UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission Name of Registrant, State of Incorporation, IRS Employer
File Address of Principal Executive Offices and Identification
Number Telephone Number Number
1-9894 INTERSTATE ENERGY CORPORATION 39-1380265
(a Wisconsin corporation)
222 West Washington Avenue
Madison, Wisconsin 53703
Telephone (608)252-3311
WPL Holdings, Inc.
(Former name, former address and former
fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past (90)
days. Yes X No _____
Number of shares outstanding of each class of common stock as of April 30,
1998:
Common Stock, $.01 par value, 76,780,996 shares outstanding
<PAGE>
CONTENTS
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997 4
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 28
Part II. Other Information 29
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
<PAGE>
INTERSTATE ENERGY CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
On April 21, 1998, the three-way business combination between IES
Industries Inc. (IES), WPL Holdings, Inc. (WPLH) and Interstate Power
Company (IPC) was completed. In connection with the merger, WPLH, as the
surviving corporation, changed its name to Interstate Energy Corporation.
Given that the merger had not yet been consummated at the end of the first
quarter of 1998, and in accordance with the rules of the Securities and
Exchange Commission, the financial statements and notes thereto included
in this Quarterly Report on Form 10-Q are those of WPLH on a stand-alone
basis. (IES and IPC deregistered as SEC registrants following
consummation of the merger). In addition, the historical information
included in Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A), including Results of Operations, focuses
primarily on WPLH. The portions of MD&A which are prospective in nature
generally reflect a discussion of operations on a post-merger basis.
Certain additional information relating to the merger is included in a
Current Report on Form 8-K, dated April 21, 1998, filed by Interstate
Energy Corporation with the Securities and Exchange Commission.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended
March 31,
1998 1997
(in thousands, except per share
amounts)
Operating revenues:
Electric utility $151,310 $158,427
Gas utility 50,318 71,579
Fees, rents, non-utility energy
sales and other 20,922 31,682
-------- --------
222,550 261,688
-------- --------
Operating expenses:
Electric production fuels 28,897 30,074
Purchased power 28,602 33,390
Cost of gas sold 30,714 47,382
Other operation 53,482 64,887
Maintenance 9,967 10,280
Depreciation and amortization 30,436 26,212
Taxes other than income taxes 8,964 8,826
-------- --------
191,062 221,051
-------- --------
Operating income 31,488 40,637
-------- --------
Interest expense and other:
Interest expense 10,830 9,679
Allowance for funds used during
construction (656) (841)
Preferred dividend requirement of
subsidiaries 828 828
Miscellaneous, net (2,725) (2,903)
-------- ---------
8,277 6,763
-------- ---------
Income before income taxes 23,211 33,874
-------- ---------
Income taxes 7,433 12,047
-------- ---------
Net income $15,778 $21,827
======== =========
Average number of common shares
outstanding 30,789 30,774
======== =========
Earnings per average common share
(basic and diluted) $0.51 $0.71
======= =======
Dividends declared per common share $0.50 $0.50
======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
March 31,
1998 December 31,
ASSETS (Unaudited) 1997
(in thousands)
Property, plant and equipment:
Utility -
Plant in service -
Electric $1,798,378 $1,790,641
Gas 237,934 237,856
Water 25,795 24,864
Common 194,935 195,815
--------- ---------
2,257,042 2,249,176
Less - Accumulated depreciation 1,093,262 1,065,726
--------- ---------
1,163,780 1,183,450
Construction work in progress 43,028 42,312
Nuclear fuel, net of
amortization 17,619 19,046
--------- ---------
1,224,427 1,244,808
Other property, plant and
equipment, net of accumulated
depreciation and amortization
of $29,927 and $29,070,
respectively 109,848 111,259
--------- ---------
1,334,275 1,356,067
--------- ---------
Current assets:
Cash and temporary cash
investments 10,119 13,987
Accounts receivable:
Customer, less allowance for
doubtful accounts of $1,143
and $1,104, respectively 29,932 39,886
Other 7,969 14,349
Notes receivable 19,752 21,699
Production fuel, at average cost 13,968 18,857
Materials and supplies, at
average cost 19,306 19,274
Gas stored underground, at
average cost 3,736 12,504
Prepayments and other 25,769 32,452
--------- ---------
130,551 173,008
--------- ---------
Investments:
Nuclear decommissioning trust
funds 129,865 112,356
Other 28,717 28,289
--------- ---------
158,582 140,645
--------- ---------
Other assets:
Regulatory assets 89,397 91,314
Deferred charges and other 99,736 100,773
--------- ---------
189,133 192,087
--------- ---------
$1,812,541 $1,861,807
========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
1998 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1997
(in thousands, except share amounts)
Capitalization:
Common stock - par value $.01 per $308 $308
share - authorized 100,000,000
shares; 30,788,593 shares
outstanding
Additional paid-in capital 303,930 304,392
Retained earnings 303,267 302,883
---------- ----------
Total common equity 607,505 607,583
---------- ----------
Subsidiary preferred stock, not
mandatorily redeemable:
Cumulative, without par value -
authorized 3,750,000 shares,
maximum aggregate stated value
$150,000,000:
$100 stated value - 449,765
shares outstanding 44,977 44,977
$ 25 stated value - 599,460
shares outstanding 14,986 14,986
--------- ---------
Total preferred stock 59,963 59,963
--------- ---------
Long-term debt (excluding current
portion) 457,901 457,520
--------- ---------
1,125,369 1,125,066
--------- ---------
Current liabilities:
Short-term borrowings 77,000 123,095
Variable rate demand bonds 56,975 56,975
Maturities and sinking funds 10,724 11,528
Accounts payable 85,561 91,175
Accrued payroll and vacations 12,173 16,030
Accrued interest 9,401 8,229
Accrued taxes 10,877 412
Other 30,992 31,728
--------- ---------
293,703 339,172
--------- ---------
Long-term liabilities:
Customer advances 32,877 34,240
Environmental liabilities 9,125 9,238
Other 46,755 47,567
--------- ---------
88,757 91,045
--------- ---------
Deferred credits:
Accumulated deferred income taxes 249,466 253,519
Accumulated deferred investment tax 34,572 35,039
credits
Other 20,674 17,966
---------- ----------
304,712 306,524
---------- ----------
$1,812,541 $1,861,807
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
WPL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended
March 31,
1998 1997
(in thousands)
Cash flows from operating
activities:
Net income $15,778 $21,827
Adjustments to reconcile net
income to net cash flows from
operating activities:
Depreciation and amortization 30,436 26,212
Amortization of nuclear fuel 1,805 -
Deferred taxes and investment
tax credits (1,607) 2,074
Other (1,205) (632)
Other changes in assets and
liabilities:
Accounts receivable 16,334 21,712
Notes receivable 1,947 6,347
Production fuel 4,889 1,135
Gas stored underground 8,768 7,920
Prepayments and other 9,135 5,962
Accounts payable (5,614) (12,412)
Accrued taxes 10,465 7,973
Other (3,585) 5,155
-------- ---------
Net cash flows from
operating activities 87,546 93,273
-------- ---------
Cash flows used for financing
activities:
Common stock dividends (15,394) (15,386)
Reduction in long-term debt (446) (10,705)
Net change in short-term
borrowings (46,095) (35,269)
--------- ---------
Net cash flows used for
financing activities (61,935) (61,360)
--------- ---------
Cash flows used for investing
activities:
Utility construction
expenditures (15,962) (25,508)
Nuclear decommissioning trust
funds (12,140) (9,267)
Other (1,377) 2,958
--------- ---------
Net cash flows used for
investing activities (29,479) (31,817)
--------- ---------
Net increase (decrease) in cash and
temporary cash investments (3,868) 96
--------- ---------
Cash and temporary cash investments
at beginning of period 13,987 11,070
--------- ---------
Cash and temporary cash investments
at end of period $10,119 $11,166
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $9,658 $11,786
======== ========
Income taxes $792 $2,580
======== ========
Preferred stock dividends of
subsidiary $828 $828
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements included herein have
been prepared by Interstate Energy Corporation (formerly WPL
Holdings, Inc.), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although management
believes that the disclosures are adequate to make the information
presented not misleading. The consolidated financial statements
include WPL Holdings, Inc. (WPLH) and its consolidated subsidiaries
including Wisconsin Power and Light Company (WP&L). These financial
statements should be read in conjunction with the financial
statements and the notes thereto included in WPLH's latest Annual
Report on Form 10-K.
In the opinion of management, all adjustments, which are normal and
recurring in nature, necessary for a fair presentation of (a) the
consolidated results of operations for the three months ended March
31, 1998 and 1997, (b) the consolidated financial position at March
31, 1998 and December 31, 1997, and (c) the consolidated statement of
cash flows for the three months ended March 31, 1998 and 1997, have
been made. Because of the seasonal nature of WP&L's operations,
results for the quarter ended March 31, 1998 are not necessarily
indicative of results that may be expected for the year ending
December 31, 1998. Certain prior period amounts have been
reclassified on a basis consistent with the 1998 presentation.
2. On January 1, 1998, WPLH adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS
130 establishes standards for reporting of comprehensive income and
its components in a full set of general purpose financial statements.
SFAS 130 requires reporting a total for comprehensive income which
includes: (a) unrealized holding gains/losses on securities
classified as available-for-sale under SFAS 115, (b) foreign currency
translation adjustments accounted for under SFAS 52, and (c) minimum
pension liability adjustments made pursuant to SFAS 87. WPLH
reported no comprehensive income in the periods presented.
