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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4 TO FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
IES Industries Inc. Interstate Power Company WPL Holdings, Inc.
200 First Street S.E. 1000 Main Street 222 West Washington Avenue
Cedar Rapids, Iowa 52401 Dubuque, Iowa 52004 Madison, Wisconsin 53703
(Name of companies filing this
statement and address of
principal executive office)
None
(Name of top registered holding company, parent of each applicant or declarant)
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Lee Liu Michael R. Chase Erroll B. Davis, Jr.
Chairman of the Board & President and Chief President and
Chief Executive Officer Executive Officer Chief Executive Officer
IES Industries Inc. Interstate Power Company WPL Holdings, Inc.
200 First Street S.E. 1000 Main Street 222 West Washington Avenue
Cedar Rapids, Iowa 52401 Dubuque, Iowa 52004-0769 Madison, Wisconsin 53703-0192
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(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
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Barbara J. Swan, Esq. Stephen W. Southwick, Esq. Kent Ragsdale, Esq.
Vice President and General Vice President, General Counsel Staff Counsel
Counsel & Secretary Interstate Power Company
Wisconsin Power and Light Company IES Industries Inc. 1000 Main Street
222 West Washington Avenue 200 First Street S.E. P.O. Box 769
Madison, Wisconsin 53703-0192 Cedar Rapids, Iowa 52401 Dubuque, Iowa 52004-0769
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M. Douglas Dunn, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
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TABLE OF CONTENTS
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Item 1. Description of Proposed Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. General Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Overview of the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
B. Description of the Parties to the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1. General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
a. WPLH (to be renamed Interstate Energy Corporation) and its Subsidiaries . . . . . . . . . 4
i. WPLH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ii. Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
iii. Interstate Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
iv. New Interstate Energy Non-Utility Subholding Company . . . . . . . . . . . . . . 8
b. IES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
c. IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Description of Energy Sales and Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
a. WP&L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
i. Energy Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ii. Electric Generating Facilities and Resources . . . . . . . . . . . . . . . . . . 12
iii. Electric Transmission Facilities . . . . . . . . . . . . . . . . . . . . . . . . 14
iv. Gas Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
v. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
b. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
i. Energy Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ii. Electric Generating Facilities and Resources . . . . . . . . . . . . . . . . . . 16
iii. Electric Transmission Facilities . . . . . . . . . . . . . . . . . . . . . . . . 17
iv. Gas Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
v. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
c. IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
i. Energy Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ii. Electric Generating Facilities and Resources . . . . . . . . . . . . . . . . . . 18
iii. Electric Transmission Facilities . . . . . . . . . . . . . . . . . . . . . . . . 19
iv. Gas Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
v. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3. Electric Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4. Gas Coordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5. Non-Utility Interests of WPLH, IES and IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
a. WPLH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
b. IES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
c. IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
C. Description of Transaction and Statement as to Consideration . . . . . . . . . . . . . . . . . . . . . . . 28
1. Background and Negotiations Leading to the Proposed Transaction . . . . . . . . . . . . . . . . . 28
2. Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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3. Management of Interstate Energy Following the Merger . . . . . . . . . . . . . . . . . . . . . . 35
D. Dividend Reinvestment Plan, Long-Term Equity Incentive Plan and other Employee Benefit Plans. . . . . . . 35
1. Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
a. Purpose of the DRIP and Eligibility of Participants . . . . . . . . . . . . . . . . . . . 36
b. Sources of Common Stock and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 36
2. Long-Term Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3. Other Stock-Based Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
E. Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 3. Applicable Statutory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
A. Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
1. Section 10(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
a. Section 10(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
i. Interlocking Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ii. Concentration of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
b. Section 10(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
i. Fairness of Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ii. Reasonableness of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
c. Section 10(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2. Section 10(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
a. Section 10(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
i. Retention of Gas Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ii. Retention of Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . . 69
b. Section 10(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
i. Efficiencies and Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
ii. Integrated Public Utility System . . . . . . . . . . . . . . . . . . . . . . . . 76
I. Electric System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
II. Gas Utility System . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3. Section 10(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4. Other Applicable Provisions - Sections 6, 7, 9(a)(1) and 12 . . . . . . . . . . . . . . . . . . . 82
B. Intra-system Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
C. Interstate Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
D. Other Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
A. Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
B. Federal Power Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
C. Atomic Energy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
D. State Public Utility Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
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Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Item 6. Exhibits and Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
A. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
B. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Item 7. Information as to Environmental Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
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Item 1. Description of Proposed Transaction
A. Introduction
This Application/Declaration seeks approvals relating to the
proposed combination of WPL Holdings, Inc. ("WPLH"), IES Industries Inc. ("IES")
and Interstate Power Company ("IPC"), pursuant to which IES' utility subsidiary,
IES Utilities Inc. ("Utilities"), and IPC will become subsidiaries of WPLH (the
"Transaction"). WPLH will be renamed Interstate Energy Corporation ("Interstate
Energy") at or prior to such time. Following the consummation of the
Transaction, Interstate Energy will register with the Securities and Exchange
Commission (the "Commission") as a holding company under the Public Utility
Holding Company Act of 1935 (the "Act").
WPLH, IES and IPC believe that their combination offers
significant strategic and financial benefits to each company and to their
respective shareowners, as well as to their employees and customers. These
benefits include, among others: (i) maintenance of competitive rates that will
improve the combined entity's ability to meet the challenges of the increasingly
competitive environment in the utility industry, (ii) reduced operating costs
and expenditures resulting from integration of corporate and administrative
functions, including the elimination of duplicative positions, limiting
duplicative capital expenditures for administrative and customer service
programs and information systems, and savings in areas such as legal, audit and
consulting fees, (iii) reduced electric production costs through the joint
dispatch of systems and natural gas supply savings through combined purchasing,
(iv) greater purchasing power for items such as fuel and transportation
services, general and operational goods and services and the reduction of
inventories, (v) more controlled expansion into non-core utility businesses,
(vi) increased customer diversity and geographic diversity of service
territories, reducing exposure to local changes in economic, competitive or
climatic conditions, and (vii) expanded management resources and ability to
select leadership from a larger and more diverse management pool. In addition,
WPLH, IES and IPC believe that synergies created by the Transaction will
generate substantial cost savings to Interstate Energy which would not be
available to the separate companies absent the Transaction. WPLH, IES and IPC
have estimated the dollar value of certain synergies resulting from the
Transaction to be approximately $749 million on a nominal dollar basis, net of
costs to achieve the savings, over the 10-year period from 1997 to 2006. The
expected Transaction benefits are discussed in further detail in Item 3.A.2.b.i.
below. Despite the passage of time since the original estimate of synergies,
WPLH, IES and IPC are still confident that such savings can be realized over
the period.
The Transaction was approved by the shareholders of WPLH and
IPC at their respective meetings held on September 5, 1996, and based on
preliminary tabulations, was approved by the shareholders of IES at its meeting
held on September 5, 1996. WPLH, IES and IPC submitted applications
requesting approval of the Transaction and/or related matters to (i) the Public
Service Commission of Wisconsin (the "PSCW"), (ii) the Iowa Utilities Board
(the "IUB"), (iii) the Minnesota Public Utilities Commission (the "MPUC"),
(v) the Illinois Commerce Commission ("ICC"), (vi) the Federal Energy
Regulatory Commission (the "FERC") and (vii) the Nuclear Regulatory Commission
(the "NRC") and received orders authorizing the companies to proceed with the
transaction. The Orders of the PSCW, IUB, MPUC and FERC were filed as Exhibits
O-4, O-5, O-6 and N-3, respectively. Finally, the three companies have made the
required filings with the Antitrust Division of the U.S. Department of Justice
(the "DOJ") and the Federal Trade Commission (the "FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). See Item 4 below for additional detail regarding these regulatory
approvals. Apart from the approval of the Commission under the Act, the
foregoing approvals are the only regulatory approvals required for the
Transaction. In order to permit timely consummation of the Transaction and the
realization of the substantial benefits it is expected to produce, the
applicants request that the Commission's review of this
Application/Declaration commence and proceed as expeditiously as
practicable.
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1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, the applicants
hereby request authorization and approval of the Commission for WPLH to acquire,
by means of the direct mergers or the reincorporation mergers described below,
all of the issued and outstanding common stock of IPC and Utilities. The
applicants also hereby request that the Commission approve (i) the transfer of
certain of Interstate Energy's non-utility interests to a subsidiary of
Interstate Energy ("Interstate Hold") which will be formed prior to consummation
of the Transaction to serve as a holding company for substantially all of
Interstate Energy's non-utility subsidiaries under Section 9(a)(1) of the Act;
(ii) the establishment of Interstate Services, Inc. ("Interstate Services") as a
subsidiary service company of Interstate Energy in accordance with the
provisions of Rule 88 of the Act; (iii) the Service Agreement and the
Non-Utility Service Agreement (described in Item 1.B.1.a.iii. below) as a basis
for Interstate Services to comply with Section 13 of the Act and the
Commission's rules thereunder; (iv) the retention by Interstate Energy of the
gas properties of its utility subsidiaries and the continuation of such
subsidiaries as combination gas and electric utilities; (v) the retention by
Interstate Energy of the non-utility businesses of WPLH, IES and IPC and of the
non-utility affiliates of WPLH, IES and IPC; (vi) all outstanding intra-system
obligations and guarantees; (vii) the issuance of shares of Interstate Energy
Common Stock, $.01 per share, (the "Interstate Energy Common Stock") in
connection with the Transaction; (viii) authority, through a period ending five
years after the date of the Commission's Order approving the matters requested
hereby, for Interstate Energy to issue (and/or acquire in open-market
transactions) up to 11 million shares of Interstate Energy Common Stock under
dividend reinvestment and stock-based management incentive and employee benefit
plans; (ix) the issuance of rights to purchase shares of Interstate Energy
Common Stock pursuant to the terms of the Rights Agreement between WPLH and
Morgan Shareholder Services Trust Company, as Rights Agent thereunder, dated as
of February 22, 1989 (the "Rights Agreement"), the sale and issuance of
Interstate Energy Common Stock upon exercise of the Rights and certain other
transactions contemplated by the Rights Agreement; and (x) exemption from the at
cost standards of certain transactions.
2. Overview of the Transaction
Pursuant to an Agreement and Plan of Merger dated as of
November 10, 1995, as amended (together with a related Plan of Merger, the
"Merger Agreement"), (i) IES will be merged with and into WPLH, with WPLH
as the surviving corporation (the "IES Merger"), and (ii) WPLH Acquisition Co.,
a wholly-owned subsidiary of WPLH incorporated under the laws of the State of
Wisconsin ("Acquisition"), will be merged with and into IPC (the "IPC Direct
Merger"),
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which will result in IPC becoming a subsidiary of WPLH. Immediately prior to or
upon consummation of the transactions described in the Merger Agreement, WPLH
will be renamed Interstate Energy Corporation. The alternative structure for
consummating the mergers as contemplated by the Merger Agreement will not be
utilized by the parties because the PSCW issued a final order determining that
the reincorporation mergers provided for in such alternative structure were not
required.
As a result of the IES Merger and the IPC Direct Merger,
Utilities and IPC will become operating utility subsidiaries of Interstate
Energy, and WPLH's existing operating utility subsidiary, Wisconsin Power &
Light Company ("WP&L"), will remain a subsidiary of Interstate Energy.
Accordingly, upon consummation of the Transaction, Interstate Energy will own
three combination electric and gas public utility companies.
Upon consummation of the Transaction, Interstate Services will
become a wholly-owned service company subsidiary of Interstate Energy and
subsequent to the consummation of the Transaction the non-utility subsidiaries
of WPLH and IES will become subsidiaries of Interstate Hold, which will serve as
a holding company for substantially all of the non-utility subsidiaries of, and
will be wholly-owned by, Interstate Energy. Applicants are also requesting
approval of the terms of (1) the Service Agreement among Interstate Services and
the operating utility subsidiaries of Interstate Energy and (2) the Non-Utility
Service Agreement between
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Interstate Services and the non-utility subsidiaries of Interstate Energy. A
chart of the proposed corporate structure of Interstate Energy following
consummation of the Transaction is attached hereto as Exhibit A.
The common shareholders of IES and IPC will receive shares of
Interstate Energy Common Stock in exchange for their shares of IES and IPC
Common Stock (as defined below), respectively, and, thus, will become common
shareholders of Interstate Energy. The exchange ratios applicable to the
conversion of IES and IPC common stock into Interstate Energy Common Stock are
described in Item 1.C.2. below. The Transaction will have no effect on
the shares of cumulative preferred stock, $50 par value, of Utilities
("Utilities Preferred Stock") or the shares of preferred stock, $50 par
value, of IPC ("IPC Preferred Stock") issued and outstanding at the time of
the consummation of the Transaction, each series of which and each share of
which will remain unchanged (other than IPC Dissenting Shares). A copy of the
Merger Agreement is incorporated by reference as Exhibit B hereto.
A. Antitrust. The Applicants fully satisfied the requirements
under the HSR Act on July 7, 1996. However, because the Applicants did not
consummate the Transaction within one year of that date, the Applicants were
obliged to re-notify the DOJ and FTC of the proposed Transaction. The Applicants
resubmitted the necessary filings under the HSR Act on September 3, 1997. The
HSR Act imposes a 30-day waiting period for the consummation of each merger
comprising the Transaction subject to the HSR Act's prenotification requirement.
The Applicants, however, requested and were granted early termination of that
waiting period by the FTC on September 12, 1997.
B. Federal Power Act. The Administrative Law Judge presiding
over the FERC proceeding issued his Initial Decision on Rate and Merger Issues
in Docket Nos EC96-13-000, ER96-1236-000 and ER96-2560-000 approving the
Transaction, subject to conditions, on July 3, 1997. The Initial FERC Decision
was subject to FERC review; the subsequent FERC order, Opinion No. 419,
approving the transaction, was issued on November 12, 1997.
C. Atomic Energy Act. The NRC approved the Transaction relative
to the Duane Arnold Energy Center on August 28, 1997. Pursuant to the Order,
parties had until October 6, 1997 to request a hearing on the Order; no such
hearing was requested.
D. State Public Utility Regulation. The MPUC approved the
Transaction in Minnesota Public Utilities Commission Opinion and Order at Docket
No. E, 6-100/PA-96-184 (March 24, 1997). The ICC approved the Transaction in
Illinois Commerce Commission Opinion and Order in Matter No. 96-1022 (May 7,
1997) (filed as Exhibits 0-3- (a) and 0-4-(a)). The IUB approved the Transaction
at Docket No. SPU-96-6 on September 16, 1997 (filed as Exhibit 0-5-(a)). The
PSCW, in an Order relating to Docket No. 6680-UM 100, as effective November 6,
1997, approved the merger subject to conditions (filed as Exhibit 0-6-(a)).
Pursuant to the Applicant's agreement with the PSCW and in
response to the PSCW Order effective November 6, 1997, the Applicants hereby
request that the Commission include in any order approving IEC as a registered
holding company:
Approval of the Application in no way precludes the Public
Service Commission of Wisconsin, the Iowa Utilities Board, the
Minnesota Utility Commission, the Illinois Commerce Commission
or any other state regulatory authority from scrutinizing and
disallowing the pass through of costs and rates for services
rendered to customers of the client companies. It is the SEC's
intention that each state commission having jurisdiction over a
client company will retain the right to review and disallow
costs of services provided to a client company by Interstate
Services, Inc., that may be subject to recovery in rates.
B. Description of the Parties to the Transaction
1. General Description
a. WPLH (to be renamed Interstate Energy Corporation) and
its Subsidiaries
i. WPLH
WPLH was incorporated under the laws of the State of Wisconsin
in 1981 and is a public utility holding company exempt from regulation under the
Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act
and by order of the Commission in WPL Holdings, Holding Co. Act Release No.
24590 (February 26, 1988), as reaffirmed in Holding Co. Act Release No. 25377
(September 18, 1991). As stated above, WPLH will change its name to Interstate
Energy Corporation at or prior to consummation of the Transaction.
WPLH owns all of the issued and outstanding common stock of
WP&L, and WP&L owns all of the issued and outstanding common stock of South
Beloit Water, Gas and Electric Company, an Illinois corporation ("South
Beloit"). South Beloit has been a wholly-owned subsidiary of WP&L since prior to
1930. WP&L also owns 33 1/3% of Wisconsin River Power Company ("WRPC"), a public
utility which owns and operates two hydro-electric facilities on the Wisconsin
River. WP&L, incorporated under the laws of the State of Wisconsin
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on February 21, 1917, is a public utility holding company exempt from regulation
by the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to
Section 3(a)(2) of the Act and Rule 2 thereunder. WP&L and South Beloit are
combination electric and gas public utility companies under the Act. WP&L is
engaged principally in generating, purchasing, distributing and selling electric
energy in 35 counties in southern and central Wisconsin. As of December 31,
1995, WP&L furnished retail electric service to approximately 370,000 customers
in 663 cities, villages and towns, and wholesale service to 27 municipal
utilities, one privately-owned utility, three rural electric cooperatives and
the Wisconsin Public Power Incorporated SYSTEM ("WPPI"), which provides retail
service to nine communities. WP&L also purchases, distributes and sells natural
gas to retail customers in 22 counties in southern and central Wisconsin; it
also supplies water to customers in two Wisconsin communities, including the
cities of Ripon and Beloit and areas adjacent thereto. As of December 31, 1995,
WP&L provided natural gas to approximately 141,000 customers and water to 31,620
customers. South Beloit supplies retail electric, gas and water service to
customers in South Beloit and Rockton, Illinois and the rural areas adjacent to
such cities. As of December 31, 1995, South Beloit provided electric utility
service to 7,005 customers, gas utility service to 5,128 customers, and water
service to 1,598 customers. The service territory of South Beloit is located in
Illinois and is adjacent to the territory served by WP&L in Wisconsin. A map of
the combined service territory of WP&L and South Beloit is attached as Exhibit
C-1.
WP&L is subject to regulation as a public utility as to retail
electric, gas and water rates, service rules, issuance of securities,
construction of new facilities, transactions with affiliates and various other
matters by the PSCW. South Beloit is subject to regulation as a public utility
as to retail electric, gas and water rates, accounts, issuance of securities and
other matters by the ICC. WP&L and South Beloit are also subject to regulation
by the FERC with respect to the classification of accounts, rates for any
wholesale sales of electricity, wheeling rates for the interstate transmission
of electric power and energy, interconnection agreements, issuances of
securities not regulated by state commissions and acquisitions and sales of
certain utility properties under the Federal Power Act. WP&L is also currently
subject to regulation by the NRC in connection with its ownership interest in
the Kewaunee Nuclear Plant.
Exhibit M-5 describes the non-utility businesses of WPLH which
are held by its subsidiary Heartland Development Corporation, a Wisconsin
corporation ("HDC"). For the year ended December 31, 1995, approximately 15%
of WPLH's consolidated operating revenues were derived from its non-utility
investments. As of December 31, 1995, less than 13.34% of WPLH's consolidated
assets were invested in non-utility businesses.
WPLH, as a public utility holding company (a "holding company")
under the Wisconsin Holding Company Act (the "Wisconsin Act"), is (and,
following consummation of
5
<PAGE> 10
the Transaction, Interstate Energy will continue to be) subject to the
jurisdiction of, and regulation by, the PSCW. The following is a brief summary
of certain provisions of the Wisconsin Act that currently apply to WPLH and will
apply to Interstate Energy.
The PSCW may order the utility affiliate to limit or cease
payment of dividends to the holding company if it finds the capital of any
public utility affiliate of a holding company will be impaired by payment of a
dividend. Various transactions by a public utility affiliate with others in the
holding company system are prohibited, including: lending money, guaranteeing
obligations, combining advertising, providing utility service on terms different
from those for other consumers in the same class, and, selling or leasing
certain real property and using the services of utility employees after
establishing that the utility affiliate will be paid at fair market value,
unless the PSCW approves the transaction. The Wisconsin Act prohibits (i) any
public utility affiliate from providing any non-utility product or service in a
manner or at a price that unfairly discriminates against any competing provider,
(ii) any non-utility activity from being subsidized materially by the customers
of any public utility in the system, (iii) the operation of the system in any
way which materially impairs any public utility affiliate's credit, ability to
acquire capital on reasonable terms or ability to provide safe, reasonable,
reliable and adequate utility service, (iv) any transfer by a public utility
affiliate to any other system company of any confidential public utility
information, including customer lists, for any non-utility purpose unless the
PSCW has approved the transfer and (v) any termination of the system's interest
in a public utility affiliate without PSCW approval.
The Wisconsin Act also limits non-utility diversification. The
Wisconsin Act generally provides that the net book value of the assets (other
than investment in system affiliates) of all non-utility affiliates may not
exceed the sum of 25% of the net book value of all electric utility affiliates
and a percentage, to be determined by the PSCW (but not less than 25%), of the
net book value of all other public utility affiliates (the PSCW has fixed that
percentage at 25% for book value of WP&L's gas utility business). Further,
the Wisconsin Act requires the PSCW periodically to investigate the impact of
the operation of every holding company system on every public utility affiliate
in the system and to determine whether each non-utility affiliate does,
or can reasonably be expected to do, at least one of the following: (a)
substantially retain, attract or promote business activity or employment
or provide capital to businesses within the service territory of any public
utility affiliate or certain other businesses, (b) increase or promote
energy conservation or develop, produce or sell renewable energy products
or equipment, (c) conduct a business that is functionally related to
providing utility service or to developing or acquiring energy resources or (d)
develop or operate commercial or industrial parks in the service territory of
any public utility affiliate. The PSCW is also authorized to order a holding
company to terminate its interest in a public utility affiliate if the
6
<PAGE> 11
PSCW finds that, based upon clear and convincing evidence, termination of the
interest is necessary to protect the interests of utility investors in a
financially healthy utility and the interests of consumers in reasonably
adequate utility service at a just and reasonable price.
The common stock, par value $.01 per share, of WPLH ("WPLH
Common Stock") is listed on the New York Stock Exchange ("NYSE"), the Boston
Stock Exchange ("BSE"), the Chicago Stock Exchange ("CSE") and the Pacific Stock
Exchange ("PSE"). As of July 10, 1996, there were 30,795,260 shares of WPLH
Common Stock outstanding. WPLH has no shares of preferred stock outstanding. As
of July 10, 1996, there were 1,049,225 shares of WP&L preferred stock
outstanding. The rights of holders of WP&L's outstanding preferred stock will
not be impacted by the Transaction. WPLH's principal executive office is located
at 222 West Washington Avenue, Madison, Wisconsin 53703. Copies of the Restated
Articles of Incorporation of WPLH and WP&L are incorporated by reference as
Exhibits C-2 and C-3, respectively.
For the year ended December 31, 1995, WPLH's operating revenues
on a consolidated basis were approximately $811 million, of which approximately
$550 million were derived from electric operations, $139 million from gas
operations and $122 million from other operations. Consolidated assets of WPLH
and its subsidiaries at December 31, 1995 were approximately $1.875 billion,
consisting of approximately $1.23 billion in identifiable electric utility
property, plant and equipment; approximately $250 million in identifiable gas
utility property, plant and equipment; and approximately $395 million in other
corporate assets.
More detailed information concerning WPLH and its subsidiaries
is contained in the Annual Reports on Form 10-K of WPLH and WP&L for the year
ended December 31, 1995, copies of which are incorporated by reference as
Exhibits C-4 and C-5, respectively, and Quarterly Reports on Form 10-Q of WPLH
and WP&L for the quarter ended March 31, 1996 copies of which are incorporated
by reference as Exhibits C-6 and C- 7, respectively.
ii. Acquisition
Acquisition has been incorporated under the laws of the State
of Wisconsin solely for the purpose of facilitating the Transaction. The
authorized capital stock of Acquisition consists of 9,000 shares of common
stock, $.01 par value ("Acquisition Common Stock"), all the outstanding shares
of which are held by WPLH. Acquisition has not had, and prior to the
consummation of the Transaction will not have, any operations other than the
activities contemplated by the Merger Agreement necessary to accomplish the
combination of Acquisition and IPC or New IPC, as applicable, as herein
described.
iii. Interstate Services
Interstate Services was incorporated in Iowa as a subsidiary
of WPLH to serve as the service company for the Interstate Energy system
after consummation of the Transaction. Interstate Services will provide
7
<PAGE> 12
WP&L, Utilities, IPC, South Beloit, and the other companies of the Interstate
Energy system with a variety of administrative, management and support services.
Interstate Services will enter into a service agreement with
WP&L, Utilities, IPC and South Beloit (the "Service Agreement"). A copy of the
form of Service Agreement as well as an appendix thereto entitled "Description
of Services and Determination of Charges for Services" is filed as Exhibit D-6.
In addition, to facilitate the joint dispatch of the combined generating
facilities of the Interstate Energy system, Interstate Services will enter into
a System Coordination and Operating Agreement with WP&L, Utilities and IPC (the
"Coordination Agreement") which will be filed with, and approved by, FERC. A
copy of the form of the Coordination Agreement is filed as Exhibit D-2 hereto.
For certain of the non-utility affiliates of Interstate Energy,
Interstate Services may enter into one or more separate service agreements (the
"Non-Utility Service Agreement"). A copy of the form of Non-Utility Service
Agreement as well as an appendix thereto entitled "Description of Services and
Determination of Charges for Services" is filed as Exhibit D-7. The Interstate
Services Policy and Procedures Manual is filed as Exhibit D-8.
The authorized capital stock of Interstate Services will
consist of 9,000 shares of common stock, par value $.01 per share.
iv. New Interstate Energy Non-Utility Subholding Company
Prior to consummation of the Transaction, Interstate Hold will
be incorporated in Wisconsin as a wholly-owned subsidiary of WPLH to serve as a
holding company for (and to acquire the outstanding capital stock of) certain of
the non-utility subsidiary companies of WPLH and IES after consummation of the
Transaction. Such non-utility subsidiary companies are described below in Item
1.B.5. The resulting corporate structure is set forth in Exhibit A.
b. IES
IES, incorporated under the laws of the State of Iowa in 1986,
is a public utility holding company exempt from regulation under the Act (except
for Section 9(a)(2) of the Act) pursuant to Section 3(a)(1) of the Act and Rule
2 thereunder. Pursuant to Rule 2, IES has filed a statement with the Commission
on Form U-3A-2 for the year ended December 31, 1995 which is incorporated by
reference as Exhibit E-1 hereto.
IES owns all of the issued and outstanding common stock of
Utilities, a public utility company under the Act. Utilities is an Iowa
corporation engaged primarily in providing electric energy, natural gas and, to
a limited extent, steam used for heating and industrial purposes, in Cedar
Rapids, Iowa. As of December 31, 1995, Utilities provided retail electric
service to approximately 333,000 customers in 525 communities and natural gas to
174,000 retail customers in 222 communities across Iowa and provided wholesale
electric service to 30 Iowa municipalities. A map of Utilities' service
territory is attached as Exhibit E-2.
8
<PAGE> 13
Utilities is subject to regulation as a public utility by the
IUB asto its retail, electric and gas rates, services, accounts, depreciation,
acquisitions and sales of utility properties, and in other respects. Utilities
is also subject to regulation by the FERC with respect to borrowings and the
issuance of securities, the classification of accounts, rates for any wholesale
sale of electricity, the interstate transmission of electric power and energy,
interconnection agreements, and acquisitions and sales of certain utility
properties under the Federal Power Act. Utilities is also subject to regulation
by the NRC as a result of its ownership interest in and operation of the Duane
Arnold Energy Center.
IES also owns all of the issued and outstanding common stock of
IES Diversified Inc. ("Diversified"), an Iowa corporation, which serves as the
holding company for certain of IES' non-utility businesses. Diversified owns all
of the issued and outstanding common stock of four corporations engaged,
directly or indirectly through subsidiaries and affiliates, in non-utility
businesses, which are described in more detail in Exhibit M-5 hereto. In
addition, Utilities owns 100% of the issued and outstanding common stock of IES
Ventures Inc. ("Ventures"), an Iowa corporation, which is engaged, indirectly
through subsidiaries, in non-utility businesses described in Exhibit M-5
hereto. For the year ended December 31, 1995, approximately 12% of IES'
consolidated operating revenues were derived from its non-utility investments.
As of December 31, 1995, approximately 20% of IES' consolidated assets were
invested in non-utility businesses.
