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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5 TO FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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
(Name of companies filing this statement and address of principal executive
office)
None
(Name of top registered holding company, parent of each applicant or declarant)
Lee Liu Michael R. Chase Erroll B. Davis, Jr.
Chairman of the Board & President and Chief President and
Chief Executive Officer 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
(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:
Barbara J. Swan, Esq. Stephen W. Southwick, Esq. Kent Ragsdale, Esq.
Vice President and General Vice President, General Staff Counsel
Counsel Counsel & Secretary Interstate Power Company
Wisconsin Power and Light IES Industries Inc. 1000 Main Street
Company 200 First Street S.E. P.O. Box 769
222 West Washington Avenue Cedar Rapids, Iowa 52401 Dubuque, Iowa
Madison, Wisconsin 52004-0769
53703-0192
M. Douglas Dunn, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza New York, New York 10005
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Page
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Item 1. Description of Proposed Transaction ................................ 4
A. Introduction .................................................... 4
1. General Request .............................................. 4
2. Overview of the Transaction .................................. 5
B. Description of the Parties to the Transaction ................... 6
1. General Description .......................................... 6
a. WPLH (to be renamed Interstate Energy Corporation) and its
Subsidiaries .............................................. 6
i. WPLH ................................................. 6
ii. Acquisition .......................................... 8
iii. Interstate Services .................................. 8
iv. New Interstate Energy Non-Utility Subholding Company . 8
b. IES ....................................................... 8
c. IPC ....................................................... 9
2. Description of Energy Sales and Facilities ................... 10
a. WP&L ......................................................... 10
i. Energy Sales ............................................ 10
ii. Electric Generating Facilities and Resources ............ 10
iii. Electric Transmission Facilities ........................ 11
iv. Gas Facilities .......................................... 11
v. Other ................................................... 12
b. Utilities ................................................... 12
i. Energy Sales ............................................ 12
ii. Electric Generating Facilities and Resources ............ 12
iii. Electric Transmission Facilities ........................ 13
iv. Gas Facilities .......................................... 13
v. Other ................................................... 13
c. IPC ......................................................... 13
i. Energy Sales ............................................ 13
ii. Electric Generating Facilities and Resources ............ 13
iii. Electric Transmission Facilities ........................ 14
iv. Gas Facilities .......................................... 14
v. Other ................................................... 14
3. Electric Coordination ........................................ 15
4. Gas Coordination ............................................. 18
5. Non-Utility Interests of WPLH, IES and IPC ................... 20
a. WPLH ...................................................... 20
b. IES ....................................................... 20
c. IPC ....................................................... 20
C. Description of Transaction and Statement as to Consideration ............ 20
1. Background and Negotiations Leading to the Proposed Transaction ...... 20
2. Merger Agreement ..................................................... 24
3. Management of Interstate Energy Following the Merger ................. 24
D. Dividend Reinvestment Plan, Long-Term Equity Incentive Plan and other
Employee Benefit Plans. ................................................. 25
1. Dividend Reinvestment Plan ........................................... 25
a. Purpose of the DRIP and Eligibility of Participants ............... 25
b. Sources of Common Stock and Use of Proceeds ....................... 25
2. Long-Term Equity Incentive Plan ...................................... 26
3. Other Stock-Based Employee Benefit Plans ............................. 28
E. Rights Agreement ........................................................ 29
Item 2. Fees, Commissions and Expenses ..................................... 30
Item 3. Applicable Statutory Provisions .................................... 30
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A. Transaction ..................................................... 31
1. Section 10(b) ................................................ 32
a. Section 10(b)(1) .......................................... 32
i. Interlocking Relationships ............................ 32
ii. Concentration of Control .............................. 32
b. Section 10(b)(2) .......................................... 34
i. Fairness of Consideration ............................. 34
ii. Reasonableness of Fees ................................ 35
c. Section 10(b)(3) .......................................... 36
2. Section 10(c) ................................................ 37
a. Section 10(c)(1) .......................................... 37
i. Retention of Gas Operations ........................... 38
ii. Retention of Other Businesses ......................... 47
b. Section 10(c)(2) .......................................... 49
i. Efficiencies and Economies ............................ 49
ii. Integrated Public Utility System ...................... 51
I. Electric System ................................... 51
II. Gas Utility System ................................ 56
3. Section 10(f) ................................................ 57
4. Other Applicable Provisions - Sections 6, 7, 9(a)(1) and 12 .. 58
B. Intra-system Financing .......................................... 58
C. Interstate Services ............................................. 59
D. Other Services .................................................. 62
Item 4. Regulatory Approvals ............................................... 63
A. Antitrust ....................................................... 63
B. Federal Power Act ............................................... 63
C. Atomic Energy Act ............................................... 64
D. State Public Utility Regulation ................................. 64
Item 5. Procedure .......................................................... 65
Item 6. Exhibits and Financial Statements .................................. 65
A. Exhibits ........................................................ 65
B. Financial Statements ............................................ 67
Item 7. Information as to Environmental Effects ............................ 68
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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. Despite the passage of time since the original estimate of synergies,
WPLH, IES and IPC are still confident that such savings can be realized over the
period.
The Transaction was approved by the shareholders of WPLH and IPC at their
respective meetings held on September 5, 1996, and based on preliminary
tabulations, was approved by the shareholders of IES at its meeting held on
September 5, 1996. WPLH, IES and IPC submitted 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") and received orders
authorizing the companies to proceed with the transaction. The Orders of the
PSCW, IUB, MPUC and FERC were filed as Exhibits O-4, O-5, O-6 and N-3,
respectively. 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 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
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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"), (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"), 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 alternative structure for consummating the mergers as
contemplated by the Merger Agreement will not be utilized by the parties because
the PSCW issued a final order determining that the reincorporation mergers
provided for in such alternative structure were not required.
As a result of the IES Merger and the IPC Direct Merger, Utilities and IPC
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.
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 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. The Transaction will have no effect on the shares of cumulative
preferred stock, $50 par value, of Utilities ("Utilities Preferred Stock") or
the shares of preferred stock, $50 par value, of IPC ("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.
A. Antitrust. The Applicants fully satisfied the requirements under the
HSR Act on July 7, 1996. However, because the Applicants did not consummate the
Transaction within one year of that date, the Applicants were obliged to
re-notify the DOJ and FTC of the proposed Transaction. The Applicants
resubmitted the necessary filings under the HSR Act on September 3, 1997. The
HSR Act imposes a 30-day waiting period for the consummation of each merger
comprising the Transaction subject to the HSR Act's prenotification requirement.
The Applicants, however, requested and were granted early termination of that
waiting period by the FTC on September 12, 1997.
B. Federal Power Act. The Administrative Law Judge presiding over the FERC
proceeding issued his Initial Decision on Rate and Merger Issues in Docket Nos
EC96-13-000, ER96-1236-000 and ER96-2560-000 approving the Transaction, subject
to conditions, on July 3, 1997. The Initial FERC Decision was subject to FERC
review; the subsequent FERC order, Opinion No. 419, approving the transaction,
was issued on November 12, 1997.
C. Atomic Energy Act. The NRC approved the Transaction relative to the
Duane Arnold Energy Center on August 28, 1997.
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Pursuant to the Order, parties had until October 6, 1997 to request a hearing on
the Order; no such hearing was requested.
D. State Public Utility Regulation. The MPUC approved the Transaction in
Minnesota Public Utilities Commission Opinion and Order at Docket No. E,
6-100/PA-96-184 (March 24, 1997). The ICC approved the Transaction in Illinois
Commerce Commission Opinion and Order in Matter No. 96-1022 (May 7, 1997) (filed
as Exhibits 0-3- (a) and 0-4-(a)). The IUB approved the Transaction at Docket
No. SPU-96-6 on September 16, 1997 (filed as Exhibit 0-5-(a)). The PSCW, in an
Order relating to Docket No. 6680-UM 100, as effective November 6, 1997,
approved the merger subject to conditions (filed as Exhibit 0-6-(a)).
Pursuant to the Applicant's agreement with the PSCW and in response to the
PSCW Order effective November 6, 1997, the Applicants hereby request that the
Commission include in any order approving IEC as a registered holding company:
Approval of the Application in no way precludes the Public Service
Commission of Wisconsin, the Iowa Utilities Board, the Minnesota Utility
Commission, the Illinois Commerce Commission or any other state regulatory
authority from scrutinizing and disallowing the pass through of costs and
rates for services rendered to customers of the client companies. It is
the SEC's intention that each state commission having jurisdiction over a
client company will retain the right to review and disallow costs of
services provided to a client company by Interstate Services, Inc., that
may be subject to recovery in rates.
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 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 September 30, 1997, WP&L furnished
retail electric service to approximately 384,000 customers in 615 cities,
villages and towns, and wholesale service to 24 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 September 30, 1997, WP&L provided
natural gas to approximately 148,000 customers and water to 31,910 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 September 30, 1997, South Beloit provided electric utility service to
7,259 customers, gas utility service to 5,741 customers, and water service to
1,722 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
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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.
Exhibit M-5 describes the non-utility businesses of WPLH which are held by
its subsidiary Heartland Development Corporation, a Wisconsin corporation
("HDC"). For the year ended September 30, 1997, approximately 15% of WPLH's
consolidated operating revenues were derived from its non-utility investments.
As of September 30, 1997, less than 12% 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 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). 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 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 September 30, 1997, there were 30,788,593 shares of WPLH Common
Stock outstanding. WPLH has no shares of preferred stock outstanding. As of
September 30, 1997, 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 September 30, 1997, WPLH's operating revenues on a
consolidated basis were approximately $934 million, of which approximately $626
million were derived from electric operations, $164 million from gas operations
and $145 million from other operations. Consolidated assets of WPLH and its
subsidiaries at December 31, 1996 were approximately $1.901 billion, consisting
of approximately $1.22 billion in identifiable electric utility property, plant
and equipment; approximately $262 million in identifiable gas utility property,
plant and equipment; and approximately $419 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
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and WP&L for the year ended December 31, 1996, which are hereby incorporated by
reference and Quarterly Reports on Form 10-Q of WPLH and WP&L for the quarter
ended September 30, 1997 which are hereby incorporated by reference.
