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File No. 70-9323
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT TO
APPLICATION-DECLARATION
ON FORM U-1A
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Interstate Energy Corporation
222 West Washington Avenue
Madison, Wisconsin 53703
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(Names of companies filing this statement and
addresses of principal executive offices)
Interstate Energy Corporation
222 West Washington Avenue
Madison, Wisconsin 53703
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(Name of top registered holding company,
parent of each applicant or declarant)
Erroll B. Davis, Jr.
President and
Chief Executive Officer
Interstate Energy Corporation
222 West Washington Avenue
Madison, Wisconsin 53703-0192
(Names and addresses of agents for service)
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The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
Steve Suleski
Senior Counsel
Alliant Services Company
222 West Washington Avenue
Madison, Wisconsin 53703-0192
M. Douglas Dunn
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, NY 10005-1413
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The Applicant hereby amends and supplements its Application-Declaration on
Form U-1 in File No. 70-9323 (the "Application-Declaration") as follows:
1. ITEM 1, under "Description of Proposed Transaction" Section, remove the
following language from phrase (i) in the (only) full paragraph:
or its affiliate,
2. ITEM 1, under "Description of Proposed Transaction" Section, replace
phrase (ii) in the (only) full paragraph with the following phrase:
(ii) HPI to assist in the implementation of a program by providing
consulting services for a program which is designed to provide assistance for
affordable single-family entry-level housing in the IEC service area.
3. ITEM 1, under the "Background: the Applicant and Its Subsidiary" Section,
add the following sentence prior to the last sentence in the second full
paragraph:
Please note, however, that HPI intends to dissolve HAM effective December
31, 1998.
4. ITEM 1, under the "Low Income Tax Credit Property Investments" Section,
add the following parenthetical to the end of the penultimate sentence in
the second full paragraph:
(i.e. up to $10 million per year)
5. ITEM 1, under the "Low Income Tax Credit Property Investments" Section,
add the following after the third full paragraph:
As described above, this application does not seek approval to invest in
any specific partnership, but rather seeks general approval for the investment
of up to $50 million in equity in properties in the IEC service territory over
the next five years. Except for three properties that HPI is considering for
investment which have already been awarded tax credits, no specific properties
can yet be identified for future investment because it is not known which
properties would be awarded tax credits through the annual, competitive, tax
credit allocation process. For those three properties with credits that HPI is
considering for investment, however, the projected annual tax credit stream
through the cross-over date when the housing properties will no longer receive
tax benefits is shown on the schedule provided as Exhibit E to this
Application-Declaration.
As mentioned above, there are only three properties with an existing tax
credit allocation that HPI is currently considering for prospective investment;
others would be considered if and when they were awarded tax credits. The
schedules showing the expected return on investment for each of these three
properties for the years following the cross-over date are provided as Exhibit F
to this Application-Declaration.
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Partnership Agreements or LLC Operating Agreements for prospective
investments have not yet been negotiated or executed; they are, instead,
typically negotiated with the third-party developer in the 30-60 days
immediately preceding the time of the investment. Such agreements, however,
would likely be similar in form and substance to the Partnership Agreement for
Riverview Point Limited Partnership, a Limited Dividend Housing Association, a
copy of which is included as Exhibit G to this Application-Declaration.
6. ITEM 1, under the "Single-Family Housing Development" Section, replace the
language in its entirety with the following language:
IEC seeks authorization for HPI to assist in the implementation of a
program that specializes in the development of single-family entry-level housing
throughout its service territory, but primarily in Iowa. Communities served by
IEC have identified the lack of affordable, entry-level housing stock in rural
communities as a major inhibitor of economic development. The opportunity for
young families to own a home is a necessary element to attract and retain a
quality workforce for the development of business. In most rural service
territory communities there has not been planned residential development since
the 1970's. The main reason for the absence of single family housing stock is a
lack of capital in rural communities for the development of infrastructure and
the funding of mortgages to purchase homes. The development of affordable single
family housing will be necessary to attract and support the labor force
necessary for new economic development and will also result in an expanded tax
base for rural communities in the IEC service territory. The local communities
in the service territory do not have the resources to address these issues on
their own.