The common stock, no par value, of IES (the "IES Common Stock")
is listed on the NYSE, the BSE, the CSE and the PSE. As of July 10, 1996, there
were 29,923,233 shares of IES Common Stock outstanding. IES has no shares of
preferred stock outstanding. As of such date there were 120,000 shares of
Utilities 4.30% Preferred Stock, 146,354 shares of Utilities 4.80% Preferred
Stock and 100,000 shares of Utilities 6.10% Preferred Stock outstanding. If the
Utilities Reincorporation Merger is effected, it is currently anticipated that
the shares of Utilities Preferred Stock will be redeemed by Utilities prior to
such merger. The principal executive office of IES and Utilities is located at
IES Tower, 200 First Street S.E., Cedar Rapids, Iowa 52401. Copies of the
Restated Articles of Incorporation of IES and the Amended and Restated Articles
of Incorporation of Utilities are incorporated by reference as Exhibits E-3 and
E-4, respectively.
9
<PAGE> 14
For the year ended December 31, 1995 IES' operating revenues on
a consolidated basis were approximately $851 million, of which approximately
$560 million were derived from electric operations, $190 million from gas
operations and $100 million from other operations. Consolidated assets of IES
and its subsidiaries at December 31, 1995 were approximately $1.986 billion
consisting of approximately $1.396 billion in identifiable electric utility
property, plant and equipment, approximately $199 million in identifiable gas
utility property, plant and equipment and approximately $391 million in other
corporate assets.
More detailed information concerning IES and its subsidiaries
is contained in the Annual Reports on Form 10-K, as amended, of IES and
Utilities for the year ended December 31, 1995, copies of which are incorporated
by reference as Exhibits E-5 and E-6, respectively, and the Quarterly Reports on
Form 10-Q of IES and Utilities for the quarter ended March 31, 1996, copies of
which are incorporated by reference as Exhibits E-7 and E-8, respectively.
c. IPC
IPC, incorporated under the laws of the State of Delaware in
1925, is a public utility company. IPC is engaged primarily in generating,
purchasing, transmitting, distributing and selling electric energy in portions
of twenty-five counties in northern and northeastern Iowa, twenty-two counties
in southern Minnesota and four counties in northwestern Illinois. IPC also
engages in distribution and sale of natural gas in 41 communities, including:
Albert Lea, Minnesota; Clinton, Mason City and Clear Lake, Iowa; Fulton and
Savanna, Illinois; and a number of smaller Minnesota, Iowa and Illinois
communities. As of December 31, 1995, IPC provided electric service to 163,344
retail customers and 19 full and partial requirements wholesale customers, and
natural gas to 48,823 retail customers. In addition, IPC engages in the
transportation of natural gas within Iowa, Minnesota and in interstate commerce.
A map of IPC's service territory is attached as Exhibit F-1.
IPC is subject to regulation as a public utility by the IUB,
the MPUC and the ICC as to its retail, electric and gas rates, services,
accounts, depreciation, acquisitions and sales of utility properties, and in
other respects. The ICC also regulates the issuance of securities and the MPUC
regulates IPC with respect to the appropriateness of IPC's capital structure.
IPC is also subject to regulation by the FERC with respect to borrowings and the
issuance of securities, the classification of accounts, rates for any wholesale
sale of electricity, the interstate transmission of electric power and energy,
interconnection agreements, and acquisitions and sales of certain utility
properties under the Federal Power Act. IPC also owns jurisdictional facilities
subject to regulation by FERC under the Natural Gas Act.
IPC owns all of the issued and outstanding common stock of IPC
Development Company, Inc., an Iowa corporation ("IPC Development"), which owns
certain non-utility investments described in more detail in Item 1.B.5.c. below.
For the year ended December 31, 1995, none of IPC's operating revenues were
derived from its non-utility investments, and such investments constituted less
than 0.2% of its assets as of such date.
10
<PAGE> 15
The common stock, $3.50 par value of IPC (the "IPC Common
Stock"), is listed on the NYSE, the CSE and the PSE. As of July 10, 1996, there
were 9,595,028 shares of IPC Common Stock and 761,381 shares of IPC Preferred
Stock outstanding. If the IPC Reincorporation Merger is effected, it is
currently anticipated that each share of IPC Preferred Stock (other than IPC
Dissenting Shares) will be converted into one share of New IPC Preferred Stock,
as described in Item 1.A.2. above, prior to such merger. The principal executive
office of IPC is located at 1000 Main Street, Dubuque, Iowa 52004-0769. A copy
of the Restated Certificate of Incorporation of IPC is incorporated by reference
as Exhibit F-2.
For the year ended December 31, 1995, IPC's operating revenues
were approximately $319 million, of which approximately $275 million were
derived from electric operations and $44 million from gas operations. Assets of
IPC at December 31, 1995 were approximately $634 million, consisting of
approximately $459 million in identifiable net electric utility property, plant
and equipment, approximately $39 million in identifiable net gas utility
property, plant and equipment and approximately $135 million in other corporate
assets.
More detailed information concerning IPC is contained in IPC's
Annual Report on Form 10-K for the year ended December 31, 1995, a copy of which
is incorporated by reference as Exhibit F-3, and IPC's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, which is incorporated by reference as
Exhibit F-4.
11
<PAGE> 16
2. Description of Energy Sales and Facilities
a. WP&L
i. Energy Sales
For the year ended December 31, 1995, WP&L and its utility
subsidiary, South Beloit, sold the following amounts of electric energy (at
retail or wholesale, including amounts delivered in interchange) and distributed
the following amounts of natural or manufactured gas at retail:
<TABLE>
<S> <C>
WP&L
Kwh of electric energy sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,745,961,496
Mcf of gas distributed at retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,942,546
South Beloit
Kwh of electric energy sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,740,052
Mcf of gas distributed at retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,434
</TABLE>
ii. Electric Generating Facilities and Resources
As of December 31, 1995, WP&L had a total net generating
capability of approximately 2,200 MW available from the following units:
12
<PAGE> 17
<TABLE>
<CAPTION>
Name and Location Major Fuel WP&L's Share of Nameplate
of Station Type Generating Capacity (MW)
---------------------------------------------------- ---------------- ----------------------------------
<S> <C> <C>
Kewaunee: Town of Carlton, Wisconsin Nuclear 219 *
Nelson Dewey: Cassville, Wisconsin Coal 200
Edgewater: Sheboygan, Wisconsin Coal 570 **
Columbia Energy Center: Portage, Wisconsin Coal 473 ***
Rock River: Beloit, Wisconsin Coal & Gas 294
Sheepskin: Edgerton, Wisconsin Gas 40
South Fond du Lac: Fond du Lac, Wisconsin Gas 172 ****
Blackhawk: Beloit, Wisconsin Gas & Hydro 52
Prairie du Sac: Prairie du Sac, Wisconsin Hydro 29
Wisconsin River Power Co.: Petenwell, Wisconsin Hydro 12 *****
Kilbourne: Wisconsin Dells, Wisconsin Hydro 10
Janesville: Janesville, Wisconsin Hydro 1
Shawano: Shawano, Wisconsin Hydro 1
- - ---------------------
</TABLE>
* Represents WP&L's 41% ownership interest in this 535 MW plant. The
plant is operated by an unaffiliated utility.
** Represents WP&L's 100%, 68.2% and 75% ownership interest in each of
the three generating units, respectively, in this 770 MW plant. The
plant is operated by WP&L.
*** Represents WP&L's 46.2% ownership interest in this 1,023 MW plant.
The plant is operated by WP&L.
**** Represents WP&L's ownership interest in two of the four generating
units in this 344 MW plant. The plant is operated by WP&L.
***** Represents WP&L's 33-1/3% ownership interest in this facility. The
facility is operated by an unaffiliated utility.
WP&L and South Beloit purchase capacity and energy from various
regional utilities as well as Qualifying Facilities ("QFs"), as that term is
defined in the Public Utility Regulatory Policies Act of 1978 ("PURPA") in order
to meet energy needs of their customers.
13
<PAGE> 18
Together, WP&L and South Beloit purchased approximately 18% of the total
electric system energy input for 1995.
WP&L's 1995 summer peak load, which occurred on July 31, 1995,
was 2,197 MW and its 1995 winter peak load, which occurred on December 11, 1995,
was 1,913 MW.
South Beloit generates approximately 3% of its electric energy
needs from its hydro-electric generating facility located in Rockton, Illinois,
which has an installed gross capacity of 2 MW and a net dependable capacity of 2
MW. South Beloit purchases all of its remaining electric energy requirements
from WP&L.
The electric operations of WP&L and South Beloit are fully
integrated and all generating units are centrally dispatched by WP&L. The
electric production and transmission costs of WP&L and South Beloit are shared
by the companies under a Contract for Electricity, dated January 1, 1983. For
the year ended December 31, 1995, the combined energy (Kwh) production of WP&L
and South Beloit was produced 81.1% by coal-fired generation, 15.3% by nuclear
generation, 2.2% by hydroelectric generation and 1.4% from other generation. For
the year ended December 31, 1995, approximately 66.6% of the combined Kwh sales
of WP&L and South Beloit was obtained from coal-fired generation, approximately
12.6% from nuclear generation, 17.9% from purchases and approximately 2.7% from
renewable resources.
iii. Electric Transmission Facilities
WP&L's transmission system is located entirely within the State
of Wisconsin. As of December 31, 1995, WP&L's electric transmission system
consisted of approximately 1,755 circuit miles of 69 kV overhead lines; 2
circuit miles of 69 kV underground lines; 737 circuit miles of 138 kV overhead
lines; 1 circuit mile of 138 kV underground lines; 1 circuit mile of 161 kV
overhead lines; 107 circuit miles of 345 kV overhead lines; and 190 circuit
miles of transmission lines under 69 kV. A map of WP&L's major electric
transmission lines is filed as Exhibit G-1.
As of December 31, 1995, South Beloit owned a 69 kV overhead
transmission line segment which is approximately 13.75 miles in length and a 345
kV overhead line segment which is approximately .25 miles in length.
iv. Gas Facilities
As of December 31, 1995, WP&L provided natural gas service at
retail to approximately 141,000 customers in 227 cities, villages and towns
located in 22 counties in southern and central Wisconsin and South Beloit
provided natural gas service in South Beloit, Illinois and adjacent areas in the
Town of Rockton and Town of Roscoe, Illinois. The gas delivery operations of
WP&L and South Beloit are managed out of Madison, Wisconsin, pursuant to a
Contract for Gas, dated February 22, 1980 between WP&L and South Beloit.
14
<PAGE> 19
Under this agreement, WP&L manages the pressures of the various pipelines owned
by these companies and the inflow and outflow of natural gas from these
pipelines.
The gas property of WP&L at December 31, 1995 consisted chiefly
of approximately 2,989 miles of distribution mains, ranging in size from 0.75 to
16 inches, and operating at pressures from 5 psig to 975 psig, and related
equipment. The U.S. Department of Transportation classifies 34 miles of the
mains as transmission.
The gas property of South Beloit at December 31, 1995 consisted
chiefly of approximately 103 miles of distribution/ transmission mains, ranging
in size from 0.50 to 8 inches, and related equipment.
v. Other
WP&L also owns two water utility systems which are regulated as public utilities
under Wisconsin law, one serving the City of Ripon and adjacent Town of Ripon,
Wisconsin (the "Ripon Water System") and the other serving the City of Beloit
and adjacent Towns of Beloit and Turtle, Wisconsin (the "Beloit Water
System"). The Ripon Water System consists primarily of a 350,000 gallon
elevated storage tank, four drilled wells, 330 hydrants and 38 2/3 miles of
distribution pipes and related equipment and serves approximately 5,375
customers. The Beloit Water System consists primarily of three elevated storage
tanks with a combined capacity of 2.25 million gallons, seven drilled wells, two
booster stations, 1,045 hydrants and 167 3/4 miles of distribution pipes and
related equipment and serves approximately 26,250 customers. South Beloit
owns a water utility system which is regulated as a public utility under
Illinois law and provides water to customers in the City of South Beloit and
the adjacent Towns of Roscoe and Rockton, Illinois (the "South Beloit Water
System"). The South Beloit Water System consists primarily of one drilled well,
325 hydrants and 23 2/3 miles of distribution pipes and related equipment and
serves approximately 1,600 customers.
Other assets owned by WP&L and South Beloit include electric
distribution systems located throughout its service area, property, plant and
equipment owned or leased supporting their electric, gas and water utility
functions. WP&L and South Beloit also own or lease other physical properties,
including real property, and other facilities necessary to conduct their
operations.
15
<PAGE> 20
b. Utilities
i. Energy Sales
For the year ended December 31, 1995, Utilities sold the
following amount of electric energy (at retail and wholesale, including amounts
delivered in interchange) and distributed the following amount of natural or
manufactured gas at retail:
Kwh of electric energy sold . . . . . . 10,869,635,000
Mcf of gas distributed at retail . . . . 29,458,000
ii. Electric Generating Facilities and Resources
At December 31, 1995 Utilities had a total net generating
capability of approximately 1,869 MW from the following units:
<TABLE>
<CAPTION>
Name and Location Major Fuel Utilities' Share of
of Station Type Generating Capacity (MW)
------------------------------------------------------- -------------- ---------------------------------
<S> <C> <C>
Duane Arnold Energy Center: Palo, Iowa Nuclear 364 *
Ottumwa Generating Station: Ottumwa, Iowa Coal 343 **
Prairie Creek Station: Cedar Rapids, Iowa Coal 212
Sutherland Station: Marshalltown, Iowa Coal 143
Sixth Street Station: Cedar Rapids, Iowa Coal 71
Burlington Generating Station: Burlington, Iowa Coal 212
George Neal Unit 3: Sioux City, Iowa Coal 144 ***
Peaking Turbines: Marshalltown, Iowa Oil 162
Centerville Cumbustion Turbines: Centerville, Iowa Oil 48
Diesel Stations: all in Iowa Oil 12
Grinnell Station: Grinnell, Iowa Gas 47
Agency Street Combustion Turbines: West Burlington,
Iowa Gas 64
Burlington Combustion Turbines: Burlington, Iowa Gas 47
</TABLE>
- -----------------------------
* Represents Utilities' 70% ownership interest in this 520 MW plant.
The plant is operated by Utilities.
16
<PAGE> 21
** Represents Utilities' 48% ownership interest in this 715.5 MW plant.
The plant is operated by Utilities.
*** Represents Utilities' 28% ownership interest in this 515 MW plant.
The plant is operated by an unaffiliated utility.
Utilities purchases capacity and energy from various regional
utilities as well as QFs, in order to meet energy needs of its customers.
Utilities purchased approximately 26.3% of the total electric system energy
input for 1995.
Utilities' summer peak load for the calendar year 1995, which
occurred on July 12, 1995, was 1,824 MW and its 1995 winter peak load, which
occurred on December 11, 1995, was 1,533 MW.
The electric operations of Utilities and Central Iowa Power
Cooperative ("CIPCO") are integrated and all generating units are centrally
dispatched by Utilities. The electric production and transmission costs of
Utilities and CIPCO are allocated between the two companies on the basis of an
Operating and Transmission Agreement dated January 1991. For the year ended
December 31, 1995, the energy (Kwh) production of Utilities was produced 67.0%
by coal-fired generation, 31.1% by nuclear generation, 0.1% by hydroelectric
generation and 1.8% from other generation. For the year ended December 31, 1995,
approximately 50.5% of the Kwh sales of Utilities was obtained from coal-fired
generation, approximately 22.9% from nuclear generation, 26.3% from purchases
and approximately 0.3% from renewable resources.
iii. Electric Transmission Facilities
Utilities' transmission system is located entirely within the
State of Iowa. A map of Utilities' major electric transmission lines is filed as
Exhibit G-2. As of December 31, 1995, Utilities' transmission system consisted
of 1,043 miles of 69 kV transmission lines, 376 miles of 115 kV transmission
lines, 650 miles of 161 kV transmission lines and 67 miles of 345 kV
transmission lines. CIPCO's transmission system consisted of 533 miles of 69 kV
transmission lines, 58 miles of 115 kV transmission lines and 250 miles of 161
kV transmission lines.
iv. Gas Facilities
As of December 31, 1995, Utilities provided natural gas service
to approximately 174,000 customers in 222 Iowa communities. Residential
customers, general service customers and large general service customers make up
87%, 11% and 2% of the company's natural gas customers, respectively. As of such
date, the gas properties consisted primarily of approximately 3,638 miles of
main in Iowa ranging in size from 2 to 12 inches with pressure ranging from 5
psig to 975 psig, 118 miles of which are classified as transmission. Utilities
currently has no operable propane air peak shaving plants.
17
<PAGE> 22
v. Other
Utilities owns a steam system which has provided steam service
to downtown Cedar Rapids residences and businesses since the turn of the
century. This system currently delivers low- and high-pressure steam to more
than 200 residential and business customers. Residential customers use the steam
for home heating while business customers use the steam in production processes.
Steam sales make up approximately 1.7% of Utilities' operating revenues.
Other assets owned by Utilities include electric distribution
systems located throughout its service area, and property, plant and equipment
owned or leased supporting its electric, gas and water utility functions.
Utilities also owns or leases other physical properties, including real
property, and other facilities necessary to conduct its operations.
c. IPC
i. Energy Sales
For the year ended December 31, 1995, IPC sold the following
amount of electric energy (at retail or wholesale, including amounts delivered
in interchange) and sold and transported the following amount of natural or
manufactured gas at retail:
<TABLE>
<S> <C>
Kwh of electric energy sold . . . . . . . . . . . . . . 5,771,043,000
Mcf of gas sold and transported at retail . . . . . . . 35,320,000
</TABLE>
ii. Electric Generating Facilities and Resources
As of December 31, 1995, IPC had a total net generating
capability of approximately 1,028 MW available from the following units:
18
<PAGE> 23
<TABLE>
<CAPTION>
Name and Location Major Fuel Company Share of Nameplate
of Station Type Generating Capacity (MW)
------------------------------------------------------- -------------- ---------------------------------
<S> <C> <C>
Dubuque: Dubuque, Iowa Coal 73
M. L. Kapp Plant: Clinton, Iowa Coal 227
Lansing: Lansing, Iowa Coal 312
Fox Lake Plant: Sherburn, Minnesota Coal 98
George Neal Unit 4: Sioux City, Iowa Coal 126 *
Louisa Unit 1: Louisa County, Iowa Coal 27 **
Montgomery: Montgomery, Minnesota Gas 27
Fox Lake Plant: Sherburn, Minnesota Gas 27
Lime Creek Plant: Mason City, Iowa Gas 75
Dubuque: Dubuque, Iowa Oil 4
Hills: Hills, Minnesota Oil 2
Lansing: Lansing, Iowa Oil 2
New Albin: New Albin, Iowa Oil .6
Rushford: Rushford, Minnesota Oil 2
</TABLE>
- -------------------------
* Represents IPC's 21.5% ownership interest in this 585 MW plant. The
plant is operated by an unaffiliated utility.
** Represents IPC's 4% ownership interest in this 685 MW plant. The
plant is operated by an unaffiliated utility.
IPC purchases capacity and energy from various regional
utilities as well as QFs, in order to meet energy needs of its customers. IPC
purchased approximately 38.3% of the total electric system energy input for
1995.
IPC is a summer peaking system; its summer peak load of 1011 MW
occurred on July 14, 1995.
For the year ended December 31, 1995, the energy (Kwh)
production of IPC was produced 90.9% by coal-fired generation and 9.1% from
other generation. For the year ended December 31, 1995, approximately 56.1% of
the Kwh sales of IPC was obtained from coal-fired generation, 38.3% from
purchases and 5.6% from other generation.
iii. Electric Transmission Facilities
IPC's transmission system is located within the States of Iowa,
Illinois and Minnesota. As of December 31, 1995, IPC's electric transmission
system consisted of 1,043 miles of kV transmission lines, 731 miles of 161 kV
transmission lines and 135 miles of 345 kV transmission lines. A map of IPC's
major electric transmission lines is filed as Exhibit G-3.
19
<PAGE> 24
iv. Gas Facilities
The gas property of IPC at December 31, 1995, consisted of
approximately 210 miles of gas main in Illinois, 553 miles of gas main in Iowa
and 209 miles of gas main in Minnesota ranging in size from .75 inches to 16
inches and operating at various pressures from 1/4 psig to 600 psig.
Seventy-seven miles of IPC's main are classified as transmission, as reported to
the U.S. Department of Transportation.
IPC operates three propane air LPG peak shaving plants, which
are located in Albert Lea, Minnesota; Clinton, Iowa; and Mason City, Iowa to
meet firm customer demand during extreme peak winter weather conditions. The
respective daily output and storage capacity of these facilities are: 5,000
MMBtu/Day - 357,000 gallons (Albert Lea); 4,000 MMBtu/Day - 306,000 gallons
(Clinton); and 9,600 MMBtu/Day - 561,000 gallons (Mason City).
v. Other
Other assets owned by IPC include electric distribution systems
located throughout its service area, and property, plant and equipment owned or
leased supporting its electric, gas and water utility functions. IPC also owns
or leases other physical properties, including real property, and other
facilities necessary to conduct their operations.
3. Electric Coordination
The following table sets forth certain information with respect
to the electric operations of Interstate Energy pro forma as of December 31,
1995, adjusted to give effect to the Transaction (before intercompany
eliminations).
<TABLE>
<CAPTION>
Electric Operating
Revenues Kwh of Electric Energy Sales (including amounts
($ in millions) delivered in interchange)
--------------- -----------------------------------------------
<S> <C> <C>
WP&L (including South $546 11,747,178,000
Beloit)
Utilities $560 10,869,635,000
IPC $275 5,771,043,000
---- -------------
TOTAL $1,381 28,387,856,000
</TABLE>
Utilities and IPC are already directly physically
interconnected through numerous transmission lines that they own, including
three 161 kV lines, and the East 345 kV Line which runs from Minneapolis/St.
Paul to St. Louis, in which Utilities and IPC participate along with Northern
States Power, Union Electric Company ("UE") and Mid-American Energy (the "East
20
<PAGE> 25
345 kV Line"). WP&L and South Beloit are directly interconnected by a 69 kV
transmission line. WP&L is a member of the Mid-America Interconnected Network,
Inc. ("MAIN"), an interstate network of transmission facilities which are owned
by public entities and investor-owned utilities. MAIN is the regional
reliability council providing planning and coordination for member electric
power systems in the North-Central United States. However, WP&L has notified
MAIN that it intends to withdraw from MAIN effective December 31, 1997. WP&L is
also an associate member, and Utilities and IPC are full members, of the
Mid-America Power Pool ("MAPP") which is an economic power pool that operates an
electronic bulletin board and acts as a clearinghouse for bulk power
transactions among over 28 member utilities and marketers. WP&L, Utilities and
IPC intend to operate Interstate Energy as a single system, economically
dispatched pursuant to the Coordination Agreement.
WP&L, Utilities and IPC are also each directly interconnected
to numerous other neighboring utilities. In addition to its direct
interconnection with Utilities, IPC is also directly interconnected with six
neighboring utilities: Commonwealth Edison ("ComEd"), CIPCO, Corn Belt Power
Cooperative ("Corn Belt"), Dairyland Power Cooperative ("DPC"), Mid-American
Energy Company ("MAEC"), Northern States Power Company ("NSP"), Southern
Minnesota Municipal Power Agency and Cooperative Power Associates. In addition
to its direct interconnection with IPC, Utilities is directly interconnected
with nine neighboring utilities: CIPCO, Corn Belt, MAEC, Western Area Power
Authority, Muscatine Power and Water, Associated Electric Cooperative, UE,
Central Illinois Public Service and Northeast Missouri Power Cooperative.
Utilities is also a party to a coordination agreement with CIPCO which provides
for the joint dispatch of the Utilities and CIPCO resources and coordinated
operation of a portion of Utilities' transmission system with the facilities of
CIPCO. WP&L and South Beloit are directly interconnected with six neighboring
utilities: ComEd, DPC, Madison Gas & Electric Company, NSP, Wisconsin Electric
Power Company and Wisconsin Public Service Corporation. Through these
interconnections with neighboring utilities and others, WP&L, Utilities and IPC
can wheel electric energy throughout the combined Interstate Energy system.
WP&L and IPC also plan to construct two direct
interconnections between their systems across the Mississippi River
following consummation of the Transaction, when authorized by the FERC to do
so, including a 69 kV tie-line between Prairie du Chien, Wisconsin and
MacGregor, Iowa and a 161 kV line connecting WP&L's Nelson Dewey generating
plant on the east side of the river to IPC's Turkey River substation on the west
side.
IEC will be an integrated electric system within the meaning
of Section 2(a)(29)(A) of the Act. IEC will be operated as a single system,
economically dispatched pursuant to the Coordination Agreement. Utilities and
IPC ("IEC West") are presently directly interconnected(1) and WP&L and South
Beloit ("IEC East") are presently directly interconnected.(2) IEC West and IEC
East are presently interconnected through firm contractual wheeling arrangements
with third parties(3) and through MAPP.(4) Additionally, IEC intends to build
two tie-lines (aggregating 250 MW of transfer capability) between IEC West and
IEC East.(5) In the Federal Energy Regulatory Commission Initial Decision on
Rate and Merger Issues (Issued July 3, 1997) (the "Initial FERC Decision"), the
Administrative Law Judge, however, ordered the Applicants to delay construction
of the tie-lines between IEC West and IEC East until the Applicants have
constructed 400 MW of additional simultaneous import capability into the
Wisconsin Upper Michigan System ("WUMS"). IES Utilities et al, 80 F.E.R.C.
Paragraph 63,001, 21 (1997).
On November 12, 1997, the Federal Energy Regulatory Commission
(the "FERC") issued its decision on the merger. IES Utilities, Inc. et al.,
Opinion No. 419, 81 FERC Paragraph 61, ___ (1997) ("Opinion No. 419"). In
Opinion No. 419, the FERC accepted a competition stipulation that had been
negotiated by the Applicants and the FERC trial staff, as modified to include an
extra condition imposed by the presiding Administrative Law Judge. The
competitive stipulation, as modified, generally addresses the Applicants' use of
firm transmission service purchased from ComEd and DPC in order to achieve joint
dispatch; Applicants' proposal to construct two additional transmission lines
between IEC West and IEC East at a future time; Applicants' proposal to make
eight specified transmission improvements to increase transfer capability into
WUMS; Applicants' obligation to purchase additional point-to-point transmission
service if joint dispatch transfers between IEC West and IEC East exceed the
contract path quantity; and alternative dispute resolution and additional
efforts to increase transfer capability into WUMS if the specified measures are
not fully successful.
The record developed in the FERC proceeding demonstrates that,
at present, although IEC West and IEC East are interconnected through
neighboring utilities, there are no high voltage connections directly between
Iowa and WUMS. Initial FERC Decision at 30. Additionally, the transmission
capability between Iowa and WUMS is limited. In short, power cannot go straight
from Iowa to WUMS but must flow across the grid which is already constrained. As
a result of physics, due to the nature of the way power flows across the grid
and the engineering peculiarities of the Iowa-WUMS interface, the joint dispatch
of the Applicants' generating facilities through use of their 200 MW of
transmission rights(6) will result in the Applicants' using up much of the
import capability into WUMS thereby during times of system constraint preventing
competitors of the Applicants from selling power into WUMS.
The immediate construction of the tie-lines(7) will, for
reasons of physics and engineering peculiar to the Iowa-WUMS interface, not
alleviate the congestion at the constrained interface. Accordingly, the Initial
Decision and Opinion No. 419 direct the Applicants to delay construction of
their new tie-lines until the Applicants construct additional facilities to
increase the overall transfer capability into WUMS. The construction of these
additional facilities will reinforce the electrical interconnection between Iowa
and WUMS. The requirements of the competitive stipulation adopted by Opinion No.
419 are only necessary because, as a factual, physics and engineering matter,
the Applicants are currently interconnected and capable of integrated operation
to the point where they must first provide transmission capacity for others
before construction of the tie-lines.
The type and degree of physical interconnection described in
the Initial FERC Decision is sufficient to establish interconnection under the
Act for the purposes of Sections 2(a)(29)(A), 10(c)(2) and 11(b)(1). The
Commission has found that proposals to contract for or to construct physical
connections between utilities in a single system satisfy the interconnection
requirement. See New England Electric System, 38 S.E.C. 193, 198-99 (1958)
(engineering studies and testimony showing feasibility of direct
interconnections among four small systems satisfied the requirements of the Act
that utilities be "capable of physical interconnection"); Mississippi Valley
Generating Co., 36 S.E.C. 159 (1955) (while complete direct physical
interconnection between the companies involved did not currently
exist, the Commission recognized that physical interconnection was possible
through the construction of transmission lines).