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
Interstate Services was incorporated in Iowa 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 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-6. 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-7. The Interstate
Services Policy and Procedures Manual is filed as Exhibit D-8.
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, 1996 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
September 30, 1997, Utilities provided retail electric service to approximately
338,000 customers in 525 communities and natural gas to 175,000 retail customers
in 222 communities across Iowa and provided wholesale electric service to 31
Iowa municipalities. A map of Utilities' service territory is attached as
Exhibit E-2.
Utilities is subject to regulation as a public utility by the IUB asto 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
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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 Exhibit M-5 hereto. 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 Exhibit M-5 hereto.
For the year ended September 30, 1997, approximately 17% of IES' consolidated
operating revenues were derived from its non-utility investments. As of
September 30, 1997, approximately 30% of IES' consolidated assets were invested
in non-utility businesses.
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 September 30, 1997, there were
30,467,739 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, 146,406 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.
For the year ended September 30, 1997 IES' operating revenues on a
consolidated basis were approximately $973 million, of which approximately $598
million were derived from electric operations, $238 million from gas operations
and $137 million from other operations. Consolidated assets of IES and its
subsidiaries at December 31, 1996 were approximately $2.126 billion consisting
of approximately $1.438 billion in identifiable electric utility property, plant
and equipment, approximately $206 million in identifiable gas utility property,
plant and equipment and approximately $482 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, 1996, which are hereby incorporated by reference and the
Quarterly Reports on Form 10-Q of IES and Utilities for the quarter ended
September 30, 1997, which are hereby incorporated by reference.
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 September 30, 1997, IPC provided electric service to 165,000 retail customers
and 11 full and partial requirements wholesale customers, and natural gas to
49,000 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 September 30, 1997, 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.
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 September 30, 1997, there were
9,751,076 shares of IPC Common Stock and 761,381 shares of IPC Preferred Stock
outstanding. If
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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 September 30, 1997, IPC's operating revenues were
approximately $328 million, of which approximately $275 million were derived
from electric operations and $53 million from gas operations. Assets of IPC at
December 31, 1996 were approximately $639 million, consisting of approximately
$453 million in identifiable net electric utility property, plant and equipment,
approximately $42 million in identifiable net gas utility property, plant and
equipment and approximately $144 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, 1996, which is hereby
incorporated by reference and IPC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, which is hereby incorporated by reference.
2. Description of Energy Sales and Facilities
a. WP&L
i. Energy Sales
For the year ended September 30, 1997, 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:
WP&L
Kwh of electric energy sold........ 14,633,354,000
Mcf of gas distributed at retail... 26,961,000
South Beloit
Kwh of electric energy sold........ 208,140,000
Mcf of gas distributed at retail... 875,000
ii. Electric Generating Facilities and Resources
As of December 31, 1996, WP&L had a total net generating capability of
approximately 2,072 MW available from the following units:
WP&L's Share of
Name and Location Major Fuel Nameplate Generating
of Station Type Capacity (MW)
- ------------------------------------------ ----------- ---------------------
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 50
Prairie du Sac: Prairie du Sac, Wisconsin Hydro 29
Wisconsin River Power Co.: Petenwell, Hydro 13 *****
Wisconsin
Kilbourne: Wisconsin Dells, Wisconsin Hydro 10
Janesville: Janesville, Wisconsin Hydro 1
Shawano: Shawano, Wisconsin Hydro 1
- ----------------------
* 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
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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.
Together, WP&L and South Beloit purchased approximately 30% of the total
electric system energy input for 1996.
WP&L's 1997 summer peak load, which occurred on July 16, 1997, was 2,253
MW and its 1997 winter peak load, which occurred on November 16, 1997, was 1,890
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, 1996, the combined energy (Kwh) production of WP&L and South Beloit
was produced 84.0% by coal-fired generation, 12.7% by nuclear generation, 2.4%
by hydroelectric generation and 0.9% from other generation. For the year ended
December 31, 1996, approximately 58.8% of the combined Kwh sales of WP&L and
South Beloit was obtained from coal-fired generation, approximately 8.8% from
nuclear generation, 30.4% from purchases and approximately 2.0% from renewable
resources.
iii. Electric Transmission Facilities
WP&L's transmission system is located entirely within the State of
Wisconsin. As of December 31, 1996, WP&L's electric transmission system
consisted of approximately 1,788 circuit miles of 69 kV overhead lines; 2
circuit miles of 69 kV underground lines; 739 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, 1996, South Beloit owned a 69 kV overhead transmission
line segment which is approximately 13.72 miles in length and a 345 kV overhead
line segment which is approximately .27 miles in length.
iv. Gas Facilities
As of September 30, 1997, WP&L provided natural gas service at retail to
approximately 148,000 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.
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, 1996 consisted chiefly of
approximately 3,112 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, 1996 consisted chiefly of
approximately 103 miles of distribution/ transmission
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mains, ranging in size from 0.50 to 8 inches, and related equipment.
v. Other
WP&L also owns at December 31, 1996 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, 332 hydrants and 39
miles of distribution pipes and related equipment and serves approximately 5,387
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 26,220 customers. 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, 155 hydrants
and 26 miles of distribution pipes and related equipment and serves
approximately 1,658 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.
b. Utilities
i. Energy Sales
For the year ended September 30, 1997, 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............ 10,756,306,000
Mcf of gas distributed at retail....... 40,148,000
ii. Electric Generating Facilities and Resources
At December 31, 1996 Utilities had a total net generating capability of
approximately 1,886 MW from the following units:
Utilities' Share
Name and Location Major Fuel of Generating
of Station Type Capacity (MW)
- ----------------------------------------------- ---------- ----------------
Duane Arnold Energy Center: Palo, Iowa Nuclear 364 *
Ottumwa Generating Station: Ottumwa, Iowa Coal 343 **
Prairie Creek Station: Cedar Rapids, Iowa Coal 206
Sutherland Station: Marshalltown, Iowa Coal 143
Sixth Street Station: Cedar Rapids, Iowa Coal 65
Burlington Generating Station: Burlington, Iowa Coal 212
George Neal Unit 3: Sioux City, Iowa Coal 144 ***
Peaking Turbines: Marshalltown, Iowa Oil 163
Centerville Cumbustion Turbines: Centerville,
Iowa Oil 49
Diesel Stations: all in Iowa Oil 12
Grinnell Station: Grinnell, Iowa Gas 45
Agency Street Combustion Turbines: West
Burlington, Iowa Gas 58
Red Cedar Combustion Turbine: Cedar Rapids, IA Gas 19
Burlington Combustion Turbines: Burlington,
Iowa Gas 63
- -----------------------------
* Represents Utilities' 70% ownership interest in this 520 MW plant. The
plant is operated by Utilities.
** Represents Utilities' 48% ownership interest in this 715.5 MW plant. The
plant is operated by Utilities.
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*** 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 35.1% of the total electric system energy input for 1996.
Utilities' summer peak load for the calendar year 1997, which occurred on
July 25, 1997, was 1,854 MW and its 1997 winter peak load, which occurred on
January 27, 1997, was 1,665 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, 1996,
the energy (Kwh) production of Utilities was produced 63.8% by coal-fired
generation, 35.6% by nuclear generation, 0.1% by hydroelectric generation and
0.5% from other generation. For the year ended December 31, 1996, approximately
41.4% of the Kwh sales of Utilities was obtained from coal-fired generation,
approximately 23.1% from nuclear generation, 35.1% from purchases and
approximately 0.4% 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, 1996, Utilities' transmission system consisted of 856
miles of 69 kV transmission lines, 373 miles of 115 kV transmission lines, 670
miles of 161 kV transmission lines and 241 miles of 345 kV transmission lines.
CIPCO's transmission system consisted of 534 miles of 69 kV transmission lines,
58 miles of 115 kV transmission lines, 250 miles of 161 kV transmission lines
and 7 miles of 345 kV transmission lines.
iv. Gas Facilities
As of September 30, 1997, Utilities provided natural gas service to
approximately 175,000 customers in 222 Iowa communities. Residential customers,
general service customers and large general service customers make up 87.8%, 12%
and 0.2% of the company's natural gas customers, respectively. As of such date,
the gas properties consisted primarily of approximately 3,835 miles of main in
Iowa ranging in size from .75 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.
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 220
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 3.2% 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 September 30, 1997, 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:
Kwh of electric energy sold................. 5,699,374,000
Mcf of gas sold and transported at retail... 38,113,000
ii. Electric Generating Facilities and Resources
As of December 31, 1996, IPC had a total net generating capability of
approximately 1,003 MW available from the following
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<PAGE> 14
units:
Name and Location Major Fuel Company Share of Nameplate
of Station Type Generating Capacity (MW)
- ------------------------------------- ----------- --------------------------
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
- -------------------------
* 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 40.0% of the total electric system energy input for 1996.
IPC is a summer peaking system; its summer peak load for 1997 of 938 MW
occurred on July 16, 1997.
For the year ended December 31, 1996, the energy (Kwh) production of IPC
was produced 93.8% by coal-fired generation and 6.2% from other generation. For
the year ended December 31, 1996, approximately 53.8% of the Kwh sales of IPC
was obtained from coal-fired generation, 40.0% from purchases and 6.2% 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, 1996, IPC's electric transmission system
consisted of 1,045 miles of kV transmission lines, 717 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.
iv. Gas Facilities
The gas property of IPC at December 31, 1996, consisted of approximately
212 miles of gas main in Illinois, 555 miles of gas main in Iowa and 212 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.
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3. Electric Coordination
The following table sets forth certain information with respect to the
electric operations of Interstate Energy pro forma as of September 30, 1997,
adjusted to give effect to the Transaction (before intercompany eliminations).
Electric Operating Kwh of Electric Energy Sales
Revenues (including amounts
($ in millions) delivered in interchange)
------------------ -----------------------------
WP&L (including South $ 626 14,841,496,000
Beloit)
Utilities $ 598 10,756,306,000
IPC $ 275 5,699,374,000
------- --------------
TOTAL $ 1,499 31,297,176,000
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 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.