3. In accordance with an order from the Public Service Commission of
Wisconsin (PSCW), effective January 1, 1998, off-system gas sales are
included in the Consolidated Statements of Income as a reduction of
the cost of gas sold rather than as gas revenue. In 1997, off-system
gas sales were included in the Consolidated Statements of Income as
gas revenue.
4. In April 1998, the three-way business combination between WPLH, IES
Industries Inc. and Interstate Power Company was consummated. WPLH,
as the surviving corporation in the merger, changed its name to
Interstate Energy Corporation and is currently doing business as
Alliant Corporation. In connection with the merger, the number of
authorized shares of Interstate Energy Corporation common stock was
increased to 200,000,000. The financial statements included herein
give no effect to the consummation of the merger. See Item 2,
"Merger" for additional information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MD&A)
MERGER
In April 1998, IES Industries Inc. (IES), WPL Holdings, Inc. (WPLH) and
Interstate Power Company (IPC) completed a three-way merger (Merger)
forming Interstate Energy Corporation. Interstate Energy Corporation is
currently doing business as Alliant Corporation (Alliant). In connection
with the Merger, IES was merged with and into WPLH forming Alliant and IPC
became a subsidiary of Alliant. In addition, following the Merger, the
holding companies for the nonregulated businesses of the former WPLH and
IES (Heartland Development Corporation (HDC) and IES Diversified Inc.
(Diversified), respectively) were merged. The resulting company from this
merger was Alliant Industries, Inc. As a result of the Merger, the first
tier subsidiaries of Alliant include: Wisconsin Power & Light Company
(WP&L), IES Utilities Inc. (IESU), IPC, Alliant Industries, Inc. and
Alliant Services Company (the subsidiary formed to provide administrative
services as required under the Public Utility Holding Company Act of
1935). Among various other regulatory constraints, Alliant is operating
as a registered public utility holding company subject to the limitations
imposed by the Public Utility Holding Company Act of 1935. Certain
additional information regarding the Merger is included in the Current
Report on Form 8-K, dated April 21, 1998, filed by Alliant with the
Securities and Exchange Commission.
Alliant currently anticipates cost savings resulting from the Merger of
approximately $749 million over a ten-year period, net of transaction
costs and costs to achieve the savings of approximately $78 million.
Approximately $32 million of costs had been incurred by the merger
partners through March 31, 1998. Alliant estimates it will record an
additional $32 million to $37 million of expenses in the second quarter of
1998. Such expenses are primarily for, among other items, employee
retirements and separations, the services of financial advisors, attorneys
and accountants, and costs relating to the various regulatory approvals
needed to complete the Merger. The remainder of the $78 million will be
incurred over the course of the next several years. The estimate of
potential cost savings constitutes a forward-looking statement and actual
results may differ materially from this estimate. The estimate is
necessarily based upon various assumptions that involve judgments with
respect to, among other things, future national and regional economic and
competitive conditions, technological developments, inflation rates,
regulatory treatments, weather conditions, financial market conditions,
future business decisions and other uncertainties. No assurance can be
given that the entire amount of estimated cost savings will actually be
realized. In addition, the allocation between the Alliant companies and
their customers of the estimated cost savings of approximately $749
million over ten years resulting from the Merger, net of costs incurred to
achieve such savings, will be subject to regulatory review and approval.
As part of the approval process for the Merger, Alliant agreed to various
rate freezes and rate caps to be implemented in certain jurisdictions for
periods not to exceed four years commencing on the effective date of the
Merger (see "Liquidity and Capital Resources - Rates and Regulatory
Matters" for a further discussion). Assuming capture of the anticipated
Merger-related synergies and no significant legislative or regulatory
changes affecting Alliant, Alliant does not expect the Merger-related
electric and natural gas price freezes to have a material adverse effect
on its financial position or results of operations.
To enhance the reader's understanding of the combined company following
the Merger, certain information relating to IES and IPC and their
respective operations, as well as to post-Merger Alliant, has been
included in this Quarterly Report on Form 10-Q. This information has been
provided for reference only and is not intended to imply that the
operations of WPLH included the operations of IES or IPC prior to the
effective time of the Merger. The portions of MD&A that are historical in
nature such as "Results of Operations" focus primarily on WPLH. The
portions of MD&A which are prospective in nature generally reflect a
discussion of operations on a post-Merger basis.
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q (including
MD&A) that are not of historical fact are forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. From time to time,
Alliant may make other forward-looking statements within the meaning of
the federal securities laws that involve judgments, assumptions and other
uncertainties beyond the control of Alliant. These forward-looking
statements may include, among others, statements concerning revenue and
cost trends, cost recovery, cost reduction strategies and anticipated
outcomes, pricing strategies, changes in the utility industry, planned
capital expenditures, financing needs and availability, statements of
Alliant's expectations, beliefs, future plans and strategies, anticipated
events or trends and similar comments concerning matters that are not
historical facts. Investors and other users of the forward-looking
statements are cautioned that such statements are not a guarantee of
future performance of Alliant and that such forward-looking statements are
subject to risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, such statements.
Some, but not all, of the risks and uncertainties include weather effects
on sales and revenues, competitive factors, general economic conditions in
Alliant's service territory, federal and state regulatory or government
actions, unanticipated construction and acquisition expenditures, issues
related to stranded costs and the recovery thereof, the operations of
Alliant's nuclear facilities, unanticipated issues or costs associated
with achieving Year 2000 compliance, the ability of Alliant to
successfully integrate the operations of the parties to the Merger,
unanticipated costs associated with certain environmental remediation
efforts being undertaken by Alliant and changes in the rate of inflation.
UTILITY INDUSTRY OUTLOOK
Alliant competes in an ever-changing utility industry. Set forth below is
an overview of this evolving marketplace.
Electric energy generation, transmission and distribution are in a period
of fundamental change in the manner in which customers obtain, and energy
suppliers provide, energy services. As legislative, regulatory, economic
and technological changes occur, electric utilities are faced with
increasing pressure to become more competitive. Such competitive pressures
could result in loss of customers and an incurrence of stranded costs
(i.e., assets and other costs rendered unrecoverable as the result of
competitive pricing). To the extent stranded costs cannot be recovered
from customers, they would be borne by security holders.
Legislative action which would allow customers to choose their electric
energy supplier is not expected in Wisconsin, Iowa or Minnesota this year.
Nationwide, however, 16 states (including Illinois and Michigan) have
adopted legislative or regulatory plans to implement electric utility
competition. In March 1998, the Clinton Administration unveiled its
electric utility competition plan, proposing that states implement
customer choice by January 1, 2003.
On a combined basis, the three companies which combined to form Alliant
realized 53%, 42%, 3% and 2% of their electric utility revenues in the
first quarter of 1998 in Iowa, Wisconsin, Minnesota and Illinois,
respectively. Approximately 88% of the electric revenues were regulated
by the respective state commissions while the other 12% were regulated by
the Federal Energy Regulatory Commission (FERC). On a combined basis, the
three companies which combined to form Alliant realized 57%, 37%, 3% and
3% of there gas utility revenues in Iowa, Wisconsin, Minnesota and
Illinois, respectively.
Federal Regulation
WP&L, IESU and IPC are subject to regulation by the FERC. The National
Energy Policy Act of 1992 addresses several matters designed to promote
competition in the electric wholesale power generation market. In 1996,
FERC issued final rules (FERC Orders 888 and 889) requiring electric
utilities to open their transmission lines to other wholesale buyers and
sellers of electricity. In March 1997, FERC issued orders on rehearing
for Orders 888 and 889 (Orders 888-A and 889-A). In response to FERC
Orders 888 and 888-A, Alliant Services Company, on behalf of WP&L, IESU
and IPC, filed an Open Access Transmission Tariff (Tariff) that complies
with the orders. The Tariff supersedes the transmission tariffs
previously filed by the three utilities. Upon receiving the final Merger-
related regulatory order, a compliance tariff was filed by Alliant
Services Company with the FERC. This filing was made to comply with the
FERC's merger order. In response to FERC Orders 889 and 889-A, WP&L, IESU
and IPC are participating in a regional Open Access Same-Time Information
System.
FERC Order 888 permits utilities to seek recovery of legitimate, prudent
and verifiable stranded costs associated with providing open access
transmission services. FERC does not have jurisdiction over retail
distribution and, consequently, the final FERC rules do not provide for
the recovery of stranded costs resulting from retail competition. The
various states retain jurisdiction over the question of whether to permit
retail competition, the terms of such retail competition, and the recovery
of any portion of stranded costs that are ultimately determined to have
resulted from retail competition.
The utility subsidiaries cannot predict the long-term consequences of
these rules on their results of operations or financial condition.
In April 1998, Alliant joined the Midwest Independent System Operator
(Midwest ISO) for electric transmission and advised the FERC of its
decision. The Midwest ISO initially was filed with the FERC by nine
energy companies in January 1998. It would establish independent
operation and control of the electric transmission system across a broad
geographic area spanning from West Virginia to Missouri. All buyers and
sellers of electricity would have open access to the transmission system
governed by the Midwest ISO.
The FERC must review and approve the Midwest ISO proposal. As part of its
Merger proceedings, the FERC accepted Alliant's offer to file an
Independent System Operator (ISO) proposal in early 1998. Alliant
believes that its decision to join the Midwest ISO satisfies this
agreement with the FERC. Alliant also filed with the FERC a copy of a
Wisconsin-only ISO proposal developed by Wisconsin Public Power Inc.