IEC therefore seeks authorization for HPI to assist in the implementation
of a program in which it would consult with rural municipalities and counties in
the IEC service territory to eliminate barriers to home ownership and develop
strategies to encourage the development of single-family entry-level housing.
HPI would act solely as a consultant in partnership with the local entities to
identify geographical areas for development, identify the most efficient types
of development and consult in the development of specific programs to address
issues such as down payment assistance, education programs for new home owners
and identifying and developing sources of capital investment. HPI would not
actually partake in the development of any of the single-family entry-level
housing.
Based on housing needs and local community interest, IEC has identified
the communities of Clarke County, Mason City and Winnebago County as possible
initial participants in the program.
7. ITEM 1, under the "Single-Family Housing Development" Section, add the
following language to the end of the Section:
USE OF PROCEEDS
The $50 million that IEC requests permission for HPI to invest over the
next 5 years pursuant to this Application-Declaration would be used for passive
investments in various affordable housing developments within the IEC service
territory. None of the $50 million
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would be used for increased staffing, as staffing levels will remain at the
level that currently exists as illustrated in the organizational chart enclosed
as Exhibit H herein. The staffing level indicated on the chart is necessary for
management of HPI's existing properties and meeting its existing obligations to
third-party investors. Investment in an additional four to eight properties per
year would not require an increase in staffing. It is not the intent of HPI to
pursue consulting activities that would add employees. HPI would respond to
community requests according to its calendar as it could accommodate the
requests.
Because of the nature of the tax credit allocation process, it is not
possible to develop a detailed schedule of the projects in which the $50 million
would be invested. Each state has an annual allocation of tax credits in the
amount of $1.25 per capita (for the states within the IEC service territory, the
annual allocation of credits is approximately $3.7 million for Iowa, $6.4
million for Wisconsin, $6.5 million for Minnesota, and $11 million for
Illinois.) These tax credits are allocated annually in a competitive process, so
there is no way of predicting which projects will be awarded credits in any
given year. For example, applications for 1999 tax credits in Iowa were due on
October 1, 1998. Over 70 applications were submitted requesting over $14 million
in tax credits, versus Iowa's annual allocation of $3.7 million. Therefore,
IEC seeks the approval of the Commission for the investment by HPI of up to $10
million per year in affordable housing developments in the IEC service territory
for each of the next five years. (Please note that, for a property receiving a
credit allocation of $200,000 per year for ten years, the equity investment
would be roughly $1.5 million).
HPI would invest in between four and eight affordable housing limited
partnerships per year, as a limited partner. A maximum of $10 million in equity
would be invested each year. Rural communities in the IEC service territory
could support LIHTC new construction developments averaging 40 units with a
total development cost ranging from $2 million to $4 million. Half of the total
development cost would be supported by community grants, long-term debt in the
form of a permanent mortgage, or other debt financing. The balance of the
development cost would be funded by equity, which would range from approximately
$1 million to $2 million per development. The equity would be paid out as the
development progressed.
USE OF FUNDS FOR LIHTC PROPERTIES VERSUS SINGLE-FAMILY HOUSING
DEVELOPMENT PROGRAM
IEC intends that HPI would use the funds being requested in the
Application-Declaration entirely for multi-family housing properties. Its
proposed involvement in the single-family entry-level housing development
program would be in a consulting capacity. IEC does not anticipate that HPI
will make equity investments in single-family housing. Short term construction
lending may be considered when requested by local communities if a local lender
is not available. Communities requesting entry-level single-family subdivisions
must realize the importance of their involvement in purchasing the land and
creating the infrastructure of a subdivision. Such involvement may be through
the creation of a TIF or offering to forgive the cost of the lot to a first
time homebuyer after a predetermined number of years in the home.