WP&L and IPC also plan to construct two direct interconnections between
their systems across the Mississippi River following consummation of the
Transaction, when authorized by the FERC to do so, 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.
IEC will be an integrated electric system within the meaning of Section
2(a)(29)(A) of the Act. IEC will be operated as a single system, economically
dispatched pursuant to the Coordination Agreement. Utilities and IPC ("IEC
West") are presently directly interconnected(1) and WP&L and South Beloit ("IEC
East") are presently directly interconnected.(2) IEC West and IEC East are
presently interconnected through firm contractual wheeling arrangements with
third parties(3) and through MAPP.(4) Additionally, IEC intends to build two
tie-lines (aggregating 250 MW of transfer capability) between IEC West and IEC
East.(5) In the Federal Energy Regulatory Commission Initial Decision on Rate
and Merger Issues (Issued July 3, 1997) (the "Initial FERC Decision"), the
Administrative Law Judge, however, ordered the Applicants to delay construction
of the tie-lines between IEC West and IEC East until the Applicants have
constructed 400 MW of additional simultaneous import capability into the
Wisconsin Upper Michigan System ("WUMS"). IES Utilities et al, 80 F.E.R.C.
Paragraph 63,001, 21 (1997).
On November 12, 1997, the Federal Energy Regulatory Commission (the
"FERC") issued its decision on the merger. IES Utilities, Inc. et al., Opinion
No. 419, 81 FERC Paragraph 61, ___ (1997) ("Opinion No. 419"). In Opinion No.
419, the FERC accepted a
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competition stipulation that had been negotiated by the Applicants and the FERC
trial staff, as modified to include an extra condition imposed by the presiding
Administrative Law Judge. The competitive stipulation, as modified, generally
addresses the Applicants' use of firm transmission service purchased from ComEd
and DPC in order to achieve joint dispatch; Applicants' proposal to construct
two additional transmission lines between IEC West and IEC East at a future
time; Applicants' proposal to make eight specified transmission improvements to
increase transfer capability into WUMS; Applicants' obligation to purchase
additional point-to-point transmission service if joint dispatch transfers
between IEC West and IEC East exceed the contract path quantity; and alternative
dispute resolution and additional efforts to increase transfer capability into
WUMS if the specified measures are not fully successful.
The record developed in the FERC proceeding demonstrates that, at present,
although IEC West and IEC East are interconnected through neighboring utilities,
there are no high voltage connections directly between Iowa and WUMS. Initial
FERC Decision at 30. Additionally, the transmission capability between Iowa and
WUMS is limited. In short, power cannot go straight from Iowa to WUMS but must
flow across the grid which is already constrained. As a result of physics, due
to the nature of the way power flows across the grid and the engineering
peculiarities of the Iowa-WUMS interface, the joint dispatch of the Applicants'
generating facilities through use of their 200 MW of transmission rights(6) will
result in the Applicants' using up much of the import capability into WUMS
thereby during times of system constraint preventing competitors of the
Applicants from selling power into WUMS.
The immediate construction of the tie-lines(7) will, for reasons of
physics and engineering peculiar to the Iowa-WUMS interface, not alleviate the
congestion at the constrained interface. Accordingly, the Initial Decision and
Opinion No. 419 direct the Applicants to delay construction of their new
tie-lines until the Applicants construct additional facilities to increase the
overall transfer capability into WUMS. The construction of these additional
facilities will reinforce the electrical interconnection between Iowa and WUMS.
The requirements of the competitive stipulation adopted by Opinion No. 419 are
only necessary because, as a factual, physics and engineering matter, the
Applicants are currently interconnected and capable of integrated operation to
the point where they must first provide transmission capacity for others before
construction of the tie-lines.
The type and degree of physical interconnection described in the Initial
FERC Decision is sufficient to establish interconnection under the Act for the
purposes of Sections 2(a)(29)(A), 10(c)(2) and 11(b)(1). The Commission has
found that proposals to contract for or to construct physical connections
between utilities in a single system satisfy the interconnection requirement.
See New England Electric System, 38 S.E.C. 193, 198-99 (1958) (engineering
studies and testimony showing feasibility of direct interconnections among four
small systems satisfied the requirements of the Act that utilities be "capable
of physical interconnection"); Mississippi Valley Generating Co., 36 S.E.C. 159
(1955) (while complete direct physical interconnection between the companies
involved did not currently exist, the Commission recognized that physical
interconnection was possible through the construction of transmission lines).
Additionally, the Commission has found that two utilities that are capable
of sharing power through wheeling or power pool arrangements (as the Applicants
will be forced to do upon consummation of the Transaction pending further
construction of new transmission facilities) are physically interconnected or
capable of physical interconnection. The fact that two facilities may be
separated by other facilities that are not owned by the holding company does not
change the fact that they are interconnected or capable of physical connection
and of supplying power to one another as needed. City of New Orleans v. SEC, 969
F.2d 1163, 1165 (D.C. Cir. 1992).
The Commission has also acknowledged that utilities can be interconnected
through power pools or by means of contractual rights to use the lines of a
third party. See Northeast Utilities, Holding Co. Act Release No. 25273 (Mar.
15, 1991); Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29,
1986); UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992). The
Commission has recognized that a finding that wheeling and other forms of
sharing power through reliability councils and proposed regional transmission
groups also qualify as "interconnection" under section 2(a)(29)(A) of the Act
appears to be a logical extension of prior Commission holdings. 1995 Report at
71.
Moreover, even in the absence of the current interconnections, the
wheeling contract and the common power pool membership, the Applicants' proposal
to construct additional transmission facilities at the minimal estimated cost of
$4,400,000 would satisfy the integration requirements of the Act. The Commission
has indicated that a single integrated system exists 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." In re North American Co.
and Its Subsidiaries, Holding Co. Act Release No. 4505 (Apr. 15, 1942); 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").
The transmission systems of IEC East and IEC West are not directly connected
currently. However, integration of the IEC East
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and IEC West systems for purposes of accomplishing joint economic dispatch and
reserve sharing will be accommodated initially through the purchase of
transmission service from other utilities. In the long term, the integration
will be made through construction of transmission ties directly linking IEC East
to IEC West.
The specific plan for integration of IEC East and IEC West is as follows.
During the first three years of the merger (1998-2000), IEC will utilize firm
transmission service which has already been purchased for this purpose from
other utilities to allow the needed integration. The specific transmission
purchases are 150 MW of firm from Commonwealth Edison ("ComEd") and 50 MW of
firm from Dairyland Power Cooperative ("DPC"). These contracts each began on
October 1, 1997 and run through September 30, 2000. The Applicants will report
to the Commission on or before the expiration of these contracts on future
integration plans.
The current plan for the future integration is to construct two
transmission ties between IPC and WP&L in the year 2000. The specific
construction projects identified in the IEC merger filing were a 4-mile 69 kV
line from Hillside substation in Prairie du Chien, Wisconsin to MacGregor
substation in MacGregor, Iowa and a 3-mile 161 kV line from Nelson Dewey
substation in Cassville, Wisconsin to IPW's Turkey River substation located in
Iowa. The total capacity of these ties is estimated at 250 MW consisting of 50
MW for the 69 kV line and 200 MW for the 161 kV line.
The Applicants that will comprise IEC have firm transmission agreements
and anticipate that they will continue to have firm transmission agreements
until such time as the additional lines are built. Thus, if, for some reason,
the transmission ties are not constructed on time or if the future integration
between IEC East and IEC West requires more than the 250 MW of capacity provided
by the two proposed transmission ties, then IEC will continue to purchase firm
transmission service from either ComEd, DPC or Northern States Power Company
("NSP"). Any of these three parties can currently provide the direct
transmission link between IEC East and IEC West. The capacities of the ComEd,
DPC and NSP transmission ties between IEC East and IEC West are currently 1086
MW, 464 MW and 336 MW respectively.
In the event that construction of the transmission reinforcements
described above has not begun within 180 days of the scheduled termination of
the currently effective transmission agreements, IEC will initiate discussions
with ComEd and DPC with the intent of extending the term of the agreements. In
the event that these discussions do not result in an agreement to extend the
term within 120 days of the scheduled termination of the agreements, IEC will
make arrangements to take short-term firm transmission service under the
then-effective open access transmission tariffs of ComEd, DPC or NSP, or in the
alternative, will submit a good faith request for long-term firm transmission
service under Section 211 of the FPA.
ComEd is currently interconnected with IEC East by means of a 345 kV line
that runs from ComEd's Wempletown substation to the Paddock substation in IEC
East. This line has a capacity of 1086 MW, which is the limiting segment of the
IEC East-IEC West transmission path through ComEd. ComEd is, in turn,
interconnected with IEC West through two lines, rated at 345 kV and 138/161 kV,
and having an aggregate capacity of 1,124 MW. The 345 kV line connects ComEd's
Quad Cities generating station with IEC East's Rock Creek substation.
DPC is currently interconnected with IEC East by means of five 69 kV lines
and one 138/161 kV line. The capacity of these six lines is 464 MW, which is the
limiting interface for the IEC East-IEC West transmission path through DPC. DPC
is, in turn, interconnected with IEC West by 32 separate transmission lines, 11
of which are rated at 161 kV and the remaining 21 of which are rated at 69 kV.
The aggregate capacity of all of these transmission lines is 1,004 MW. In
addition, regional developments such as the MAPP Independent System Operator
("ISO") and the Midwest ISO are currently underway.
WPL has a projected native load of 2169 MW and firm off-system sales of
251 MW for 1998. WPL owns generation capacity totaling 2350 MW. WPL has also
purchased 421 MW of firm capacity for 1998. IPW has a projected native load of
1105 MW and firm off-system sales of 179 MW for 1998. IPC owns generation
capacity totaling 1028 MW. IPC also has purchased firm capacity of 333 MW for
1998. IES's projected native load for 1998 is 1820 MW. IES has no firm
off-system sales. IES owns generation capacity totaling 1853 MW and has
purchased firm capacity for 1998 totaling 245 MW.