(WPPI). Alliant was ordered to include the WPPI proposal in its FERC
filing by the Public Service Commission of Wisconsin (PSCW), which
reviewed and commented upon Alliant's ISO filing with the FERC as a
condition of merger approval in Wisconsin. Alliant's decision to join the
Midwest ISO also responds to electric-reliability legislation that was
enacted in Wisconsin.
State Regulation
Iowa
IESU and IPC are subject to regulation by the Iowa Utilities Board (IUB).
The IUB initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995
on the subject of "Emerging Competition in the Electric Utility Industry"
to address all forms of competition in the electric utility industry and
to gather information and perspectives on electric competition from all
persons or entities with an interest or stake in the issues. The IUB
staff's report in this docket was accepted by the IUB, finding, in part,
that there is no compelling reason to move quickly into restructuring the
electric utility industry in Iowa, based upon the existing level of
relative prices. However, the IUB is continuing the analysis and debate
on restructuring and retail competition in Iowa.
On September 10, 1997, the IUB issued an order adopting an "Action Plan to
Develop a Competitive Model for the Electric Industry in Iowa." The IUB
states in this action plan that while "the IUB has not determined retail
competition in the electric industry is in the best interests of Iowa's
consumers...", the State of Iowa is likely to be affected by federal or
neighboring states' actions so there is a need for the IUB to design a
model that suits Iowa's needs. The priority concerns in the plan are
public interest issues (an Iowa-specific pilot project, customer
information and assessment, environmental impacts, public benefits and
transition costs/benefits) and transmission-related issues (transmission
and distribution system reliability and transmission system operations).
There is no timetable in the action plan. On October 2, 1997, the IUB
staff sent to the advisory group (of which IESU and IPC are members) for
written comment a set of proposed guidelines for an Iowa-specific electric
pilot project that would allow retail access to a "subset of all customer
classes." IESU has indicated to the IUB its interest in pursuing such a
pilot program. The IUB has also issued an order covering unbundling of
natural gas rates for all Iowa customers to be effective in 1999.
Wisconsin
WP&L is subject to regulation by the PSCW. The PSCW's inquiries into the
future structure of the natural gas and electric utility industries are
ongoing. The stated goal of the PSCW in the natural gas docket is "to
accommodate competition but not create it." The PSCW has followed a
measured approach to restructuring the natural gas industry in Wisconsin.
The PSCW has determined that customer classes will be deregulated (i.e.,
the gas utility would no longer have an obligation to procure gas
commodity for customers, but would still have a delivery obligation) in a
step-wise manner, after each class has been demonstrated to have a
sufficient number of gas suppliers available. A number of working groups
have been established by the PSCW and these working groups are addressing
numerous subjects which need to be resolved before deregulation may
proceed.
The short-term goals of the electric restructuring process are to ensure
reliability of the state's electric system and development of a robust
wholesale electric market. The longer-term goal is to establish
prerequisite safeguards to protect customers prior to allowing retail
customer choice. The PSCW is following a timetable to make this latter
determination on allowing customer choice in 1999-2000.
The PSCW has issued an order outlining its policies and principles for
Public Benefits (low-income assistance, energy efficiency, renewable
generation and environmental research and development) including funding
levels, administration of the funds and how funds should be collected from
customers. The PSCW has proposed increasing funding levels primarily
through utility rates by $50 to $75 million statewide. Legislation to
implement this proposal is being developed and likely will be introduced
in 1998.
Minnesota
IPC is subject to regulation by the Minnesota Public Utilities Commission
(MPUC). The MPUC established an Electric Competition Working Group in
April 1995. On October 28, 1997, the Working Group issued a report and
recommendations on retail competition. The MPUC reviewed the report and
directed its staff to develop an electric utility restructuring plan and
timeline. The Minnesota legislature had established a joint legislative
task force on electric utility restructuring in 1995. This joint task
force has generally been inactive the past year. It appears the earliest
restructuring legislation could be introduced is in 1999.
Illinois
IPC and WP&L are subject to regulation by the Illinois Commerce
Commission. The State of Illinois has passed electric deregulation
legislation requiring customer choice of electric supplier for all
customers by May 1, 2002. The legislation also requires filing a plan for
the assignment of transmission assets in Illinois to an ISO by June 1998.
Alliant plans to meet this requirement by joining the Midwest ISO as
previously discussed under "Federal Regulation."
Summary
Each of the utilities complies with the provisions of Statement of
Financial Accounting Standards No. 71 (SFAS 71) "Accounting for the
Effects of Certain Types of Regulation." SFAS 71 provides that rate-
regulated public utilities record certain costs and credits allowed in the
ratemaking process in different periods than for nonregulated entities.
These are deferred as regulatory assets or regulatory liabilities and are
recognized in the consolidated statements of income at the time they are
reflected in rates. If a portion of the utility subsidiaries' operations
becomes no longer subject to the provisions of SFAS 71 as a result of
competitive restructurings or otherwise, a write-down of related
regulatory assets and possibly other charges would be required, unless
some form of transition cost recovery is established by the appropriate
regulatory body that would meet the requirements under generally accepted
accounting principles for continued accounting as regulatory assets during
such recovery period. In addition, each utility subsidiary would be
required to determine any impairment of other assets and write-down any
impaired assets to their fair value. The utility subsidiaries believe
they currently meet the requirements of SFAS 71.
IESU, IPC and WP&L cannot currently predict the long-term consequences of
the competitive and restructuring issues described above on their results
of operations or financial condition. The major objective is to allow the
utilities to better prepare for a competitive, deregulated utility
industry. The strategy for dealing with these emerging issues includes
seeking growth opportunities, continuing to offer quality customer
service, ongoing cost reductions and productivity enhancements.
WPLH RESULTS OF OPERATIONS -
THREE MONTHS ENDED MARCH 31, 1998 VS. MARCH 31, 1997
Overview
WPLH reported net income for the first quarter of 1998 of $15.8 million or
$0.51 per share, as compared to $21.8 million or $0.71 per share for the
first quarter of 1997. The decrease in first quarter 1998 earnings versus
first quarter 1997 was primarily the result of lower operating income at
WP&L. All references to earnings per share throughout MD&A refer to both
basic and diluted earnings per share.
Gas and electric margins decreased $4.6 and $1.2 million, respectively, in
the first quarter of 1998 as compared to the first quarter of 1997. The
decrease in gas margin was primarily due to lower weather-driven sales as
well as a 2.2% average retail gas rate decrease which went into effect on
April 29, 1997. Electric margin declined slightly due to an average retail
electric rate decrease of 2.4% and warmer weather which was partially
offset by the positive impact on electric margin of reduced purchased
power costs. In addition to lower margins, depreciation expense also
increased due to property additions and higher depreciation and
decommissioning expense associated with the Kewaunee Nuclear Power Plant
(Kewaunee), in which WP&L has an ownership interest.
HDC, parent company of WPLH's nonregulated operations, reported a net loss
of $0.7 million for the first quarter of 1998 compared with a net loss of
$1.1 million for the first quarter of 1997.
Electric Operations
Electric margins and megawatt-hour (MWH) sales for WP&L for the three
months ended March 31 were as follows:
<TABLE>
<CAPTION>
Revenues and Costs MWHs Sold
(In Thousands) Change (In Thousands) Change
1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Residential $ 49,755 $ 54,804 (9%) 758 811 (7%)
Commercial 25,604 26,799 (4%) 459 467 (2%)
Industrial 37,069 35,282 5% 1,041 995 5%
-------- -------- ------ ------
Total from
ultimate customers 112,428 116,885 (4%) 2,258 2,273 (1%)
Sales for resale 35,626 38,504 (7%) 1,415 1,387 2%
Other 3,256 3,038 7% 17 20 (15%)
-------- -------- ------ ------
Total 151,310 158,427 (4%) 3,690 3,680 -
====== ====== =======
Electric
production fuels 28,897 30,074 (4%)
Purchased power 28,602 33,390 (14%)
-------- --------
Margin $ 93,811 $ 94,963 (1%)
======== ======== ======
</TABLE>
Electric margin decreased $1.2 million, or 1%, during the first quarter of
1998 compared with the first quarter of 1997 due to an average retail rate
reduction of 2.4% effective April 29, 1997 and reduced residential and
commercial sales. The sales decline was primarily due to warmer weather
in the first quarter of 1998 compared with the same period in 1997.
Partially offsetting the decline in margin was the favorable impact of
reduced purchased power costs and reduced electric production fuel costs
per MWH in the first quarter of 1998 compared with the same period in
1997. Purchased power costs declined due to Kewaunee being operational in
the first quarter of 1998. Kewaunee experienced outages for steam
generator repairs for most of the first six months of 1997. Electric
production fuel costs per MWH were higher in the first quarter of 1997 due
to the increased use of higher cost peaking plants. Various temporary
plant outages, including at Kewaunee, during the first quarter of 1997
resulted in increased use of the peaking units.