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There are four primary components to addressing entry-level housing in
communities throughout the IEC service area: 1) developing lots either from a
vacant field or creating infill, 2) construction capital, preferably from a
local lender, 3) home ownership counseling, offered through Fannie Mae and local
lenders and realtors, and 4) buyer financing assistance from the state (or local
assistance). HPI's role as consultant would be to instruct a community how to
organize such a program, provide construction loans if necessary, and assist in
contractor selection. None of these responsibilities would require capital
funds. Capital Square has a line of credit with IEC for construction lending
purposes. HPI would charge a consulting fee if a community required its
involvement beyond the education process as compensation for its time and
expenses. To date, three communities have asked for HPI's assistance, but have
continued with the program of developing single-family housing using local
businesses.
8. ITEM 1, under the "Current Activities" Section, replace language in
entirety with the following language:
The income statement and balance sheet for each property in which HPI or
an affiliate has an ownership interest is provided in Exhibit I to this
Application-Declaration.
Please note that note 6 to the financial statements in WPLH's Annual
Report on Form 10-K (at pg. 67), which note is entitled "Income Taxes," provides
a summary of the effect of housing tax credits on the effective income tax rate
of WPLH and the dollar amount of credits utilized to reduce income tax expense
for the years ended December 31, 1995, 1996 and 1997. A copy of this note is
provided as Exhibit J herein.
Schedules providing a tax analysis for each partnership that specifically
delineates the annual amount of LIHTC received for 1996 and 1997 for each such
HPI property is provided as Exhibit K to this Application-Declaration.
A schedule listing, by partnership, the amount of tax credits received or
to be received in each year for each HPI property is provided as Exhibit L to
this Application-Declaration. The schedule includes annual projections through
the cross-over date when each housing property will no longer receive tax
benefits but will become an investment property.
The expected return on investment for each year after the cross-over date
for each property is shown on the schedules provided as Exhibit M herein.
Please note that even though the flow of tax credits for an LIHTC property
stops after ten years, the property remains subject to rent and income
restrictions for at least fifteen years. (In most cases, a land-use restriction
agreement restricts rental rates at the property for thirty years). Because of
these rent restrictions, the annual return on investment for LIHTC properties
is quite low after the tax credit stream expires. This is true for HPI
properties, as shown on the schedules provided.
Copies of the Partnership Agreements, LLC Operating Agreements, or
corporate Bylaws, as appropriate, for each of the properties in which HPI has
an investment are provided as Exhibit N. The organizational structure of these
Agreements is also included in Exhibit N.
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IEC will continue, through its subsidiaries, its ownership and asset
management services in connection with its existing portfolios of multi-family
LIHTC properties. HPI will continue the oversight of the low-income properties
(performed by HAM prior its December 31, 1998 dissolution) consistent with the
role of passive investor. HPI will focus on three primary areas of asset
management: property management, property accounting and compliance. Capital
Square, like HPI a direct subsidiary of Alliant, will provide needed financing
services for the investment properties. These services will include the
origination and sale of mortgages.
IEC anticipates that the 1998 LIHTC portfolio of IEC (formerly WPLH) will
comprise sixty-two (62) developments with budgeted revenue of $12.9 million and
operating expenses of $8.6 million. HPI will also perform the same management
role for twenty-nine (29) additional low-income properties in four (4) equity
investment funds and one (1) property with a direct outside investor. The
property management companies that provide the hands-on management services for
these properties will continue to be responsible for the implementation of
capital improvement plans, the maximization of revenues from the properties and
to ensure that actual operating expenses fall within budgeted amounts.
HPI will continue to conduct on-site inspections (conducted through its
subsidiary, HAM, prior to its dissolution) to review management operations and
to ensure that each of the properties remains in compliance with LIHTC
requirements. These review operations include the close monitoring of properties
that HPI has placed on a "watch list" as properties that are not meeting
pre-established performance criteria for their investors. It is the role of the
management companies to improve the performances and have the properties removed
from the watch list. IEC is evaluating the sale of at least three(3) properties
from the existing portfolio during 1998. This is consistent with the scheduled
wind-down of the investment properties as the existing LIHTCs expire. Also,
Capital Square will arrange the permanent financing of at least seven(7) such
properties that remain in lease-up situations with ongoing construction loans.