Additionally, the Commission has found that two utilities that
are capable of sharing power through wheeling or power pool arrangements (as the
Applicants will be forced to do upon consummation of the Transaction pending
further construction of new transmission facilities) are physically
interconnected or capable of physical interconnection. The fact that two
facilities may be separated by other facilities that are not owned by the
holding company does not change the fact that they are interconnected or capable
of physical connection and of supplying power to one another as needed. City of
New Orleans v. SEC, 969 F.2d 1163, 1165 (D.C. Cir. 1992).
The Commission has also acknowledged that utilities can be
interconnected through power pools or by means of contractual rights to use the
lines of a third party. See Northeast Utilities, Holding Co. Act Release No.
25273 (Mar. 15, 1991); Centerior Energy Corp., Holding Co. Act Release No. 24073
(April 29, 1986); UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24,
1992). The Commission has recognized that a finding that wheeling and other
forms of sharing power through reliability councils and proposed regional
transmission groups also qualify as "interconnection" under section 2(a)(29)(A)
of the Act appears to be a logical extension of prior Commission holdings. 1995
Report at 71.
Moreover, even in the absence of the current interconnections,
the wheeling contract and the common power pool membership, the Applicants'
proposal to construct additional transmission facilities at the minimal
estimated cost of $4,400,000 would satisfy the integration requirements of the
Act. The Commission has indicated that a single integrated system exists based
solely on a planned, future interconnection, provided that such physical
interconnection is "contemplated or . . . possible within the reasonably near
future" and not just something that "might occur in the remote future, and whose
occurrence has not been foreshadowed by any facts shown in the record." In re
North American Co. and Its Subsidiaries, Holding Co. Act Release No. 4505 (Apr.
15, 1942); In re Cities Service Power & Light Corp., Holding Co. Act Release No.
5256 (Aug. 30, 1944) (integration standard met where "Derby contemplates the
construction of such interconnection facilities").
The transmission systems of IEC East and IEC West are not
directly connected currently. However, integration of the IEC East and IEC West
systems for purposes of accomplishing joint economic dispatch and reserve
sharing will be accommodated initially through the purchase of transmission
service from other utilities. In the long term, the integration will be made
through construction of transmission ties directly linking IEC East to IEC West.
21
<PAGE> 26
The specific plan for integration of IEC East and IEC West is
as follows. During the first three years of the merger (1998-2000), IEC will
utilize firm transmission service which has already been purchased for this
purpose from other utilities to allow the needed integration. The specific
transmission purchases are 150 MW of firm from Commonwealth Edison ("ComEd") and
50 MW of firm from Dairyland Power Cooperative ("DPC"). These contracts each
began on October 1, 1997 and run through September 30, 2000. The Applicants
will report to the Commission on or before the expiration of these contracts on
future integration plans.
The current plan for the future integration is to construct
two transmission ties between IPC and WP&L in the year 2000. The specific
construction projects identified in the IEC merger filing were a 4-mile 69 kV
line from Hillside substation in Prairie du Chien, Wisconsin to MacGregor
substation in MacGregor, Iowa and a 3-mile 161 kV line from Nelson Dewey
substation in Cassville, Wisconsin to IPW's Turkey River substation located in
Iowa. The total capacity of these ties is estimated at 250 MW consisting of 50
MW for the 69 kV line and 200 MW for the 161 kV line.
The Applicants that will comprise IEC have firm transmission
agreements and anticipate that they will continue to have firm transmission
agreements until such time as the additional lines are built. Thus, if, for some
reason, the transmission ties are not constructed on time or if the future
integration between IEC East and IEC West requires more than the 250 MW of
capacity provided by the two proposed transmission ties, then IEC will continue
to purchase firm transmission service from either ComEd, DPC or Northern States
Power Company ("NSP"). Any of these three parties can currently provide the
direct transmission link between IEC East and IEC West. The capacities of the
ComEd, DPC and NSP transmission ties between IEC East and IEC West are currently
1086 MW, 464 MW and 336 MW respectively.
In the event that construction of the transmission
reinforcements described above has not begun within 180 days of the scheduled
termination of the currently effective transmission agreements, IEC will
initiate discussions with ComEd and DPC with the intent of extending the term of
the agreements. In the event that these discussions do not result in an
agreement to extend the term within 120 days of the scheduled termination of the
agreements, IEC will make arrangements to take short-term firm transmission
service under the then-effective open access transmission tariffs of ComEd, DPC
or NSP, or in the alternative, will submit a good faith request for long-term
firm transmission service under Section 211 of the FPA.
ComEd is currently interconnected with IEC East by means of a
345 kV line that runs from ComEd's Wempletown substation to the Paddock
substation in IEC East. This line has a capacity of 1086 MW, which is the
limiting segment of the IEC East-IEC West transmission path through ComEd. ComEd
is, in turn, interconnected with IEC West through two lines, rated at 345 kV and
138/161 kV, and having an aggregate capacity of 1,124 MW. The 345 kV line
connects ComEd's Quad Cities generating station with IEC East's Rock Creek
substation.
DPC is currently interconnected with IEC East by means of five
69 kV lines and one 138/161 kV line. The capacity of these six lines is 464 MW,
which is the limiting interface for the IEC East-IEC West transmission path
through DPC. DPC is, in turn, interconnected with IEC West by 32 separate
transmission lines, 11 of which are rated at 161 kV and the remaining 21 of
which are rated at 69 kV. The aggregate capacity of all of these transmission
lines is 1,004 MW. In addition, regional developments such as the MAPP
Independent System Operator ("ISO") and the Midwest ISO are currently underway.
WPL has a projected native load of 2169 MW and firm off-system
sales of 251 MW for 1998. WPL owns generation capacity totaling 2350 MW. WPL has
also purchased 421 MW of firm capacity for 1998. IPW has a projected native load
of 1105 MW and firm off-system sales of 179 MW for 1998. IPC owns generation
capacity totaling 1028 MW. IPC also has purchased firm capacity of 333 MW for
1998. IES's projected native load for 1998 is 1820 MW. IES has no firm
off-system sales. IES owns generation capacity totaling 1853 MW and has
purchased firm capacity for 1998 totaling 245 MW.
Because the WPL system is not directly interconnected with
either the IES system or the IPW system, WPL has purchased a total of 200 MW of
firm transmission service between the IPW system and the WPL system for a three
year period, commencing October 1, 1997 and continuing through September 30,
2000. 150 MW of this firm transmission service was purchased from Commonwealth
Edison and the remaining 50 MW of the firm transmission service was purchased
form Dairyland Power Cooperative. The Commonwealth Edison and the Dairyland
Power Cooperative systems are directly interconnected with both the WPL and the
IPW systems. 50 MW of the total 200 MW of firm transmission service purchased by
WPL are reserved for the use of third parties. The remaining 150 MW is
sufficient for and will be used by Interstate Energy Corporation postmerger for
transferring capacity and energy between WPL and IPW for the purposes of
optimizing economic dispatch of the generation resources of IEC as a whole and
providing reliability support for the loads in all areas of the IEC system.
The IPW and IES systems are directly interconnected by means
of a number of transmission lines at voltage levels of 69 kV, 161 kV and 345
kV. The cumulative tie capacity of all these interconnections is 1620 MW. This
tie capacity will likewise be used for the purposes of optimizing economic
dispatch of the generation resources of IEC as a whole and providing
reliability support for the loads in all areas of the IEC system.
All of the above interconnections are depicted on maps attached
as Exhibit G-4.
4. Gas Coordination.
The following table sets forth certain information with respect
to the gas operations of Interstate Energy pro forma as of December 31, 1995,
adjusted to give effect to the Transaction (before intercompany eliminations).
22
<PAGE> 27
<TABLE>
<CAPTION>
Gas Operating Revenues Mcf of Gas Distributed
($ in millions) (including natural and
--------------- manufactured gas)
-------------------------
<S> <C> <C>
WP&L (including South $139 24,727,980
Beloit)
Utilities $137 29,458,000
IPC $ 44 35,320,000
---- ----------
TOTAL $320 89,505,980
</TABLE>
WP&L presently provides natural gas service at retail in
Wisconsin. South Beloit provides gas service in the area of South Beloit,
Illinois which is adjacent to and interconnected with the WP&L system. IPC
presently provides gas service in northern Iowa and southern Minnesota and in
northwestern Illinois and eastern Iowa. Utilities presently provides gas service
throughout Iowa. Upon consummation of the Transaction, the WP&L, South Beloit,
IPC and Utilities gas operations will continue to serve this contiguous four
state area. The combined gas service territories of WP&L, South Beloit, IPC and
Utilities after the Transaction are shown in Exhibit G-5.
The gas systems of (i) WP&L and South Beloit, (ii) IPC and
(iii) Utilities, respectively, each presently operates as a single coordinated
system. While the WP&L, IPC and Utilities gas systems are not physically
interconnected, they will functionally perform as a coordinated system through
purchase of natural gas from common sources of supply, delivery through common
interstate pipelines (all of which are open access transportation-only pipelines
under FERC Order 636) and storage of gas in common underground storage
facilities.
WP&L, IPC and Utilities are served through a "grid" of
interstate pipelines that serve the four state region. Underground storage
providers are also attached to such grid. A map of this grid is shown as Exhibit
G-6. This grid allows the coordination of gas purchases and delivery in a manner
analogous to the coordination created by the electric generation and
transmission grid.
Northern Natural Gas Company ("NNGC") presently provides WP&L
with approximately 50% of its gas requirements, provides IPC with approximately
33% of its gas requirements and IES with approximately 50% of its gas
requirements. Thus, each of the three companies that will comprise IEC receive
a large portion of its gas supplies from NNGC. WP&L has access to 35 gas gates
in NNGC's Zone D; IPC has access to 2 gates in Zone D; IES has access to 28
gates in Zone D. IPC also has access to 24 NNGC gates in Zone E-F and IES has
access to an additional 87 gates in NNGC Zone B-C. Each customer can specify
delivery of gas to any individual gate within a specific zone. For an added
charge, an arrangement can be made to deliver gas from one zone to another.
NNGC is clearly the backbone of the proposed IEC system. The gas lines of
Northern Border Pipeline Company ("NBPC") intersect NNGC pipelines in the IEC
service area. NNGC transports gas primarily from Texas; NBPC transports gas
primarily from Canada. Therefore, the Applicants have a significant common
source of supply and delivery and fulfill that requirement of Section
2(a)(29)(B) of the 1935 Act for an "integrated (gas) public-utility system."
Services has begun to implement the specific plans to manage
internally IEC's gas supply procurement system to achieve cost savings for the
holding company system. The general manager of Energy Portfolio Management
("Portfolio") for Services will make decisions on optimum configuration of the
capacity and supply portfolios for the three utility companies that comprise
IEC. The employees who will be responsible for performing the gas capacity and
supply procurement functions of Portfolio will be employees of Services.
Although the employees who procure gas for one utility will not be distinguished
from the employees who procure gas for the other utilities, the employees will
still have to forecast requirements, procure gas and capacity in accordance with
those forecasted requirements, and dispatch to meet those requirements by
utility jurisdiction. This central management of the gas procurement function
will, over time, improve efficiency and reduce overall costs as duplicative
functions and excess reserve capacity are eliminated. The Applicants estimate
the annual savings to be achieved through these enhanced efficiencies to be
$27.4 million.
23
<PAGE> 28
WP&L, IPC and Utilities purchase interstate gas transmission
and/or storage services from the following:
<TABLE>
<CAPTION>
Provider WP&L/South Beloit IPC Utilities
-------- ----------------- --- ---------
<S> <C> <C> <C>
ANR Pipeline Company X X
Northern Natural Gas Company X X X
Northern Border Pipeline Company X X X
LG&E/Llano Inc. X X
Great Lakes Gas Transmission Company X
Viking Gas Transmission Company X
Natural Gas Pipeline Company of X X
America
</TABLE>
As a result of FERC Order 636 regarding restructuring, WP&L, IPC and Utilities
are now able to directly purchase wholesale natural gas at the wellhead (or
processing plant outlet, hub, or gathering system outlet) from numerous
independent "third party" suppliers. However, WP&L, IPC and Utilities purchase
significant quantities of natural gas from common supply fields.
WP&L, IPC and Utilities purchase gas in the following major
supply fields or basins:
<TABLE>
<CAPTION>
Field/Basin WP&L/South Beloit IPC Utilities
----------- ----------------- --- ---------
<S> <C> <C> <C>
Gulf Coast X X X
Permian Basin X X
Canada X X X
Texas/Oklahoma X X X
</TABLE>
The three companies procure some gas supplies from common producers. However,
there are hundreds of natural gas producers available in the marketplace. Since
restructuring of gas supply under FERC Order 636 was designed to allow local
distribution companies ("LDCs") to directly contract with any producers they
wish, and allow the three companies to use competitive bidding procedures to
select their respective suppliers, the fact that WP&L, IPC and Utilities
purchase supplies from different suppliers within the common pools simply
indicates that FERC's policy objective of robust supply competition is being
achieved.
IEC intends to operate the presently separate gas operations of
the Applicants as a single centrally managed and coordinated integrated gas
system within the meaning of Section 2(a)(29)(B) of the Act. Central to the
coordinated operation of the gas system is the procurement of gas supplies. The
gas companies share common sources of supply and receive gas transportation
services from NNG, NGPL, ANR, Viking Natural Gas Pipeline and Northern Border
Pipeline Company. Upon consummation of the Transaction, the gas procurement
component of the gas operations of the Applicants will be centrally managed
through Interstate Services.
Additionally, as existing gas supply contracts between the
individual utilities and their suppliers terminate in the ordinary course, it is
expected that Interstate Services, rather than the separate utilities, will
contract for future gas supplies. The greater economies of scale as a result of
coordinated gas procurement are expected to generate further cost savings. It is
also expected that, over time, the utilities will enter into a gas coordination
agreement to detail how pipeline and gas supply costs attributable to the
centralized procurement function are to be allocated between the utilities. PSCW
R. at 799. Any such gas coordination agreement would be subject to state
commission approval. Id.
In sum, the coordinated gas operations of the gas properties
of the Applicants will commence immediately through the centralization of
management and day-to-day operating functions at Interstate Services. Full
integration will be achieved over time as existing individual gas contracts are
replaced with contracts covering the entire system.
24
<PAGE> 29
5. Non-Utility Interests of WPLH, IES and IPC
a. WPLH
WPLH's non-utility subsidiaries and investments constituted
less than 13.34% of WPLH's assets on a consolidated basis as of December 31,
1995. Operating revenues from WPLH's non-utility subsidiaries and investments
were approximately 15% of WPLH's consolidated total operating revenues for the
year ended December 31, 1995. A corporate chart of WPLH and its subsidiaries,
including their non-utility interests, is filed herewith as Exhibit H-1. The
non-utility businesses are described in Exhibit M-5.
25
<PAGE> 30
b. IES
As of December 31, 1995, IES' non-utility subsidiaries and
investments constituted approximately 20% of IES' assets on a consolidated
basis. Operating revenues from IES' non-utility subsidiaries and investments
were approximately 12% of IES' consolidated total operating revenues for the
year ended December 31, 1995. A corporate chart of IES and its subsidiaries,
including its non-utility interests, is filed herewith as Exhibit H-2. A
description of IES non-utility interests is filed in Exhibit M-5.
IES wholly owns one direct non-utility subsidiary,
Diversified, which was formed in 1992 as a holding company for substantially
all of IES' non-utility businesses. Diversified has four direct, wholly-owned
subsidiaries, IES Transportation Inc. ("Transportation"), IES Energy Inc.
("Energy"), IES Investments Inc. ("Investments") and IES International Inc.
("International").
26
<PAGE> 31
c. IPC
IPC's non-utility subsidiary and investments constituted less
than 0.2% of IPC's assets on a consolidated basis as of December 31, 1995. For
the year ended December 31, 1995, there were no operating revenues from IPC's
non-utility subsidiary and investments. A corporate chart of IPC and its
non-utility subsidiary is filed herewith as Exhibit H-2.
IPC has one direct wholly-owned non-utility subsidiary, IPC
Development, which acquires and disposes of real estate on behalf of IPC and
owns less than 1% of McLeod. IPC Development's real estate operations consist
principally of buying homes from IPC employees who have been relocated by the
company and purchasing real estate intended for future use in IPC's public
utility operations.
The information contained in Exhibit M-5 hereto is hereby
incorporated by reference to this Item 1.B.5.
27
<PAGE> 32
C. Description of Transaction and Statement as to Consideration
1. Background and Negotiations Leading to the Proposed
Transaction
Each of WPLH, IES and IPC believes that fundamental changes in
the regulatory structure of the electric utility industry are inevitable and
that such changes will likely occur in the near future. Recently enacted federal
laws and actions by federal and state regulatory commissions are facilitating
the changes to bring more competition to various segments of the industry.
The Energy Policy Act of 1992 (the "1992 Act") granted FERC the
authority to order electric utilities to provide transmission service to other
utilities and to other buyers and sellers of electricity in the wholesale
market. The 1992 Act also created a new class of power producers, exempt
wholesale generators ("EWGs"), which are exempt from regulation under the Act.
The exemption from regulation under the Act of EWGs has increased the number of
entrants into the wholesale electric generation market, thus increasing
competition in the wholesale segment of the electric utility industry.
Commencing in December 1993, pursuant to its authority under
the 1992 Act, FERC issued a number of orders in specific cases directing
utilities to provide transmission services. Under FERC's evolving transmission
policies, utilities are being required to offer transmission services to third
parties on a basis comparable to services that the utilities provide themselves.
FERC is in the process of rulemaking pursuant to which it is seeking to
implement, on a comprehensive basis, the comparable transmission service
policies it has set forth in these specific cases. FERC's actions to date and
its transmission rulemaking proceeding have increased the availability of
transmission services, thus creating greater competition in the wholesale power
market.
In addition, state regulatory bodies in over thirty states,
including, among others, Wisconsin, Illinois, Iowa and Minnesota, have initiated
proceedings to review the basic structure of the industry. These bodies are
considering, or may soon consider, proposals to require some measure of
competition in the retail portion of the industry. The PSCW requested comment
regarding how the industry might be restructured in order to create a more
competitive environment. Following receipt of responses, the PSCW created a task
force to analyze how the industry might be restructured in Wisconsin to allow
consumers to receive the benefits of increased competition. On December 19,
1995, following receipt of the report of the task force, the PSCW agreed to take
steps to further increase competition in Wisconsin's electric utility industry
within five years. While the outcome of the actions described above is
uncertain, it remains the view of the management of WPLH, IES and IPC that there
will ultimately be increased competition in the retail segment of the business.
The changes to the electric industry that have occurred and
that are occurring are bringing increased competition to various sectors of the
business and are putting pressure on utilities to lower their costs. Each of
WPLH, IES and IPC recognized that a combination with
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one or more appropriate utilities would enable the combined entity to generate
and deliver energy more cheaply and efficiently and thereby remain a competitive
supplier of energy in an increasingly competitive industry.
Over the last several years, the management of WPLH has
periodically analyzed various potential strategic options that might be
available to WPLH, including possible business combinations or alliances with
other utilities. WPLH management considered the possibility of pursuing business
combinations with a number of the utilities with service areas proximate to the
service area of WP&L, as well as other utilities with Midwestern operations, and
periodically briefed the WPLH Board on such matters. Based on a cost-benefit
analysis of the potential strategic options considered, WPLH management
determined the options studied were not in the best interests of WPLH and its
shareholders. In early February 1995, during the continuation of one of its
reviews of various strategic alternatives, WPLH management concluded that, among
others, both IES and IPC were prospective merger partners that would provide a
good overall strategic fit. WPLH's management based its conclusions on various
factors, including low-cost structure, competitive energy rates, potential
merger-related cost savings, economies of scale, marketing potential and similar
shareholder and common stock trading characteristics. These reasons, combined
with the physical proximity of the respective companies' service areas and the
compatibility of and similarity between the companies' operations and
management, made IES and IPC natural combination partners for WPLH.
IES has believed for many years that consolidation of electric
utilities within the State of Iowa would be both desirable and inevitable. In
July 1991, Iowa Southern Inc. and IE Industries Inc. merged to form IES. The
utilities in that merger, Iowa Southern Utilities Company and Iowa Electric
Light and Power Company, merged in December 1993 to form Utilities. Since the
1991 merger, management of IES has continued to assess other possible
combination transactions both in the State of Iowa and generally in the Midwest.
In December 1992, IES acquired certain electric utility assets and properties in
Iowa from Union Electric Company. Preliminary discussions with respect to
consolidation transactions were held from time to time between representatives
of IES and other utilities in the Midwest, including IPC. IES management
recognized that in the increasingly competitive market for electric power,
important criteria would include low cost production, efficiencies of scale,
transmission capability, as well as cultural fit between possible partners and
resolution of corporate governance and other issues. In December 1994, IES
determined to pursue aggressively process reengineering to reduce costs and
create efficiencies in its electric and gas utility businesses. Management of
IES continued to consider potential combination transactions both as an
additional means of realizing higher efficiency levels and as a means to
increase shareholder value.
For the past several years, IPC has been monitoring the changes
occurring in the electric and gas utility industry and conducting strategic
planning in an effort to remain competitive in the changing environment. During
that time, IPC has been approached by representatives of other utilities
(including IES) in connection with potential business combinations, but has not
held substantive discussions on any specific proposed combination.
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During the eighteen months prior to the execution of the Merger Agreement, the
management of IPC analyzed various potential strategic options that might be
available to IPC, including possible business combinations or strategic
alliances with other utilities, as well as options that could be pursued by IPC
on a stand-alone basis. In examining these potential strategic initiatives, IPC
management determined that, at that time, and based upon the circumstances then
existing, IPC and its stockholders would be best served by a strengthening of
IPC on a stand-alone basis. This determination was made by IPC management based
upon its subjective assessment of the potential benefits and potential risks of
each of the alternatives considered. In April 1995, IPC management proposed to
the IPC Board, and the IPC Board approved, a series of strategic steps to be
pursued by IPC on an independent basis. These strategic steps included
initiatives to: increase energy sales consistent with efficient energy usage;
enhance efforts to improve productivity and efficiency; leverage existing skills
and resources to increase revenues and earnings through new service offerings;
focus the core energy service business to be customer driven; prepare the
generation segment for potential unregulated market; intensify efforts to earn
the allowed rate of return in all jurisdictions in which IPC does business; and
investigate the potential for diversification into non-core businesses.
Over the last several years, as the foregoing issues were being
considered by the management of each of WPLH, IES and IPC, Lee Liu, Chairman of
the Board, President & Chief Executive Officer of IES ("Mr. Liu") and Erroll B.
Davis, Jr., President and Chief Executive Officer of WPLH ("Mr. Davis"), and Mr.
Liu and Wayne H. Stoppelmoor, Chairman of the Board, President and Chief
Executive Officer of IPC ("Mr. Stoppelmoor"), held general discussions
concerning the evolving nature of the electric utility industry. In May 1995,
Mr. Davis called Mr. Liu to schedule a meeting to discuss in a more focussed
manner the views of WPLH and IES regarding the future of the utility industry.
That call resulted in a meeting on May 18, 1995 at which the concept of a
business combination between WPLH and IES and a subsequent combination between
the combined WPLH/IES and IPC were discussed in a very preliminary fashion. At
that meeting, Messrs. Davis and Liu also identified the issues of management
succession, board composition and various utility integration strategies as
significant points in any such business combination to be agreed upon, and
agreed that discussions between representatives of WPLH and IES should be
initiated. Such discussions commenced shortly thereafter.
WPLH subsequently engaged Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") as its exclusive financial advisor to assist WPLH
in analyzing, structuring, negotiating, and effecting the possible transaction.
In addition, WPLH engaged Foley & Lardner, its outside law firm, to advise it
with respect to the potential business combination.
IES engaged Morgan Stanley & Co. Incorporated ("Morgan
Stanley") as its financial advisor in connection with this possible transaction
and also retained its outside law firm, Winthrop, Stimson, Putnam & Roberts, to
assist it in the potential business combination. In addition, Arthur Andersen
Economic Consulting was engaged to assist the IES Board and management in their
consideration of strategic alternatives, particularly in the area of possible
synergies and/or cost savings that could be obtained from various alternative
combination
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transactions and as compared to cost savings which management of IES believed
could be obtained on a stand-alone basis through process reengineering.
During the time that discussions were being held between
representatives of WPLH and IES, representatives of IPC were contacted to
determine if IPC was interested in discussing a potential business combination.
The IPC Board subsequently authorized its representatives to meet with
representatives of IES and WPLH to discuss a potential business combination
among the companies.
IPC subsequently engaged Salomon Brothers Inc ("Salomon
Brothers") as its financial advisor to assist IPC in analyzing, structuring,
negotiating and effecting the possible three-way transaction and engaged the law
firm of Milbank, Tweed, Hadley & McCloy to advise it with respect thereto. In
addition, IPC engaged the Deloitte & Touche Consulting Group ("Consulting
Group") to assist IPC's management in identifying other potential combination
partners and in assessing the relative attractiveness of each of these potential
partners, including WPLH and IES, from the standpoint of the potential synergies
described by management which could be realizable from such a transaction. IPC
management, with the assistance of Consulting Group, identified certain
financial factors, such as financial strength and earnings growth, and certain
operational factors, such as customer mix and capacity mix, that would be
relevant to the IPC Board's assessment of the relative attractiveness of other
potential combination partners. This information, based only on publicly
available information and certain attributes regarding the financial and
operational profile of these potential partners, was presented to the IPC Board
to describe potential areas of synergies.
Consulting Group was subsequently retained to assist the senior
managements of all three companies and certain employees designated by them in
identifying and quantifying the potential cost savings from synergies resulting
from the proposed three-way merger. The scope of Consulting Group's engagement
(as with its earlier engagement by IPC) was limited to assisting such
managements and designated employees in the identification and quantification of
potential combination synergies, including personnel reductions, non-labor
savings, field operations, electric dispatch, capacity deferral and gas supply
savings; the assessment of impacts of current stand-alone cost reduction
initiatives on merger-related savings; quantification of costs to achieve
identified savings; and developing summary presentation materials and supporting
documentation. Managements of the three companies were responsible for the
assumptions and conclusions made in the synergy study. While Consulting Group
assisted such managements in the synergy identification and estimation process,
the determination of synergy estimates were the sole responsibility of the
managements of the three companies. Consistent with its assignment, Consulting
Group did not prepare any financial projections, feasibility studies or reports,
or assist the three companies with financial evaluation or modeling of potential
combination scenarios.
To facilitate consideration of the proposed business
combination, the three companies formed task forces to review and evaluate
issues associated with the transaction. During the following months, the various
task forces continued their work with respect to the
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synergistic analyses, business plans, legal structures, regulatory plans, due
diligence and employee benefits. In addition, discussions continued between WPLH
management and Merrill Lynch, IES management and Morgan Stanley, and IPC
management and Salomon Brothers with respect to negotiation of the exchange
ratios, and between counsel for the three companies with respect to the terms of
drafts of the mergers and stock option agreements. Numerous briefings were also
made by management and the outside advisors to the respective Boards of
Directors of WPLH, IES and IPC.
Prior to November 10, 1995, the three companies with the
assistance of their respective financial and legal advisors agreed on the
proposed structure for the Transaction and negotiated the terms of the Merger
Agreement, including the conditions to closing, the termination provisions, the
break-up fees, the covenants which would govern the operations of WPLH, IES and
IPC prior to the completion of the Transaction and various other matters, such
as employee benefits and workforce matters. Discussions were also held among Mr.
Davis, Mr. Liu and Mr. Stoppelmoor and among Merrill Lynch, Morgan Stanley and
Salomon Brothers regarding the exchange ratios to be applied to the IES Common
Stock and the IPC Common Stock. After consulting and reviewing with Merrill
Lynch the range of exchange ratios previously presented by Merrill Lynch and
discussed with the WPLH Board, as well as the discussions among the companies
and their financial advisors regarding the exchange ratios, WPLH management
proposed ratios to IES and IPC which would result in each share of WPLH Common
Stock remaining outstanding as one share of Interstate Energy Common Stock, each
share of IES Common Stock being converted into 0.98 of a share of Interstate
Energy Common Stock and each share of IPC Common Stock being converted into 1.11
shares of Interstate Energy Common Stock.
On November 10, 1995, the Boards of Directors of WPLH, IES and
IPC each approved the Merger Agreement, and certain related agreements and the
transactions contemplated thereby. The Merger Agreement and certain related
agreements were executed on that date.
In mid-April 1996, Morgan Stanley, on behalf of IES, contacted
Merrill Lynch and informed Merrill Lynch that IES desired to discuss certain
issues regarding the Merger Agreement and specifically IES' investment in
McLeod. Morgan Stanley noted that the potential value of IES' stake in McLeod
might be above that contemplated at the time the parties originally entered into
the Merger Agreement. Following the passage of the Telecommunications Act of
1996, in April 1996, McLeod had filed a registration statement with the
Commission with respect to an initial public offering of its Class A common
stock.