Gas Operations
Gas margins and dekatherm (Dth) sales for WP&L for the three months ended
March 31 were as follows:
<TABLE>
<CAPTION>
Revenues and Costs Dekatherms Sold
(In Thousands) Change (In Thousands) Change
1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Residential $ 31,010 $ 41,633 (26%) 5,227 6,053 (14%)
Commercial 15,237 21,039 (28%) 3,121 3,678 (15%)
Industrial 2,675 3,956 (32%) 602 730 (18%)
Transportation and other 1,396 4,951 (72%) 3,829 6,178 (38%)
--------- -------- ------ ------
Total 50,318 71,579 (30%) 12,779 16,639 (23%)
======= ====== ======
Cost of gas sold 30,714 47,382 (35%)
--------- --------
Margin $ 19,604 $ 24,197 (19%)
========= ======== ====
</TABLE>
Gas margin declined $4.6 million, or 19%, in the first quarter of 1998 as
compared with the first quarter of 1997 primarily due to a reduction in
dekatherm sales and an average retail rate reduction of 2.2% effective
April 29, 1997. Sales declined 23% primarily as a result of warmer weather
in the first quarter of 1998 compared with the first quarter of 1997. The
significant decline in transportation and other revenues resulted from
both reduced dekatherm sales and an accounting change for off-system sales
as required by the PSCW effective January 1, 1998. The accounting change
requires that beginning in 1998, off-system gas sales are reported as a
reduction of the cost of gas sold rather than as gas revenue. Off-system
gas sales were $6.9 million and $5.4 million in the first quarter of 1998
and 1997, respectively.
Effective January 1, 1995, the PSCW approved the replacement of
the purchased gas adjustment clause with an adjustment mechanism based on
a prescribed commodity price index. Fluctuations in WP&L's commodity cost
of gas as compared with the price index are subject to a customer sharing
mechanism, with WP&L's gains or losses limited to $1.1 million. The gas
incentive mechanism was modified effective April 29, 1997 with Rate Order
UR-110 to include a revised sharing mechanism. Under the revised sharing
mechanism, 40% of all gains and losses relative to current commodity
prices as well as other benchmarks are recognized by WP&L rather than
refunded to or recovered from customers. Due to favorable gas procurement
activities, WP&L realized favorable contributions to gas margin of $0.2
million for the first quarter of 1998 and $0.9 million for the first
quarter of 1997.
Fees, Rents, Non-Utility Energy Sales and Other Revenues
Fees, rents, non-utility energy sales and other revenues
primarily reflect sales and revenues of WPLH's nonregulated subsidiaries,
consolidated under HDC. Revenues (in thousands) of the principal
businesses of HDC and including WP&L's water operations for the three
months ended March 31 were as follows:
1998 1997
Environmental and
engineering services $16,700 $19,527
Energy marketing (18) 7,873
Other 4,240 4,282
------- -------
$20,922 $31,682
======= =======
The decline in revenues in the energy marketing business for the first
quarter of 1998 was due to the transfer of the power marketing business to
a joint venture formed with Cargill Incorporated in July 1997. The
environmental and engineering services business experienced a decline in
revenues due to a softening market.
In addition to the revenues of the nonregulated businesses, other revenues
also include water revenues of $1.2 million in the first quarter of 1998
and $1.0 million in the first quarter of 1997.
Operating Expenses
Other operation expense includes expenses related to WP&L, WPLH and the
nonregulated businesses of HDC. The distribution of other operation
expense (in thousands) was as follows for the three months ended March 31:
1998 1997
WP&L $34,003 $32,203
Nonregulated businesses
and parent company operations 19,479 32,684
------- -------
$53,482 $64,887
======= =======
Contributing to the decrease for the nonregulated businesses and parent
company operations was the transfer of the power marketing business to the
joint venture as described above in "Fees, Rents, Non-Utility Energy Sales
and Other Revenues" and the softening market for the environmental and
engineering services business.
Other operation expense at WP&L increased as a result of early retirement
and employee separation expenses recorded in the first quarter of 1998.
Depreciation and amortization expense increased due to property additions
and higher depreciation and decommissioning expense associated with
Kewaunee which were effective in May 1997 ( see "Capital Requirements-
Nuclear Facilities" for additional information).
Interest Expense and Other
The increase in interest expense and other is primarily the result of
increased levels of short-term borrowings.
Income Taxes
The decrease in income taxes between periods reflects lower taxable income
and a lower effective income tax rate in the first quarter of 1998
compared to the first quarter of 1997. The lower effective income tax
rate is a result of an adjustment of prior period taxes.
PRO FORMA EARNINGS PER SHARE INFORMATION AND HISTORICAL
IES AND IPC DATA
Set forth below is information regarding pro forma earnings per share
(basic and diluted) of Alliant and certain historical financial
information regarding IES and IPC for the three months ended March 31,
1998 and 1997.
The earnings per average common share for Alliant on a pro forma basis and
for each of WPLH, IES and IPC for the three months ended March 31, 1998
and 1997 were as follows:
1998 1997
Alliant pro forma combined $0.43 $0.56
WPLH 0.51 0.71
IES 0.39 0.41
IPC 0.51 0.90
The slight decrease in IES's earnings per share in the first quarter of
1998 as compared with the first quarter of 1997 was primarily the result
of milder weather conditions, one-time Merger-related expenses and
increased depreciation expense. The higher expenses were partially offset
by lower purchased power capacity costs.
The decrease in IPC's earnings per share in the first quarter of 1998 as
compared with the first quarter of 1997 was primarily the result of
significant one-time Merger-related expenses and milder weather
conditions.
LIQUIDITY AND CAPITAL RESOURCES
Historical WPLH Analysis
Cash flows from operating activities at WPLH decreased to $88 million in
the first quarter of 1998 compared with $93 million in the first quarter
of 1997 primarily due to a reduction in net income. Cash flows used for
financing activities were $62 million in the first quarter of 1998 as
compared to $61 million in the first quarter of 1997. Cash flows used for
investing activities were lower in the first quarter of 1998 as compared
with the first quarter of 1997 due to reduced utility construction
expenditures, which were partially offset by higher nuclear
decommissioning funding levels. Times interest earned before income taxes
for WPLH for the first quarter of 1998 was 3.22 compared with 4.59 for the
first quarter of 1997.
Post-Merger Considerations
The capital requirements of Alliant are primarily attributable to its
utility subsidiaries' construction and acquisition programs, its debt
maturities and business opportunities of Alliant Industries, Inc. It is
anticipated that future capital requirements of Alliant will be met by
cash generated from operations and external financing. The level of cash
generated from operations is partially dependent upon economic conditions,
legislative activities, environmental matters and timely regulatory
recovery of utility costs. Alliant's liquidity and capital resources will
be affected by costs associated with environmental and regulatory issues.
Emerging competition in the utility industry could also impact Alliant's
liquidity and capital resources, as discussed previously in the "Utility
Industry Outlook" section.
Alliant has interests in the international arena. At March 31, 1998, IES
had approximately $60 million of investments in foreign entities. At
March 31, 1998, WPLH and IPC did not have material foreign investments.
It is expected that Alliant will continue to explore additional
international investment opportunities. Such investments may carry a
higher level of risk than Alliant's traditional domestic utility
investments or Alliant Industries, Inc.'s domestic investments. Such risks
could include foreign government actions, foreign economic and currency
risks and others.
Alliant is expected to pursue various potential business development
opportunities, including international as well as domestic investments,
and is devoting resources to such efforts. It is anticipated that Alliant
will strive to select investments where the international and other risks
are both understood and manageable.
At March 31, 1998, IES and IPC had investments in the stock of McLeodUSA
Inc. (McLeod), a telecommunications company, valued at $432 million and
$1.9 million (based on a March 31, 1998 closing price of $42.25 per share
and compared to a cost basis of $29.0 million and $0.1 million),
respectively. Pursuant to the applicable accounting rules, the carrying
value of the investments are adjusted to the estimated fair value each
quarter based on the closing price at the end of the quarter. The
adjustments do not impact earnings as the unrealized gains or losses, net
of taxes, are recorded directly to the common equity section of the
balance sheet. In addition, any such gains or losses are reflected in
current earnings only at the time they are realized through a sale. IES
and IPC have entered into agreements with McLeod which restricts the sale
or disposal of their shares without the consent of the McLeod Board of
Directors until September and June 1998, respectively.
The merger partners had certain off-balance sheet financial guarantees and
commitments outstanding at March 31, 1998. They generally consist of
third-party borrowing arrangements and lending commitments as well as
guarantees of financial performance of syndicated affordable housing
properties. Management currently believes the possibility of Alliant
having to make any material cash payments under these agreements is
remote.
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets, and
costs of external financing, are dependent on creditworthiness. The
debt ratings of Alliant and certain subsidiaries are as follows:
Standard
Moody's &
Poor's
IESU - Secured long-term debt A2 A+
- Unsecured long-term debt A3 A
- Commercial paper (a) P1 A1
WP&L - Secured long-term debt Aa2 AA
- Unsecured long-term debt Aa3 A+
- Commercial paper (a) P1 A1+
IPC - Secured long-term debt A1 A+
- Unsecured long-term debt A2 A
- Commercial paper (a) P1 A1
Alliant
Industries, Inc. - Commercial paper P2 A1
Alliant - Commercial paper (a) P1 A1
(a) IESU, WP&L and IPC expect to participate in a utility money pool
which will be funded, as needed, through the issuance of commercial
paper. This utility money pool is expected to replace the commercial
paper programs currently in place at IESU, WP&L and IPC.
In October 1997, Diversified entered into a 3-Year Credit Agreement with
various banking institutions, which has been assumed by Alliant
Industries, Inc. The agreement extends through October 2000, with one-
year extensions available upon agreement by the parties. Unused borrowing
availability under this agreement is also used to support Alliant
Industries, Inc.'s commercial paper program. A combined maximum of $450
million of borrowings under this agreement and the commercial paper
program may be outstanding at any one time. Interest rates and maturities
are set at the time of borrowing. The rates are based upon quoted market
prices and the maturities are less than one year. At March 31, 1998,
Diversified had $212 million of borrowings outstanding under this facility
with interest rates ranging from 5.68%-5.90%. (Refer to the "Other
Matters-Financial Instruments" section for a discussion of several
interest rate swaps Alliant Industries, Inc. has entered into relative to
$200 million of borrowings under this Agreement). Alliant Industries,
Inc. intends to continue borrowing under the renewal options of this
facility and no conditions existed at March 31, 1998 that would prevent
such borrowings. Accordingly, this debt is classified as long-term. In
addition, Alliant Industries, Inc. also has in place a $150 million 364-
Day Credit Agreement which is described below.
