
Utilities Reincorporation Merger, and each share of preferred stock, $50 par
value, of IPC ("IPC Preferred Stock") (other than shares held by IPC preferred
stockholders who perfect dissenter's rights under applicable state law ("IPC
Dissenting Shares")) will be converted into one share of preferred stock, $50
par value, of New IPC ("New IPC Preferred Stock") with terms (including
dividend rates) and designations substantially identical to those of IPC
Preferred Stock. If the Reincorporation Mergers are not effected, the
Transaction will have no effect on the shares of Utilities Preferred Stock and
IPC
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Preferred Stock issued and outstanding at the time of the consummation of the
Transaction, each series of which and each share of which will remain unchanged
(other than IPC Dissenting Shares).
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
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