During the following weeks, the parties, in consultation with
their financial and legal advisors, discussed proposals to provide for an
adjustment of the IES exchange ratio. On May 7, 1996, the Boards of Directors of
WPLH and IES approved a proposed amendment to the Merger Agreement which, among
other things, provided for an adjustment of the IES exchange ratio from 0.98 to
1.01 in the event certain contingencies were satisfied relative to the
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McLeod initial public offering. The Board of Directors of IPC approved
the amendment on May 10, 1996. The amendment to the Merger Agreement was
executed by the parties on May 22, 1996.
On June 14, 1996, McLeod completed its initial public offering
and the conditions precedent to an adjustment of the IES exchange ratio were
satisfied. As a result, the IES exchange ratio was automatically adjusted to
1.01.
On August 4, 1996, MidAmerican Energy Company ("MEC") made an
unsolicited takeover proposal for IES, which was delivered in a letter to IES
(the "MEC Takeover Proposal"). The MEC Takeover Proposal was premised upon the
withdrawal by IES from its proposed transaction with WPLH and IPC. After
consulting with its advisors, the IES Board concluded on August 14, 1996, that,
from a strategic perspective, the Mergers would be more beneficial to IES and
its shareholders, customers and employees in the communities that IES serves
than the MEC Takeover Proposal would be.
On August 15, 1996, the WPLH Board, the IPC Board and the IES
Board agreed to increase the IES exchange ratio to 1.14. The parties thereafter
executed and delivered Amendment No. 2 to the Merger Agreement, dated as of
August 16, 1996, increasing the IES exchange ratio to 1.14. On September 5,
1996, the Transaction was approved by the shareholders of WPLH and IPC at their
respective meeting and, based on preliminary tabulations, was approved by the
shareholders of IES at its meeting held on September 5, 1996.
Additional information regarding the background of the
Transaction is set forth in the Joint Registration Statement on Form S-4 of WPLH
and New IPC which is attached as Exhibit I-1 hereto.
2. Merger Agreement
The Merger Agreement provides for IES to be merged with and
into WPLH (at or prior to which time WPLH will change its name to
Interstate Energy), and Acquisition to be merged with and into IPC. The Merger
Agreement is incorporated by reference as Exhibit B.
Under the terms of the Merger Agreement, upon consummation of the
Transaction: (i) each outstanding share of IES Common Stock (other than shares
owned directly or indirectly by WPLH, IES or IPC and IES Dissenting Shares) will
be converted into the right to receive 1.14 shares of Interstate Energy Common
Stock; (ii) each outstanding share of IPC Common Stock (other than shares owned
directly or indirectly by WPLH, IES or IPC) will ultimately be converted into
the right to receive 1.11 shares of Interstate Energy Common Stock; (iii) each
outstanding share of IPC Preferred Stock (other than shares owned directly or
indirectly by WPLH, IES or IPC and other than IPC Dissenting Shares) will remain
outstanding and unchanged, and (iv) each outstanding share of WPLH Common Stock
will remain outstanding and unchanged as one share of Interstate Energy Common
Stock. As a result of the Transaction, the common shareholders of WPLH, IES and
IPC immediately prior to the Transaction (except for holders of IES Dissenting
Shares) will all be common shareholders of Interstate Energy. The alternative
structure for consummating the mergers as contemplated by the Merger Agreement
will not be utilized by the parties because the PSCW issued a final order
determining that the reincorporation mergers provided for in such alternative
structure were not required. Based on the capitalization of WPLH, IES and IPC on
August 15, 1996 and the exchange capitalization of WPLH, IES and IPC on August
15, 1996 and the exchange ratios for the IES Common Stock and the IPC Common
Stock, holders of WPLH Common Stock, IES Common Stock and IPC Common Stock would
have held approximately 40.8%, 45.1% and 14.1%, respectively, of the aggregate
number of shares of Interstate Energy Common Stock that would have been
outstanding if the Transaction had been consummated as of such date.
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Except as set forth below, if any holder of IES Common Stock or
IPC Common Stock would be entitled to receive a number of shares of Interstate
Energy Common Stock that includes a fraction, then in lieu of a fractional
share, such holder will be entitled to receive a cash payment determined by
multiplying the fractional share interest by the average of the last reported
sales price, regular way, per share of WPLH Common Stock on the New York Stock
Exchange Composite Tape for the ten business days prior to and including the
last business day prior to the consummation of the Transaction, without any
interest thereon. Fractional shares of IES Common Stock and IPC Common Stock
held in accounts under the dividend reinvestment plans and employee benefit
plans of IES and IPC may be converted into the applicable number of shares (or
fractional shares) of Interstate Energy Common Stock in accordance with the
respective exchange ratios.
The Transaction is subject to customary closing conditions,
including the approval of the Commission.
The Transaction is designed to qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended. WPLH, IES and IPC believe that the Transaction will be treated as a
"pooling of interests" for accounting purposes.
The Merger Agreement contains certain covenants relating to the
conduct of business by the parties pending the consummation of the Transaction,
which are customarily contained in merger transactions generally. As a general
matter, the parties must carry on their businesses in the ordinary course
consistent with past practice, may not increase dividends beyond specified
levels, and may not issue capital stock except as otherwise specified. The
Merger Agreement also contains customary restrictions on, among other things,
charter and bylaw amendments, capital expenditures, acquisitions, dispositions,
incurrence of indebtedness, certain increases in employee compensation and
benefits and affiliate transactions.
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3. Management of Interstate Energy Following the Merger.
Following consummation of the Transaction, the headquarters of
Interstate Energy will be in Madison, Wisconsin. Pursuant to the Merger
Agreement, upon consummation of the Transaction, the Interstate Energy Board of
Directors will consist of fifteen members: six designated by IES (including Mr.
Liu), six designated by WPLH (including Mr. Davis) and three designated by IPC
(including Mr. Stoppelmoor). As of the date hereof, WPLH, IES and IPC have not
determined which individuals, in addition to Messrs. Liu, Davis and Stoppelmoor,
will be designated to serve as directors of Interstate Energy upon consummation
of the Transaction.
Upon consummation of the Transaction, Mr. Liu will serve as
Chairman of the Board of Directors of Interstate Energy for a period of two
years and thereafter will retire as an officer of Interstate Energy but may
continue as a director of Interstate Energy. Mr. Davis will serve as President
and Chief Executive Officer of Interstate Energy for a period of two years
following the effective date of the Transaction and, for the three-year period
thereafter and following Mr. Liu's retirement, Mr. Davis will serve as Chairman,
President and Chief Executive Officer of Interstate Energy. Mr. Stoppelmoor will
serve as Vice Chairman of Interstate Energy for a period of two years following
the effective date of the Transaction and thereafter will retire as an officer
of Interstate Energy but may continue as a director of Interstate Energy.
Messrs. Liu, Davis, Stoppelmoor and Michael R. Chase (Executive Vice President
of IPC) will each have an employment agreement with Interstate Energy following
the consummation of the Transaction. The forms of these employment agreements
are attached as Annexes H, I, J and K to the Joint Registration Statement on
Form S-4 and are incorporated by reference herein as Exhibit I-2.
Following consummation of the Transaction, the activities of
Interstate Energy will be governed by its Amended and Restated Articles of
Incorporation and Restated Bylaws, attached hereto as Exhibits J-1 and J-2,
respectively.
D. Dividend Reinvestment Plan, Long-Term Equity Incentive Plan and other
Employee Benefit Plans.
Interstate Energy proposes, from time to time during a period
of five years from the date of an Order issued by the Commission, to issue
and/or acquire in open market transactions or through privately-negotiated
transactions up to 11 million shares of Interstate Energy Common Stock under
Interstate Energy's dividend reinvestment and stock purchase plan, long-term
equity incentive plan and certain other employee benefit plans described below.
1. Dividend Reinvestment Plan
Each of WPLH, IES and IPC has in place a dividend reinvestment
and stock purchase plan. Following consummation of the Transaction, the IES and
IPC plans will cease to exist and participants in such plans will be eligible to
become participants in the WPLH plan,
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which is referred to below as the "DRIP" and which will become (subject to
certain proposed modifications as described below) the Interstate Energy plan.
Set forth below is a description of the principal terms of the
DRIP:
a. Purpose of the DRIP and Eligibility of Participants.
The purpose of the DRIP is to provide eligible participants
with a convenient and economical method of investing cash dividends and/or
optional cash payments in shares of Interstate Energy Common Stock. To be
eligible to participate in the DRIP, a person will need to be: (i) a shareholder
of record of Interstate Energy Common Stock, (ii) a shareholder of record of
Preferred Stock of WP&L or (iii) an employee of Interstate Energy or one of its
majority-owned subsidiaries. Directors of Interstate Energy or any
majority-owned subsidiary will also be eligible to participate in the DRIP. It
is anticipated that prior to the consummation of the Transaction, the DRIP will
be modified to permit other investors who are not shareholders or employees of
Interstate Energy to make an original purchase of Interstate Energy Common Stock
under the DRIP, whereupon they will become shareholders of Interstate Energy and
will be entitled to participate in the DRIP like other shareholders. It is also
expected that the DRIP will be modified to allow (following consummation of the
Transaction) the reinvestment of dividends paid on shares of Preferred Stock of
Utilities and IPC.
The DRIP is designed to encourage and facilitate broader
ownership of Interstate Energy Common Stock. Full investment of funds will be
possible under the DRIP, subject to minimum and maximum purchase limits, because
the DRIP will permit fractional as well as whole shares to be credited to a
participant's account. The DRIP will also provide Interstate Energy with a means
to raise equity capital and to increase ownership by small, long-term investors.
b. Sources of Common Stock and Use of Proceeds.
Any shares of Interstate Energy Common Stock purchased under
the DRIP with optional cash payments or reinvested dividends will be, at the
discretion of Interstate Energy, authorized but unissued shares, treasury shares
or shares purchased on the open market or in privately negotiated transactions
by the DRIP's independent plan administrator (the "Administrator"). As of the
date of this Application, the Administrator is purchasing shares in the open
market for the WPLH plan. Following consummation of the Transaction, the
decision as to whether shares are to be purchased directly from Interstate
Energy, or in the open market or in privately negotiated transactions, will be
based on Interstate Energy's need for common equity and other factors considered
by Interstate Energy to be relevant. Any determination by Interstate Energy to
alter the manner in which shares will be purchased for the DRIP, and
implementation of any such change, will comply with applicable law and
Commission interpretations then in effect.
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Net proceeds from the sale of newly issued shares of Interstate
Energy Common Stock will be added to Interstate Energy's general funds to be
available for general corporate purposes. Interstate Energy will not receive any
proceeds from shares acquired by the Administrator in the open market or in
privately negotiated transactions.
Interstate Energy will not use any proceeds from newly issued
shares to acquire the securities of or any interest in any EWG or foreign
utility companies (as those terms are defined in Sections 32(e) and 33(a) of the
Act, as amended by the Energy Policy Act of 1992), until such time as such use
shall be approved by regulation or order of the Commission, to the extent such
approval is required under the Act.
A full statement of the current provisions of the DRIP is
included in WPLH's Registration Statement on Form S-3 (Exhibit I-3 hereto).
2. Long-Term Equity Incentive Plan.
WPLH currently has in effect the Long-Term Equity Incentive
Plan (the "Long-Term Plan") which will remain in effect following the
consummation of the Transaction. In addition to providing the opportunity for
awards to key employees of Interstate Energy and its subsidiaries following the
consummation of the Transaction, the Long-Term Plan is expected to replace the
IES Long-Term Incentive Plan (the "IES Long-Term Plan") (except with respect to
obligations incurred thereunder prior to the consummation of the Transaction).
Pursuant to the Merger Agreement, (i) each outstanding option to purchase shares
of IES Common Stock under the IES Long-Term Plan along with tandem stock
appreciation rights will be modified such that the option will constitute at the
effective time of the Transaction the right to acquire (on the same terms and
conditions as were applicable under such option) shares of Interstate Energy
Common Stock based on the same number of shares of Interstate Energy Common
Stock as the holder of such IES stock option would have been entitled to receive
in the Transaction had such holder exercised such option in full immediately
prior to the consummation of the Transaction; and (ii) each other outstanding
award under the IES Long-Term Plan shall be modified to constitute an award
based upon the same number of shares of Interstate Energy Common Stock as the
holder of such award would have been entitled to receive in the Transaction had
such holder been the owner, immediately before the consummation of the
Transaction, of the shares of IES Common Stock on which such award is based, and
otherwise on the same terms and conditions as govern such award immediately
before the consummation of the Transaction. IES also has in effect the Whiting
Stock Option Plan pursuant to which one remaining participant thereunder has an
option to acquire IES Common Stock. It is anticipated that prior to the
consummation of the Transaction such option will be exercised or such Plan will
be amended to provide that the option will be exercisable for shares of
Interstate Energy Common Stock based on the IES exchange ratio.
Set forth below is a summary of certain features of the
Long-Term Plan, which summary is qualified by reference to such plan (Exhibit
I-4 hereto):
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The Long-Term Plan is required to be administered by a
committee of the Interstate Energy Board of Directors (the "Committee")
consisting of not less than two directors who are eligible to administer the
Long-Term Plan pursuant to Rule 16b-3 under the Securities Exchange Act of 1934.
The Compensation and Personnel Committee of the WPLH Board is currently serving
as the administrator of the Long-Term Plan. Among other functions, the Committee
has the authority to establish rules for the administration of the Long-Term
Plan; to select the employees of Interstate Energy and its subsidiaries to whom
awards will be granted; to determine the types of awards to be granted to
employees and the number of shares covered by such awards; to set the terms and
conditions of such awards; to determine whether, to what extent and when awards
may be settled in cash or shares; and to amend the terms and conditions of any
outstanding awards to the extent authorized under the Long-Term Plan. Except as
otherwise provided in the Long-Term Plan, determinations and interpretations
with respect to the Long-Term Plan and any award agreements will be in the sole
discretion of the Committee, whose determination and interpretations will be
binding on all parties. Any nonunion employee of Interstate Energy or any
subsidiary, including any executive officer or employee-director of Interstate
Energy, is eligible to receive awards under the Long-Term Plan.
The Long-Term Plan authorizes the granting to employees of: (a)
stock options, which may be either incentive stock options ("ISOs") meeting the
requirements of Section 422 of the Internal Revenue Code (the "Code") or
nonqualified stock options; (b) restricted stock; and (c) performance shares and
performance units. The Long-Term Plan provides that up to a total of 1,000,000
shares of Interstate Energy Common Stock (subject to adjustment as described
below) will be available for the granting of awards. Of this number, up to
300,000 shares may be granted as restricted stock. If any shares subject to
awards granted under the Long-Term Plan, or to which any award relates, are
forfeited or if an award otherwise terminates, expires or is cancelled prior to
the delivery of all of the shares or other consideration issuable or payable
pursuant to the award, such shares (assuming the holder of the award did not
receive dividends on the shares or exercise other indicia of ownership) will be
available for the granting of new awards under the Plan. Any shares delivered
pursuant to an award may be either authorized and unissued shares of Interstate
Energy Common Stock or shares reacquired and held by Interstate Energy.
Options may be granted to employees at such times and in such
amounts as determined by the Committee, provided that the maximum number of
shares subject to options that may be granted to any single participant during
the term of the Long-Term Plan is 150,000. The exercise price per share of
Interstate Energy Common Stock subject to an option granted under the Long-Term
Plan will be determined by the Committee, provided that the exercise price may
not be less than 100% of the fair market value of a share of Interstate Energy
Common Stock on the date of grant. In addition, the Committee may grant options
with exercise prices that increase over time. The term of an option granted
under the Long-Term Plan will be as determined by the Committee, but cannot
exceed ten years. Options granted under the Long-Term Plan will become
exercisable in such manner and within such period or periods and in such
installments or otherwise as determined by the Committee; provided, that no
option may be exercised within six months of its grant. All ISOs granted under
the Long-Term Plan will
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also be required to comply with all other terms of Section 422 of the Code. At
the time an option is granted, the Committee may also grant dividend
equivalents. Dividend equivalents give the participant a contingent right to
receive an amount equal to the dividends declared on a share of Interstate
Energy Common Stock on all record dates during the related option exercise
period. Payout of the value of a dividend equivalent will be made in cash within
30 days following the exercise of the related option, provided the option is
in-the-money on the exercise date.
In the event a participant's employment is terminated by reason
of death, disability or retirement, all outstanding options granted to the
participant will become fully vested and remain exercisable prior to their
expiration or for one year (three years in the case of retirement), whichever
period is shorter. If a participant's employment is terminated for any other
reason (other than for cause), unvested options held by the participant will be
forfeited, unless otherwise determined by the Committee, and vested options may
be exercised during the three month period following termination. If a
participant's employment is terminated for cause, all options held by the
participant will be forfeited.
Shares of restricted common stock granted to employees under
the Long-Term Plan will be subject to such restrictions as the Committee may
impose, including a requirement that participants pay a stipulated purchase
price for each share. The restrictions imposed on the shares may lapse
separately or in combination at such time or times, or in such installments or
otherwise, as the Committee may deem appropriate; provided, that no restrictions
will lapse prior to six months after award, except in the case of death. Upon
termination of an employee's employment for any reason other than death,
disability or retirement during the applicable restriction period, all shares of
restricted stock still subject to restriction will be subject to forfeiture by
the employee. In the event an employee's employment is terminated by reason of
death, disability or retirement, all shares of restricted stock still subject to
restriction will become fully vested. Under the Long-Term Plan, the Committee
will have the authority at its discretion to waive in whole or in part any or
all remaining restrictions with respect to shares of restricted stock granted to
an employee.
During the period of restriction, participants may exercise
full voting rights with respect to restricted shares and are entitled to receive
all regular cash dividends paid with respect to those shares. All other cash
dividends and distributions may be credited to participants subject to the same
restrictions on transferability and forfeitability as the restricted shares with
respect to which they are paid. If any dividends or distributions are paid in
shares, the shares will be subject to the same restrictions on transferability
as the shares on which the dividends or distributions are paid.
The Long-Term Plan also provides for the granting of
performance shares and performance units to employees. The Committee will
determine the number of performance units and shares granted to participants;
provided that so long as the Committee determines that a grant of performance
units or performance shares should qualify for the "performance-based" exemption
under Section 162(m) of the Code, the maximum payout to any executive officer
39
<PAGE> 44
named in the proxy statement compensation table with respect to performance
units and/or performance shares granted in any fiscal year is $400,000. The
Committee will determine the applicable performance period, which, in all cases,
will exceed six months, the performance goal or goals to be achieved during any
performance period, the proportion of payments, if any, to be made for
performance between the minimum and full performance levels and any other terms,
conditions and rights relating to the grant of performance shares or performance
units. Interstate Energy and subsidiary performance goals established by the
Committee under the Long-Term Plan will be chosen from return on equity, total
shareholder return, net income, earnings per share and cash flow. The Committee
will establish the specific goals each year prior to the commencement of the
period to which the compensation relates. Payment on performance shares and
performance units held by employees will be made in cash or shares of Interstate
Energy Common Stock (which, at the discretion of the Committee, may be shares of
restricted stock) (or in a combination thereof), which have an aggregate fair
market value equal to the value of the earned performance shares and performance
units. Payments will be made in a single lump sum within seventy-five days
following the close of the applicable performance period, unless the participant
elects to defer payment.
In the event a participant's employment is terminated by reason
of death, disability, retirement or involuntary termination without cause, the
participant will receive a prorated payout of the performance shares and/or
performance units as determined by the Committee based on the length of time the
awards were held and the achievement of the preestablished performance goals.
Upon termination of a participant's employment for any other reason, all
performance shares and performance units will be forfeited.
Participants will be entitled to receive dividends with respect
to shares earned in connection with grants of performance shares and performance
units, subject to the same accrual, forfeiture and payout restrictions which
apply with respect to shares of restricted stock. In addition, participants may,
at the discretion of the Committee, be entitled to exercise voting rights with
respect to shares which have been earned in connection with grants of
performance units and performance shares.
In the event of any stock dividend, stock split, merger,
consolidation, reorganization, recapitalization, share combination, liquidation
or any other change affecting the Interstate Energy Common Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Long-Term
Plan, then the Committee will generally have the authority, in such manner as it
deems equitable, to adjust (i) the number and type of shares of stock that may
be issued under the Long-Term Plan, (ii) the number and type of shares of stock
subject to outstanding awards, and (iii) the grant, purchase or exercise price
with respect to any award.
No award granted under the Long-Term Plan may be assigned,
sold, pledged, transferred or encumbered by any participant, otherwise than by
will, or by the laws of descent and distribution.
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<PAGE> 45
The Interstate Energy Board may amend, suspend or terminate the
Long-Term Plan at any time, provided that no amendment which requires
shareholder approval in order for the Long-Term Plan to continue to comply with
Rule 16b-3 under the Securities Exchange Act of 1934 will be effective without
approval of shareholders. Further, no termination, amendment or modification of
the Long-Term Plan will adversely affect in any material way any outstanding
award without the consent of the holder of such award.
The Committee may permit a participant to defer receipt of the
payment of cash or delivery of shares due with respect to an award, subject to
such rules and procedures as the Committee may establish.
Upon the occurrence of a Change in Control (as defined in the
Rights Agreement) of Interstate Energy (i) all outstanding options will become
immediately exercisable; (ii) any restriction periods and related restrictions
on restricted stock will lapse; (iii) the target payout opportunity attainable
under all outstanding performance units and shares will be deemed fully earned
for the entire performance period and a pro rata portion of the performance
share or unit, based on the portion of the performance period which has elapsed,
will be paid out in cash; and (iv) the Committee may make any other
modifications to outstanding awards, except, in all cases, unless otherwise
specifically prohibited by the Plan.
3. Other Stock-Based Employee Benefit Plans
Each of WPLH, IES and IPC currently has plans, in addition to
the Long-Term Plan, the IES Long-Term Plan and the Whiting Stock Option Plan,
that provide for the issuance of shares of its common stock to participating
employees. It is currently anticipated that such plans, the Wisconsin Power and
Light Company Employees' Retirement Savings Plan, the IES Employee Savings Plan,
the IES Employee Stock Purchase Plan, the IES Bonus Stock Ownership Plan and the
Interstate Power Company 401(k) Plan, will remain in effect following the
consummation of the Transaction, except that such plans will be modified to
provide for the acquisition of Interstate Energy Common Stock. Each of the
Wisconsin Power and Light Company Employees' Retirement Savings Plan, the IES
Employee Savings Plan and the Interstate Power Company 401(k) Plan allows
participating employees to elect to defer a portion of their compensation and
have such funds invested in designated investment media selected by the
participants, including a common stock fund of the sponsoring company. In
connection with the Transaction, shares of IES Common Stock held in the IES
Employee Savings Plan and shares of IPC Common Stock held in the Interstate
Power Company 401(k) Plan will be converted into shares of Interstate Energy
Common Stock and following the consummation of the Transaction the employer
common stock fund of each of the plans will provide for the issuance of
Interstate Energy Common Stock. Each of the plans is a qualified plan for
purposes of Section 401(a) of the Code. The IES Employee Stock Purchase Plan
allows eligible IES employees to purchase stock at a discount to fair market
value and the IES Bonus Stock Ownership Plan provides a mechanism to award stock
bonuses to nonmanagement employees of IES and its subsidiaries.
As soon as practicable after the consummation of the merger,
the Applicants intend to implement a new single IEC 401(k) plan by merging the
401(k) plans of WPLH/WP&L, IPC and IES. The merged IEC 401(k) plan will use the
common stock of IEC.
41
<PAGE> 46
E. Rights Agreement
Applicants seek authorization to implement the following
transactions, which are permitted by the terms of the Rights Agreement: (i) the
issuance of the Rights (as defined below); (ii) the sale and issuance of
Interstate Energy Common Stock or other Interstate Energy securities or assets
upon the exercise of the Rights; (iii) the redemption of the Rights or the
issuance of Interstate Energy Common Stock or other Interstate Energy securities
in exchange for the Rights; and (iv) the amendment of the Rights Agreement as
permitted by the terms thereof.
Set forth below is a description of the principal terms of the
Rights Agreement. Such description is qualified in its entirety by reference to
the text of the Rights Agreement, which is attached hereto as Exhibit I-5.
The Rights Agreement provides that each outstanding share of
Interstate Energy Common Stock will have attached thereto one Common Stock
Purchase Right ("Right") and each share subsequently issued by Interstate Energy
prior to the expiration of the Rights Agreement, including the shares issued
pursuant to the Transaction, will have attached thereto one Right. Under certain
circumstances described below, the Rights will entitle the holder thereof to
purchase additional shares of Interstate Energy Common Stock.
Currently the Rights are not exercisable and trade with the
WPLH Common Stock. In the event the Rights become exercisable, each Right
(unless held by a person or group which beneficially owns more than 20% of the
outstanding Interstate Energy Common Stock) will initially entitle the holder to
purchase one-half share of Interstate Energy Common Stock at a price of $60 per
full share (equivalent to $30 per each one-half share), subject to adjustment.
The Rights will only become exercisable if a person or group has acquired, or
announced an intention to acquire, 20% or more of the outstanding shares of
Interstate Energy Common Stock. Under certain circumstances, including the
existence of a 20% acquiring party, each holder of a Right, other than the
acquiring party, will be entitled to purchase at the exercise price Interstate
Energy Common Stock having a market value of two times the exercise price. In
the event of the acquisition of Interstate Energy by another corporation
subsequent to a person acquiring 20% or more of the Interstate Energy Common
Stock, each holder of a Right will be entitled to receive the acquiring
corporation's common shares having a market value of two times the exercise
price. The Rights may be redeemed at a price of $.01 per Right prior to the
existence of a 20% acquiring party and may thereafter be exchanged for one share
of Interstate Energy Common Stock per Right until the existence of a 50%
acquiring party. The Rights will expire on February 22, 1999. Under the Rights
Agreement, the Interstate Energy Board will be able to reduce the thresholds
applicable to the Rights from 20% to not less than 10%. Rights do not have
voting or dividend rights and, until they become exercisable, have no dilutive
effect on the earnings of WPLH.
Shareholder rights plans, such as the Rights Agreement, have
become a widely accepted means of maximizing shareholder value by reducing the
risk of nonrealization of
42
<PAGE> 47
shareholder value due to opportunistic takeover proposals. The Rights Agreement
would encourage potential acquirors to negotiate with the Interstate Energy
Board and would be intended to assist the Interstate Energy Board in obtaining
the highest value for the shareholders of Interstate Energy, especially in a
hostile or unwanted takeover situation. The Rights Agreement may, in certain
circumstances, permit the Interstate Energy Board to thwart an offer the
Interstate Energy Board determines to be inadequate. The Rights Agreement also
provides the Interstate Energy Board with a role (supplemental to the role of
the Commission under the Act) in discouraging implicitly coercive takeover
tactics and is intended to enable the Interstate Energy Board to provide holders
of Interstate Energy Common Stock adequate time to properly assess a takeover
bid without undue pressure. A shareholder rights plan, such as the Rights
Agreement, may enhance the probability that a higher competing bid will emerge.
Over 1,700 American public companies have adopted shareholder rights plans. The
Commission has authorized registered holding companies to adopt shareholder
rights plans substantially similar to the Rights Agreement. National Fuel Gas
Company, Holding Co. Act Release No. 26532 (June 12, 1996); Consolidated Natural
Gas Company, Holding Co. Act Release No. 26434 (December 19, 1995).