Other than periodic sinking fund requirements, which will not require
additional cash expenditures, the following long-term debt (in millions)
will mature prior to December 31, 2002:
IESU $185.1
IPC 8.1
WP&L 10.8
Alliant Industries, Inc. 236.6
--------
Alliant $440.6
========
Depending upon market conditions, it is currently anticipated that a
majority of the maturing debt will be refinanced with the issuance of
long-term securities.
IESU, IPC and WP&L currently have no authority from their applicable
federal/state regulatory commissions or the Securities and Exchange
Commission (SEC) to issue additional long-term debt. The companies are
evaluating their future financing needs and will make the necessary
regulatory filings as needed.
The various charter provisions of the entities identified below authorize
and limit the aggregate amount of additional shares of Cumulative
Preferred Stock and Cumulative Preference Stock that may be issued. At
March 31, 1998, the companies could have issued the following additional
shares of Cumulative Preferred or Preference Stock:
IESU IPC WP&L
Cumulative Preferred - 1,238,619 2,700,775
Cumulative Preference 700,000 2,000,000 -
The capitalization ratios of WPLH, IES, IPC and Alliant on a pro forma
basis were as follows:
<TABLE>
<CAPTION>
Alliant
Pro WPLH IES IPC
Forma
3/31/98 3/31/98 12/31/97 3/31/98 12/31/97 3/31/98 12/31/97
<S> <C> <C> <C> <C> <C>
Common equity 52% 54% 54% 51% 49% 53% 52%
Preferred stock 4 5 5 1 1 8 8
Long-term debt 44 41 41 48 50 39 40
------- ------ ------ ------ ------ ----- ------
100% 100% 100% 100% 100% 100% 100%
</TABLE>
For interim financing, WP&L, IESU and IPC were authorized by the
applicable federal or state regulatory agency to issue short-term debt as
follows (in millions) at March 31, 1998:
WP&L IESU IPC
Regulatory authorization $138 $200 $75
Short-term debt outstanding $39 - $12
WPLH also had an additional $38 million of short-term debt outstanding at
March 31, 1998. In addition to providing for ongoing working capital
needs, this availability of short-term financing provides the companies
flexibility in the issuance of long-term securities. The level of short-
term borrowing fluctuates based on seasonal corporate needs, the timing of
long-term financing, and capital market conditions. To maintain
flexibility in its capital structure and to take advantage of favorable
short-term rates, WP&L and IESU also use proceeds from the sale of
accounts receivable and unbilled revenues to finance a portion of their
long-term cash needs. Alliant anticipates that short-term debt will
continue to be available at reasonable costs due to current ratings by
independent utility analysts and rating services.
In October 1997, Diversified entered into a 364-Day Credit Agreement with
various banking institutions, which agreement has been assumed by Alliant
Industries, Inc. The agreement extends through October 20, 1998, with 364
day extensions available upon agreement by the parties. The unborrowed
portion of this agreement is also used to support Alliant Industries
Inc.'s commercial paper program. A combined maximum of $150 million of
borrowings under this agreement and the commercial paper program may be
outstanding at any one time. Interest rates and maturities are set at the
time of borrowing. The rates are based upon quoted market prices and the
maturities are less than one year. There were no borrowings under this
facility at March 31, 1998.
In addition to the aforementioned borrowing capability under Alliant
Industries, Inc. Credit Agreements, WPLH, IES and IPC had the following
bank lines of credit (in millions) at March 31, 1998 available to support
borrowings, which lines of credit have been available to Alliant following
consummation of the Merger:
WPLH IES IPC
Bank lines of credit $210 $45 $53
Amount utilized - $11 $12
Commitment fees are paid to maintain these lines and there are no
conditions which restrict the unused lines of credit. From time to time,
Alliant may borrow from banks and other financial institutions in lieu of
commercial paper, and has agreements with several financial institutions
for such borrowings. There are no commitment fees associated with these
agreements and there were no borrowings outstanding under these agreements
at March 31, 1998.
Given the above financing flexibility, including Alliant's access to both
the debt and equity securities markets, management believes it has the
necessary financing capabilities in place to adequately finance its
capital requirements for the foreseeable future.
Capital Requirements
General
Capital expenditure and investment and financing plans are subject to
continual review and change. The capital expenditure and investment
programs may be revised significantly as a result of many considerations,
including changes in economic conditions, variations in actual sales and
load growth compared to forecasts, requirements of environmental, nuclear
and other regulatory authorities, acquisition and business combination
opportunities, the availability of alternate energy and purchased power
sources, the ability to obtain adequate and timely rate relief,
escalations in construction costs and conservation and energy efficiency
programs.
Construction expenditures for WPLH for the three months ended March 31,
1998 were $16.0 million. Alliant's anticipated construction and
acquisition expenditures for 1998 are estimated to be approximately $630
million, consisting of approximately $277 million in its utility
operations, $190 million for energy-related international investments and
$163 million for new business development initiatives at Alliant
Industries, Inc. The level of 1998 domestic and international investments
could vary significantly from the estimates noted here dependent on actual
investment opportunities as well as the timing of the opportunities. It
is expected that Alliant will spend approximately $1.2 billion on utility
construction and acquisition expenditures during 1999-2002. The strategy
related to the construction and acquisition program for Alliant
Industries, Inc. during 1999-2002 is currently being finalized. It is
expected that Alliant Industries, Inc. will invest in energy products and
services in domestic and international markets, industrial services
initiatives and other strategic initiatives.
Alliant anticipates financing utility construction expenditures during
1998-2002 through internally generated funds supplemented, when required,
by outside financing. Funding of a majority of the Alliant Industries,
Inc. construction and acquisition expenditures is expected to be completed
with external financings.
Nuclear Facilities
Alliant owns interests in two nuclear facilities, Kewaunee and the Duane
Arnold Energy Center (DAEC). Set forth below is a discussion of certain
matters impacting these facilities.
Kewaunee, a 535-megawatt (nameplate capacity) pressurized water reactor
plant, is operated by Wisconsin Public Service Corporation (WPSC) and is
jointly owned by WPSC (41.2%), WP&L (41.0%), and Madison Gas & Electric
Company (MG&E) (17.8%). The Kewaunee operating license expires in 2013.
In accordance with PSCW authorization, WP&L had deferred $3.1 million at
March 31, 1998, associated with Kewaunee steam generator repair costs. In
March 1998, the PSCW approved recovery of these costs through a customer
surcharge effective April 1, 1998 through May 31, 1998.
On April 7, 1998, the PSCW approved WPSC's application for replacement of
the two steam generators at Kewaunee. The total cost of replacing the
steam generators would be approximately $90.7 million with WP&L's share of
the cost being approximately $37.2 million. The replacement work is
tentatively planned for the spring of 2000 and will take approximately 60
days.
Notwithstanding PSCW approval of the steam generator replacement, issues
related to the continued operation and future ownership of Kewaunee must
be resolved before the replacement proceeds. The owners of Kewaunee have
differing views on the desirability of proceeding with the steam generator
replacement project. WPSC favors replacement at the earliest possible
date because of reliability and cost concerns related to steam generator
repairs. The co-owners are continuing to discuss resolution of the
issues. Background information regarding Kewaunee steam generator repairs
is set forth in WPLH's Annual Report on Form 10-K for the year ended
December 31, 1997, to which reference is hereby made.
The PSCW has directed the owners of Kewaunee to develop depreciation and
decommissioning cost levels based on an expected plant end-of-life of 2002
versus a license end-of-life of 2013. This was prompted by the
uncertainty regarding the expected useful life of the plant without steam
generator replacement. The revised end-of life of 2002 resulted in higher
depreciation and decommissioning expense at WP&L beginning in May 1997, in
accordance with the PSCW rate order UR-110. At March 31, 1998, the net
carrying amount of WP&L's investment in Kewaunee was approximately $45.9
million. The current cost of WP&L's share of the estimated costs to
decommission Kewaunee is $181.3 million and exceeds the trust assets at
March 31, 1998 by $51.4 million. The costs of decommissioning are assumed
to escalate at an annual rate of 5.83%. WP&L's retail customers in the
Wisconsin jurisdiction are responsible for approximately 80% of WP&L's
share of Kewaunee costs.
DAEC, a 520-megawatt boiling water reactor plant, is operated by IESU and
IESU has a 70% ownership interest in the plant. The DAEC operating
license expires in 2014. Pursuant to the most recent electric rate case
order, the IUB allows IESU to recover $6.0 million annually for the cost
to decommission the DAEC. The current recovery figures are based on an
assumed cost to decommission the DAEC of $252.8 million, which is IESU's
70% portion in 1993 dollars, based on the Nuclear Regulatory Commission
(NRC) minimum formula (which exceeds the amount in the current
site-specific study completed in 1994). At March 31, 1998, IESU had $80.5
million invested in external decommissioning trust funds and also had an
internal decommissioning reserve of $21.7 million recorded as accumulated
depreciation.