Because the WPL system is not directly interconnected with either the IES
system or the IPW system, WPL has purchased a total of 200 MW of firm
transmission service between the IPW system and the WPL system for a three year
period, commencing October 1, 1997 and continuing through September 30, 2000.
150 MW of this firm transmission service was purchased from Commonwealth Edison
and the remaining 50 MW of the firm transmission service was purchased form
Dairyland Power Cooperative. The Commonwealth Edison and the Dairyland Power
Cooperative systems are directly interconnected with both the WPL and the IPW
systems. 50 MW of the total 200 MW of firm transmission service purchased by WPL
are reserved for the use of third parties. The remaining 150 MW is sufficient
for and will be used by Interstate Energy Corporation postmerger for
transferring capacity and energy
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between WPL and IPW for the purposes of optimizing economic dispatch of the
generation resources of IEC as a whole and providing reliability support for the
loads in all areas of the IEC system.
The IPW and IES systems are directly interconnected by means of a number
of transmission lines at voltage levels of 69 kV, 161 kV and 345 kV. The
cumulative tie capacity of all these interconnections is 1620 MW. This tie
capacity will likewise be used for the purposes of optimizing economic dispatch
of the generation resources of IEC as a whole and providing reliability support
for the loads in all areas of the IEC system.
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 September 30, 1997, adjusted to
give effect to the Transaction (before intercompany eliminations).
Mcf of Gas Distributed
Gas Operating Revenues (including natural and
($ in millions) Manufactured gas)
---------------------- ----------------------
WP&L (including South $ 164 27,836,000
Beloit)
Utilities $ 180 40,148,000
IPC $ 53 38,113,000
----- -----------
TOTAL $ 397 106,097,000
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.
Northern Natural Gas Company ("NNGC") presently provides WP&L with
approximately 50% of its gas requirements, provides IPC with approximately 33%
of its gas requirements and IES with approximately 50% of its gas requirements.
Thus, each of the three companies that will comprise IEC receive a large portion
of its gas supplies from NNGC. WP&L has access to 35 gas gates in NNGC's Zone D;
IPC has access to 2 gates in Zone D; IES has access to 28 gates in Zone D. IPC
also has access to 24 NNGC gates in Zone E-F and IES has access to an additional
87 gates in NNGC Zone B-C. Each customer can specify delivery of gas to any
individual gate within a specific zone. For an added charge, an arrangement can
be made to deliver gas from one zone to another. NNGC is clearly the backbone of
the proposed IEC system. The gas lines of Northern Border Pipeline Company
("NBPC") intersect NNGC pipelines in the IEC service area. NNGC transports gas
primarily from Texas; NBPC transports gas primarily from Canada. Therefore, the
Applicants have a significant common source of supply and delivery and fulfill
that requirement of Section 2(a)(29)(B) of the 1935 Act for an "integrated (gas)
public-utility system."
Services has begun to implement the specific plans to manage internally
IEC's gas supply procurement system to achieve cost savings for the holding
company system. The general manager of Energy Portfolio Management ("Portfolio")
for Services will make decisions on optimum configuration of the capacity and
supply portfolios for the three utility companies that comprise IEC. The
employees who will be responsible for performing the gas capacity and supply
procurement functions of Portfolio will be employees of Services. Although the
employees who procure gas for one utility will not be distinguished from the
employees who procure gas for the other utilities, the employees will still have
to forecast requirements, procure gas and capacity in accordance with those
forecasted
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requirements, and dispatch to meet those requirements by utility jurisdiction.
This central management of the gas procurement function will, over time, improve
efficiency and reduce overall costs as duplicative functions and excess reserve
capacity are eliminated. The Applicants estimate the annual savings to be
achieved through these enhanced efficiencies to be $27.4 million.
WP&L, IPC and Utilities purchase interstate gas transmission and/or
storage services from the following:
WP&L, IPC and Utilities purchase interstate gas transmission and/or
storage services from the following:
Provider WP&L/South Beloit IPC Utilities
- -------- ----------------- --- ---------
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
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.
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:
Field/Basin WP&L/South Beloit IPC Utilities
-------------- ----------------- --- ---------
Gulf Coast X X X
Permian Basin X X
Canada X X X
Texas/Oklahoma X X X
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.
IEC intends to operate the presently separate gas operations of the
Applicants as a single centrally managed and coordinated integrated gas system
within the meaning of Section 2(a)(29)(B) of the Act. Central to the coordinated
operation of the gas system is the procurement of gas supplies. The gas
companies share common sources of supply and receive gas transportation services
from NNG, NGPL, ANR, Viking Natural Gas Pipeline and Northern Border Pipeline
Company. Upon consummation of the Transaction, the gas procurement component of
the gas operations of the Applicants will be centrally managed through
Interstate Services.
Additionally, as existing gas supply contracts between the individual
utilities and their suppliers terminate in the ordinary course, it
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is expected that Interstate Services, rather than the separate utilities, will
contract for future gas supplies. The greater economies of scale as a result of
coordinated gas procurement are expected to generate further cost savings. It is
also expected that, over time, the utilities will enter into a gas coordination
agreement to detail how pipeline and gas supply costs attributable to the
centralized procurement function are to be allocated between the utilities. PSCW
R. at 799. Any such gas coordination agreement would be subject to state
commission approval. Id.
In sum, the coordinated gas operations of the gas properties of the
Applicants will commence immediately through the centralization of management
and day-to-day operating functions at Interstate Services. Full integration will
be achieved over time as existing individual gas contracts are replaced with
contracts covering the entire system.
5. Non-Utility Interests of WPLH, IES and IPC
a. WPLH
WPLH's non-utility subsidiaries and investments constituted less than 12%
of WPLH's assets on a consolidated basis as of September 30, 1997. Operating
revenues from WPLH's non-utility subsidiaries and investments were approximately
15% of WPLH's consolidated total operating revenues for the year ended September
30, 1997. A corporate chart of WPLH and its subsidiaries, including their
non-utility interests, is filed herewith as Exhibit H-1. The non-utility
businesses are described in Exhibit M-5.
b. IES
As of September 30, 1997, IES' non-utility subsidiaries and investments
constituted approximately 30% of IES' assets on a consolidated basis. Operating
revenues from IES' non-utility subsidiaries and investments were approximately
17% of IES' consolidated total operating revenues for the year ended September
30, 1997. A corporate chart of IES and its subsidiaries, including its
non-utility interests, is filed herewith as Exhibit H-2. A description of IES
non-utility interests is filed in Exhibit M-5.
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").
c. IPC
IPC's non-utility subsidiary and investments constituted less than 0.2% of
IPC's assets on a consolidated basis as of September 30, 1997. For the year
ended September 30, 1997, 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.
The information contained in Exhibit M-5 hereto is hereby incorporated by
reference to this Item 1.B.5.
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
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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 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.
During the eighteen months prior to the execution of the Merger Agreement, the
management of IPC analyzed various potential
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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
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
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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 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 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.
On August 4, 1996, MidAmerican Energy Company ("MEC") made an unsolicited
takeover proposal for IES, which was delivered in a letter to IES (the "MEC
Takeover Proposal"). The MEC Takeover Proposal was premised upon the withdrawal
by IES from its proposed transaction with WPLH and IPC. After consulting with
its advisors, the IES Board concluded on August 14, 1996, that, from a strategic
perspective, the Mergers would be more beneficial to IES and its shareholders,
customers and employees in the communities that IES serves than the MEC Takeover
Proposal would be.
On August 15, 1996, the WPLH Board, the IPC Board and the IES Board agreed
to increase the IES exchange ratio to 1.14. The parties thereafter executed and
delivered Amendment No. 2 to the Merger Agreement, dated as of August 16, 1996,
increasing the IES exchange ratio to 1.14. On September 5, 1996, the Transaction
was approved by the shareholders of WPLH and IPC at their respective
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meeting and, based on preliminary tabulations, was approved by the shareholders
of IES at its meeting held on September 5, 1996.
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
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. 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 1.14 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, and (iv) each outstanding share of WPLH Common Stock
will remain outstanding and unchanged as one share of Interstate Energy Common
Stock. 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. The alternative
structure for consummating the mergers as contemplated by the Merger Agreement
will not be utilized by the parties because the PSCW issued a final order
determining that the reincorporation mergers provided for in such alternative
structure were not required. Based on the capitalization of WPLH, IES and IPC on
August 15, 1996 and the exchange capitalization of WPLH, IES and IPC on August
15, 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 40.8%, 45.1% and 14.1%, 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
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.
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
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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, 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
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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.
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):
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
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("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 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 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
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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.
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
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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.
As soon as practicable after the consummation of the merger, the
Applicants intend to implement a new single IEC 401(k) plan by merging the
401(k) plans of WPLH/WP&L, IPC and IES. The merged IEC 401(k) plan will use the
common stock of IEC.
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 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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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:
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.............................. 69,145
Legal fees and expenses relating to the Act.... 715,000
Other legal fees and expenses.................. 2,757,000
Shareholder communication and proxy
solicitation................................... 1,174,000
NYSE listing fee............................... 150,000
Exchanging, printing, and engraving of
stock certificates............................. 150,000
Investment bankers' fees and expenses
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................. 5,000,000
Morgan Stanley & Co. Incorporated............ 5,000,000
Salomon Brothers Inc......................... 2,500,000
Consulting fees related to human
resource issues, public relations,
regulatory support, and other
matters relating to the Transaction.......... 7,951,000
Expenses related to integrating
the operations of the merged company
and miscellaneous............................ 15,874,000
-----------
TOTAL 41,795,512
- --------------
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:
Section of the Act Transactions to which section or rule is or may be applicable
- ------------------ -------------------------------------------------------------
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
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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.
Rules
-----
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
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:
- - 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.
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
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<PAGE> 32
would be consistent with previous Commission rulings(8) 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,"(9) 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
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,(10) utility ownership(11) and diversification.(12)
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 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.(13) 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
886,000 retail electric customers and 375,000 natural gas customers in four
states. As of and for the year ended December 31, 1996: (1) the combined assets
of WPLH, IES and IPC would have totaled approximately $4.665 billion; (2)
combined utility revenues of WPLH, IES and IPC would have totaled
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<PAGE> 33
approximately $1.929 billion; and (3) combined owned total net generating
capacity capability would have totaled approximately 4,961 MW.