43
<PAGE> 48
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred,
directly or indirectly, in connection with the Transaction, including the
solicitation of proxies, registration of securities of the applicants under the
Securities Act of 1933, and other related matters, are estimated as follows:
<TABLE>
<S> <C>
Commission filing fee relating to
Application/Declaration on Form U-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000.00
Commission filing fee for the
Registration Statement on Form S-4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,367.00
Accountants' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,145
Legal fees and expenses relating to the Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715,000
Other legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,757,000
Shareholder communication and proxy solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174,000
NYSE listing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Exchanging, printing, and engraving of
stock certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Investment bankers' fees and expenses
Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000
Salomon Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000
Consulting fees related to human
resource issues, public relations,
regulatory support, and other
matters relating to the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,951,000
Expenses related to integrating
the operations of the merged company
and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,874,000
----------
TOTAL 41,795,512
</TABLE>
- - --------------
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<PAGE> 49
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules thereunder
are or may be directly or indirectly applicable to the proposed Transaction:
<TABLE>
<CAPTION>
Section of the Act Transactions to which section or rule is or may be applicable
- - ------------------ -------------------------------------------------------------
<S> <C>
4, 5 Registration of Interstate Energy as a holding company following the
consummation of the Transaction
6(a), 7 Issuance of Interstate Energy Common Stock in the Transaction in exchange
for shares of IES and IPC Common Stock; issuance of Rights; issuance of
Interstate Energy Common Stock or other securities in connection with the
Rights Agreement; issuance of Interstate Energy Common Stock under
certain employee benefit and savings plans of WPLH, IES and IPC and the
Interstate Energy Dividend Reinvestment Plan; approval of all outstanding
intra-system debt, including guarantees
9(a)(2), 10 Acquisition by Interstate Energy of common stock of Utilities (or New
Utilities) and IPC (or New IPC)
9(a)(1), 10 Acquisition by Interstate Hold of certain non-utility subsidiaries of
WPLH and IES; acquisition of Interstate Energy Common Stock in open-
market transactions under certain benefit and savings plans
8, 11(b), 21 Retention by Interstate Energy of gas operations and other businesses of
WPLH, IES and IPC and their direct and indirect subsidiaries
13 Approval of the Service Agreement and services
provided to utility affiliates thereunder by
Interstate Services; approval of incidental
services among WP&L, South Beloit, Utilities and
IPC; approval of the Non-Utility Service
Agreement and services provided to non-utility
affiliates thereunder by Interstate Services;
approval of the performance of certain services
between the Interstate Energy system companies
13(b)(1) Exemption from at-cost standards with respect to certain services.
</TABLE>
45
<PAGE> 50
<TABLE>
<CAPTION>
Rules
- - -----
<S> <C>
42 Open-market purchases of Interstate Energy Common Stock pursuant to the
Interstate Energy Dividend Reinvestment Plan
80-92 Interstate Services charges to Interstate Energy
system companies; WP&L charges to Utilities and
IPC and vice-versa; certain Interstate Energy
system companies' charges to other Interstate
Energy system companies
83(a) Exemption from at-cost standards with respect to certain services
87(a)(3) Incidental services among Interstate Energy system utility companies
88 Approval of Interstate Services as a subsidiary service company
93, 94 Accounts, records and annual reports by Interstate Services
</TABLE>
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Transaction, such sections and rules
should be considered to be set forth in this Item 3.
A. Transaction
Section 9(a)(2) makes it unlawful, without approval of the
Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public utility company, if such person is an
affiliate [under Section 2(a)(11)(A) of the Act] . . . of such company and of
any other public utility or holding company, or will by virtue of such
acquisition become such an affiliate." Under the definition set forth in Section
2(a)(11)(A), an "affiliate" of a specified company means "any person that
directly or indirectly owns, controls, or holds with power to vote, 5 per centum
or more of the outstanding voting securities of such specified company."
WP&L, South Beloit, Utilities and IPC are public utility
companies as defined in Section 2(a)(5) of the Act. Because WPLH, an "affiliate"
of WP&L and South Beloit within the meaning of Section 2(a)(11) of the Act, will
acquire more than five percent of the voting securities of each of Utilities and
IPC as a result of the Transaction, and because WPLH will thereby become an
affiliate of Utilities and IPC, WPLH must obtain the approval of the Commission
for the Transaction under Sections 9(a)(2) and 10 of the Act. The statutory
standards to be considered by the Commission in evaluating the proposed
transaction are set forth in Section 10 of the Act.
As set forth more fully below, the Transaction complies with
all of the applicable provisions of Section 10 of the Act and should be
approved by the Commission. Thus:
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<PAGE> 51
<TABLE>
<S> <C>
- - - the Transaction will not create detrimental interlocking relations or concentration of control;
- - - the consideration to be paid in the Transaction is fair and reasonable;
- - - the Transaction will not result in an unduly complicated capital structure for the Interstate Energy system;
- - - the Transaction is in the public interest and the interests of investors and consumers;
- - - the Transaction is not unlawful under Section 8 and is not detrimental to the carrying out of the provisions of Section 11
of the Act;
- - - The Transaction tends toward the economical and efficient development of an integrated electric utility system; and
- - - the Transaction will comply with all applicable state laws.
</TABLE>
The Transaction and the requests contained in this
Application/Declaration are well within the precedent of transactions approved
by the Commission as consistent with the Act. In addition, a number of the
recommendations made by the Division of Investment Management (the "Division")
in the report issued by the Division in June 1995 entitled "The Regulation of
Public Utility Holding Companies" (the "1995 Report") support the applicants'
analysis. The Commission's approval of the Transaction would be consistent with
previous Commission rulings(8) and would also be consistent with the
Division's overall recommendation in the 1995 Report that the
Commission "act administratively to modernize and simplify holding company
regulation. . . and minimize regulatory overlap, while protecting the
interests of consumers and investors,"(9) since, as demonstrated below, the
Transaction will benefit both consumers and shareholders of Interstate Energy,
and the other federal and state regulatory authorities with jurisdiction
over this Transaction have approved it as in the public interest. In
addition, although discussed in more detail in each applicable item below,
the Transaction is consistent with the specific recommendations of the Division
with regard to financing transactions,(10) utility ownership(11) and
diversification.(12)
1. Section 10(b)
Section 10(b) provides that, if the requirements of Section
10(f) are satisfied, the Commission shall approve an acquisition under Section
9(a) unless:
(1) such acquisition will tend towards interlocking relations
or the concentration of control of public utility companies, of a kind
or to an extent detrimental to the public interest or the interests of
investors or consumers;
(2) in case of the acquisition of securities or utility assets,
the consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital
structure of the holding company system of the applicant or will be
detrimental to the public interest or the
47
<PAGE> 52
interests of investors or consumers or the proper functioning of such
holding company system.
a. Section 10(b)(1)
i. Interlocking Relationships
Section 10(b)(1) was primarily aimed at preventing business
combinations unrelated to operating synergies and was never intended to prohibit
mergers that otherwise made operational sense and were permissible under other
provisions of the Act.
As described in Item 1.C.3. above, the Merger Agreement
provides for the Board of Directors of Interstate Energy to be composed of
fifteen members, six designated by each of WPLH and IES and three designated by
IPC.(13) In addition, each of the utility subsidiaries of Interstate Energy
is expected to enter into a service agreement with Interstate Services, which
is necessary to integrate WPLH, IES and IPC into a single Interstate Energy
system. These actions are subject to approval of the Commission under
Section 13 and state regulatory authorities and will, therefore, be closely
monitored to insure that they are in the public interest and the interests
of investors and consumers. Forging such relations is beneficial to the
protected interests under the Act and thus is not prohibited by Section
10(b)(1). Moreover, the projected benefits that will accrue to the public,
investors and consumers from the combination of WPLH, IES and IPC
demonstrate that the combination is not detrimental to the protected
interests under the Act.
ii. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of
concentration and bigness" while preserving the "opportunities for economies of
scale, the elimination of duplicate facilities and activities, the sharing of
production capacity and reserves and generally more efficient operations"
afforded by the coordination of local utilities into an integrated system.
American Electric Power Co., 46 S.E.C. 1299, 1309 (1978). In applying Section
10(b)(1) to utility acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations at which the
Act was specifically directed." Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700
(1968). As discussed below, the WPLH-IES-IPC combination alliance will not
create a "huge, complex, and irrational system" of a type at which the Act is
directed, but rather will afford the opportunity to achieve economies of scale
and efficiencies which are expected to benefit investors and consumers. American
Electric Power Co., 46 S.E.C. 1299, 1307 (1978).
Size: If approved, the Interstate Energy system will serve
approximately 873,000 retail electric customers and 369,000 natural gas
customers in four states. As of and for the year ended December 31, 1995: (1)
the combined assets of WPLH, IES and IPC would have totaled approximately $4.492
billion; (2) combined utility revenues of WPLH, IES and IPC would have totaled
approximately $1.755 billion; and (3) combined owned generating capacity would
have totaled approximately 5,469 MW.
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<PAGE> 53
By comparison, the Commission has approved a number of
acquisitions involving significantly larger operating utilities. See, e.g.,
CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994) (combination of
Cincinnati Gas & Electric Co. and PSI Resources; combined assets at time of
acquisition of approximately $7.9 billion); Entergy Corp., Holding Co. Act
Release No. 25952 (Dec. 17, 1993) (acquisition of Gulf States Utilities;
combined assets at time of acquisition in excess of $21 billion); Northeast
Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990) (acquisition of
Public Service of New Hampshire; combined assets at time of acquisition of
approximately $9 billion).
In the states to be served by the Interstate Energy system,
several public utilities are larger than Interstate Energy's utility operations
will be following the Transaction. Union Electric Company has total assets of
approximately $6.625 billion, revenues of $2.117 billion, electricity sales of
39.688 million MWH and 1.116 million customers. Northern States Power Company
has total assets of approximately $5.950 billion, revenues of $2.034 billion,
electricity sales of 39.829 million MWH and 1.389 million customers. Wisconsin
Energy Company has total assets of $4.408 billion, total revenues of $1.389
billion, electricity sales of 26.911 million MWH and 937,968 customers.
As the following table demonstrates, nine of the currently
registered electric utility holding company systems are larger than Interstate
Energy will be following the Transaction in terms of assets, operating revenues,
customers and/or sales of electricity:
<TABLE>
<CAPTION>
Total Operating Sales in
Assets Revenues Customers MWH
System Total ($ Billions) ($ Billions) (Millions)
<S> <C> <C> <C> <C>
Southern $27.042 $8.426 3,478,889 157.5
Entergy $22.622 $6.707 2,358,992 120.1
AEP $15.779 $6.096 2,813,177 142.6
CSW $11.066 $3.076 1,643,143 60.2
Northeast Utilities $10.585 $4.242 1,680,349 48.0
GPU $9.210 $3.644 1,935,832 44.2
NEES $5.251 $3.508 1,292,628 45.6
Allegheny Power
System, Inc. $6.711 $2.625 1,348,832 52.0
Cinergy $8.150 $2.584 1,331,548 31.4
Interstate Energy $4.080 $1.322 855,394 28.9
</TABLE>
In addition, Interstate Energy will be smaller than the
registered holding companies to be formed as a result of recently announced
proposed and completed mergers, specifically the mergers of AEP and CSW
(combined 1995 year-end assets of approximately $52.845 billion and operating
revenues of $9.172 billion), the Ameren combination of Union Electric Company
and CIPSCO, Inc. (combined 1994 year-end assets of approximately $8.402 billion
and operating revenues of $2.850 billion) and the New Centuries combination of
Public Service Company of Colorado and Southwestern Public Service Company
(combined 1994 year-end assets of approximately $6.018 billion and operating
revenues of $2.881 billion.)
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<PAGE> 54
Interstate Energy will be a small- to mid-size registered holding
company, and its operations would not exceed the economies of scale of current
electric generation and transmission technology or provide undue power or
control to Interstate Energy in the region in which it will provide service.
Efficiencies and economies: The Commission has rejected a mechanical
size analysis under Section 10(b)(1) in favor of assessing the size of the
resulting system with reference to the efficiencies and economies that can be
achieved through the integration and coordination of utility operations.
American Electric Power Co., 46 S.E.C. 1299, 1309. More recent pronouncements of
the Commission confirm that size is not determinative. Thus, in Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986), the Commission stated
flatly that a "determination of whether to prohibit enlargement of a system by
acquisition is to be made on the basis of all the circumstances, not on the
basis of size alone." See also Entergy Corporation, Holding Co. Act Release No.
25952 (December 17, 1993). In addition, the Division recommended in the 1995
Report that the Commission approach its analysis of merger and acquisition
transactions in a flexible manner with emphasis on whether the Transaction
creates an entity subject to effective regulation and is beneficial for
shareholders and customers as opposed to focusing on rigid, mechanical
tests.(14)
By virtue of the Transaction, Interstate Energy will be in a position
to realize the "opportunities for economies of scale, the elimination of
duplicate facilities and activities, the sharing of production capacity and
reserves and generally more efficient operations" described by the Commission in
American Electric Power Co., 46 S.E.C. at 1309. Among other things, the
Transaction is expected to yield significant production cost savings from
integrated economic dispatch; savings through greater purchasing power; labor
cost savings; savings through consolidation of corporate and administrative
programs; and savings from integrated gas operations through optimization of
transportation capacity, shortening storage withdrawal periods and avoidance of
duplicative reserve margins. These expected economies and efficiencies from the
combined utility operations are described in greater detail in Item 3.A.2.b.i.
below and are projected to result in net savings of approximately $749 million
over the first ten years alone.
Competitive Effects: As the Commission noted in Northeast Utilities,
Holding Co. Act Release No. 25221 (Dec. 21, 1990), the "antitrust ramifications
of an acquisition must be considered in light of the fact that public utilities
are regulated monopolies and that federal and state administrative agencies
regulate the rates charged consumers." It is a condition to the consummation of
the Transaction that the applicable waiting periods under the HSR Act shall have
expired or been terminated. On June 7, 1996, WPLH, IES and IPC filed a
Notification and Report Form with the DOJ and FTC pursuant to the HSR Act
describing the effects of the Transaction on competition in the relevant market.
The 30-day waiting period with respect to such Notification and Report Form
expired on July 7, 1996 without the issuance of a request for additional
information from the DOJ or FTC. After the expiration of one year from the
original expiration, a subsequent filing in September of 1997 produced a similar
result. No further requirements consequently remain to be satisfied under the
HSR Act for the consummation of the Transaction.
In addition, the competitive impact of the Transaction was fully
considered by the FERC before it approved the Transaction. A detailed
explanation of the reasons why the Transaction will not threaten competition in
even the most narrowly drawn geographic and product markets is set forth in the
prepared testimony of Rodney Frame, filed with the FERC
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<PAGE> 55
on behalf of WPLH, IES and IPC, a copy of which is filed as Exhibit K-1.
The application filed by WPLH, IES and IPC with the FERC is filed as Exhibit K-2
and the Order received is filed as Exhibit N-3. The Commission may
appropriately rely upon the FERC with respect to such matters. Entergy
Corporation, supra citing, City of Holyoke Gas & Electric Department et al. v.
S.E.C., 972 F.2d 358, 363-64 quoting Wisconsin Environmental Decade, Inc. v.
S.E.C., 882 F.2d 523, 527 (D.C. Cir. 1989).
For these reasons, the Transaction will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
b. Section 10(b)(2)
As noted above, Section 10(b)(2) requires the Commission to determine
whether the consideration to be paid in connection with the combination of WPLH,
IES and IPC, including all fees, commissions and other remunerations, is
reasonable and whether it bears a fair relation to investment in and earning
capacity of the utility assets underlying the securities being acquired.(15)
i. Fairness of Consideration
For the reasons set forth below, the requirements of Section 10(b)(2)
regarding consideration are satisfied in this Transaction.
First, the Transaction is a pure stock-for-stock exchange and qualifies
for treatment as a pooling of interests for accounting purposes. As set forth
more fully above, each share of IES Common Stock will be converted into the
right to receive 1.14 shares of Interstate Energy Common Stock, each share of
IPC Common Stock will be converted into the right to receive 1.11 shares of
Interstate Energy Common Stock and each share of WPLH Common Stock will continue
as one share of Interstate Energy Common Stock. Each share of IPC Preferred
Stock and Utilities Preferred Stock will remain unchanged unless the
Reincorporation Mergers are effected, in which case it is anticipated that all
of the Utilities Preferred Stock will be redeemed by Utilities prior to
consummation of the Utilities Reincorporation Merger and each share of IPC
Preferred Stock (other than IPC Dissenting Shares) will be converted into one
share of New IPC Preferred Stock with terms and designations substantially
identical to those of the IPC Preferred Stock. The Transaction will, therefore,
involve no "acquisition adjustment" or other write-up of the assets of WPLH, IES
or IPC.
Second, the exchange ratios are the product of extensive and vigorous
arms-length negotiations between WPLH, IES and IPC. These negotiations were
preceded by extensive due diligence, analysis and evaluation of the assets,
liabilities and business prospects of each of the respective companies. See
"Background of the Mergers" at pages 31 to 45 of the WPLH Registration Statement
on Form S-4 (Exhibit I-1 hereto). As recognized by the Commission in Ohio Power
Co., 44 S.E.C. 340, 346 (1970), prices arrived at through arms-length
negotiations are particularly persuasive evidence that Section 10(b)(2) is
satisfied.
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<PAGE> 56
Finally, nationally-recognized investment bankers for each of WPLH, IES
and IPC have reviewed extensive information concerning the companies and
analyzed the exchange ratios employing a variety of valuation methodologies, and
have opined that the exchange ratios are fair, from a financial point of view,
to the respective holders of WPLH Common Stock, IES Common Stock and IPC Common
Stock. The investment bankers' opinions are attached as Annexes L, M and N to
WPLH's Registration Statement on Form S-4 and are described on pages 53 to 69 of
the Form S-4 (Exhibit I-1 hereto). The assistance of independent consultants in
setting consideration has been recognized by the Commission as evidence that the
requirements of Section 10(b)(2) have been met. The Southern Company; SV
Ventures, Inc., Holding Co. Act Release 24579 (February 12, 1988).
ii. Reasonableness of Fees
WPLH, IES and IPC believe that the overall fees, commissions and
expenses incurred and to be incurred in connection with the Transaction are
reasonable and fair in light of the size and complexity of the Transaction
relative to other transactions and the anticipated benefits of the Transaction
to the public, investors and consumers; that they are consistent with recent
precedent; and that they meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, WPLH, IES and
IPC together expect to incur a combined total of approximately $14 million(16)
in fees, commissions and expenses in connection with the Transaction. By
contrast, Cincinnati Gas & Electric Company and PSI Resources incurred $47.1
million in fees, commissions and expenses in connection with their
reorganization as subsidiaries of CINergy, Northeast Utilities alone incurred
$46.5 million in fees, commissions and expenses in connection with its
acquisition of Public Service Company of New Hampshire and Entergy alone
incurred approximately $38 million in fees, commissions and expenses in
connection with its recent acquisition of Gulf States Utilities -- all of which
amounts were approved as reasonable by the Commission. See CINergy, Holding
Co., Act Release No. 26146 (Oct. 21, 1994); Northeast Utilities, Holding Co. Act
Release No. 25548 (June 3, 1992); Entergy Corp., Holding Co. Act Release No.
25952 (Dec. 17, 1993).
With respect to financial advisory fees, WPLH, IES and IPC believe that
the fees payable to their investment bankers are fair and reasonable for similar
reasons. Pursuant to the terms of an engagement letter dated June 29, 1995, WPLH
has agreed to pay Merrill Lynch (i) a $100,000 retainer fee, payable as of the
date of the engagement letter, (ii) $200,000 payable upon the execution of the
Merger Agreement, (iii) $200,000 payable upon the delivery by Merrill Lynch of
its fairness opinion and (iv) a transaction fee payable only upon consummation
of the Mergers equal to 0.40% of the product of the closing price of WPLH Common
Stock on November 6, 1995, which was $30.75, multiplied by the sum of (a)
10,616,359, the number of outstanding shares of IPC Common Stock as set forth in
the Merger Agreement multiplied by the IPC Ratio, and (b) 29,639,029, the number
of outstanding shares of IES Common Stock as set forth in the Merger Agreement
multiplied by the IES Ratio (approximately $4,951,413), against which the
amounts referred to in clauses (i) - (iii) above will be credited. WPLH has also
agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses,
including all reasonable fees and disbursements of its legal counsel, and to
indemnify Merrill Lynch and
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certain related persons against certain liabilities in connection with its
engagement, including certain liabilities under the federal securities laws.
Pursuant to a letter agreement dated June 30, 1995 between IES and
Morgan Stanley, Morgan Stanley is entitled to (i) an advisory fee for its time
and efforts expended in connection with the engagement which is estimated to be
between $100,000 and $250,000, which is payable in the event the transaction is
not consummated, (ii) an announcement fee of $1,000,000, which has been paid,
and (iii) a transaction fee equal to the product of 0.472562% multiplied by the
Aggregate Value of the transaction (as such term is defined in such letter
agreement), or approximately $4,370,228, which is payable only upon consummation
of the transaction. Any amounts paid or payable to Morgan Stanley as advisory or
announcement fees will be credited against the transaction fee. IES has agreed
to reimburse Morgan Stanley for its expenses, including reasonable fees and
expenses of its counsel, and to indemnify Morgan Stanley and its affiliates
against certain liabilities and expenses, including liabilities under federal
securities laws.
Pursuant to a letter agreement dated September 13, 1995, between IPC
and Salomon Brothers, Salomon Brothers agreed to act as financial advisor to IPC
in connection with the Mergers. IPC is obligated to pay Salomon Brothers a
monthly fee of $25,000 during the term of the engagement and an additional fee
equal to the product of 0.75% multiplied by the aggregate consideration paid for
IPC's common equity (approximately $2,448,000). This additional fee is due
Salomon Brothers as follows: 25% contingent upon and payable following execution
of the Merger Agreement; 25% contingent upon and payable following approval by
the IPC stockholders; and the remainder (less all monthly fees paid or payable)
contingent upon and only payable following consummation of the Mergers. IPC also
agreed to reimburse Salomon Brothers for its reasonable out-of-pocket expenses,
including fees and disbursements of counsel, and to indemnify Salomon Brothers
and its affiliates, their respective directors, officers, agents and employees
and each person, if any, controlling Salomon Brothers or any of its affiliates
against certain liabilities, including liabilities under the federal securities
laws, relating to, or arising out of, its engagement.
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will unduly complicate Interstate Energy's capital structure or will
be detrimental to the public interest, the interests of investors or consumers
or the proper functioning of Interstate Energy's system.
Capital structure: The corporate capital structure of Interstate
Energy after the Transaction will not be unduly complicated and will be
substantially similar to capital structures of existing registered holding
company systems approved by the Commission in other orders. See, e.g.,
CINergy, Holding Co. Act Release No. 26146 (Oct. 21, 1994); Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986); Midwest Resources,
et al., Holding Co. Act Release No. 25159 (Sept. 26, 1990); Entergy Corp.,
Holding Co. Act Release No. 25952 (Dec. 17, 1993); Northeast Utilities, Holding
Co. Act Release No. 25548 (June 3, 1992).
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In the Transaction, the common shareholders of IES and IPC will receive
Interstate Energy Common Stock in exchange for their share of IES Common Stock
and IPC Common Stock, respectively. Interstate Energy will own 100% of the
common stock of WP&L, Utilities (or New Utilities) and IPC (or New IPC) and
there will be no minority common stock interest remaining in any of the three
companies. Each share of IPC Preferred Stock outstanding at the time of the
consummation of the Transaction (other than IPC Dissenting Shares) will remain
outstanding preferred stock of IPC. However, if the Reincorporation Mergers are
effected as described more fully in Item 1.A.2 above, it is currently
anticipated that the shares of Utilities preferred stock currently outstanding
will be redeemed by Utilities prior to consummation of the Utilities
Reincorporation Merger and each share of IPC preferred stock currently
outstanding will be converted into one share of preferred stock of New IPC with
terms (including dividend rates) substantially identical to those of IPC's
preferred stock under IPC's Restated Certificate of Incorporation (Exhibit F-2
hereto).
The debt securities of Utilities, IPC and WP&L outstanding at the time
of the consummation of the Transaction will likewise remain outstanding without
change except that, if the Reincorporation Mergers are effected, the debt of
Utilities and IPC will become the debt of New Utilities and New IPC,
respectively.
The only voting securities of Interstate Energy which will be publicly
held after the transaction will be Interstate Energy Common Stock. With respect
to the direct non-utility subsidiaries of Interstate Energy and Interstate Hold,
the only class of voting securities of such subsidiaries will be common stock,
and Interstate Energy or Interstate Hold will hold all of the issued and
outstanding shares of such common stock other than a minority interest in HEHC
owned by certain employees as described in Item 1.B.5.a above.
Set forth below are summaries of the historical capital structure of
WPLH, IES and IPC as of December 31, 1995 and the pro forma consolidated capital
structure of Interstate Energy (assuming the Transaction had occurred at
December 31, 1995):
<TABLE>
<CAPTION>
WPLH, IES and IPC Historical Capital Structures
(dollars in millions)
(as of December 31, 1995)
WPLH IES IPC
---- --- ---
<S> <C> <C> <C>
Common Stock $597.5 $612.3 $197.8
Preferred Stock 60.0 18.3 34.9
Long-term Debt 430.4 601.7 188.9
Short-term Debt 109.5 101.0 39.3
------ ------ -----
Total $1,197.4 $1,333.3 $460.9
</TABLE>
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Interstate Energy Pro Forma Consolidated Capital Structure
(dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Without With
Reincorporation Mergers Reincorporation Mergers
----------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock $1,399 46.9% $1,399 47.2%
Preferred Stock 113 3.8% 95 3.2%
Long-Term Debt 1,221 40.9% 1,221 41.2%
Short-Term Debt 250 8.4% 250 8.4%
----- ---- ---- ----
Total $2,983 100.0% $2,965 100.0%
</TABLE>
Interstate Energy's pro forma consolidated common equity to total capitalization
ratio of 46.9% is significantly higher than the common equity position approved
by the Commission for Northeast Utilities (27.6%) and CINergy (39.5%) and
comfortably exceeds the "traditionally acceptable 30% level." Northeast
Utilities, Holding Co. Act Release 25221 (December 21, 1990).
Protected interests: As set forth more fully in Item 3.A.2.b.i
(Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility System)
and elsewhere in this Application/ Declaration, the Transaction is expected to
result in substantial, otherwise unavailable, cost savings and benefits to the
public and to consumers and investors of WPLH, IES and IPC, and will integrate
and improve the efficiency of the WPLH, IES and IPC utility systems. Moreover,
as noted by the Commission in Entergy Corporation, Holding Co. Act Release 25952
(December 17, 1993), "concerns with respect to investors' interests have been
largely addressed by developments in federal securities laws and the securities
market themselves." WP&L, Utilities and IPC (or New IPC) will be reporting
companies subject to the continuous disclosure requirements of the Securities
Exchange Act of 1934 (the "1934 Act") following completion of the Transaction.
The various reports previously filed by WPLH, IES and IPC under the 1934 Act
contain readily available information concerning the Transaction. The
Transaction will, therefore, be in the public interest and the interests of
investors and consumers, and will not be detrimental to the proper functioning
of the resulting holding company system.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; (17)
or
(2) the acquisition of securities or utility assets of a public utility
or holding company unless the Commission finds that such acquisition
will serve the public interest by tending
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towards the economical and the efficient development of an integrated public
utility system . . . .
a. Section 10(c)(1)
Section 10(c)(1) requires that an acquisition be lawful under Section
8. Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if prohibited by state law. Following the
Transaction, the utility subsidiaries of Interstate Energy will provide electric
and gas services in Wisconsin, Illinois, Iowa and Minnesota. Since Wisconsin,
Iowa, Illinois and Minnesota laws all permit combination gas and electric
utilities serving the same area, the Transaction does not raise any issue under
Section 8 or, accordingly, the first clause of Section 10(c)(1). Indeed, Section
8 indicates that a registered holding company may own both gas and electric
utilities where, as here, the relevant state utility commissions support such an
arrangement.
Section 10(c)(1) also requires that transactions not be detrimental to
carrying out the provisions of Section 11. Section 11(a) of the Act requires the
Commission to examine the corporate structure of registered holding companies to
ensure that unnecessary complexities are eliminated and voting powers are fairly
and equitably distributed. As described above in Item 3.A.1.c., the Transaction
will not result in unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding
company system to limit its operations "to a single integrated public utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system," a combination integrated gas and electric system within
a registered holding company is permissible under Section 8. Additionally,
Section 11(b)(1) provides that "one or more additional integrated public utility
systems" may be retained if, as here, certain criteria are met. Section 11(b)(2)
directs the Commission "to ensure that the corporate structure or continued
existence of any company in the holding company system does not unduly or
unnecessarily complicate the structure, or unfairly or inequitably distribute
voting power among security holders, of such holding company system."
As detailed below, the Transaction will not be detrimental to the
carrying out of the provisions of Section 11.
i. Retention of Gas Operations
WP&L and South Beloit have provided retail gas distribution service for
more than 68 years. Initially, this service provided gas that was derived from
coal through local manufactured gas or "town gas" plants. From the late 1930's
to the early 1980's, interstate natural gas pipelines (primarily by ANR Pipeline
Company) were constructed to provide natural gas delivery to WP&L gas
distribution systems in each significant city served by WP&L and South Beloit.