9. ITEM 1, immediately preceding the "Statement Pursuant to Rule 54" Section,
add the following under the heading "LEGAL ANALYSIS FOR AUTHORIZATION OF HPI
INVESTMENTS":
In this Application-Declaration, IEC seeks authorization for HPI to
continue to invest in LIHTC properties through the acquisition of interests in
limited partnerships in the IEC service area from time to time during the next
five years and, in a related exercise, to provide consultation to a program that
will seek to develop entry-level affordable housing in rural parts of the IEC
service territory. In the Order, the Commission authorized the retention by IEC
of HPI and its direct and indirect subsidiaries pursuant to Section 11 of the
1935 Act. The Order listed the activities of HPI as the "development, ownership,
and sales of, and asset management services in connection with, affordable
multi-family housing properties," and characterized HPI in that context as a
"passive investor." WPL Holdings, Inc., Holding Company Act Release No. 35-26856
(Apr. 14, 1998). This Application-Declaration does not seek to change the
Commission's characterization of HPI's role in these LIHTC investments but,
indeed, wishes to reinforce it and seek additional authorization under Section
9(c)(3) of the Act to acquire future interests in the identical form of
investment.
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The role of HPI as a "passive investor" in the limited partnerships would
not change. It would invest in the limited partnership interests and review and
analyze the financial statements generated by third-party property management
firms and conduct compliance assessments to assure that the subject matter of
the limited partnerships' investments would remain eligible for the LIHTC
credits that HPI seeks. HPI would remain a "passive investor" and, like any
other investor -- passive or otherwise - would follow and analyze the
performance of the limited partnerships; HPI's intent would be to perform the
required due diligence to ensure that its LIHTC investments were being properly
managed by the agents of the general partner. "It can hardly be argued that for
a business to attempt to reduce its tax liability is anything but an indication
of prudent management...For such businesses to attempt such reductions can
fairly be characterized as being in the ordinary course of business. The
Commission can think of no argument which suggests that attempting to reduce
one's tax liability should not also be considered to be in the ordinary course
of business for a regulated utility holding company..." Central and South West
Corporation, Holding Company Act Release No. 23578 (Jan. 22, 1985). Neither can
the Applicant in this Application-Declaration.
IEC seeks authorization to invest up to $50 million in such limited
partnerships over a five-year period - an average of up to $10 million annually
- --- to try to maximize the LIHTC benefits available to it. In 1985, the
Commission authorized an investment of $200 million by Central and South West
Corporation ("CSW") pursuant to Section 9(c)(3) of the 1935 Act in a new company
created to invest as an equity participant in leveraged leases. Central and
South West Corporation, id. In that filing, CSW sought authority from the
Commission, similar to IEC in this filing, "to continue to secure for CSW and
its stockholders the tax benefits associated with" tax benefit transfer ("TBT")
transactions. CSW asserted that tax benefits similar to TBT's were available
through investment in conventional leases. The Commission hence authorized the
creation of a new company to invest in such leases and the $200 million
investment by CSW to maintain those tax benefits. The Commission also authorized
CSW to guarantee loans to the new company up to the amount of its investment in
the new company. To support its judgment, the Commission concluded that the
purchase and investment in tax benefits of this type was both in the ordinary
course of business of CSW and was an investment rather than an acquisition that
involved management of the new company.
More recently, the Commission authorized the investment by Georgia Power
Company ("Georgia Power") pursuant to Section 9(c)(3) of the 1935 Act of up to
$10 million over three years to acquire limited partnership units in limited
partnerships that were essentially identical to those in which IEC currently
seeks authorization to invest. Georgia Power Company, Holding Co. Act Release
No. 26220 (Jan. 24, 1995). Also, the Commission approved an earlier investment
by Georgia Power of up to $5 million to acquire all of the limited partnership
units of a limited partnership designed to make venture capital investments in
high-tech companies located in Georgia Power's service territory. Georgia Power
Company, Holding Co. Act Release No. 25949 (Dec. 15, 1993). The Commission
approved this $5 million investment in a venture capital enterprise which, by
its nature, is a far riskier venture for a registered holding company and its
stockholders than is an investment in LIHTC limited partnerships for the purpose
of obtaining commensurate tax benefits. See also generally, Hope Gas, Inc.,
Holding Co. Act Release No. 25739 (Jan. 26, 1993) (Commission approved $1
million investment in limited partnership designed to encourage private local
venture capital investments and achieve state tax
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credits for investors); The Potomac Edison Company, Holding Co. Act Release No.