Refer to the "Other Matters - Environmental" section for a discussion of
various issues impacting Alliant's future capital requirements.
Rates and Regulatory Matters
In November 1997, as part of its merger approval, FERC accepted a proposal
by IESU, WP&L, and IPC, which provides for a four-year freeze on wholesale
electric prices beginning with the effective date of the Merger.
WP&L
In connection with its approval of the Merger, the PSCW accepted a WP&L
proposal to freeze rates for four years following the date of the Merger.
A re-opening of an investigation into WP&L's rates during the rate freeze
period, for both cost increases and decreases, may occur only for single
events that are not Merger-related and have a revenue requirement impact
of $4.5 million or more. In addition, the electric fuel adjustment clause
and purchase gas adjustment clause are not affected by the rate freezes.
In rate order UR-110, the PSCW approved new rates effective April 29,
1997. On average, WP&L's retail electric rates under the new rate order
declined by 2.4% and retail gas rates declined by 2.2%. Other items
included in the rate order were: authorization of a surcharge to collect
replacement power costs while Kewaunee remained out of service for the
period effective April 29, 1997 through July 1, 1997; authorization of an
increase in the return on equity to 11.7% from 11.5%; reinstatement of the
electric fuel adjustment clause; continuation of a modified gas
performance based ratemaking incentive mechanism; and a modified SO2
incentive. In addition, the PSCW ordered that it must approve the payment
of dividends by WP&L to its parent company that are in excess of the level
forecasted in the rate order ($58.3 million), if such dividends would
reduce WP&L's average common equity ratio below 52.00% of total
capitalization. Based on the PSCW method approved for calculating return
on average common equity, the 13-month average for the period ending March
31, 1998 was 50.07%.
The retail electric rates are based in part on forecasted fuel and
purchased power costs. Under PSCW rules, Wisconsin utilities can seek
emergency rate increases if these costs are more than three percent higher
than the estimated costs used to establish rates. In WP&L's case, actual
fuel costs since May 1997 have been higher than estimated and are expected
to remain well above the estimated levels in 1998. As a result, WP&L has
asked the PSCW to approve a rate increase. It is expected that the PSCW
will issue a decision in the second quarter of 1998. Any increase
approved by the PSCW will be implemented on a prospective basis.
The gas performance incentive was modified to eliminate the maximum gain
or loss to be recognized by WP&L. Previously, this incentive was limited
to $1.1 million to WP&L. The incentive includes a sharing mechanism,
whereby 40% of all gains and losses relative to current commodity prices
as well as other benchmarks are recognized by WP&L rather than refunded to
or recovered from customers.
IESU
In September 1997, IESU agreed with the IUB to provide Iowa customers a
four-year retail electric and gas price freeze commencing on the effective
date of the Merger. The agreement excluded price changes due to
government-mandated programs (such as energy efficiency cost recovery),
the electric fuel adjustment clause and purchase gas adjustment clause and
unforeseen dramatic changes in operations. In addition, the price freeze
does not preclude a review by either the IUB or Office of Consumer
Advocate (OCA) into whether IESU is exceeding a reasonable return on
common equity.
Under provisions of the IUB rules, IESU is currently recovering the costs
it has incurred for its energy efficiency programs. There have been
several cost recovery filings made and approved by the IUB over the course
of the last few years. Generally, the costs incurred through July 1997
are being recovered over various four-year periods. The IUB commenced a
rulemaking in January 1997 to implement statutory changes allowing
concurrent recovery and a final order in this proceeding was issued in
April 1997. The new rules allowed IESU to begin concurrent recovery of
its prospective expenditures on August 1, 1997. The implementation of
these changes will gradually eliminate the regulatory asset that was
created under the prior rate making mechanism as these costs are
recovered.
IESU has the following amounts of energy efficiency costs included in
regulatory assets on its Consolidated Balance Sheets (in thousands):
Four-Year March 31, December 31,
Recovery Beginning 1998 1997
Costs incurred through 1993 6/95 $6,167 $7,779
Costs incurred in 1994 -1995 8/97 28,357 30,924
Costs incurred from 1/96 - 7/97 8/97 17,955 19,847
(Over) under collection
of concurrent recovery N/A (532) 850
------- --------
$51,947 $59,400
======= ========
IPC
In September 1997, IPC agreed with the IUB to provide Iowa customers a
four-year retail electric and gas price freeze commencing on the effective
date of the Merger. The agreement excluded price changes due to
government-mandated programs (such as energy efficiency cost recovery),
the electric fuel adjustment clause and purchase gas adjustment clause and
unforeseen dramatic changes in operations. In addition, the price freeze
does not preclude a review by either the IUB or OCA into whether IPC is
exceeding a reasonable return on common equity. IPC also agreed with the
MPUC and Illinois Commerce Commission to four-year and three-year rate
freezes, respectively, commencing on the effective date of the Merger.
On September 30, 1997, the IUB approved a settlement between IPC and the
OCA which provided for an electric rate reduction of approximately $3.2
million annually. The reduction applied to all bills rendered on and
after October 7, 1997.
IPC is also recovering its energy efficiency costs in Iowa in a similar
manner as IESU and began its concurrent cost recovery in October 1997.
IPC has the following amounts of energy efficiency costs to be recovered
in Iowa included in regulatory assets on its Balance Sheets (in
thousands):
<TABLE>
<CAPTION>
Four-Year
Recovery
Beginning March 31, 1998 December31, 1997
<S> <C> <C> <C>
Costs incurred through 1992 10/94 $608 $912
Costs incurred in 1993 - 1995 5/97 15,363 16,576
Costs incurred from 1/96 - 9/97 10/97 9,143 9,796
------- -------
$25,114 $27,284
======= =======
</TABLE>
In addition, IPC had $2.4 million and $2.7 million at March 31, 1998 and
December 31, 1997, respectively, included in regulatory assets for energy
efficiency recoveries in Minnesota.
Assuming capture of the Merger-related synergies described under the
caption "Merger" above and no significant legislative or regulatory
changes affecting its utility subsidiaries, Alliant does not expect the
Merger-related electric and gas price freezes to have a material adverse
effect on its financial position or results of operations.
OTHER MATTERS
Year 2000
Alliant utilizes software, embedded systems and related technologies
throughout its businesses that will be affected by the date change in the
Year 2000. An internal task force has been assembled to review and
develop the full scope, work plan and cost estimates to ensure that
Alliant's systems continue to meet their internal and customer needs.
Phase I of the project, which encompassed a review of the necessary
software modifications that will need to be made to Alliant's financial
and customer systems, has been completed. Alliant currently estimates
that the remaining costs to be incurred on this phase of the project will
be approximately $4 million to $8 million in the aggregate.
The task force has also begun Phase II of the project which is an
extensive review of the embedded systems for Year 2000 conversion issues.
The task force has inventoried critical embedded operating systems and is
working with the system vendors to ascertain Year 2000 compliance of these
systems. The task force is also developing detailed plans for testing and
remediating critical systems (i.e., systems whose failure could affect
employee safety or business operations).
As part of an awareness effort, Alliant has also notified its utility
customers of its Year 2000 project efforts. Key suppliers are also being
contacted to confirm their Year 2000 readiness plans. Efforts are also
underway to develop contingency plans for critical embedded operating
systems. Management is currently unable to estimate the costs to be
incurred on this phase of the project but believes that the costs will be
significant. An estimate of the expenses to be incurred on this phase of
the project is expected to be available by the third quarter of 1998.
The goal of Alliant is to have all the material Year 2000 conversions made
sufficiently in advance of December 31, 1999 to allow for unanticipated
issues. At this time, management is unable to determine if the Year 2000
issue will have a material adverse effect on the financial position or
results of operations of Alliant.
In April 1998, WP&L filed a request with the PSCW requesting deferral
treatment of all Year 2000 costs provided those costs exceed $4.5 million.
In May 1998, the PSCW approved the deferral of certain costs associated
with the Year 2000 issue and required WP&L to submit a request and support
for the rate recovery of these costs by November 1, 1998.
Labor Issues
The status of the collective bargaining agreements at each of the
utilities is as follows at March 31, 1998:
IESU WP&L IPC
Number of collective bargaining agreements 6 1 3
Percentage of workforce covered by agreements 50 68 64
There are two agreements at IESU expiring on July 1, 1998 and the number
of employees covered under these agreements is relatively small.
Financial Instruments
WPLH has historically had only limited involvement with derivative
financial instruments and has not used them for trading purposes. They
have been used to manage well-defined interest rate and commodity price
risks. WP&L historically has entered into interest rate swap agreements
to reduce the impact of changes in interest rates on its floating-rate
long-term debt, short-term debt and the sales of its accounts receivable.
The total notional amount of interest rate swaps outstanding was $30
million at March 31, 1998. WPLH has historically used swaps, futures and
options to hedge the price risks associated with the purchase and sale of
stored gas at WP&L and with the purchases and sales of gas and electric
power at the energy marketing subsidiary.
IES historically had a policy that derivative financial instruments were
to be used only to mitigate business risks and not for speculative
purposes. Derivatives were used on a very limited basis. At March 31,
1998, IES did not have any material derivatives outstanding.