WP&L and South Beloit also responded to FERC's efforts from 1983 to
1993 to restructure the interstate pipeline industry. In 1987, WP&L and South
Beloit were among the
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first LDCs in the United States to convert from firm pipeline "full
requirements" sales service to firm transportation-only service in accordance
with open access provisions of FERC Order 436. In 1986, WP&L and South Beloit
began offering "open access" retail transportation service to eligible large
customers.
WP&L and South Beloit currently purchase transportation service from
five United States pipeline carriers and storage from three underground storage
service providers. WP&L and South Beloit procure natural gas supplies from
numerous suppliers located in North America. As a result of this "grid" approach
to gas supply acquisition, WP&L and South Beloit have retail gas rates which are
among the lowest in the region and well below the national average. Moreover,
the diversity of supply and delivery routes provide for increased reliability
for firm customers. Approximately 30% of the gas delivered by WP&L and South
Beloit is third party gas purchased directly by large industrial retail
customers. Under rate designs approved by the various regulatory agencies, WP&L
and South Beloit are financially indifferent to whether a customer purchases
sales or transportation only service.
Utilities and its predecessor companies have provided gas service to
customers throughout Iowa since the late 1940s. Prior thereto, Utilities'
predecessor companies provided manufactured gas to their customers from coal
gasification facilities operated by such predecessor companies. Utilities
historically grew by purchasing municipal gas systems and other utilities.
Utilities also responded to FERC's efforts in the mid 1980's to
restructure the interstate pipeline industry. In 1985, Utilities offered open
access transportation to eligible customers on its distribution system. At the
same time, Utilities began purchasing a portion of its natural gas from
suppliers other than the pipeline companies which supplied gas and used the
pipelines for transportation only. Utilities currently purchases transportation
services on three interstate pipelines and storage services from three
pipelines. Natural gas is procured from a number of different suppliers located
in the mid-continent, Gulf Coast and Canadian production areas.
Utilities continues to offer competitively priced natural gas sales
service to customers who prefer delivered gas service. It also provides
transportation and balancing services to a number of commercial and industrial
customers who prefer to purchase their own gas and transport their gas on
pipelines and through the Utilities distribution system. Under this
transportation service, approximately 27% of all gas delivered by Utilities is
third party gas owned by customers. Under rate designs approved by the various
regulatory agencies, Utilities is financially indifferent to whether a customer
purchases sales or transportation only service.
IPC and its predecessor companies have provided gas service to
customers in Iowa, Minnesota and Illinois since its incorporation in 1925.
Initially, IPC and its predecessor companies provided manufactured gas to their
customers from coal gasification facilities. Since 1951, all of IPC's gas sales
have predominantly been natural gas.
IPC also responded to FERC's efforts in the mid 1980's to restructure
the interstate pipeline industry. In 1986, IPC offered open access
transportation to eligible customers on its distribution system. At the same
time, IPC began purchasing a portion of its
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natural gas from suppliers other than the pipeline companies which supplied gas
and used the pipelines for transportation only. IPC currently purchases
transportation services on two interstate pipelines and storage services from
two pipelines. IPC also contracts for synthetic storage services, which act like
a financial hedge, from one company. Natural gas is procured from a number of
different suppliers located in the Gulf Coast, Canadian and Texas/Oklahoma
production areas. The propane-air LPG peak shaving plants continue to provide
gas service to customers on the coldest days of the year while reducing pipeline
demand charges.
IPC continues to offer competitively priced natural gas sales service
to customers who prefer delivered gas service. It also provides transportation
and balancing services to a number of commercial and industrial customers who
prefer to purchase their own gas and transport their gas on pipelines and
through IPC's distribution system. Under this transportation service, over 70%
of all gas delivered by IPC is third party gas owned by customers. Under rate
designs approved by the various regulatory agencies, IPC is financially
indifferent to whether a customer purchases sales or transportation only
service.
For more general information regarding the gas operations of WP&L,
South Beloit, Utilities and IPC, See Items I.B.2.a.iv., I.B.2.b.iv. and
I.B.2.c.iv. above.
Currently, WPLH and IES are energy service companies which are also
exempt holding companies, and IPC is a public-utility company primarily engaged
in the energy services business. Following consummation of the Transaction,
WP&L, Utilities and IPC will continue to be energy services companies. In
today's changing energy markets, consumers and regulators must be -- and are
- -- more careful with limited energy resources than was ever contemplated in
1935. Increasingly, customers select among different forms of energy to
perform the same or similar tasks depending upon environmental and
economic factors. As energy service companies, WP&L, Utilities and IPC offer,
and the Interstate Energy system will offer, diverse forms of energy to
customers, thereby allowing choices among different forms of energy, which, in
turn, fosters efficiency and conservation. By providing such choices, energy
companies assist in the allocation of scarce national resources, under the
supervision of local regulators who are most familiar with the needs of the
local constituencies. This modern energy business, with a high level of state
scrutiny, is a far cry from the marketplace and regulatory situation perceived
by the drafters of the Act and the then-perceived abuses that arose from
combination companies. The fears expressed at that time, the "favoring of one of
these competing forms of energy over the other," S.E.C. v. New England Electric
System, 384 U.S. 176, 183 (1966), are no longer realistic in today's market.
For the reasons set forth below and in the accompanying memoranda attached
as Exhibits L-1, L-2, L-3, L-4, L-5 and L-6, Interstate Energy's retention of
the gas operations of WP&L (including South Beloit), Utilities and IPC
should be approved by the Commission. Retention of such gas operations is
lawful under, and is consistent with the congressional intent behind,
Section 8 of the Act and would not be detrimental to the carrying out of
Section 11 of the Act.
Section 8: Section 8 of the Act provides that "[w]henever a State law
prohibits, or requires approval or authorization of, the ownership or operation
by a single company of the utility assets of an electric utility company and a
gas utility company serving substantially the same territory, it shall be
unlawful for a registered holding company, or any subsidiary company
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thereof . . . (1) to take any step, without the express approval of the state
commission of such state, which results in its having a direct or indirect
interest in an electric utility company and a gas company serving substantially
the same territory; or (2) if it already has any such interest, to acquire,
without the express approval of the state commission, any direct or indirect
interest in an electric utility company or gas utility company serving
substantially the same territory as that served by such companies in which it
already has an interest." (emphasis added)
On its face, Section 8 indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both electric and gas utility systems. A careful reading of the section
indicates that the thrust of the section is to preclude the use of the
registered holding company form to circumvent any state law restrictions on the
ownership of gas and electric assets by the same company. Thus, combination
registered holding companies, or a registered holding company system that
includes combination companies, are implicitly acceptable under the statute
absent an objection by the affected state(s).
WPLH, IES and IPC believe it is consistent with both the Act and its
policy objectives to permit combination companies to exist and operate provided
such combination companies are permitted by the affected states. Indeed, over
time the Commission has emphasized different aspects of Section 8 and its
interplay with Section 11 -- initially allowing registered holding companies to
own both gas and electric systems under Section 8, then focusing on Section 11
as controlling determinations regarding combination companies, and requiring the
second system to meet a strict interpretation of the requirements set forth in
clauses A, B and C of Section 11(b)(1) which is discussed below.
While the Commission has focused on Section 11 and adopted a narrow
interpretation of the standards contained therein as the controlling factor with
regard to combination registered holding companies since the early 1940s, both
the legislative history of the Act and recent changes in the utility industry
indicate that it is now appropriate and necessary for the Commission to
reemphasize the provisions of Section 8 of the Act and allow combination
registered holding companies where they are permitted under relevant state law,
as they are in this case.(18)
The legislative history of Section 8 supports a policy of allowing
combination utilities where they are permitted by state law. As noted in the
Senate Interstate Commerce Committee "[Section 8] is concerned with competition
in the field of distribution of gas and electric energy -- a field which is
essentially a question of State policy, but which becomes a proper subject of
Federal action where the extra-State device of a holding company is used to
circumvent state policy." S. Rep. No. 2796, 74th Cong., 1st Sess., pt 1 at 31
(1935) (the "Senate Report"). Nothing in the legislative history indicates a
Congressional desire to prohibit combination companies where state approvals can
be obtained.
Much more recently, the Division noted in the 1995 Report, "it does not
appear that the SEC's precedent concerning additional systems precludes the SEC
from relaxing its interpretation of Section 11(b)(1)(A)" and "that the utility
industry is evolving toward the creation of one-source energy companies that
will provide their customers with whatever type of energy supply they want,
whether electricity or gas." The Division recommended that the Commission
interpret Section 11(b)(1) of the Act to allow registered holding companies to
hold
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both gas and electric operations as long as each affected state utility
regulatory commission approves of the existence of such a company.(19)
Local regulators are in the best position to assess the needs of their
communities. The Act was never intended to supplant local regulation but,
rather, was intended to create conditions under which local regulation was
possible. Section 21 of the Act, which further codifies this legislative
intent, states: "Nothing in [the Act] shall affect . . . the jurisdiction of
any other commission, board, agency, or officer of . . . any State, or
political subdivision of any State, over any person, security, or contract,
insofar as such jurisdiction does not conflict with any provision of [the Act]
. . . ."
The legislative history reveals that Section 21 of the Act was further
intended "to insure the autonomy of state commissions [and] nothing in the [Act]
shall exempt any public utility from obedience to the requirements of state
regulatory law." Senate Report at p. 10. Thus, the Act should not be used as a
tool to override state policy, particularly when the holding company involved is
subject to both state and federal regulation and when the affected state
regulatory commissions have supported combined electric and gas operations in
one holding company system.
Finally, this analysis and focus fits within the overall regulatory
scheme of the Act. First, Section 11 of the Act is flexible and was designed to
change as the policy concerns over the regulation of utility holding companies
changed.(20) As discussed below, the utility industry and the regulation of
that industry has changed dramatically in recent years. Second, a registered
holding company would still be required to demonstrate that any
acquisition or transaction by which it would become a combination
company would not be detrimental to the carrying out of the provisions of
Section 11 of the Act. In other words, its electric system would have to
constitute an integrated electric system and its gas system would have to
constitute an integrated gas system and both systems must be capable of being
operated efficiently. Thus, the standards of Section 11 would still have to be
met, but the application of those standards should take into account the
fundamental policy of the Act and allow local regulators to make the
threshold determination with regard to combination companies.
Each of WP&L (including South Beloit), Utilities and IPC is permissible
as a combination company pursuant to the terms of Section 8 of the Act because
the affected states are expected to approve the continued combined activities
and each is in the public interest. Moreover, as required by Section 11, the
electric systems of WP&L, South Beloit, Utilities and IPC constitute an
integrated electric system and the gas systems of each together will constitute
an integrated gas system as explained in detail below under Item 3.A.2.b.ii.
Interstate Energy as a combination company is permissible pursuant to
the terms of Section 8 of the Act and is in the public interest. First, the
combination of electric and gas operations in WP&L (including South Beloit),
Utilities and IPC is lawful under all applicable state laws and has been
considered and tacitly approved on numerous occasions by Wisconsin, Iowa,
Minnesota and Illinois regulators who have, and will continue to have, direct
jurisdiction over the Interstate Energy electric and gas operations. Interstate
Energy will not be using its holding company structure to circumvent any state
regulations since the gas utility operations of WP&L, South Beloit, Utilities
and IPC, respectively, will continue to be regulated by the
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relevant state jurisdictions. In addition, in connection with their applications
for approval of the Transaction submitted or to be submitted to the Wisconsin,
Iowa, Illinois and Minnesota regulatory commissions -- who have, and will
continue to have, direct jurisdiction over the Interstate Energy system's gas
operations located in their respective states -- WP&L, South Beloit, Utilities
and IPC expect these commissions to either order or express approval for WP&L,
South Beloit, Utilities and IPC to continue as combination electric and gas
utility companies through the retention of their respective gas operations and
for Interstate Energy to operate as a holding company for WP&L, Utilities and
IPC. Such actions by the applicable state commissions will reflect their
recognition that the existence of both gas and electric systems in the
Interstate Energy holding company system will allow Interstate Energy's
customers greater choice to meet their energy needs, especially given the fact
that the electric and gas systems operate in substantially the same territory
while sharing in the synergies that result from the Transaction. Moreover, the
prior fear that a holding company such as Interstate Energy would be able to
greatly emphasize one form of energy over the other based on its own agenda has
dissipated both because of the competitive nature of the energy market, which
requires utilities to meet customer demand for energy supply requirements or
risk losing the customer to a competing supplier, and because state regulators
will have sufficient control over, and would be unlikely to approve, a
combination company that attempts to undertake such practices.
Furthermore, the Commission has reviewed and approved the combination
gas and electric operations of WPLH and IES in several prior orders. IES
Industries Inc., Holding Co. Act Release No. 25325 (June 3, 1991), (IES' Section
3(a)(2) exemption continued by the Commission virtually without discussion in
connection with the merger of two exempt holding companies with combination
electric and gas utilities); WPL Holdings, Inc., Holding Co. Act Release No.
24590 (February 26, 1988) (the Commission reviewed its prior decisions on
ownership of electric and gas utilities by exempt holding companies and noted
that the PSCW staff had advised the Commission "that it had experienced no
problems regulating combined electric and gas companies and was opposed to
separating such operations into separate companies"); Wisconsin Power and Light
Co., 1 S.E.C. 362 (1936).
For all of the foregoing reasons, the Commission should approve the
retention by WP&L (including South Beloit), Utilities and IPC of their
respective gas properties as contemplated by the Transaction. No policy would be
furthered by requiring divestiture, and, in fact, state policy would be thwarted
by such a requirement.
Section 11: Even if the Act were not interpreted as generally
permitting combination gas and electric systems upon state approval, Section 11
contains additional provisions that permit the retention by WP&L, Utilities and
IPC of their respective gas systems. Section 11(b)(1) of the Act permits a
registered holding company to control one or more additional integrated public
utility systems -- i.e., gas as well as electric -- if:
(A) each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can
be secured by the retention of control by such holding company of such
system;
(B) all of such additional systems are located in one
state, adjoining states, or a contiguous foreign country; and
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<PAGE> 66
(C) the continued combination of such systems under the control
of such holding company is not so large (considering the state of the
art and the area or region affected) as to impair the advantages of
localized management, efficient operation, or the effectiveness of
regulation.
Each of these requirements is satisfied in this Transaction. Retention
is, therefore, appropriate on the basis of Section 11(b)(1).
In the 1995 Report, the Division recommended that the Commission
"liberalize its interpretation of the `A-B-C' clauses." (21) The Commission
has historically given consideration to four ratios as a "guide" to
determining whether lost economies are "substantial" under Section 11(b)(1)(A).
These ratios measure the projected loss of economies as a percentage of:
(1) total gas operating revenues; (2) total gas expense or "operating revenue
deductions"; (3) gross gas income; and (4) net gas income or net gas utility
operating income. Although the Commission has declined to draw a bright-line
numerical test under Section 11(b)(1)(A), it has indicated that cost increases
resulting in a 6.78% loss of operating revenues, a 9.72% increase in operating
revenue deductions, a 25.44% loss of gross income and a 42.46% loss of net
income would afford an "impressive basis for finding a loss of substantial
economies." Engineers Public Service Co., 12 S.E.C. 41, 59 (1942).
In this case, the lost economies that would be experienced if the gas
properties of WP&L (including the gas properties owned by WP&L and South Beloit,
which are both part of a single inter-connected gas system), Utilities and IPC
were each to be operated on a stand-alone basis exceed these numbers, without
any increase in benefits to consumers. These lost economies result from the need
to replicate services, the loss of economies of scale, the costs of
reorganization, and other factors, and are described more fully in the Analysis
of the Economic Consequences of Divestiture of Wisconsin Power and Light's and
South Beloit Water, Gas and Electric's Natural Gas Operations, Analysis of the
Economic Impact of a Divestiture of IES Utilities Inc.'s Gas Operations and
Analysis of the Economic Impact of a Divestiture of Interstate Power Company's
Gas Operations (collectively, the "Gas Studies") (attached as Exhibits L-2
and L-6 hereto). In the absence of rate relief, these lost economies
would substantially injure the shareholders of WPLH, IES and IPC upon the
divestiture of those gas operations. As the Gas Studies further show, if rate
relief were granted with respect to the lost economies, then consumers would
bear those substantial costs over what they would have to pay if the
properties were retained as contemplated by the Transaction.
As set forth in the Gas Studies, divestiture of the gas operations of
WP&L, Utilities and IPC into stand-alone companies would result in lost
economies of $15,558,000 for WP&L, $14,205,142 for Utilities and $5,048,533 for
IPC. Exhibit L-6 considers the case of combining the gas properties of WP&L,
Utilities and IPC into one company prior to divestiture which would still
result in lost economies of approximately $27,000,000. The table below shows the
gas operating revenues, gas operating revenue deductions, gas gross income
and gas net income of WP&L, Utilities and IPC.
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<PAGE> 67
<TABLE>
<CAPTION>
GAS OPERATING GAS OPERATING REVENUE GAS GROSS
COMPANY REVENUES DEDUCTIONS INCOME GAS NET INCOME
------- ---------- -------------- ------ ------
<S> <C> <C> <C> <C>
WP&L 144,000,000 133,242,000 19,199,000 10,758,000
Utilities 144,377,806 130,359,782 14,018,024 9,751,955
IPC 43,669,329 34,148,636 9,520,693 5,798,949
</TABLE>
As a percentage of 1995 gas net income, the lost economies amount to
144.62% in the case of WP&L, 145.66% in the case of Utilities and 87.06% in the
case of IPC. These percentage losses in gas net income, as described in the Gas
Studies, that will be suffered by the WP&L, Utilities and IPC gas systems,
respectively, if operated on a stand-alone basis are far in excess of the loss
of net income in UNITIL Corp., Holding Co. Act Release No. 25524, (Apr. 24,
1992), where the Commission allowed the retention of the gas utility operations,
and the 30% loss in the New England Electric System case that the Commission has
described as the highest loss of net income in any past divestiture order.(22)
As a percentage of 1995 gas operating revenues, the lost economies described in
the Gas Studies would equal 10.80% in the case of WP&L, 9.84% in the case of
Utilities and 11.56% in the case of IPC, which in each case substantially
exceeds the percentage loss in any past divestiture order issued by the
Commission and exceeds the losses in UNITIL and Entergy Corporation, Holding Co.
Act Release No. 25952 (December 17, 1993), another case in which the Commission
authorized the retention of gas operations. As a percentage of 1995 expenses or
operating revenue deductions, the lost economies described in the Gas Studies
would equal 11.68% in the case of WP&L, 10.90% in the case of Utilities and
14.78% in the case of IPC, which in each case substantially exceeds the
percentage loss in any past divestiture order issued by the Commission and the
losses in UNITIL and Entergy. As a percentage of 1995 gas gross income, the lost
economies described in the Gas Studies amount to 81.04% in the case of WP&L,
101.33% in the case of Utilities and 53.03% in the case of IPC, which in each
case exceeds the highest loss of gross income in any divestiture order. The
applicable percentages here and in past cases are summarized in Exhibit L-5.
In order to recover these lost economies, the WP&L gas system would
need to increase its revenue from rates by $14.024 million or 9.74%, the
Utilities gas system would need to increase its revenue from rates by $14.205
million or 9.84% and the IPC gas system would need to increase its revenue from
rates by $5,048,533 and 11.56%. These increases in rate revenues would have a
direct and immediate negative impact on the rates charged to consumers for gas
services. In addition, the customers of the WP&L, Utilities and IPC gas
businesses who are also customers of their respective electric utility
businesses will experience a doubling of their postage costs to pay two separate
monthly bills. The total estimated increase in such postage costs is $900,000 in
the aggregate for the gas customers of the three companies.
Divestiture would also result in the loss to consumers of the economies
offered by the "energy services" approach of WP&L, Utilities and IPC to the
utility business. While the losses cannot be fully quantified, they are clearly
substantial. For the energy services company, providing gas and electric
products is only the start of the utility's job. The utility must also provide
enhanced service to the consumer by providing an entire package of both
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<PAGE> 68
energy products and services. In this regard, the efforts of WP&L, Utilities and
IPC reflect a trend by utilities to organize themselves as energy service
companies which provide a total package of energy services rather than merely
supplying gas and electric products. The goal of an energy service company is to
retain its current customers and obtain new customers in an increasingly
competitive environment by meeting customers' needs better than the competition.
An energy service company can provide the customer with a low cost energy (i.e.,
gas, electricity or conservation) option without inefficient subsidies.
The energy services company operating combination utilities offers a
wide range of benefits. For customers, an energy service company provides the
convenience and efficiency of service by a single energy provider and reduces
transaction costs incurred in gathering and analyzing information, contacting
energy suppliers, negotiating terms of services and paying bills. For the
communities in which an energy service company operates, combining gas and
electric operations simplifies community planning on energy-related matters. For
society, an energy service company is best able to ensure an environmentally
efficient allocation of energy. For utility shareholders and employees, an
energy service company is better able to respond to a competitive environment
and to remain an attractive investment opportunity for shareholders and an
appealing employer for utility employees.
The Commission has historically looked to the Supreme Court decisions
in S.E.C. v. New England Electric System, et al., 384 U.S. 176 (1966) ("NEES I")
and 390 U.S. 207 (1968) ("NEES II") in interpreting clause (A) of Section
11(b)(1). In NEES I, the Supreme Court accepted the Commission's interpretation
of the "loss of substantial economies" language of clause (A) to require an
applicant seeking to own an electric and gas utility system to show that the
additional system would be incapable of independent economic operation if
separated from the principal system. The Court in NEES I accepted the
Commission's then-current interpretation of clause (A), despite earlier SEC
interpretations permitting the Commission to use business judgment and expertise
to apply the statutory phrase "loss of substantial economies." In NEES I, the
Court specifically recognized that the language of clause (A) was "admittedly
not crystal clear" and deferred to the agency's "expertise on the total
competitive situation." 384 U.S. at 185 (emphasis in original). In NEES II, the
Court reiterated and strengthened its earlier statement of deference to the
Commission. 390 U.S. at 219.
The Division recognized in the 1995 Report that the Commission was no
longer bound by the narrow interpretation of clause (A) under the NEES
decisions. In so doing, the Division stated:
As discussed above, the SEC has generally required electric
registered holding companies that seek to own gas utility
properties to satisfy the requirements of the A-B-C clauses
concerning additional integrated systems. In contrast, exempt
holding companies have generally been permitted to retain or
acquire combination systems so long as combined ownership of
gas and electric operations is permitted by state law and is
supported by the interested regulatory authorities.
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<PAGE> 69
In the past, the SEC has construed the A-B-C clauses narrowly
to permit retention only where the additional system, if
separated from the principal system, would be incapable of
independent economic operations. Although the Supreme Court
upheld the SEC's reading, two justices dissented, contending
that the "serious impairment" standard was at odds with the
wording of the Act, had little basis in the statutory history
or aims of the Act, and could not be sustained by agency or
judicial precedent. The dissenting justices believed that the
statutory language "called for a business judgment of what
would be a significant loss."
Applicants in recent matters have argued that, in a competitive
utility environment, any loss of economies threatens a
utility's competitive position, and even a "small" loss of
economies may render a utility vulnerable to significant
erosion of its competitive position. There is general support
for a more relaxed standard. A number of commenters emphasize
that these are essentially state issues. It does not appear
that the SEC's precedent concerning additional systems
precludes the SEC from relaxing its interpretation of section
11(b)(1)(A). Indeed, the SEC has recognized that section 11
does not impose "rigid concepts" but rather creates a
"flexible" standard designed "to accommodate changes in the
electric utility industry."
Congress, in 1935, recognized that competition in the field of
distribution of gas and electric energy is essentially a
question of state policy. The Act was intended to ensure
compliance with state law in this regard. Moreover, it appears
that the utility industry is evolving toward the creation of
one-source energy companies that will provide their customers
with whatever type of energy supply they want, whether
electricity or gas. Accordingly, the Division believes it is
appropriate to reconcile the treatment of registered and exempt
companies in this regard, and so recommends that the SEC permit
registered holding companies to own gas and electric utility
systems pursuant to the A-B-C clauses of section 11(b)(1),
where the affected states agree.(23)
In NEES I (and NEES II), the Court accepted the Commission's
interpretation of clause A as a "construction well within the permissible range
given to those who are charged with the task of giving an intricate statutory
scheme practical sense and application." 384 U.S. at 185. However, there is
strong support in Supreme Court case law for the Commission's application in
this case of its current interpretation of clause A, based upon current
competitive facts and current policy, as stated in the 1995 Report. In Chevron
USA, Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984), the
Court outlined the parameters for changing agency interpretations of statutory
language based on policy considerations and agency expertise:
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<PAGE> 70
When a court reviews an agency's construction of the statute
which it administers, it is confronted with two questions.
First, always, is the question whether Congress has directly
spoken to the precise question at issue. If the intent of
Congress is clear, that is the end of the matter; for the
court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress. If, however, the
court determines Congress has not directly addressed the
precise question at issue, the court does not simply impose its
own construction on the statute, as would be necessary in the
absence of an administrative interpretation. Rather, if the
statute is silent or ambiguous with respect to the specific
issue, the question for the court is whether the agency's
answer is based on a permissible construction of the statute.
467 U.S. at 842 (citations omitted; emphasis added). Justice Scalia pointed out
that the Court's Chevron opinion "announced the principle that the courts will
accept an agency's reasonable interpretation of the ambiguous terms of a statute
that the agency administers." Antonin Scalia, "Judicial Deference to
Administrative Interpretations of Law," 1989 Duke L.J. 511.
In the NEES I opinion, the Supreme Court specifically pointed out that
"[t]he phrase 'without the loss of substantial economies' is admittedly not
crystal clear." 384 U.S. at 185. Thus, the first prong of the analysis under
Chevron is clearly met. As Justice Scalia pointed out, under Chevron:
"the agency is free to give the statute whichever of several
possible meanings it thinks most conducive to accomplishment of
the statutory purpose. Under the latter regime, there is no
apparent justification for holding the agency to its first
answer, or penalizing it for a change of mind."
1989 Duke L.J. at 516. Justice Scalia argues that a primary point of Chevron is
to allow agencies flexibility to change their statutory interpretations based
upon current economic (and even political) considerations. Under Chevron,
therefore, it is appropriate for the Commission to interpret clause A based on
its current "expertise on the total competitive situation." (NEES I at 185.)
Applicants believe that the Division's recommendation would represent
sound policy by the Commission. From a policy perspective, the Commission's
historic concern underpinning its 1964 NEES decision and a host of earlier
decisions where the retainability of gas properties by registered electric
systems was at issue -- namely, of fostering competition between electric and
gas -- is simply no longer valid given the current "state of the art" in the
electric and gas utility industries. In the generation since the Commission
decided the NEES case, profound economic and regulatory factors have caused
fundamental changes in the gas supply and electric generation industry. These
changes have made the Commission's earlier positions regarding combination
utilities obsolete.
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<PAGE> 71
In the gas area, regulatory changes have introduced competition into what
was formerly a monopoly and have expanded the availability of non-utility
"transportation-only service" as an alternative of sales services from the local
gas utility company. The WP&L, Utilities and IPC gas operations all have "open
access" transportation service tariffs on file with their respective state
commissions, and approximately 47% of the gas delivered by them in 1995 was
directly purchased by customers. Combination utilities therefore have less
ability than they did in 1935 to "favor" electric -- the principal policy
concern in decisions ordering the separation of gas and electric systems -- by
curtailing the availability or increasing the price of gas.(24)
Combination utilities also have less incentive to favor electric over gas in
light of the increasing importance of demand-side management, the costs and
risks involved in the construction of new generating capacity and the
incentives to avoid such construction, and the emergence of integrated
resource planning involving both gas and electric service as noted in the
June 1994 issue of The Electricity Journal.
In the electric area, the Energy Policy Act of 1992 and the Public
Utility Regulatory Policies Act of 1978 have introduced competition into the
electric utility business. As the chairman of the Senate Banking Committee
stated recently:
"[The Act] was substantially changed by the Energy Policy Act
of 1992. That law restructured the utility industry to promote
greater competition for the benefit of energy customers. The
Energy Policy Act of 1992 was the product of a cooperative
effort on the part of the Banking Committee and the Energy
Committee to create a more market-oriented regulatory framework
for the energy industry."