25312 (May 14, 1991) (approval of investment in a for-profit economic
development corporation); and East Ohio Gas Company, Holding Co. Act Release No.
25046 (Feb. 27, 1990) (approval of investment of $500,000 in limited partnership
investing in real estate in downtown Cleveland). These precedents span two
decades, involve a variety of limited partnerships - some with riskier mandates
than others - and authorize various investment sums. In this context, the
proposed investment by IEC of up to $10 million over each of five years in a
proven, relatively low-risk investment to achieve LIHTC benefits for its
stockholders is consistent with the Commission's well-developed authority for
Section 9(c)(3) approvals of this nature.
The authorizations sought by IEC for the investment by HPI in LIHTC
properties and for its participation in a program specializing in the
development of single-family entry-level housing in the IEC service territory
would have the added benefit of providing low-income housing in rural areas. HPI
would not acquire the securities of the proposed rural housing program to
"control" it in the context of Michigan Consolidated Gas Co. v. Securities and
Exchange Commission, 44 F.2d 913, 915 (6th Cir. 1971), but would, rather, merely
consult with local communities to identify rural areas that are in need of the
development of affordable housing and to develop strategies for attracting
capital to such developments. In both The Potomac Edison Company, id., and
Appalachian Power Company, Holding Co. Act Release No. 25266 (Mar. 6, 1991), the
Commission approved investments by subsidiaries of registered holding companies
in an economic development corporation designed to invest in small, rural firms
in Virginia to stimulate economic development. Similarly, in East Ohio Gas
Company, id., a subsidiary of a registered holding company was authorized to
invest in a partnership designed to invest in real estate development projects
to stimulate the local economy of downtown Cleveland.
In each of these Section 9(c)(3) cases, of course, the subsidiary did not
control the entity in which it invested. Similarly, as stated in this
Application-Declaration, HPI would not control the program in which it would
invest not dollars, but the time of certain of its employees, to develop rural
entry-level housing.
For the reasons stated above, the Commission should grant the
authorizations sought by IEC on behalf of HPI pursuant to this
Application-Declaration.
9. ITEM 6, under the "Exhibits" Section, add the following to the end of the
Section:
EXHIBITS* DESCRIPTION
Exhibit E Schedules of Expected LIHTC for
Partnerships In Prospective
Investments
Exhibit F Schedules of Expected Rate of
Return for Each Prospective
Partnership Investment
* Note that these exhibits have been separately filed in paper format
pursuant to a request for a continuing hardship exemption made under
Item 202(a) of Regulation S-T, 17 C.F.R. Section 232.202(a).
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Exhibit G Copies of Partnership or LLC
Agreements (or Bylaws) for
Prospective Acquisitions by HPI
Exhibit H Organizational Chart of HPI
Exhibit I Income Statements/Balance Sheets of
HPI Properties as of June 30, 1998
Exhibit J Page from Form 10-K of WPL
Holdings, Inc. (December 31, 1997)
Exhibit K Schedules (Tax Analyses)
Delineating Annual LIHTC for HPI
Properties for 1996 and 1997
Exhibit L Schedules Listing LIHTC Projections
for HPI Properties through
Cross-Over Dates
Exhibit M Schedules Showing Expected Returns
on Investment for each HPI Property
Exhibit N Copies of Partnership or LLC
Agreements (or Bylaws) of HPI
Properties
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, as amended, the undersigned company has duly caused this statement to be
signed on its behalf by the undersigned thereunto duly authorized.
Date: November 24, 1998
Interstate Energy Corporation
By: /s/Erroll B. Davis, Jr.
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Erroll B. Davis, Jr.
President and Chief Executive Officer
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