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 $6.871 billion, revenues of $2.161 billion, electricity sales of
41.276 million MWH and 1.139 million customers.
As the following table demonstrates, based on the latest available year
end 1996 dates, nine of the currently registered electric utility holding
company systems are larger than Interstate Energy will be following the
Transaction in terms of assets, operating revenues, customers and/or sales of
electricity:
Total Operating Sales in
Assets Revenues Customers MWH
System Total ($ Billions) ($ Billions) (Millions)
Southern $ 30.292 $ 8.675 3,643,000 153.5
Entergy $ 22.966 $ 6.450 2,426,000 106.9
AEP $ 15.886 $ 5.849 2,942,000 132.6
CSW $ 13.332 $ 3.248 1,690,000 62.43
Northeast
Utilities $ 10.742 $ 3.709 1,701,070 39.53
GPU $ 9.866 $ 3.918 1,997,000 42.5
NEES $ 5.223 $ 2.153 1,333,000 21.674
Allegheny Power
System, Inc. $ 6.619 $ 2.327 1,388,500 59.96
Cinergy $ 8.849 $ 2.760 1,377,532 57.5
Interstate
Energy $ 4.665 $ 1.440 886,000 30.8
In addition, Interstate Energy will be smaller than the registered holding
companies to be formed as a result of recently announced proposed and completed
mergers, specifically the mergers of AEP and CSW (combined 1996 year-end assets
of approximately $29.218 billion and operating revenues of $9.097 billion), the
Ameren combination of Union Electric Company and CIPSCO, Inc. (combined 1996
year-end assets of approximately $8.933 billion and operating revenues of $3.014
billion) and the New Centuries combination of Public Service Company of Colorado
and Southwestern Public Service Company (combined 1996 year-end assets of
approximately $6.617 billion and operating revenues of $2.417 billion.)
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.(14)
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
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<PAGE> 34
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. After the expiration of one year from the
original expiration, a subsequent filing in September of 1997 produced a similar
result. 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 was fully
considered by the FERC before it approved 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 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 and the Order received is
filed as Exhibit N-3. 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.(15)
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 1.14 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.
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
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<PAGE> 35
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 million(16) 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 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.
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<PAGE> 36
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).
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 September 30, 1997 and the pro forma consolidated capital
structure of Interstate Energy (assuming the Transaction had occurred at
September 30, 1997):
WPLH, IES and IPC Historical Capital Structures
(dollars in millions)
(as of 9/30/97)
WPLH IES IPC
---- --- ---
Common Stock $ 605.7 $ 861.6 $ 215.8
Preferred Stock 60.0 18.3 35.1
Long-term Debt 458.5 854.5 171.7
Short-term Debt 100.1 34.3
-------- -------- --------
Total $1,224.3 $1,734.4 $ 456.9
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Interstate Energy Pro Forma Consolidated Capital Structure
(dollars in millions)
(unaudited)
Without
Reincorporation Mergers
-----------------------
Common Stock $1,683.1 49.3%
Preferred Stock 113.4 3.3%
Long-Term Debt 1,484.7 43.5%
Short-Term Debt 134.4 3.9%
-------- ------
Total $3,415.6 100.0%
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;
(17) 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 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
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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 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 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.
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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 and 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 memoranda attached
as Exhibits L-1, L-2, L-3, L-4, L-5 and L-6, 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 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.(18)
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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 both gas and electric operations as long as each affected state utility
regulatory commission approves of the existence of such a company.(19)
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.(20) 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 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
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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
(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." (21) 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 and
L-6 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
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result in lost economies of $15,558,000 for WP&L, $14,205,142 for Utilities and
$5,048,533 for IPC. Exhibit L-6 considers the case of combining the gas
properties of WP&L, Utilities and IPC into one company prior to divestiture
which would still result in lost economies of approximately $27,000,000. 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.
GAS OPERATING
GAS OPERATING REVENUE GAS GROSS
COMPANY REVENUES DEDUCTIONS INCOME GAS NET INCOME
- ---------------- ------------- ---------- ---------- ----------
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
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.(22)
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 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
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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.
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.(23)
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:
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
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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.
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.(24) 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.(25)
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
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free to apply its expertise to administer the Act in light of 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 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.
In recent months the Commission has been presented with several real,
rather than hypothetical, opportunities to assess the recommendations of the
Division made in the 1995 Report as to the appropriateness of combination
electric and gas companies under the Act as several companies seeking to
implement convergence mergers have filed applications with the Commission. At
the same time, merger opponents have sought to persuade the Commission that the
Commission should not implement the Division's recommendations.
In July and August of 1997, the Commission approved three convergence
mergers clarifying that the Act does not prohibit combination electric and gas
companies of the type sought to be created in the instant situation.(26) In the
words of the Commission, the Act "does not prohibit ownership of combination gas
and electric systems." New Century Energies, Inc., Holding Co. Act Release No.
26748 at 27.
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<PAGE> 46
The Commission's actions in approving three new convergence transactions
upon a showing of loss of economies are consistent with the recommendations set
forth in the 1995 Report. In approving the formation of New Century Energies as
a combination gas and electric registered holding company, the Commission
stated:
The Commission has previously taken notice of developments that have
occurred in the gas and electric industries in recent years, and has
interpreted the Act and has analyzed proposed transactions in light
of these changed circumstances... The gas and electric industries
are converging, and, in these circumstances, separation of gas and
electric businesses may cause the separated entities to be weaker
competitors than they would be together. This factor adds to the
quantifiable loss of economies caused by increased costs.
New Century Energies, Inc., Holding Co. Act Release No. 26748 at 30-31.
Most importantly, the Commission distanced itself from the earlier more
restrictive precedent of the decision in New England Electric System, 41 S.E.C.
888 (1964) ("NEES") stating:
In the 1960s, when the NEES case was decided, utilities were
primarily franchised monopolies with captive ratepayers, and
competition between suppliers of gas and electricity, however
limited, was virtually the only source of customer choice and was
thus deemed beneficial to energy consumers. The fact that other gas
utilities of comparable size could operate successfully on an
independent basis was evidence that a gas system could also operate
on its own, a desirable result, without a substantial loss of
economies. The empirical basis for these assumptions, however, is
rapidly eroding. Although franchised monopolies are still the rule,
competition is increasing. Increased expenses of separate operation
may no longer be offset, as they were in New England Electric System
by a gain of qualitative competitive benefits, but rather may be
compounded by a loss of such benefits...
New Century Energies, Inc., Holding Co. Act Release No. 26748 at 32.
The logic of the New Century Energies decision is equally compelling in
the instant situation. It is the intention of the Applicants that the separate
gas properties of the Applicants be integrated and operated as a single economic
system in conjunction with Applicants' electric system in order to better
provide competitive comprehensive energy services to Applicants' customers.
Because today the properties are operated as separate entities and Section
11(b)(1)(A), (B) and (C) appear to require an analysis of "[e]ach such
additional system," the original loss-of-economies analysis looked at
divestiture as three separate gas systems, preserving their present status of
being independent from one another, which produced annual lost economies that
are estimated to be $34.3 million per annum. If the gas integration and
coordination plan discussed above was in effect and these properties were to be
divested as a single multistate gas utility company, annual lost economies are
still estimated to be $27.4 million per annum.
In either case, the lost economies are substantial in an industry in which
there are already many companies competing with Applicants for the provision of
comprehensive energy services in Applicants' service territory and, where there
is not yet competition, lost economies may well result in increased retail
rates. Competition between energy suppliers can only benefit consumers.
Increasingly, the competitors are themselves suppliers of comprehensive energy
services just like New Century Energies, Inc., TUC Holding Company and Houston
Industries Incorporated.
The chief savings achieved by operation of the three properties as a
single multistate gas property arises from the complete elimination of the
administrative costs of one of the larger companies. The non-field operations
are assumed to be met by the executive and administrative operations of the
other two companies. Thus, the $34.3 million of annual lost economies of
operating as three companies becomes $27.4 of lost economies on and integrated
basis, which as the following table shows is still significant in a very
competitive industry:
TABLE
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<PAGE> 47
RELATIVE LOST ECONOMIES DUE TO DIVESTITURE OF
THE COMBINED NATURAL GAS OPERATION
OF IEC
(BASED ON 1995 RESULTS)
diseconomies
revenues diseconomies as a percent
$(000's) $(000's) of revenue
TOTAL GAS OPERATING REVENUE $ 332,047 $27,327.3 8.23%
TOTAL GAS OPERATING REVENUE DEDUCTIONS $ 297,750 $27,327.3 9.18%
GROSS NATURAL GAS OPERATING INCOME $ 42,738 $27,327.3 63.94%
NET NATURAL GAS OPERATING INCOME $ 26,309 $27,327.3 103.87%
The Applicants have prepared and submitted as Exhibit L-6 a Supplemental
Study analyzing the impact of the divestiture of their gas operations (the
"Supplemental Study"). The Supplemental Study focuses on the combined gas
properties of the Applicants creating one gas system.
Section 11(b) (1) of the Act 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." Section 11(b) (1) of the Act expressly permits a
registered holding company to control 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; (B)
all of such additional systems are located in one state, adjoining states, or 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, efficient operation, or the effectiveness of
regulation.
The Commission has consistently relied upon the Supreme Court decisions in
SEC v. New England Elec. Sys., 390 U.S. 207 (1968) ("NEES I") and SEC v. New
England Elec. Sys., 390 U.S. 207 (1968) ("NEES II") to interpret Clause (A) of
Section 11(b)(1). Moreover, to determine whether lost economies are
"substantial" for purposes of Section 11(b)(1)(A), the Commission has
consistently given consideration to four ratios cited in the cases. These ratios
measure the projected loss of economies of a potential divestiture 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 ratios are not bright-line rules
to identify substantial lost economies, the Commission suggested in an early
leading decision 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
SEC 41, 59 (1942), rev'd on other grounds and remanded, 138 F.2d 936 (D.C. Cir.