Hearing on S. 182, The Communications Act of 1994 before the Comm. on Commerce,
Science and Transportation, 103rd Cong. 2nd Sess. 344-345 (1994) (Prepared
Statement of Senator Riegle) (emphasis added). In addition, many states have
"retail wheeling" measures under discussion which are likely to have the effect
of extending electric supply competition to the retail level. Wisconsin, and
to a lesser extent Minnesota, are each in the process of evaluating various
options that could increase electric supply competition at the retail level.(25)
Instead of relying on the blunt instrument of competition between gas
and electric, national policy has now created direct competition within the gas
and electric utility industries. Thus, combination ownership does not eliminate
competition, since a combination utility now has competitors for both gas and
electric service. Moreover, competition is not an end in itself, but is merely a
means to the end of efficient, cost-effective service. Since combination
ownership creates efficiencies and no longer has the effect of eliminating
competition, there is no reason for the Commission to prohibit combination
ownership, at least under the circumstances presented here.
Nothing in the Supreme Court's NEES decisions compels a different
result. First, as the Commission noted in its Union Electric decision, the
Supreme Court's NEES decisions attached "great weight ... to [the Commission's]
expertise in the administration of the Act." 45 S.E.C. 489, 509, n.77. (1974).
The NEES decisions and the Court's reasoning in Chevron therefore leave the
Commission free to apply its expertise to administer the Act in light of
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<PAGE> 72
changes in legal, regulatory and economic circumstances which were not
foreseen at the time of the NEES decisions, including federal legislation which
has "substantially changed" the Act. See Chevron, 476 U.S. at 842.
Second, as noted by the Commission in Union Electric and later
decisions, the NEES decisions are based on premises and policies that are no
longer operative. See Delmarva Power & Light Co., et. al., 46 S.E.C. 710, 716
(1976) ("the objective of promoting retail competition between gas and
electricity, which was stressed in the NEES opinions, is less critical now.");
Union Electric Co., 45 S.E.C. 489, 510 (1974), City of Cape Girardeau, Missouri
v. S.E.C., 521 F.2d 324 (D.C. Cir. 1974) (describing as "outmoded" the
Commissions' previous policy to "promot[e] the wider...use of gas and electric
energy" and to "foster...variegated competition between gas and electricity and
the attendant promotion of the use of each;" holding that "the maximization of
energy use seems a questionable public policy objective" and that "[i]n today's
world the public interest and the long-run consumer interest seem to call for
prudent conservation and rational allocation" of resources).
(B) and (C) clauses: The remaining requirements of Section 11(b)(1) are
met because the gas operations of WP&L (including South Beloit), Utilities and
IPC are located in adjoining states (Wisconsin, Illinois, Iowa and Minnesota)
and because the combination of the gas operations under Interstate Energy is not
so large (considering the state of the art and the area or region affected) as
to impair the advantages of localized management, efficient operation or the
effectiveness of regulation. The gas systems are confined to a relatively small
area and are not as large as other gas systems in the states served by the
applicants and will preserve the advantages of localized management, efficient
operation and effectiveness of regulation. The Commission has recognized
elsewhere that the determinative consideration is not size alone or size in an
absolute sense, either big or small, but size in relation to its effect, if any,
on localized management, efficient operation and effective regulation. From
these perspectives, it is clear that the continued combination of the gas
operations under Interstate Energy is not too large. Following the Transaction,
the gas operations of WP&L, South Beloit, Utilities and IPC, with approximately
370,000 customers in four states, will be smaller than the following companies
which have gas operations in such states: Minnegasco (which has 630,000
customers in Minnesota), Northern Illinois Gas Company (1,769,800 customers in
Illinois), Mid-American Energy (which has 467,547 customers in Iowa), People's
Gas Light and Coke Company (which has 842,510 customers in the Chicago area),
Utilicorp United (288,093 customers in Iowa and Minnesota), and the proposed
combination of Wisconsin Electric Power Company and Northern States Power
Company (750,000 customers predominately in Minnesota and Wisconsin). These
companies all provide service in the same states as the applicants.
With respect to localized management, management will remain
geographically close to each of the three gas operations, thereby preserving the
advantages of localized management. WP&L (and South Beloit), Utilities and IPC
will be operated as separate subsidiaries of Interstate Energy for at least
three years after the consummation of the Transaction and will continue to be
headquartered in Madison, Wisconsin, Cedar Rapids, Iowa and Dubuque, Iowa,
respectively. From the standpoint of regulatory effectiveness, each gas
operation is organized as a separate corporation and will continue to be subject
to regulation by the respective state in which such gas operation is located,
which will ensure the continued effectiveness of state regulation. IPC already
operates a multi-jurisdictional (Iowa, Illinois and
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<PAGE> 73
Minnesota) gas utility, as does WP&L directly and through its subsidiary, South
Beloit (Wisconsin and Illinois). Several other gas utilities in the region serve
customers in multiple states. Accordingly, the regulating agencies in the four
state region currently regulate multi- jurisdictional gas utilities and will be
able to effectively regulate the gas utility operations of Interstate Energy. In
addition, it is expected that each relevant state regulatory authority will
indicate its support for or order the retention by Interstate Energy of the gas
system(s) located in such state, thereby indicating that state regulating
authorities can continue to regulate such system effectively. Finally, as
detailed above, the gas operations of WP&L (including South Beloit), Utilities
and IPC enjoy substantial economies as part of the WPLH, IES and IPC systems,
respectively, and will realize additional economies as a result of the
Transaction as part of the Interstate Energy system. Far from impairing the
advantages of efficient operation, the continued combination of the gas
operations under Interstate Energy will facilitate and enhance the efficiency of
gas operations.
In recent months the Commission has been presented with several real,
rather than hypothetical, opportunities to assess the recommendations of the
Division made in the 1995 Report as to the appropriateness of combination
electric and gas companies under the Act as several companies seeking to
implement convergence mergers have filed applications with the Commission. At
the same time, merger opponents have sought to persuade the Commission that the
Commission should not implement the Division's recommendations.
In July and August of 1997, the Commission approved three convergence
mergers clarifying that the Act does not prohibit combination electric and gas
companies of the type sought to be created in the instant situation.(26) In the
words of the Commission, the Act "does not prohibit ownership of combination gas
and electric systems." New Century Energies, Inc., Holding Co. Act Release No.
26748 at 27.
The Commission's actions in approving three new convergence
transactions upon a showing of loss of economies are consistent with the
recommendations set forth in the 1995 Report. In approving the formation of New
Century Energies as a combination gas and electric registered holding company,
the Commission stated:
The Commission has previously taken notice of developments
that have occurred in the gas and electric industries in
recent years, and has interpreted the Act and has analyzed
proposed transactions in light of these changed
circumstances... The gas and electric industries are
converging, and, in these circumstances, separation of gas and
electric businesses may cause the separated entities to be
weaker competitors than they would be together. This factor
adds to the quantifiable loss of economies caused by increased
costs.
New Century Energies, Inc., Holding Co. Act Release No. 26748 at 30-31.
Most importantly, the Commission distanced itself from the
earlier more restrictive precedent of the decision in New England Electric
System, 41 S.E.C. 888 (1964) ("NEES") stating:
In the 1960s, when the NEES case was decided, utilities were
primarily franchised monopolies with captive ratepayers, and
competition between suppliers of gas and electricity, however
limited, was virtually the only source of customer choice and
was thus deemed beneficial to energy consumers. The fact that
other gas utilities of comparable size could operate
successfully on an independent basis was evidence that a gas
system could also operate on its own, a desirable result,
without a substantial loss of economies. The empirical basis
for these assumptions, however, is rapidly eroding. Although
franchised monopolies are still the rule, competition is
increasing. Increased expenses of separate operation may no
longer be offset, as they were in New England Electric System
by a gain of qualitative competitive benefits, but rather may
be compounded by a loss of such benefits...
New Century Energies, Inc., Holding Co. Act Release No. 26748 at 32.
The logic of the New Century Energies decision is equally
compelling in the instant situation. It is the intention of the Applicants that
the separate gas properties of the Applicants be integrated and operated as a
single economic system in conjunction with Applicants' electric system in order
to better provide competitive comprehensive energy services to Applicants'
customers. Because today the properties are operated as separate entities and
Section 11(b)(1)(A), (B) and (C) appear to require an analysis of "[e]ach such
additional system," the original loss-of-economies analysis looked at
divestiture as three separate gas systems, preserving their present status of
being independent from one another, which produced annual lost economies that
are estimated to be $34.3 million per annum. If the gas integration and
coordination plan discussed above was in effect and these properties were to be
divested as a single multistate gas utility company, annual lost economies are
still estimated to be $27.4 million per annum.
In either case, the lost economies are substantial in an industry in
which there are already many companies competing with Applicants for the
provision of comprehensive energy services in Applicants' service territory
and, where there is not yet competition, lost economies may well result in
increased retail rates. Competition between energy suppliers can only benefit
consumers. Increasingly, the competitors are themselves suppliers of
comprehensive energy services just like New Century Energies, Inc., TUC Holding
Company and Houston Industries Incorporated.
The chief savings achieved by operation of the three properties as a
single multistate gas property arises from the complete elimination of the
administrative costs of one of the larger companies. The non-field operations
are assumed to be met by the executive and administrative operations of the
other two companies. Thus, the $34.3 million of annual lost economies of
operating as three companies becomes $27.4 of lost economies on and integrated
basis, which as the following table shows is still significant in a very
competitive industry:
TABLE
RELATIVE LOST ECONOMIES DUE TO DIVESTITURE OF
THE COMBINED NATURAL GAS OPERATION
OF IEC
(BASED ON 1995 RESULTS)
<TABLE>
<CAPTION>
diseconomies
revenues diseconomies as a percent
$(000's) $(000's) of revenue
<S> <C> <C> <C>
TOTAL GAS OPERATING REVENUE $332,047 $27,327.3 8.23%
TOTAL GAS OPERATING REVENUE DEDUCTIONS $297,750 $27,327.3 9.18%
GROSS NATURAL GAS OPERATING INCOME $ 42,738 $27,327.3 63.94%
NET NATURAL GAS OPERATING INCOME $ 26,309 $27,327.3 103.87%
</TABLE>
The Applicants have prepared and submitted as Exhibit L-6 a
Supplemental Study analyzing the impact of the divestiture of their gas
operations (the "Supplemental Study"). The Supplemental Study focuses on the
combined gas properties of the Applicants creating one gas system.
Section 11(b) (1) of the Act generally requires a registered holding
company system to limit its operations "to a single integrated public utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system." Section 11(b) (1) of the Act expressly permits a
registered holding company to control one or more "additional integrated public
utility systems" if (A) each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can be
secured by the retention of control by such holding company of such system; (B)
all of such additional systems are located in one state, adjoining states, or a
contiguous foreign country; and (C) the continued combination of such systems
under the control of such holding company is not so large (considering the state
of the art and the area or region affected) as to impair the advantages of
localized management, efficient, efficient operation, or the effectiveness of
regulation.
The Commission has consistently relied upon the Supreme Court decisions
in SEC v. New England Elec. Sys., 390 U.S. 207 (1968) ("NEES I") and SEC v. New
England Elec. Sys., 390 U.S. 207 (1968) ("NEES II") to interpret Clause (A) of
Section 11(b)(1). Moreover, to determine whether lost economies are
"substantial" for purposes of Section 11(b)(1)(A), the Commission has
consistently given consideration to four ratios cited in the cases. These ratios
measure the projected loss of economies of a potential divestiture as a
percentage of: (1) total gas operating revenues, (2) total gas expense or
"operating revenue deductions," (3) gross gas income, and (4) net gas income or
net gas utility operating income. Although the ratios are not bright-line rules
to identify substantial lost economies, the Commission suggested in an early
leading decision that cost increases resulting in a 6.78% loss of operating
revenues, a 9.72% increase in operating revenue deductions, a 25.44% loss of
gross income and a 42.46% loss of net income would afford an "impressive basis
for finding a loss of substantial economies." Engineers Public Service Co., 12
SEC 41, 59 (1942), rev'd on other grounds and remanded, 138 F.2d 936 (D.C. Cir.
1943), vacated as moot, 332 U.S. 788 (1947).
The Supplemental Study submitted as Exhibit L-6 by the Applicants
indicates that the costs increases that would result from sever ance of the gas
properties would satisfy, and in almost all instances exceed, those thresholds.
As set forth in the Supplemental Study, divestiture of the gas
operations of WPLH, IES and IPC into one stand-alone company would result in
lost economies of approximately $27.9 million. On a percentage basis, the
Supplemental Study indicates that divesture of the gas operations would amount
to 8.45% of total gas operating revenues, 9.65% of total gas operating revenue
deductions, 68.11% of gross gas income and 101.71% of net gas income.
The Supplemental Study indicates further that in order to recover these
lost economies, the single, new stand-alone company divested from MPLH, IES and
IPC would need to increase customer rates by 8.45% ($27.9 million) in order to
provide a 10.39% rate of return on rate base. In the absence of rate relief, the
Supplemental Study concludes that the lost economies would result in
approximately a 5% rate of return on rate base for the gas operations.
ii. Retention of Other Businesses
As a result of the Transaction, the non-utility businesses and
interests of WPLH, IES and IPC described in Item 1.B.5. above will become
businesses and interests of Interstate Energy. Certain of such businesses will
be held directly by Interstate Hold. In addition, the subsidiaries, affiliates
and associates of these non-utility businesses will become indirect
subsidiaries, affiliates and associates, respectively, of Interstate Energy.
As noted above, prior to consummation of the Transaction, a new
wholly-owned subsidiary, Interstate Hold, will be established by WPLH. Upon
consummation of the Transaction, Interstate Hold will be a direct wholly-owned
subsidiary of Interstate Energy which will replace HDC and Diversified as the
holding company for many of the non-utility subsidiaries and interests of WPLH
and IES. To accomplish this new structure, HDC and Diversified will be merged
into Interstate Hold and the existing 1.9% minority interest in HDC will be
eliminated. Corporate charts showing the existing subsidiaries, including
non-utility subsidiaries, of WPLH and IES, are filed as Exhibits M-1 and M-2
and updated by Exhibits M-4 and M-5. A corporate chart showing the projected
arrangement of these subsidiaries under Interstate Energy is filed as Exhibit
A. To simplify further its corporate structure, Interstate Energy may
combine certain of its non-utility businesses which it is authorized to retain
by the Commission following the Transaction.
Standard for retention: Section 11(b)(1) permits a registered holding
company to retain "such other businesses as are reasonably incidental, or
economically necessary or appropriate, to the operations of [an] integrated
public utility system." Under the cases interpreting Section 11, an interest is
retainable if (1) there is an operating or functional relationship between the
operations of the utility system and the non-utility business sought to be
retained, and retention is in the public interest(27) or if (2) the business
evolved out of the system's utility business, the investment is not significant
in relation to the system's total financial resources, and the investment has
the potential to produce benefits for investors and/or consumers.(28) In
addition, the Commission has stated that "retainable non-utility interests
should occupy a clearly subordinate position to the integrated system
constituting the primary business of the registered holding company."29
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The majority of Interstate Energy's non-utility businesses would be
considered energy-related companies under the Commission's proposed Rule 58.
Under proposed Rule 58, an energy-related company is a company that derives or
will derive substantially all of its revenues (exclusive of revenues from
temporary investments) from one of the twelve businesses described in the Rule
and from such other activities and investments as the Commission may approve
under Section 10.
In the 1995 Report, in addition to the proposed Rule 58 safe harbor for
energy-related diversification, the Division suggested the adoption of a de
minimus "budget approach" for limited investments in activities which do not fit
within previous orders of the Commission, yet appear to be within the meaning of
the "other businesses" clauses of Section 11. The Division suggested that this
approach would allow registered holding companies to make minimal investments
without regard to the identity of each investment up to a certain authorized
amount, provided certain structural considerations were observed which limited
the potential losses to the amount of the investment and insulated the other
system assets by isolating the activity in a separate subsidiary.(30)
Upon the consummation of the Transaction, each of the non-utility
investments retained by Interstate Energy from WPLH and those to be acquired by
Interstate Energy from IES and IPC will become subject to the jurisdiction of,
and regulation by, the PSCW pursuant to the Wisconsin Act as described above in
Item 1.B.1.a. The policy of the Wisconsin Act is set forth in its preamble and
explicitly recognizes that the financial health of a public utility depends upon
the economic well-being of its service area and encourages the conduct of
substantial business by the utility within the service area by, among other
things, providing investment capital for new ventures. To foster these
objectives, and to ensure safe and reliable service at competitive rates, the
Wisconsin Act contains provisions concerning oversight by the PSCW of the
diversification and community investment permitted and encouraged by the
statute.(31) As previously described, among other things, the Wisconsin
Act provides for (1) a cap on amounts invested in diversified
non-utility businesses; (2) annual reporting requirements with respect to the
total amount of assets held by non-utility affiliates, amounts located within
the state and number of employees; and (3) periodic investigations by the state
commission at least every three years. Furthermore, the PSCW is required to
consider whether the non- utility affiliates (1) substantially retain,
attract or promote business activities or employment or provide capital to
businesses being formed or operating in the service territory of any public
utility affiliate; or (2) develop or operate commercial or industrial parks
in the service territory of any public utility affiliate. Each non-utility
investment retained by Interstate Energy from WPLH has been subject to analysis
by the PSCW in accordance with these requirements, and each non-utility
investment retained (including those obtained from IES and IPC) will be
subject to ongoing regulation under the Wisconsin Act. Because the extensive
regulation to which these investments will be subject ensures such investments
are and will be in the best interests of investors and consumers, the
Commission should allow retention under Section 11's "other businesses"
clause.
As set forth more fully in Exhibit M-5, the non-utility business
interests that Interstate Energy will hold through Interstate Hold or
through utility subsidiaries meet the Commission's standards for retention.
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In addition to these specific factors in support of retention, a number
of more general considerations support Interstate Energy's retention of the
non-utility businesses of
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WPLH, IES and IPC. First, the businesses in question provide benefits to
customers, investors and the public. Second, the Transaction is, at heart, a
utility combination, in which the non-utility businesses are small and only
incidentally involved, amounting, in the aggregate, to less than 15% of the
consolidated assets and 12% of consolidated revenues of the Interstate Energy
system. Third, this is not a case in which an existing registered holding
company system is acquiring new non-utility interests; rather, Interstate Energy
is only seeking authorization to retain the non-utility interests held by WPLH,
IES and IPC before the Transaction. Finally, state holding company regulation
has developed (such as the Wisconsin Act) which dictates what investments are
"necessary or appropriate in the public interest" and are "not detrimental to
the proper functioning" of a holding company. WPLH's investments were made in
accordance with the rigorous statutory limitations of the Wisconsin Act
applicable to non-utility diversification and continue to be subject to periodic
audits by the PSCW under the Wisconsin Act. When held by Interstate Energy all
of the non-utility businesses of Interstate Energy will be subject to such
review.
Rule 53 requires that aggregate investments in EWGs and FUCOs not
exceed 50% of the system's consolidated retained earnings. As of December 31,
1995, WPLH, IES and IPC had no investments in EWG's and their aggregate
investments in FUCOs was less than 2% of combined retained earnings, well within
the amount permitted.
Proposed Rule 58 would require that the aggregate investment in "energy
related" companies not exceed 15% of the consolidated capitalization of a
registered holding company. As of December 31, 1995, the aggregate investment in
"energy related" companies of WPLH, IES and IPC would come within that
limitation. Because these businesses pre-existed the application of the Act to
WPLH, IES and IPC, it is not intended to rely on Rule 58 for retention of the
businesses but rather to rely on the legal precedents discussed in Exhibit M-5
hereto which is hereby incorporated by reference to this Item 3.A.2.a.ii.
b. Section 10(c)(2)
The Transaction will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the public
interest, as required by Section 10(c)(2) of the Act.
i. Efficiencies and Economies
The Transaction will produce economies and efficiencies more than
sufficient to satisfy the standards of Section 10(c)(2), described above.
Although some of the anticipated economies and efficiencies will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met. See American Electric
Power Co., 46 S.E.C. 1299, 1320-21 (1978). Some potential benefits cannot be
precisely estimated; nevertheless they too are entitled to be considered:
"[S]pecific dollar forecasts of future savings are not necessarily required; a
demonstrated potential for economies will suffice even when these are not
precisely quantifiable." Centerior Energy Corp., Holding Co. Act Release No.
24073 (April 29, 1986).
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Despite the passage of time since the first filing of Form U-1 under
the Act, WPLH, IES and IPC still believe the nominal dollar net value of
synergies from the Transaction to be approximately $749 million over the first
10-year period from 1997 to 2006. The Transaction is expected to yield several
types of presently quantifiable benefits: (1) corporate and operations labor
cost savings; (2) corporate and administrative programs cost savings; (3)
non-fuel purchasing economies savings; (4) production cost savings; and (5) gas
supply cost savings. The amount of savings currently estimated in each of these
categories, on a nominal dollar basis, is summarized in the table below:
Transaction Synergies
(Nominal Dollars)
Category Amount (Millions)
<TABLE>
<S> <C>
Corporate and Operations Labor Savings $380.5
Corporate and Administrative Programs 149.1
Non-fuel Purchasing Economies Savings 60.2
Production Cost Savings 220.9
Gas Supply Cost Savings 23.6
Less: Costs to Achieve 85.3
Net Total Estimated Savings $749.0
-----
</TABLE>
These expected savings far exceed the savings claimed in a number of
recent acquisitions approved by the Commission. See, e.g., Kansas Power and
Light Co., Holding Co. Act Release No. 25465 (Feb. 5, 1992) (expected savings
of $140 million over five years); IE Industries, Holding Co. Act Release No.
25325 (June 3, 1991) (expected savings of $91 million over ten years); Midwest
Resources, Holding Co. Act Release No. 25159 (Sept. 26, 1990) (estimated
savings of $25 million over five years). These savings categories are
described in greater detail below.
Corporate and Operations Labor Cost Savings: Applicants
estimate that a net reduction in labor costs of approximately $380.5
million on a nominal dollar basis can be achieved as a result of the
Transaction through elimination of approximately 600 full time
equivalent duplicative positions in certain corporate and operations
functions.
Corporate and Administrative Programs Savings: Applicants
estimate that a reduction in non-labor corporate and administrative
expenses totalling approximately $149.1 million on a nominal dollar
basis can be achieved through consolidation of duplicative programs and
spreading expenses over greater asset or customer bases. These include
savings related to information systems, insurance costs, outside
services, shareholder services, benefits administration and other
general and administrative overheads. The aggregate cost of these items
for the companies on a stand-alone basis
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is greater than the cost will be to the combined new company. An
example would be the hiring of one outside professional service
(external auditors, attorneys, consultants, etc.) instead of three.
Non-Fuel Purchasing Economies Savings: These are the savings
which will result from the new, larger company having greater
purchasing power. Interstate Energy will be able to coordinate its
purchasing needs, buy in greater quantity, negotiate with vendors and
receive larger discounts. Applicants estimate cost savings of
approximately $60.2 million on a nominal dollar basis from such
economies.
Production Cost Savings: Applicants estimate that production
cost savings (including fuel savings) of approximately $220.9 million
on a nominal dollar basis will result from the combined operation of
the three companies' generation and transmission systems, including the
integrated economic dispatch of such systems and electric fuel
procurement savings. WPLH, IES and IPC currently commit and dispatch
their respective systems on an "economic dispatch" basis; that is, each
company commits and dispatches its generating system to meet the load
in such manner as to minimize production costs. There are differences
in incremental cost between the three systems, as well as generation
available on each system during most hours. Interstate Energy will be
able to take advantage of these factors by committing and dispatching
the lowest cost generation from WP&L, Utilities and IPC to serve the
total load of Interstate Energy at a cost that is lower than the
combined cost of the three stand-alone companies.
Gas Supply Cost Savings: Applicants estimate savings of
approximately $23.6 million on a nominal dollar basis can be achieved
by the combined companies in gas supply costs by optimization of
transportation capacity on various gas pipelines, improving utilization
of no-notice service, shortening storage withdrawal periods and
avoiding duplication of reserve margins through supply integration.
(less)
Costs to Achieve: This consists of merger costs such as
investment bankers' fees, attorney and accountant fees, and severance
and other employee reduction-related costs. Item 2 provides details of
some of these components and their amounts.
Additional Expected Benefits: In addition to the benefits
described above, there are other benefits which, while presently
difficult to quantify, are nonetheless substantial. These other
benefits include maintenance of competitive rates and services,
increased size and stability, diversification of service territory,
coordination of diversification programs, complementary operational
functions and complementary management.
Maintenance of Competitive Rates: Interstate Energy will be
more effective in meeting the challenges of the increasingly
competitive environment in the utility industry than any of WPLH, IES
or IPC standing alone due to the economies of scale available
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to Interstate Energy. The impact of these economies of scale, which are
described in greater detail below, will help to position Interstate
Energy to deal effectively with increased competition with respect to
rates. The Mergers, by creating the potential for increased economies
of scale, will create the opportunity for strategic, financial and
operational benefits for customers in the form of more competitive
rates over the long term and for shareowners in the form of greater
financial strength and financial flexibility.
Integration of Corporate and Administrative Functions:
Interstate Energy will be able to consolidate certain corporate and
administrative functions of WPLH, IES and IPC, thereby eliminating
duplicative positions, reducing other non-labor corporate and
administrative expenses and limiting or avoiding duplicative
expenditures for administrative and customer service programs and
information systems. A joint transition task force is examining the
manner in which to best organize and manage the businesses of
Interstate Energy and identify duplicative positions in the corporate
and administrative areas. It is anticipated that, as a result of
combining staff and other functions, Interstate Energy will have
somewhat fewer employees within several years than WPLH, IES and IPC
currently have in the aggregate. WPLH, IES and IPC are committed to
achieve cost savings in the area of personnel reductions through
attrition, strictly controlled hiring, and reassignment and retaining
and, to the extent required, severance and targeted early retirement
programs. In addition, some savings in areas such as insurance and
regulatory costs and legal, audit and consulting fees are expected to
be realized.
Reduced Operating Costs: The combination should result in
decreased electric production costs through the joint dispatch of the
systems. Natural gas supply savings through combined purchasing are
also anticipated.
Purchasing Economies and Streamlining of Inventories: The
combination of the three companies should result in greater purchasing
power for items such as fuel and transportation services and general
and operational goods and services, and the reduction of inventories
for standardized materials and supplies for construction, operations
and maintenance within the combined generation, transmission and
distribution systems.
Coordination of Diversification Programs: WPLH and IES each
have significant non-utility subsidiaries, and Interstate Energy, as a
stronger financial entity, should be able to manage and pursue such
subsidiary businesses more efficiently and effectively. WPLH and IES
currently engage in a number of diversified businesses, some of which
are complementary. To the extent such complementary businesses are
combined and able to collaborate in the pursuit of market
opportunities, benefits from economies of scale should be obtained and
thereby improve the performance of these businesses. Furthermore, due
to the larger capital base of Interstate Energy, the financial
flexibility will exist to support the existing businesses as well as to
advantage of new business opportunities as they arise.
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More Diverse Service Territory: The combined service
territories of WP&L, Utilities and IPC will be larger and more diverse
than any of the service territories of WP&L, Utilities or IPC as
independent entities. This increased customer and geographical
diversity is expected to reduce the exposure to changes in economic,
competitive or climatic conditions in any given sector of the combined
service territory.
Expanded Management Resources: In combination, WPLH, IES and IPC will
be able to draw on a larger and more diverse mid- and senior-level management
pool to lead Interstate Energy forward in an increasingly competitive
environment for the delivery of energy and should be better able to attract and
retain the most qualified employees. The employees of Interstate Energy should
also benefit from new opportunities in the expanded organization.
ii. Integrated Public Utility System
I. Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants
and/or transmission lines and/or distributing facilities, whose
utility assets, whether owned by one or more electric utility
companies, are physically interconnected or capable of physical
interconnection and which under normal conditions may be
economically operated as a single interconnected and
coordinated system confined in its operation to a single area
or region, in one or more states, not so large as to impair
(considering the state of the art and the area or region
affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation.
On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
public utility system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected
or capable of physical interconnection;
(2) the utility assets, under normal conditions, may be
economically operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area
or region; and
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(4) the system must not be so large as to impair (considering the state
of the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
Environmental Action, Inc. v. S.E.C., 895 F.2d 1255, 1263 (9th Cir. 1990)
(citing In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958)). The
Transaction satisfies all four of these requirements. It should be noted that
in the 1995 Report, the Division recommended that the Commission "respond
realistically to the changes in the utility industry and interpret more
flexibly each piece of the integration equation."(32)
First, as described in Item 1.B.3. above, the Utilities system and the IPC
system are physically connected by three 161kV lines and the East 345 kV
Line. In addition, the WP&L system and the combined Utilities/IPC systems are
capable of interconnection through the construction of two new transmission
tie-lines, construction of which is planned for completion within five years of
the effective time of the Transaction. When authorized by FERC, a 69 kV
tie-line approximately 3.5 miles in length will be constructed across the
Mississippi River connecting WP&L's Hillside substation near Prairie du
Chien, Wisconsin with IPC's 69kV line at MacGregor, Iowa on the west side of
the river. This overhead line will be constructed on a right-of-way from a
previously existing connection between WP&L and IPC which remains under
their control. Also, a 161 kV overhead line approximately 2.5 miles in
length will be constructed across the Mississippi River from WP&L's Nelson
Dewey generating plant on the east to IPC's Turkey River substation on the
west side of the river. The capability of this interconnection would be
approximately 200 MW. It is currently estimated that the total cost associated
with constructing the interconnection lines will be $4 million (in 1996
dollars).