On April 23, 1998 Alliant Industries, Inc. successfully competitively bid
$200 million of interest rate swaps with six relationship banks. These
interest rate swap agreements were entered into to reduce the impact of
changes in variable interest rates by converting variable rate borrowings
into fixed rate borrowings. Two separate structures of $100 million each
were put up for bid. The first structure, a straight 2-year swap, was
priced at 5.841%. Under this structure, Alliant Industries, Inc. pays a
fixed rate of 5.841% and receives 3-month London Interbank Offer Rate
(LIBOR). Payments are made and LIBOR is reset quarterly. The second
structure, a 2-year swap with a 1-year extension option, was priced at
5.6891%. This structure is identical to the first structure except the
bank has the option to extend the swap an additional year at the end of
the second year. The LIBOR set for the initial 3-month period is 5.6875%.
IPC had no derivatives outstanding at March 31, 1998.
Alliant is in the process of developing its policy for the use of
derivative financial instruments.
Accounting Pronouncements
In February 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." This SOP
provides authoritative guidance for determining whether computer software
is in fact internal-use software, citing specific examples and situations
that answer that preliminary question. Further, it provides guidelines on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public.
Additionally, SOP 98-1 addresses specifics of accounting by discussing
expensing versus capitalization of costs, accounting for the costs
incurred in the upgrading of the software and amortizing the capitalized
cost of software. This statement is effective for fiscal years beginning
after December 15, 1998 and is not expected to have a materially adverse
impact on Alliant's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." This SOP provides guidance on the financial
reporting of start-up costs and organization costs. Costs of start-up
activities and organization costs are required to be expensed as incurred.
The statement is effective for periods beginning after December 15, 1998.
Alliant will be adopting the requirements of this statement in 1999 and
does not anticipate any material impact on its financial statements upon
adoption.
Accounting for Obligations Associated with the Retirement of Long-Lived
Assets
The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry, including IESU and WP&L,
regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating stations in financial
statements of electric utilities. In response to these questions, the
FASB is reviewing the accounting for closure and removal costs, including
decommissioning of nuclear power plants. If current electric utility
industry accounting practices for nuclear power plant decommissioning are
changed, the annual provision for decommissioning could increase relative
to 1997, and the estimated cost for decommissioning could be recorded as a
liability (rather than as accumulated depreciation), with recognition of
an increase in the cost of the related nuclear power plant. Assuming no
significant change in regulatory treatment, IESU and WP&L do not believe
that such changes, if required, would have an adverse effect on their
financial position or results of operations due to their ability to
recover decommissioning costs through rates.
Inflation
Alliant does not expect the effects of inflation at current levels to have
a significant effect on its financial position or results of operations.
Environmental
The pollution abatement programs of IESU, IPC, WP&L, and Alliant
Industries, Inc. are subject to continuing review and are revised from
time to time due to changes in environmental regulations, changes in
construction plans and escalation of construction costs. While management
cannot precisely forecast the effect of future environmental regulations
on Alliant's operations, it has taken steps to anticipate the future while
also meeting the requirements of current environmental regulations.
IESU, IPC and WP&L all have current or previous ownership interests in
properties previously associated with the production of gas at
manufactured gas plants (MGP) for which they may be liable for
investigation, remediation and monitoring costs relating to the sites. A
summary of information relating to the sites is as follows:
IESU IPC WP&L
Number of known sites for which
liability may exist 34 9 14
Liability recorded at
March 31, 1998 (millions) $32.9 $5.8 $9.1
Regulatory asset recorded at
March 31, 1998 (millions) $32.9 $6.1 $16.1
The companies are working pursuant to the requirements of various federal
and state agencies to investigate, mitigate, prevent and remediate, where
necessary, the environmental impacts to property, including natural
resources, at and around the sites in order to protect public health and
the environment. The companies each believe that they have completed the
remediation at various sites, although they are still in the process of
obtaining final approval from the applicable environmental agencies for
some of these sites.
Each company has recorded environmental liabilities related to the MGP
sites; such amounts are based on the best current estimate of the amount
to be incurred for investigation, remediation and monitoring costs for
those sites where the investigation process has been or is substantially
completed, and the minimum of the estimated cost range for those sites
where the investigation is in its earlier stages. Management currently
estimates the range of costs to be incurred for the investigation,
remediation and monitoring of the sites to be approximately $36 million to
$84 million. It is possible that future cost estimates will be greater
than the current estimates as the investigation process proceeds and as
additional facts become known.
Under the current rate making treatment approved by the PSCW, the MGP
expenditures of WP&L, net of any insurance proceeds, are deferred and
collected from gas customers over a five-year period after new rates are
implemented. The MPUC also allows the deferral of MGP-related costs
applicable to the Minnesota sites and IPC has been successful in obtaining
approval to recover such costs in rates in Minnesota. While the IUB does
not allow for the deferral of MGP-related costs, it has permitted
utilities to recover prudently incurred costs. As a result, regulatory
assets have been recorded by each company which reflect the probable
future rate recovery, where applicable. Considering the current rate
treatment, and assuming no material change therein, each of IESU, IPC and
WP&L believes that the clean-up costs incurred for these MGP sites will
not have a material adverse effect on their respective financial positions
or results of operations.
In April 1996, IESU filed a lawsuit against certain of its insurance
carriers seeking reimbursement for its MGP-related costs. Settlement
discussions are proceeding with its insurance carriers regarding the
recovery of these costs. Settlement has been reached with sixteen
carriers, and agreement in principle has been reached with three carriers.
In 1994, IPC filed a lawsuit against certain of its insurance carriers to
recover its MGP-related costs. Settlements have been reached with eight
carriers. Both companies are continuing their pursuit of additional
recoveries. Amounts received from insurance carriers are being deferred
by IESU and IPC pending a determination of the regulatory treatment of
such recoveries. WP&L has settled with twelve carriers and is also
continuing to pursue additional recoveries from other carriers. The three
companies are unable to predict the amount of any additional insurance
recoveries they may realize.
The Clean Air Act Amendments of 1990 (Act) require emission reductions of
sulfur dioxide (SO2), nitrogen oxides (NOx) and other air pollutants to
achieve reductions of atmospheric chemicals believed to cause acid rain.
IESU, IPC and WP&L have met the provisions of Phase I of the Act and are
in the process of meeting the requirements of Phase II of the Act
(effective in the year 2000). The Act also governs SO2 allowances, which
are defined as an authorization for an owner to emit one ton of SO2 into
the atmosphere. The companies are reviewing their options to ensure they
will have sufficient allowances to offset their emissions in the future.
The companies believe that the potential costs of complying with these
provisions of Title IV of the Act will not have a material adverse impact
on their financial position or results of operations.
The Act and other federal laws also require the United States
Environmental Protection Agency (EPA) to study and regulate, if necessary,
additional issues that potentially affect the electric utility industry,
including emissions relating to ozone transport, mercury and particulate
control as well as modifications to the Polychlorinated Biphenyl (PCB)
rules. In July 1997, the EPA issued final rules that would tighten the
National Ambient Air Quality Standards (NAAQS) for ozone and particulate
matter emissions. IESU, IPC and WP&L are currently reviewing the rules to
determine what impact they may have on their operations.
In October 1997, the EPA issued a proposed rule to require 22 states,
including Wisconsin, to modify their State Implementation Plans (SIPs) to
address the ozone transport issue. The proposed rule would require WP&L
to reduce its NOx emissions at all of its plants to .15 lbs/mmbtu. WP&L
cannot presently predict the final outcome of this proposal but believes
that, under the terms of the proposed rule, it would be required to
install controls at its plants and that the costs related thereto would be
significant.
In 1995, the EPA published the Sulfur Dioxide Network Design Review for
Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-case
modeling method, suggested that the Cedar Rapids area could be classified
as "nonattainment" for the NAAQS standards established for SO2. The
worst-case modeling suggested that two of IESU's generating facilities
contributed to the modeled exceedences. As a result of exceedences at a
monitor near one of IESU's generating facilities, the EPA issued a letter
to the Iowa Governor's office directing the state to develop a plan of
action. In this regard, IESU entered into a consent order with the Iowa
Department of Natural Resources (IDNR) in the third quarter of 1997 on
this issue. IESU agreed to limit the SO2 emissions from the two noted
generating facilities and to install a new stack (potential aggregate
capital cost of up to $2.5 million over the next two years of which $1.5
million is included in the anticipated 1998 capital requirements and $1.0
million is included in the anticipated 1999 capital requirements) at one
of the facilities. The IDNR approved the consent order in the fourth
quarter of 1997 and it is expected to be approved by the EPA in the second
quarter of 1998.
Pursuant to a routine internal review of documents, IESU determined that
certain changes undertaken during previous years at one of its generating
facilities may have required a federal Prevention of Significant
Deterioration (PSD) permit. IESU initiated discussions with its
regulators on the matter, resulting in the submittal of a PSD permit
application in February 1997. IESU expects to receive the permit in the
second quarter of 1998. IESU may be subject to a penalty for not having
obtained the permit previously; however, IESU believes that any likely
actions resulting from this matter will not have a material adverse effect
on its financial position or results of operation.
Pursuant to a separate routine internal review of plant operations, IESU
determined that certain permit limits were exceeded in 1997 at one of its
generating facilities in Cedar Rapids, Iowa. IESU has initiated
discussions with its regulators on the matter and has proposed a
compliance plan which includes equipment modifications and contemplates
operational changes. In addition, IESU has committed to submitting a PSD
permit application in the second quarter of 1998, if necessary. IESU may
be subject to a penalty for exceeding permit limits established for this
facility; however, management believes that any likely actions resulting
from this matter will not have a material adverse effect on IESU's
financial position or results of operations.