1943), vacated as moot, 332 U.S. 788 (1947).
The Supplemental Study submitted as Exhibit L-6 by the Applicants
indicates that the costs increases that would result from severance of the gas
properties would satisfy, and in almost all instances exceed, those thresholds.
As set forth in the Supplemental Study, divestiture of the gas operations
of WPLH, IES and IPC into one stand-alone company would result in lost economies
of approximately $27.9 million. On a percentage basis, the Supplemental Study
indicates that divesture of the gas operations would amount to 8.45% of total
gas operating revenues, 9.65% of total gas operating revenue deductions, 68.11%
of gross gas income and 101.71% of net gas income.
The Supplemental Study indicates further that in order to recover these
lost economies, the single, new stand-alone company divested from MPLH, IES and
IPC would need to increase customer rates by 8.45% ($27.9 million) in order to
provide a 10.39% rate of return on rate base. In the absence of rate relief, the
Supplemental Study concludes that the lost economies would result in
approximately a 5% rate of return on rate base for the gas operations.
ii. Retention of Other Businesses
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<PAGE> 48
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 and
updated by Exhibits M-4 and M-5. 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(27) 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.(28) 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."29
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.(30)
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.(31) 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 in Exhibit M-5, the non-utility business interests
that Interstate Energy will hold through Interstate Hold or
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<PAGE> 49
through utility subsidiaries meet the Commission's standards for retention.
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 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. Because these businesses pre-existed the application of the Act to
WPLH, IES and IPC, it is not intended to rely on Rule 58 for retention of the
businesses but rather to rely on the legal precedents discussed in Exhibit M-5
hereto which is hereby incorporated by reference to this Item 3.A.2.a.ii.
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).
Despite the passage of time since the first filing of Form U-1 under the
Act, WPLH, IES and IPC still believe 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)
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<PAGE> 50
Category Amount (Millions)
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
--------
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 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.
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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 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.
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:
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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
(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."(32) 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. When authorized by
FERC, 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."(33) The benefits to be derived by the new transmission lines are also a
factor in determining whether the system is capable of physical
interconnection.(34) The fact that the Commission has indicated that, absent
special circumstances, the "reasonably near future" mentioned above, should not
exceed 10 years, (35) 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 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
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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 in the industry, such as brokers
and marketers, that affect the concept of geographic integration."(36) The 1995
Report also recommends primacy be given to "demonstrated economies and
efficiencies to satisfy the integration requirements."(37) 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
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given the 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,"(38) especially since this Transaction will result in a
system similar to the traditional registered holding company system.
IEC will be an integrated electric system within the meaning of Section
2(a)(29)(A) of the Act. IEC will be operated as a single system, economically
dispatched pursuant to the Coordination Agreement. Utilities and IPC ("IEC
West") are presently directly interconnected(39) and WP&L and South Beloit ("IEC
East") are presently directly interconnected.(40) IEC West and IEC East are
presently interconnected through firm contractual wheeling arrangements with
third parties(41) and through MAPP.(42) Additionally, IEC intends to build two
tie-lines (aggregating 250 MW of transfer capability) between IEC West and IEC
East.(43) In the Federal Energy Regulatory Commission Initial Decision on Rate
and Merger Issues (Issued July 3, 1997) (the "Initial FERC Decision"), the
Administrative Law Judge, however, ordered the Applicants to delay construction
of the tie-lines between IEC West and IEC East until the Applicants have
constructed 400 MW of additional simultaneous import capability into the
Wisconsin Upper Michigan System ("WUMS"). IES Utilities et al, 80 F.E.R.C.
Paragraph 63,001, 21 (1997).
On November 12, 1997, the Federal Energy Regulatory Commission (the
"FERC") issued its decision on the merger. IES Utilities, Inc. et al., Opinion
No. 419, 81 FERC Paragraph 61, ___ (1997) ("Opinion No. 419"). In Opinion No.
419, the FERC accepted a competition stipulation that had been negotiated by the
Applicants and the FERC trial staff, as modified to include an extra condition
imposed by the presiding Administrative Law Judge. The competitive stipulation,
as modified, generally addresses the Applicants' use of firm transmission
service purchased from ComEd and DPC in order to achieve joint dispatch;
Applicants' proposal to construct two additional transmission lines between IEC
West and IEC East at a future time; Applicants' proposal to make eight specified
transmission improvements to increase transfer capability into WUMS; Applicants'
obligation to purchase additional point-to-point transmission service if joint
dispatch transfers between IEC West and IEC East exceed the contract path
quantity; and alternative dispute resolution and additional efforts to increase
transfer capability into WUMS if the specified measures are not fully
successful.
The record developed in the FERC proceeding demonstrates that, at present,
although IEC West and IEC East are interconnected through neighboring utilities,
there are no high voltage connections directly between Iowa and WUMS. Initial
FERC Decision at 30. Additionally, the transmission capability between Iowa and
WUMS is limited. In short, power cannot go straight from Iowa to WUMS but must
flow across the grid which is already constrained. As a result of physics, due
to the nature of the way power flows across the grid and the engineering
peculiarities of the Iowa-WUMS interface, the joint dispatch of the Applicants'
generating facilities through use of their 200 MW of transmission rights(44)
will result in the Applicants' using up much of the import capability into WUMS
thereby during times of system constraint preventing competitors of the
Applicants from selling power into WUMS.
The immediate construction of the tie-lines(45) will, for reasons of
physics and engineering peculiar to the Iowa-WUMS interface, not alleviate the
congestion at the constrained interface. Accordingly, the Initial Decision and
Opinion No. 419 direct the Applicants to delay construction of their new
tie-lines until the Applicants construct additional facilities to increase the
overall transfer capability into WUMS. The construction of these additional
facilities will reinforce the electrical interconnection between Iowa and WUMS.
The requirements of the competitive stipulation adopted by Opinion No. 419 are
only necessary because, as a factual, physics and engineering matter, the
Applicants are currently interconnected and capable of integrated operation to
the point where they must first provide transmission capacity for others before
construction of the tie-lines.
The type and degree of physical interconnection described in the Initial
FERC Decision is sufficient to establish interconnection under the Act for the
purposes of Sections 2(a)(29)(A), 10(c)(2) and 11(b)(1). The Commission has
found that proposals to contract for or to construct physical connections
between utilities in a single system satisfy the interconnection requirement.
See New England Electric System, 38 S.E.C. 193, 198-99 (1958) (engineering
studies and testimony showing feasibility of direct interconnections among four
small systems satisfied the requirements of the Act that utilities be "capable
of physical interconnection"); Mississippi
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Valley Generating Co., 36 S.E.C. 159 (1955) (while complete direct physical
interconnection between the companies involved did not currently exist, the
Commission recognized that physical interconnection was possible through the
construction of transmission lines).
Additionally, the Commission has found that two utilities that are capable
of sharing power through wheeling or power pool arrangements (as the Applicants
will be forced to do upon consummation of the Transaction pending further
construction of new transmission facilities) are physically interconnected or
capable of physical interconnection. The fact that two facilities may be
separated by other facilities that are not owned by the holding company does not
change the fact that they are interconnected or capable of physical connection
and of supplying power to one another as needed. City of New Orleans v. SEC, 969
F.2d 1163, 1165 (D.C. Cir. 1992).
The Commission has also acknowledged that utilities can be interconnected
through power pools or by means of contractual rights to use the lines of a
third party. See Northeast Utilities, Holding Co. Act Release No. 25273 (Mar.
15, 1991); Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29,
1986); UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992). The
Commission has recognized that a finding that wheeling and other forms of
sharing power through reliability councils and proposed regional transmission
groups also qualify as "interconnection" under section 2(a)(29)(A) of the Act
appears to be a logical extension of prior Commission holdings. 1995 Report at
71.
Moreover, even in the absence of the current interconnections, the
wheeling contract and the common power pool membership, the Applicants' proposal
to construct additional transmission facilities at the minimal estimated cost of
$4,400,000 would satisfy the integration requirements of the Act. The Commission
has indicated that a single integrated system exists 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." In re North American Co.
and Its Subsidiaries, Holding Co. Act Release No. 4505 (Apr. 15, 1942); 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").
The transmission systems of IEC East and IEC West are not directly
connected currently. However, integration of the IEC East and IEC West systems
for purposes of accomplishing joint economic dispatch and reserve sharing will
be accommodated initially through the purchase of transmission service from
other utilities. In the long term, the integration will be made through
construction of transmission ties directly linking IEC East to IEC West.
The specific plan for integration of IEC East and IEC West is as follows.
During the first three years of the merger (1998-2000), IEC will utilize firm
transmission service which has already been purchased for this purpose from
other utilities to allow the needed integration. The specific transmission
purchases are 150 MW of firm from Commonwealth Edison ("ComEd") and 50 MW of
firm from Dairyland Power Cooperative ("DPC"). These contracts each began on
October 1, 1997 and run through September 30, 2000. The Applicants will report
to the Commission on or before the expiration of these contracts on future
integration plans.
The current plan for the future integration is to construct two
transmission ties between IPC and WP&L in the year 2000. The specific
construction projects identified in the IEC merger filing were a 4-mile 69 kV
line from Hillside substation in Prairie du Chien, Wisconsin to MacGregor
substation in MacGregor, Iowa and a 3-mile 161 kV line from Nelson Dewey
substation in Cassville, Wisconsin to IPW's Turkey River substation located in
Iowa. The total capacity of these ties is estimated at 250 MW consisting of 50
MW for the 69 kV line and 200 MW for the 161 kV line.
The Applicants that will comprise IEC have firm transmission agreements
and anticipate that they will continue to have firm transmission agreements
until such time as the additional lines are built. Thus, if, for some reason,
the transmission ties are not constructed on time or if the future integration
between IEC East and IEC West requires more than the 250 MW of capacity provided
by the two proposed transmission ties, then IEC will continue to purchase firm
transmission service from either ComEd, DPC or Northern States Power Company
("NSP"). Any of these three parties can currently provide the direct
transmission link between IEC East and IEC West. The capacities of the ComEd,
DPC and NSP transmission ties between IEC East and IEC West are currently 1086
MW, 464 MW and 336 MW respectively.
In the event that construction of the transmission reinforcements
described above has not begun within [180] days of the scheduled termination of
the currently effective transmission agreements, IEC will initiate discussions
with ComEd and DPC with the intent of extending the term of the agreements. In
the event that these discussions do not result in an agreement to extend the
term within [120] days of the scheduled termination of the agreements, IEC will
make arrangements to take short-term firm transmission service under the
then-effective open access transmission tariffs of ComEd, DPC or NSP, or in the
alternative, will submit a good faith request for
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long-term firm transmission service under Section 211 of the FPA.
ComEd is currently interconnected with IEC East by means of a 345 kV line
that runs from ComEd's Wempletown substation to the Paddock substation in IEC
East. This line has a capacity of 1086 MW, which is the limiting segment of the
IEC East-IEC West transmission path through ComEd. ComEd is, in turn,
interconnected with IEC West through two lines, rated at 345 kV and 138/161 kV,
and having an aggregate capacity of 1,124 MW. The 345 kV line connects ComEd's
Quad Cities generating station with IEC East's Rock Creek substation.
DPC is currently interconnected with IEC East by means of five 69 kV lines
and one 138/161 kV line. The capacity of these six lines is 464 MW, which is the
limiting interface for the IEC East-IEC West transmission path through DPC. DPC
is, in turn, interconnected with IEC West by 32 separate transmission lines, 11
of which are rated at 161 kV and the remaining 21 of which are rated at 69 kV.
The aggregate capacity of all of these transmission lines is 1,004 MW. In
addition, regional developments such as the MAPP Independent System Operator
("ISO") and the Midwest ISO are currently underway.
WPL has a projected native load of 2169 MW and firm off-system sales of
251 MW for 1998. WPL owns generation capacity totaling 2350 MW. WPL has also
purchased 421 MW of firm capacity for 1998. IPW has a projected native load of
1105 MW and firm off-system sales of 179 MW for 1998. IPW owns generation
capacity totaling 1028 MW. IPW also has purchased firm capacity of 333 MW for
1998. IES's projected native load for 1998 is 1820 MW. IES has no firm
off-system sales. IES owns generation capacity totaling 1853 MW and has
purchased firm capacity for 1998 totaling 245 MW.
Because the WPL system is not directly interconnected with either the IES
system or the IPW system, WPL has purchased a total of 200 MW of firm
transmission service between the IPW system and the WPL system for a three year
period, commencing October 1, 1997 and continuing through September 30, 2000.
150 MW of this firm transmission service was purchased from Commonwealth Edison
and the remaining 50 MW of the firm transmission service was purchased from
Dairyland Power Cooperative. The Commonwealth Edison and the Dairyland Power
Cooperative systems are directly interconnected with both the WPL and the IPW
systems. 50 MW of the total 200 MW of firm transmission service purchased by WPL
are reserved for the use of third parties. The remaining 150 MW will be used by
Interstate Energy Corporation postmerger for transferring capacity and energy
between WPL and IPW for the purposes of optimizing economic dispatch of the
generation resources of IEC as a whole and providing reliability support for the
loads in all areas of the IEC system.
The IPW and IES systems are directly interconnected by means of a number
of transmission lines at voltage levels of 69 kV, 161 kV and 345 kV. The
cumulative tie capacity of all these interconnections is 1620 MW. This tie
capacity will likewise be used for the purposes of optimizing economic dispatch
of the generation resources of IEC as a whole and providing reliability support
for the loads in all areas of the IEC 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 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,(46) 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.(47) The Commission also has considered obtaining
gas from a common pipeline(48) as well as from different pipelines
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when the gas originates from the same gas field in determining a common source
of supply.(49) 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.
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 Orders of the FERC, PSCW, MPUC, ICC and IUB, all relating to the
Transaction, Interstate Energy intends to comply with all applicable state laws
related to the proposed
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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 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
all the diversified businesses discussed in Exhibit M-5. 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.
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.
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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.
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 maintenance, marketing and
customer relations, electric transmission and distribution engineering and
construction, power
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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 Service Agreements give the system companies the explicit right, at
their sole discretion, to discontinue taking services from Interstate Services
under any circumstances where a company other than Interstate Services can
provide fully comparable quality services at a price that is lower than the
price charged by Interstate Services. Also, prior to filing any amendments to a
Service Agreement with the Commission, the parties to the Service Agreement must
file with the applicable state regulatory commissions, pursuant to law or
stipulation, a copy of such amendments. Under the Service Agreements, in the
event that a state commission does not object to an amendment within forty five
days of its filing with the state commission or issue a letter within that time
requiring that the amendment be held in abeyance until that state commission
completes its review, the parties to the Service Agreement will consider the
state commission to have acquiesced to the amendment.
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 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(50) and recently with some frequency to
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generally allow non-utility subsidiaries of registered holding companies to
provide services to certain FUCOs at market-based rates.(51) 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."(52) 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."
The Applicants hereby request on behalf of IEC an exemption under section
13 of the Act and rules 90 and 91 thereunder from the at-cost requirements in
connection with the provision of goods and services, including operation and
maintenance services, at fair market prices by Interstate Services to associate
foreign utility companies ("FUCO's"), provided that no such services will be
rendered to an associate FUCO unless the FUCO derives no part of its income,
directly or indirectly, from the generation, transmission or distribution of
electric energy for sale within the United States. (53) 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.
Any modification of allocation factors which requires filing under 60-day
letter procedures based on existing Commission guidelines will be filed on a
timely basis. The current guidelines require approval if the change will cause
the lesser of $50,000 or a 5% change in the allocation of cost between
companies. These guidelines are subject to change.
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.
Services will be the central control point for all services provided by
Services or through Services and during the interim before personnel are moved
into Services, from one affiliated company to another. Services will maintain
policies and procedures to accurately account for services requested by
affiliates, the cost of providing such services and, if necessary, the cost to
Services of procuring such services. This system of policies and procedures will
be maintained on line for all to use. IEC will have a separate account with
Services for executive functions that are not related to utility affairs. This
account will include charges that are appropriately included in it alone and
which, under the executive allocation formula, will be allocated to the account.
Such functions
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will include, for example, strategic planning by executives of merger and
acquisition activities.
Included as Exhibits D-6 and D-7 are the updated Utility and Non-Utility
Service Agreements, respectively, that have been revised pursuant to the order
of the PSCW. The PSCW ordered two basic changes to the Services Agreements.
First, the Applicants added language to the Service Agreements to give WP&L the
right to discontinue taking services from Services if the cost for those
particular services exceeds the fair market value for the services (please see
discussion below). Second, language was added to require the Applicants, prior
to making any amendment to the Service Agreements, to file the amendment for
approval with each of the state commissions with jurisdiction over the holding
company's activities. Under this provision, if any of the state commissions does
not object to the amendment or issue a letter requiring that the amendment be
held in abeyance until the state commission issuing the letter completes its
review, the Applicants will be able to file the amendment with the Commission.
Also, under the Service Agreements, prior to the filing of any amendment
relating to the cost allocation methods to be utilized by Services, Services and
each of the other parties to the Service Agreements would have to approve the
change.
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;(54)
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 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.)
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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.
Other than permitted "incidental services," the services provided by WP&L,
South Beloit, Utilities and IPC will only be provided in the interim period
between the consummation of the merger and the completion of the transfer of
necessary employees from the companies to Services. The completion of all of the
employee transfers, however, cannot be accomplished simultaneously. All services
will nevertheless still be provided through Services. Employees will simply be
secunded from the appropriate companies to Services to provide needed services;
these services will be billed at cost to Services by the companies and will be
accounted for on Services' accounts. Ultimately, after the transition of
employees is completed, all of these services will be performed directly by
Services through its own employees.
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. Applicants have fully satisfied the
requirements of the HSR Act and are free to consummate the merger with no
further obligations thereunder. The Applicants fully satisfied the requirements
under the HSR Act on July 7, 1996. However, because the Applicants did not
consummate the Transaction within one year of that date, the Applicants were
obliged to re-notify the DOJ and FTC of the proposed Transaction. The Applicants
resubmitted the necessary filings under the HSR Act on September 3, 1997. The
HSR Act imposes a 30-day waiting period for the consummation of each merger
comprising the Transaction subject to the HSR Act's prenotification requirement.
The Applicants, however, requested and were granted early termination of that
waiting period by the FTC on September 12, 1997.
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. The Administrative Law Judge presiding over the FERC
proceeding issued his Initial Decision on Rate and Merger Issues in Docket Nos.
EC96-13-000, ER96-1236-000 and ER96-2560-000 approving the Transaction, subject
to conditions, on July 3, 1997. The Initial FERC Decision was subject to FERC
review; the subsequent FERC order, Opinion No. 419, approving the transaction,
was issued on November 12, 1997.
The FERC's competitive analysis in Opinion No. 419, issued on November 12,
1997, focused primarily on the effect of the merger on the control of transfer
capability into WUMS and the potential that IEC would use any such enhanced
control to reduce the ability of other competing utilities from accessing
lower-cost power from outside of WUS. In response to this concern, the FERC
agreed with the conclusion of the Administrative Law Judge in the Initial
Decision on Rate and Merger Issues in Docket Nos. EC96-13-000, ER96-1236-000 and
ER96-2560-000, issued on July 3, 1997, that the Competition Stipulation
("Stipulation") entered into by the Applicants and FERC trial staff would
sufficiently mitigate any adverse competitive effects that may arise as a result
of the merger. One of the points in the Stipulation required IEC to delay the
construction of the two proposed transmission ties between IEC East and IEC West
until it is determined that the ties, either by themselves or in combination
with other transmission facility additions, will increase the simultasneous
import capability into WUMS by a minimum of 400MW over existing capability. The
Applicants proposed that IEC would make eight specified transmission system
improvements to increase simultaneous transfer capability into WUMS by
400-600MW. The cost of the improvements will be approximately $4 million. The
determination of whether the enhanced capability goal has been met shall be
conducted, under FERC Opinion No. 419, by a Facilities Study Group described in
the FERC Opinion. In addition, the Applicants agreed that they would not at any
time claim more than 250MW of capacity of the 400 MW of additional
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capacity. FERC stated that the net effect of the Applicants' commitments would
be at least an additional 150MW of transfer capability into WUMS and that such
an additional capability mitigates any competitive concerns. Thus, the FERC did
not prohibit the construction of the tie-lines, but merely delayed the start of
the construction until they were made part of an overall design plan to provide
additional simultaneous transfer capability into WUMS.