In March 1998, IPC received a Notice of Intent to Sue from an
environmental group alleging certain violations of effluent limits,
established pursuant to the Clean Water Act, at IPC's generating facility
in Clinton, Iowa. IPC is currently evaluating allegations and is in the
process of contacting its regulators to resolve the matter. IPC may be
subject to a penalty for exceeding permit limits established for this
facility, however, management believes that any likely actions resulting
from this matter will not have a material adverse effect on IPC's
financial position or results of operations.
Pursuant to an internal review of operations, IPC discovered that Unit No.
6 at its generating facility in Dubuque, Iowa, may require a Clean Air
Act, Acid Rain permit and continuous emissions monitoring system (CEMS).
IPC has initiated discussions with its regulators, is continuing its
internal review of historical operations and communications on the matter,
and has discontinued operation of the unit, pending resolution of the
issues. IPC may be subject to a penalty for not having installed the CEMS
and for not having obtained the permit previously. However, IPC believes
that any likely actions resulting from this matter will not have a
material adverse effect on its financial position or results of
operations.
A global treaty has been negotiated that could require reductions of
greenhouse gas emissions from utility plants. Negotiators left
significant implementation and compliance questions open to resolution at
meetings to be held starting in November 1998. At this time, management
is unable to predict whether the United States Congress will ratify the
treaty. Given the uncertainty of the treaty ratification and the ultimate
terms of the final regulations, management cannot currently estimate the
impact the implementation of the treaty would have on Alliant's
operations.
The Nuclear Waste Policy Act of 1982 (NWPA) assigned responsibility to the
U.S. Department of Energy (DOE) to establish a facility for the ultimate
disposition of high level waste and spent nuclear fuel and authorized the
DOE to enter into contracts with parties for the disposal of such material
beginning in January 1998. IESU and WP&L entered into such contracts and
have made the agreed payments to the Nuclear Waste Fund (NWF) held by the
U.S. Treasury. The companies were subsequently notified by the DOE that
it was not able to begin acceptance of spent nuclear fuel by the January
31, 1998 deadline. Furthermore, DOE has experienced significant delays in
its efforts and material acceptance is now expected to occur no earlier
than 2010 with the possibility of further delay being likely. IESU and
WP&L are evaluating and pursuing multiple options, including litigation
and legislation to protect their customers and the contractual and
statutory rights that are diminished by delays in the DOE program.
The NWPA assigns responsibility for interim storage of spent nuclear fuel
to generators of such spent nuclear fuel, such as IESU and WP&L. In
accordance with this responsibility, IESU and WP&L have been storing spent
nuclear fuel on site at DAEC and Kewaunee, respectively, since plant
operations began. DAEC has current on-site capability to store spent fuel
until 2001. IESU is currently reviewing its options to expand on-site
storage capability. To provide assurance that both the operating and
post-shutdown storage needs are satisfied, a combination of expanding the
capacity of the existing fuel pool and construction of a dry cask modular
facility are being contemplated. With minor modifications, Kewaunee would
have sufficient fuel storage capacity to the end of the license life in
2013. Legislation is being considered on the federal level to provide for
the establishment of an interim storage facility as early as 2002.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates
that each state must take responsibility for the storage of low-level
radioactive waste produced within its borders. The States of Iowa and
Wisconsin are members of the six-state Midwest Interstate Low-Level
Radioactive Waste Compact (Compact) which is responsible for development
of any new disposal capability within the Compact member states. In June
1997, the Compact commissioners voted to discontinue work on a proposed
waste disposal facility in the State of Ohio because the expected cost of
such a facility was comparably higher than other options currently
available. Dwindling waste volumes and continued access to existing
disposal facilities were also reasons cited for the decision. A disposal
facility located near Barnwell, South Carolina continues to accept the
low-level waste and IESU and WP&L currently ship the waste each produces
to such site, thereby minimizing the amount of low-level waste stored on-
site. In addition, given technological advances, waste compaction and the
reduction in the amount of waste generated, DAEC and Kewaunee each have
on-site storage capability sufficient to store low-level waste expected to
be generated over at least the next ten years, with continuing access to
the Barnwell disposal facility extending that on-site storage capability
indefinitely.
The National Energy Policy Act of 1992 requires owners of nuclear power
plants to pay a special assessment into a "Uranium Enrichment
Decontamination and Decommissioning Fund." The assessment is based upon
prior nuclear fuel purchases. IESU is recovering the costs associated
with this assessment through its electric fuel adjustment clauses over the
period the costs are assessed. IESU's 70% share of the future assessment
at March 31, 1998 was $8.9 million and has been recorded as a liability
with a related regulatory asset for the unrecovered amount. WP&L is also
recovering these costs from its customers and at March 31, 1998 had a
regulatory asset and a liability of $5.9 million and $5.1 million
recorded, respectively.
Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary of
Alliant Industries, Inc., is responsible for certain dismantlement and
abandonment costs related to various off-shore oil and gas platforms (and
related on-shore plants and equipment), the most significant of which is
located off the coast of California. Whiting estimates the total costs
for these properties to be approximately $14 million and the expenditures
are not expected to be incurred for approximately five years. Whiting
accrues these costs as reserves are extracted, resulting in a recorded
liability of $8.9 million at March 31, 1998.
Power Supply
The power supply concerns of 1997 have raised awareness of the electric
system reliability challenges facing Wisconsin and the Midwest region.
WP&L was among an 11-member group of Wisconsin energy suppliers that, on
October 1, 1997, recommended to the Governor of Wisconsin a series of
steps to improve electric reliability in the state. Wisconsin enacted
electric reliability legislation in April 1998. The legislation has the
goal of assuring reliable electric energy for Wisconsin. The new law,
effective September 1, 1998, requires Wisconsin utilities to join a
regional independent system operator for transmission by the year 2000,
allows the construction of merchant power plants in the state and
streamlines the regulatory approval process for building new generation
and transmission facilities.
On September 24, 1997, the PSCW ordered WP&L and two other Wisconsin
utilities to arrange for additional electric capacity to help maintain
reliable service for their customers. In response to this order, WP&L has
issued a Request for Proposal (RFP) for contracts to provide WP&L with an
additional 150 MW of electric capacity beginning as early as June 1, 1999.
WP&L anticipates its RFP will result in a purchased power arrangement with
a contract period of three to eight years and contract extension or
"rollover" options. WP&L expects to award the contract at the end of the
second quarter of 1998.
Utility officials noted that it will take time to get new transmission and
power plant projects approved and built. While utility officials fully
expect to meet customer demands in 1998 and 1999, problems still could
arise if there are unexpected power plant outages, transmission system
outages or extended periods of extremely hot weather.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
IESU
IESU is in discussions with the regulators regarding certain environmental
permit issues. For a discussion of these matters, see MD&A above, which
information is incorporated herein by reference.
IPC
In March 1998, IPC received a Notice of Intent to Sue from an
environmental group alleging certain violations of effluent limits,
established pursuant to the Clean Water Act, at IPC's generating facility
in Clinton, Iowa. IPC is currently evaluating allegations and is in the
process of contacting its regulators to resolve the matter. IPC may be
subject to a penalty for exceeding permit limits established for this
facility, however, management believes that any likely actions resulting
from this matter will not have a material adverse effect on IPC's
financial position or results of operations.
IPC also is in discussions with the regulators regarding an environmental
permit and related issues at a generating facility in Dubuque, Iowa. For
a discussion of this matter, see MD&A above, which information is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
Interstate Energy Corporation filed a Current Report on Form 8-K, dated
April 21, 1998, reporting (under Item 2) the consummation of the three-way
business combination between WPL Holdings, Inc., IES Industries Inc. and
Interstate Power Company. Under Item 7(a), historical financial
statements for IES Industries Inc. and Interstate Power Company were
incorporated by reference and under Item 7(b) pro forma financial
information related to the three-way business combination was included.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of May 1998.
Interstate Energy Corporation
By: /s/ Thomas M. Walker Executive Vice President and Chief
Thomas M. Walker Financial Officer (Principal
Financial Officer)
By: /s/ John E. Ebright Vice President-Controller
John E. Ebright (Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,224,427
<OTHER-PROPERTY-AND-INVEST> 268,430
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<TOTAL-DEFERRED-CHARGES> 99,736
<OTHER-ASSETS> 89,397
<TOTAL-ASSETS> 1,812,541
<COMMON> 308
<CAPITAL-SURPLUS-PAID-IN> 303,930
<RETAINED-EARNINGS> 303,267
<TOTAL-COMMON-STOCKHOLDERS-EQ> 607,505
0
59,963
<LONG-TERM-DEBT-NET> 457,901
<SHORT-TERM-NOTES> 44,500
<LONG-TERM-NOTES-PAYABLE> 56,975
<COMMERCIAL-PAPER-OBLIGATIONS> 32,500
<LONG-TERM-DEBT-CURRENT-PORT> 10,724
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 542,473
<TOT-CAPITALIZATION-AND-LIAB> 1,812,541
<GROSS-OPERATING-REVENUE> 222,550
<INCOME-TAX-EXPENSE> 7,433 <F1>
<OTHER-OPERATING-EXPENSES> 191,062
<TOTAL-OPERATING-EXPENSES> 191,062 <F1>
<OPERATING-INCOME-LOSS> 31,488
<OTHER-INCOME-NET> 3,381
<INCOME-BEFORE-INTEREST-EXPEN> 34,869
<TOTAL-INTEREST-EXPENSE> 10,830
<NET-INCOME> 16,606
828
<EARNINGS-AVAILABLE-FOR-COMM> 15,778
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<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<FN>
<F1> Income tax expense is not included
in Operating Expense in the Consolidated
Statements of Income.
</FN>
</TABLE>