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 have reviewed
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. The NRC approved the
Transaction relative to the Duane Arnold Energy Center on August 28, 1997.
Pursuant to the Order, parties had until October 6, 1997 to request a hearing on
the Order; no such hearing was requested.
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. The
MPUC approved the Transaction in Minnesota Public Utilities Commission Opinion
and Order at Docket No. E, 6-100/PA-96- 184 (March 24, 1997). The ICC approved
the Transaction in Illinois Commerce Commission Opinion and Order in Matter No.
96-0122 (May 7, 1997) (filed as Exhibits O-3- (a) and O-4-(a)). The IUB approved
the Transaction at Docket No. SPU-96-6 on September 26, 1997 (filed as Exhibit
0-5-(a)). The PSCW, in an Order relating to Docket No. 6680-UM-100, effective
November 6, 1997, approved the merger subject to conditions (filed as Exhibit
0-6-(a)).
Pursuant to the Applicants' agreement with the PSCW and in response to the
PSCW Order effective November 6, 1997, the Applicants hereby request that the
Commission include in any order approving IEC as a registered holding company:
Approval of the Application in no way precludes the Public Service
Commission of Wisconsin, the Iowa Utilities Board, the Minnesota Utility
Commission, the Illinois Commerce Commission or any other state regulatory
authority from scrutinizing and disallowing the pass through of costs and
rates for services rendered to customers of the client companies. It is
the SEC's intention that each state commission having jurisdiction over a
client company will retain the right to review and disallow cost of
services provided to a client company by Interstate Services, Inc., that
may be subject to recovery in rates.
In its Order relating to Docket No. 6680-UM-100, effective November 6,
1997, the PSCW recognized that a conflict could arise between it and the
Commission if it applied the usual PSCW pricing standards for transactions
between Services and the utility operating companies such as WP&L. The PSCW
acknowledged that the Commission requires that such services be billed "at
cost," in contrast to its own pricing standards, which generally require billing
at the lower of at cost or "fair market value." In order to prevent a conflict
between the provisions but maintain its policy of trying to "protect ratepayers
from paying higher than market prices," the PSCW required that the Applicants
add language to the Service Agreements that gives WP&L the explicit right to
discontinue taking services from Services any time the cost for such services
exceeds the fair market value for the services. Thus, the PSCW reached a balance
between its pricing standards and those of the Commission because (i) it did not
require Services to provide services to WP&L at a price level that would deviate
from the at cost price standards of the Commission, but (ii) did require WP&L to
look elsewhere for services when the price of the services provided by Services
exceeded the fair market value for those services.
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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.
Item 5. Procedure
The Commission is respectfully requested to enter an order not later than
February 20, 1998 granting and permitting this Application/Declaration to become
effective.
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.
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 D-4 Revised Public Utility Service Agreement.
Exhibit D-5 Revised Non-Utility Service Agreement.
Exhibit D-6 Second Revised Public Utility Service Agreement.
Exhibit D-7 Second Revised Non-Utility Service Agreement.
Exhibit D-8 Description of Interstate Services' Accounting and Cost
Allocation and Other Policies and Procedures.
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.
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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]
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]
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 K-3 Order of the Administrative Law Judge at the Federal
Energy Regulatory Commission
Exhibit L-1 Memorandum in Support of the Retention by
Interstate Energy of the Gas Properties of
WP&L, South Beloit, Utilities and IPC.
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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.
Exhibit L-6 Supplemental Analysis of the Economic Impact/Last
Economies Resulting of a Divestiture of the Gas Operating
of WPLH, IES and IPC (the "Supplemental Study")
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 M-3 Discussion of Retention of Non-Utility Business
Exhibit M-4 Revised Discussion of Retention of Non-Utility Business
Exhibit M-5 Second Revised Appendix of Non-Utility Businesses
Exhibit M-5.1 Schedules of Compliance Periods of Properties of
Heartland Properties, Inc.
Exhibit N Accounting and Cost Allocation Procedures of Interstate
Services.
P Exhibit N-3 Order of Federal Energy Regulatory Commission
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.
Exhibit 0-3-(a) Order of the Minnesota Public Utilities Commission
P Exhibit O-4 Application filed by IPC and South Beloit with the ICC.
Exhibit O-4-(a) Order of the Illinois Commerce Commission
Exhibit O-5-(a) Order of the Iowa Utilities Board
Exhibit O-6-(a) Order of the Public Service Commission of Wisconsin
Exhibit P-1 Preliminary Opinion of Counsel
Exhibit P-2 Opinion of Counsel (past tense)
Exhibit Q Proposed Form of Notice
In accordance with Rule 202 of Regulation S-T, several of these Exhibits were
filed with the Commission in paper on November 17, 1997, December 31, 1997 and
February 9, 1998, pursuant to a continuing hardship exemption.
B. Financial Statements
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).
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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).
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.
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, each of the undersigned companies has duly caused this
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: February 19, 1998
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 &
Chief Executive Officer
INTERSTATE POWER COMPANY
By: /s/ Michael R. Chase
---------------------------------
Michael R. Chase
President and Chief Executive Officer
1. 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 other neighboring
utilities.
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2. WP&L and South Beloit are already directly physically interconnected by
two 69 KV transmission lines.
3. The Applicants have entered into a firm contract for the transmission of
up to 200 MW of power with ComEd and DPC for a three year period that
commenced on October 1, 1997.
4. WP&L, Utilities and IPC are members of the MAPP Regional Transmission
Committee ("RTC") and the MAPP Power and Energy Marketing Committee
("PEM"). Membership in the RTC joins the transmission resources of all
three Applicants to the MAPP transmission pool and permits participation
in the MAPP transmission pool by the Applicants through the use of MAPP
Schedule F. Membership in PEM allows the Applicants to engage in capacity
and energy transactions using MAPP Schedule K.
5. The transmission lines proposed to be constructed include 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 Mississippi River to IPC's Turkey River substation on the west side of
the Mississippi River.
6. See endnote 3. Pursuant to the competitive stipulation, Applicants agreed
to offer 50 MW of their transmission rights to WUMS loads on a first come,
first served basis.
7. See endnote 5.
8. See, e.g., CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21,
1994).
9. Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
10. E.g., the reduced regulatory burdens associated with routine financings.
1995 Report at 50.
11. 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.
12. 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.
13. 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.
14. 1995 Report at 73-4.
15. 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.
16. This number is a preliminary estimate only, and will be updated as
necessary.
17. 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.
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18. 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).
19. 1995 Report at 15-6.
20. 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).
21. 1995 Report at 74.
22. New England Electric System, 41 S.E.C. 888 (1964), aff'd, 384 U.S. 176
(1966) and 390 U.S. 207 (1968).
23. 1995 Report at 74, 75, 76. Footnotes omitted.
24. 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.
25. 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.
26. See New Century Energies, Inc. Holding Co. Act Release No. 26748 (Aug. 1,
1997) (New Century Energies Inc., a registered holding company, is the
result of the combination of Public Service Company of Colorado and
Southwestern Public Service Company.); TUC Holding Company, Holding Co.
Act Release No. 26749 (Aug. 1, 1997) (TUC Holding Company, an exempt
holding company, is the result of the combination of Texas Utilities
Company and ENSERCH Corporation.); and Houston Industries Incorporated,
Holding Co. Act Release No. 26744 (July 24, 1997) (Houston Industries
Incorporated, an exempt holding company, is the result of the combination
of Houston Industries Incorporated and NorAm Energy Corp.)
27. 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).
28. CSW Credit, Inc., Holding Co. Act Release No. 25995 (1994); Jersey Central
Power & Light Co., Holding Co. Act Release No. 24348 (March 18, 1987).
29. United Light and Railways Co., 35 S.E.C. at 519.
30. 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.
31. In the 1995 Report, the Division noted a comment by Wisconsin Electric
Power Company regarding the scope of the Wisconsin
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Act. 1995 Report at 91.
32. 1995 Report at 71.
33. 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").
34. 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).
35. 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).
36. 1995 Report at 72-74.
37. 1995 Report at 73.
38. 1995 Report at 74.
39. 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 other neighboring
utilities.
40. WP&L and South Beloit are already directly physically interconnected by
two 69 KV transmission lines.
41. The Applicants have entered into a firm contract for the transmission of
up to 200 MW of power with ComEd and DPC for a three year period that
commenced on October 1, 1997
42. WP&L, Utilities and IPC are members of the MAPP Regional Transmission
Committee ("RTC") and the MAPP Power and Energy Marketing Committee
("PEM"). Membership in the RTC joins the transmission resources of all
three Applicants to the MAPP transmission pool and permits participation
in the MAPP transmission pool by the Applicants through the use of MAPP
Schedule F. Membership in PEM allows the Applicants to engage in capacity
and energy transactions using MAPP Schedule K.
43. The transmission lines proposed to be constructed include 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
Mississippi River to IPC's Turkey River substation on the west side of the
Mississippi River.
44. See endnote 41. Pursuant to the competitive stipulation, Applicants agreed
to offer 50 MW of their transmission rights to WUMS loads on a first come,
first served basis.
45. See endnote 43.
46. 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").
47. 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).
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48. In re North American Co., 31 S.E.C. 463 (1950) (finding Panhandle Eastern
pipeline to be a common source of supply).
49. 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."
50. 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).
51. 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).
52. 1995 Report at 102. 53. The Commission has granted similar requests by
other registered system companies. See, e.g., New Century Energies, Inc.,
Holding Co. Act Release No. 26748 (Aug. 1, 1997); Entergy Corp. Holding
Co. Act Release No. 26322 (June 30, 1995).
54. 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. services to such affiliates. services to such affiliates.
services to such affiliates.
72