These additional interconnects will further the economic operation of
the Interstate Energy system by enabling it to achieve additional
production-related synergies. Indeed, the plans for the construction of the two
lines are not related to any requirement of the Act, but rather to the
substantial benefits that will accrue as a result of the lines.
The Commission has previously indicated that a single integrated system
exists even based solely on a planned, future interconnection, provided that
such physical interconnection is "contemplated or . . . possible within the
reasonably near future" and not just something that "might occur in the remote
future, and whose occurrence has not been foreshadowed by any facts shown in the
record."(33) The benefits to be derived by the new transmission lines are also a
factor in determining whether the system is capable of physical
interconnection.(34) The fact that the Commission has indicated that, absent
special circumstances, the "reasonably near future" mentioned above, should not
exceed 10 years, (35) is not an issue in this case as the parties have definite
plans to construct the two interconnections that will be in service and
generating economies within 5 years of the consummation of the Transaction.
Second, WP&L, Utilities and IPC will be economically operated as a
single interconnected and coordinated system. The combined system will be
centrally and economically
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dispatched and generating units committed as a single integrated system. Upon
consummation of the Transaction, WP&L, Utilities, IPC and Interstate Services
will enter into the Coordination Agreement which will be filed with and approved
by FERC. The Coordination Agreement will provide for joint dispatch of the
combined generating resources of WP&L, Utilities and IPC, and will contain the
terms, conditions and payment provisions associated with energy exchanges,
resource sharing and other transactions among the companies. Pursuant to the
Coordination Agreement, generation and tie-line data of all three systems will
be fed into a common dispatch computer to economically dispatch the combined
system taking into account the existing 1,339 MW of interconnection capacity
between IPC and Utilities and the proposed 250 MW of interconnection capacity
between IPC and WP&L. The studies which projected the level of production costs
savings in this Application/Declaration were based upon this same
interconnection capacity. In order to facilitate joint economic dispatch
throughout the Interstate Energy system, applicants anticipate that Interstate
Energy will enter into one or more contractual arrangements for the purchase of
200 MW of firm transmission service between the IPC and WP&L systems from one of
three neighboring electric systems, each of which has indicated that it has such
service available for sale to WP&L and/or IPC. Such purchased transmission
service will generally be sufficient to facilitate joint economic dispatch
throughout the Interstate Energy system. However, there may be instances when
transactions in excess of 200 MW between the Iowa and Wisconsin portions of the
Interstate Energy system will be made based upon economic dispatch
opportunities. In such situations, additional non-firm transmission service
would be purchased, subject to availability, from one of the neighboring
electric systems.
As members of MAPP, both IPC and Utilities are subject to the MAPP
transmission use agreement and the MAPP loss reimbursement agreement. These MAPP
agreements identify third party impacts for member transactions and make the
appropriate charges to transacting parties so that third parties within MAPP
receive transmission line use fees and line loss reimbursement. Transactions
between IPC, Utilities and WP&L which are required for joint economic dispatch
purposes will be covered under these MAPP agreements. Thus, MAPP members will
receive compensation for third party impacts caused by the joint economic
dispatch activities of the utility subsidiaries of Interstate Energy. No such
mechanism exists nor is one required for compensation of third party impacts on
non-MAPP utilities.
For integration purposes under the Act, what is relevant is that
Interstate Energy will have sufficient internal transmission capacity to fully
accommodate the anticipated transfers between WP&L, Utilities and IPC under
central economic dispatch, and will obtain transmission service from neighboring
utilities to accommodate any transfers that might exceed the capabilities of its
system.
Third, the integrated Interstate Energy electric system will operate in
a single area or region. The system will operate in four contiguous states
(Wisconsin, Iowa, Illinois and Minnesota) in the north central area of the
United States delineated on Exhibit G-4. In the 1995 Report, the Division has
stated that the evaluation of the "single area or region" portion of the
integration requirement "should be made... in light of the effect of
technological advances on the ability to transmit electric energy economically
over longer distance, and other developments
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in the industry, such as brokers and marketers, that affect the concept of
geographic integration."(36) The 1995 Report also recommends primacy be given to
"demonstrated economies and efficiencies to satisfy the integration
requirements."(37) As set forth in Item 3.A.2.b.i, the Transaction will result
in economies and efficiencies for the utilities and, in turn, their customers.
Fourth, the Interstate Energy electric system will not be so large as
to impair the advantages of localized management, efficient operations, and the
effectiveness of regulation. The Commission's past decisions on "localized
management" show that the Transaction fully preserves the advantages of
localized management. In such cases, the Commission has evaluated localized
management in terms of: (i) responsiveness to local needs, see American Electric
Power Co., Holding Co. Act Release No. 20633 (Jul. 21, 1978) (advantages of
localized management evaluated in terms of whether an enlarged system could be
"responsive to local needs"); General Public Utilities Corp., 37 S.E.C. 28, 36
(1956) (localized management evaluated in terms of "local problems and matters
involving relations with consumers"); (ii) whether management and directors were
drawn from local utilities, see Centerior Energy Corp., Holding Co. Act Release
No. 24073 (April 29, 1986) (advantages of localized management would not be
compromised by the affiliation of two electric utilities under a new holding
company because the new holding company's "management [would be] drawn from the
present management" of the two utilities); Northeast Utilities, Holding Co. Act
Release No. 25221 (December 21, 1990) (advantages of localized management would
be preserved in part because the board of the New Hampshire Utility, which was
to be by an out-of-state holding company, included "four New Hampshire
residents"); (iii) the preservation of corporate identities, see Northeast
Utilities, Holding Co. Act Release No. 25221 (December 21, 1990) (utilities
"will be maintained as separate New Hampshire corporations... [t]herefore the
advantages of localized management will be preserved"); Columbia Gas System,
Inc., Holding Co. Act Release No. 24599 (March 15, 1988) (benefits of local
management maintained where the utility to be added would be a separate
subsidiary); and (iv) the ease of communications, see American Electric Power
Co., Holding Co. Act Release No. 20633 (Jul. 21, 1978) (distance of corporate
headquarters from local management was a "less important factor in determining
what is in the public interest" given the "present-day ease of communications
and transportation").
The Transaction satisfies all of these factors. WP&L, Utilities and IPC
will continue to operate through regional offices with local service personnel
and line crews available to respond to customers' needs. In addition, the new
management and Board of Directors of Interstate Energy is expected to be drawn
primarily from the existing management and boards of WPLH, IES, IPC and their
subsidiaries.
After the Transaction, WP&L, Utilities and IPC will maintain their
current headquarters as subsidiary headquarters and as local operating
headquarters for the areas they presently serve, while Interstate Energy will
maintain system headquarters in Madison, Wisconsin. Although the location of the
corporate headquarters of Interstate Energy will add distance from customers who
are served by Utilities and IPC, this distance is, as noted by the Commission in
the American Electric Power case, a relatively unimportant factor given the
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present ease of transportation and communications and the retention of the
headquarters of Utilities and IPC at their present locations. This structure
will preserve all the benefits of localized management WP&L, Utilities and IPC
presently enjoy while simultaneously allowing for the efficiencies and economies
that will derive from their strategic alliance. Furthermore, as described
earlier, the system will facilitate efficient operation.
Additionally, the Interstate Energy system will not impair the
effectiveness of state regulation. WP&L, Utilities and IPC will continue their
separate existence as before and their utility operations will remain subject to
the same regulatory authorities by which they are presently regulated, namely
the PSCW, IUB, ICC, MPUC, the FERC and the NRC. WP&L, Utilities and IPC are
working closely with the PSCW, IUB, ICC and MPUC as well as the FERC and the NRC
to ensure they are well informed about this Transaction, and this Transaction
will not be consummated unless all required regulatory approvals are obtained.
Pursuant to the recommendations contained in the 1995 Report, this last factor
is significant. As the Division stated therein "when the affected state and
local regulators concur, the [Commission] should interpret the integration
standard flexibly to permit non-traditional systems if the standards of the Act
are otherwise met,"(38) especially since this Transaction will result in a
system similar to the traditional registered holding company system.
IEC will be an integrated electric system within the meaning
of Section 2(a)(29)(A) of the Act. IEC will be operated as a single system,
economically dispatched pursuant to the Coordination Agreement. Utilities and
IPC ("IEC West") are presently directly interconnected(39) and WP&L and South
Beloit ("IEC East") are presently directly interconnected.(40) IEC West and IEC
East are presently interconnected through firm contractual wheeling arrangements
with third parties(41) and through MAPP.(42) Additionally, IEC intends to build
two tie-lines (aggregating 250 MW of transfer capability) between IEC West and
IEC East.(43) In the Federal Energy Regulatory Commission Initial Decision on
Rate and Merger Issues (Issued July 3, 1997) (the "Initial FERC Decision"), the
Administrative Law Judge, however, ordered the Applicants to delay construction
of the tie-lines between IEC West and IEC East until the Applicants have
constructed 400 MW of additional simultaneous import capability into the
Wisconsin Upper Michigan System ("WUMS"). IES Utilities et al, 80 F.E.R.C.
Paragraph 63,001, 21 (1997).
On November 12, 1997, the Federal Energy Regulatory Commission
(the "FERC") issued its decision on the merger. IES Utilities, Inc. et al.,
Opinion No. 419, 81 FERC Paragraph 61, ___ (1997) ("Opinion No. 419"). In
Opinion No. 419, the FERC accepted a competition stipulation that had been
negotiated by the Applicants and the FERC trial staff, as modified to include an
extra condition imposed by the presiding Administrative Law Judge. The
competitive stipulation, as modified, generally addresses the Applicants' use of
firm transmission service purchased from ComEd and DPC in order to achieve joint
dispatch; Applicants' proposal to construct two additional transmission lines
between IEC West and IEC East at a future time; Applicants' proposal to make
eight specified transmission improvements to increase transfer capability into
WUMS; Applicants' obligation to purchase additional point-to-point transmission
service if joint dispatch transfers between IEC West and IEC East exceed the
contract path quantity; and alternative dispute resolution and additional
efforts to increase transfer capability into WUMS if the specified measures are
not fully successful.
The record developed in the FERC proceeding demonstrates that,
at present, although IEC West and IEC East are interconnected through
neighboring utilities, there are no high voltage connections directly between
Iowa and WUMS. Initial FERC Decision at 30. Additionally, the transmission
capability between Iowa and WUMS is limited. In short, power cannot go straight
from Iowa to WUMS but must flow across the grid which is already constrained. As
a result of physics, due to the nature of the way power flows across the grid
and the engineering peculiarities of the Iowa-WUMS interface, the joint dispatch
of the Applicants' generating facilities through use of their 200 MW of
transmission rights(44) will result in the Applicants' using up much of the
import capability into WUMS thereby during times of system constraint preventing
competitors of the Applicants from selling power into WUMS.
The immediate construction of the tie-lines(45) will, for
reasons of physics and engineering peculiar to the Iowa-WUMS interface, not
alleviate the congestion at the constrained interface. Accordingly, the Initial
Decision and Opinion No. 419 direct the Applicants to delay construction of
their new tie-lines until the Applicants construct additional facilities to
increase the overall transfer capability into WUMS. The construction of these
additional facilities will reinforce the electrical interconnection between Iowa
and WUMS. The requirements of the competitive stipulation adopted by Opinion No.
419 are only necessary because, as a factual, physics and engineering matter,
the Applicants are currently interconnected and capable of integrated operation
to the point where they must first provide transmission capacity for others
before construction of the tie-lines.
The type and degree of physical interconnection described in
the Initial FERC Decision is sufficient to establish interconnection under the
Act for the purposes of Sections 2(a)(29)(A), 10(c)(2) and 11(b)(1). The
Commission has found that proposals to contract for or to construct physical
connections between utilities in a single system satisfy the interconnection
requirement. See New England Electric System, 38 S.E.C. 193, 198-99 (1958)
(engineering studies and testimony showing feasibility of direct
interconnections among four small systems satisfied the requirements of the Act
that utilities be "capable of physical interconnection"); Mississippi Valley
Generating Co., 36 S.E.C. 159 (1955) (while complete direct physical
interconnection between the companies involved did not currently exist, the
Commission recognized that physical interconnection was possible through the
construction of transmission lines).
Additionally, the Commission has found that two utilities that
are capable of sharing power through wheeling or power pool arrangements (as the
Applicants will be forced to do upon consummation of the Transaction pending
further construction of new transmission facilities) are physically
interconnected or capable of physical interconnection. The fact that two
facilities may be separated by other facilities that are not owned by the
holding company does not change the fact that they are interconnected or capable
of physical connection and of supplying power to one another as needed. City of
New Orleans v. SEC, 969 F.2d 1163, 1165 (D.C. Cir. 1992).
The Commission has also acknowledged that utilities can be
interconnected through power pools or by means of contractual rights to use the
lines of a third party. See Northeast Utilities, Holding Co. Act Release No.
25273 (Mar. 15, 1991); Centerior Energy Corp., Holding Co. Act Release No. 24073
(April 29, 1986); UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24,
1992). The Commission has recognized that a finding that wheeling and other
forms of sharing power through reliability councils and proposed regional
transmission groups also qualify as "interconnection" under section 2(a)(29)(A)
of the Act appears to be a logical extension of prior Commission holdings. 1995
Report at 71.
Moreover, even in the absence of the current interconnections,
the wheeling contract and the common power pool membership, the Applicants'
proposal to construct additional transmission facilities at the minimal
estimated cost of $4,400,000 would satisfy the integration requirements of the
Act. The Commission has indicated that a single integrated system exists based
solely on a planned, future interconnection, provided that such physical
interconnection is "contemplated or . . . possible within the reasonably near
future" and not just something that "might occur in the remote future, and whose
occurrence has not been foreshadowed by any facts shown in the record." In re
North American Co. and Its Subsidiaries, Holding Co. Act Release No. 4505 (Apr.
15, 1942); In re Cities Service Power & Light Corp., Holding Co. Act Release No.
5256 (Aug. 30, 1944) (integration standard met where "Derby contemplates the
construction of such interconnection facilities").
The transmission systems of IEC East and IEC West are not
directly connected currently. However, integration of the IEC East and IEC West
systems for purposes of accomplishing joint economic dispatch and reserve
sharing will be accommodated initially through the purchase of transmission
service from other utilities. In the long term, the integration will be made
through construction of transmission ties directly linking IEC East to IEC West.
The specific plan for integration of IEC East and IEC West is
as follows. During the first three years of the merger (1998-2000), IEC will
utilize firm transmission service which has already been purchased for this
purpose from other utilities to allow the needed integration. The specific
transmission purchases are 150 MW of firm from Commonwealth Edison ("ComEd") and
50 MW of firm from Dairyland Power Cooperative ("DPC"). These contracts each
began on October 1, 1997 and run through September 30, 2000. The Applicants will
report to the Commission on or before the expiration of these contracts on
future integration plans.
The current plan for the future integration is to construct
two transmission ties between IPC and WP&L in the year 2000. The specific
construction projects identified in the IEC merger filing were a 4-mile 69 kV
line from Hillside substation in Prairie du Chien, Wisconsin to MacGregor
substation in MacGregor, Iowa and a 3-mile 161 kV line from Nelson Dewey
substation in Cassville, Wisconsin to IPW's Turkey River substation located in
Iowa. The total capacity of these ties is estimated at 250 MW consisting of 50
MW for the 69 kV line and 200 MW for the 161 kV line.
The Applicants that will comprise IEC have firm transmission
agreements and anticipate that they will continue to have firm transmission
agreements until such time as the additional lines are built. Thus, if, for some
reason, the transmission ties are not constructed on time or if the future
integration between IEC East and IEC West requires more than the 250 MW of
capacity provided by the two proposed transmission ties, then IEC will continue
to purchase firm transmission service from either ComEd, DPC or Northern States
Power Company ("NSP"). Any of these three parties can currently provide the
direct transmission link between IEC East and IEC West. The capacities of the
ComEd, DPC and NSP transmission ties between IEC East and IEC West are currently
1086 MW, 464 MW and 336 MW respectively.
In the event that construction of the transmission
reinforcements described above has not begun within [180] days of the scheduled
termination of the currently effective transmission agreements, IEC will
initiate discussions with ComEd and DPC with the intent of extending the term of
the agreements. In the event that these discussions do not result in an
agreement to extend the term within [120] days of the scheduled termination of
the agreements, IEC will make arrangements to take short-term firm transmission
service under the then-effective open access transmission tariffs of ComEd, DPC
or NSP, or in the alternative, will submit a good faith request for long-term
firm transmission service under Section 211 of the FPA.
ComEd is currently interconnected with IEC East by means of a
345 kV line that runs from ComEd's Wempletown substation to the Paddock
substation in IEC East. This line has a capacity of 1086 MW, which is the
limiting segment of the IEC East-IEC West transmission path through ComEd. ComEd
is, in turn, interconnected with IEC West through two lines, rated at 345 kV and
138/161 kV, and having an aggregate capacity of 1,124 MW. The 345 kV line
connects ComEd's Quad Cities generating station with IEC East's Rock Creek
substation.
DPC is currently interconnected with IEC East by means of five
69 kV lines and one 138/161 kV line. The capacity of these six lines is 464 MW,
which is the limiting interface for the IEC East-IEC West transmission path
through DPC. DPC is, in turn, interconnected with IEC West by 32 separate
transmission lines, 11 of which are rated at 161 kV and the remaining 21 of
which are rated at 69 kV. The aggregate capacity of all of these transmission
lines is 1,004 MW. In addition, regional developments such as the MAPP
Independent System Operator ("ISO") and the Midwest ISO are currently underway.
WPL has a projected native load of 2169 MW and firm off-system sales
of 251 MW for 1998. WPL owns generation capacity totaling 2350 MW. WPL has also
purchased 421 MW of firm capacity for 1998. IPW has a projected native load of
1105 MW and firm off-system sales of 179 MW for 1998. IPW owns generation
capacity totaling 1028 MW. IPW also has purchased firm capacity of 333 MW for
1998. IES's projected native load for 1998 is 1820 MW. IES has no firm
off-system sales. IES owns generation capacity totaling 1853 MW and has
purchased firm capacity for 1998 totaling 245 MW.
Because the WPL system is not directly interconnected with either the
IES system or the IPW system, WPL has purchased a total of 200 MW of firm
transmission service between the IPW system and the WPL system for a three year
period, commencing October 1, 1997 and continuing through September 30, 2000.
150 MW of this firm transmission service was purchased from Commonwealth Edison
and the remaining 50 MW of the firm transmission service was purchased from
Dairyland Power Cooperative. The Commonwealth Edison and the Dairyland Power
Cooperative systems are directly interconnected with both the WPL and the IPW
systems. 50 MW of the total 200 MW of firm transmission service purchased by WPL
are reserved for the use of third parties. The remaining 150 MW will be used by
Interstate Energy Corporation postmerger for transferring capacity and energy
between WPL and IPW for the purposes of optimizing economic dispatch of the
generation resources of IEC as a whole and providing reliability support for
the loads in all areas of the IEC system.
The IPW and IES systems are directly interconnected by means of a
number of transmission lines at voltage levels of 69 kV, 161 kV and 345 kV. The
cumulative tie capacity of all these interconnections is 1620 MW. This tie
capacity will likewise be used for the purposes of optimizing economic dispatch
of the generation resources of IEC as a whole and providing reliability support
for the loads in all areas of the IEC system.
II. Gas Utility System
Section 2(a)(29)(B) of the Act defines an "integrated public utility
system" as applied to gas utility companies as:
a system consisting of one or more gas utility companies which
are so located and related that substantial economies may be
effectuated by being operated as a single coordinated system
confined in its operation to a single area or region, in one or
more states, not so large as to impair (considering the state
of the art and the area or region affected) the advantages of
localized management, efficient operation, and the
effectiveness of regulation: provided, that gas utility
companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
The Interstate Energy gas utility system will meet the standard set forth in
Section 2(a)(29)(B) and, therefore, will satisfy the requirements of sections
10(c)(1) and (2) and should be approved by the Commission.
First, both the Commission's limited precedent and current
technological realities indicate that the Interstate Energy gas utility system
will operate as a coordinated system confined in its operation to a single area
or region because it will derive natural gas from common sources of supply,
transportation and storage. The gas utility operations of WP&L (including South
Beloit), Utilities and IPC will operate in a single area or region covering
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portions of Wisconsin, Iowa, Minnesota and Illinois. See Exhibit G-5 hereto. The
Commission has not traditionally required that the pipeline facilities of an
integrated system be physically interconnected,(46) and instead has looked to
such issues as from whom the distribution companies within the system receive
much, although not all, of their gas supply.(47) The Commission also has
considered obtaining gas from a common pipeline(48) as well as from different
pipelines when the gas originates from the same gas field in determining a
common source of supply.(49) Since the time of most of these decisions, the
state of the art in the industry has developed to allow efficient operation of
systems whose gas supplies derive from many sources.
Because natural gas is made up of naturally occurring elements found in
geologic formations, and is not a refined energy product produced from other
fuels, the natural gas and electricity industries developed in different
structures. The gas industry developed in three separate segments:
FUNCTION OWNERSHIP
Production Independent Producers
Transmission/Storage Interstate Pipelines/Storage Companies
Distribution/Retail Sales Local Distribution Companies (LDCs)
The WP&L, Utilities and IPC gas systems will functionally perform as a
coordinated system through the purchase of natural gas from common sources of
supply, delivery through common interstate pipelines (all of which are open
access transportation only pipelines under FERC Order 636) and storage of gas in
common underground storage facilities. This coordination will also result in
greater, not lesser, efficiency.
As explained previously under Item 1.B.4.: WP&L, Utilities and IPC all
contract for interstate pipeline transportation and storage services from
Northern Natural Gas Company and Northern Border Pipeline Company, and two of
the three companies contract for transportation and/or storage services from ANR
Pipeline Company, LG&E/Llano Inc. and Natural Gas Pipeline Company of America.
In addition, all three companies procure natural gas supplies from producers in
the Gulf Coast and Canadian regions. Less significant volumes are purchased from
non-common supply areas such as the Texas/Oklahoma and Permian Basin regions.
WP&L, Utilities and IPC all use a "supply grid" approach to gas supply
procurement described in more detail in Item 1.B.4. Integrated WP&L, Utilities
and IPC gas operations would present opportunities to use an expanded supply
grid and more consolidated gas supply procurement to increase competition among
suppliers, transporters and storage providers to capture approximately $23.6
million in delivered gas cost savings. Integrated gas operations could also
offer opportunities for more efficient utilization of IPC peak shaving
operations and more efficient reserve margins. With the cooperation of the
common pipeline interconnections, the ability to engage in swap transactions
will also exist.
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Finally, the system will not be so large as to impair the advantages of
localized management or the effectiveness of regulation. As set forth in Item
3.A.2.a.(i)., localized management will be preserved. The three utilities will
maintain headquarters in Madison, Cedar Rapids and Dubuque, and local matters
will be handled by several regional offices. Management will, accordingly,
remain close to the gas operations, thereby preserving the advantages of local
management.
As also set forth in Item 3.A.2.a.i., from a regulatory standpoint,
there will be no impairment of regulatory effectiveness. The same regulators
currently overseeing these gas operations will continue to have jurisdiction
after the Transaction. Several states are already regulating
multi-jurisdictional gas utilities since other gas utilities currently operate
in some of the states to be served by Interstate Energy. IPC currently operates
gas utilities in multiple states.
For all of these reasons, the post-Transaction gas operations satisfy
the integration requirements of Section 2(A)(29)(B).
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect to such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
As described in Item 4 of this Application/Declaration, and
as evidenced by the Orders of the FERC, PSCW, MPUC, ICC and IUB, all
relating to the Transaction, Interstate Energy intends to comply with all
applicable state laws related to the proposed transaction.
4. Other Applicable Provisions - Sections 6, 7, 9(a)(1) and 12
As noted in Items 1.D. and 1.E., WPLH, IES and IPC have dividend
reinvestment plans, employee benefit plans and 401(k) savings plans, which may
require the issuance, or acquisition in open-market transactions, of common
stock. The dividend reinvestment plans of IES and IPC will be terminated as of
the date of consummation of the Transaction. The dividend reinvestment plan of
WPLH will remain (subject to certain proposed modifications) as the dividend
reinvestment plan of Interstate Energy. In addition, the employee benefits plans
(including the 401(k) plans) of IES and IPC will be amended to provide for the
acquisition or issuance of shares of Interstate Energy Common Stock in place of
IES Common Stock or IPC Common Stock, as the case may be. Additional information
concerning the anticipated terms of the dividend reinvestment plan, benefit
plans and 401(k) plans is set forth
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in Items I.D.1 - .3. To provide for the operation of these existing and amended
or replacement plans after the consummation of the Transaction and the
registration of Interstate Energy as a holding company under the Act, it is
estimated that up to 11 million shares of Interstate Energy Common Stock may
need to be issued and/or acquired in open-market or privately negotiated
transactions through December 31, 2001.
As required by Section 6 of the Act, the issuance by Interstate Energy
of shares of its common stock pursuant to such plans and to effect the
Transaction will comply with the standards of Section 7 of the Act. With
reference to Sections 7(c) and 7(d) of the Act, Interstate Energy Common Stock
will have a par value of $0.01 per share, will be Interstate Energy's only
outstanding voting security and will not be preferred as to dividends or
distributions over any other security of Interstate Energy. Interstate Energy
Common Stock is reasonably adapted to Interstate Energy's capital structure
(common stock being the cornerstone of a registered holding company's capital
structure).
Finally, applicants request authorization under Section 9(a)(1) of the
Act for Interstate Hold to acquire all of the issued and outstanding common
stock of all the diversified businesses discussed in Exhibit M-5. Applicants
believe that the reorganization of the non-utility businesses described
above as subsidiaries of Interstate Hold will be beneficial to ratepayers by
continuing to insulate the operating utilities from the results of operations
of these non-utility business entities.
B. Intra-system Financing
WPLH has entered into agreements with its non-utility subsidiaries HDC,
HPI and Capital Square to provide inter-company loans and other credit support.
Loans made by WPLH to these non-utility subsidiaries are used to finance the
specific activities of the subsidiaries or may be used to fund activities of
entities in which the subsidiaries have an equity interest. Intercompany loans
to subsidiaries bear interest at an intercompany borrowing rate which is set at
slightly above the forecasted WPLH weighted average cost of capital for the year
and is reviewed and reset, if necessary, annually. The increase over the
weighted average cost of capital is intended to cover the costs of administering
the loan agreements with subsidiaries. Intercompany loans are payable on demand.
As of May 31, 1996, WPLH had loans outstanding to HDC, HPI and Capital Square of
$17.0 million, $11.2 million, and $10.4 million, respectively.
To provide funds for these loans, WPLH has adopted an internal banking
arrangement pursuant to which any excess funds from non-utility subsidiaries are
deposited with WPLH and used to fund loans to other non-utility subsidiaries and
WPLH's own operations. Interest is paid on deposits from subsidiaries maintained
by WPLH at a rate equal to the intercompany borrowing rate described above.
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WPLH also acquires funds from loans under committed bank lines of
credit, which totalled $45,000,000 as of May 31, 1996, and through long-term
private placements of notes. WPLH periodically issues its notes, with maturities
generally ranging from 5 to 10 years, in private placement transactions with
unaffiliated third parties. Such funds are generally used to retire short-term
debt incurred to finance loans by WPLH to non-utility subsidiaries, or to
finance specific activities of WPLH or its non-utility subsidiaries.
In addition to making loans to non-utility subsidiaries, WPLH has also
guaranteed the mortgage debt of RMT, with an original principal balance of $7.4
million, and provided credit guarantees on behalf of HES. WPLH guarantees
payment of all obligations incurred by HES in connection with various power
purchase transactions.
In connection with the issuance of mortgage bonds under a master
indenture to finance affordable housing projects by various subsidiaries of HPI,
WPLH entered into a support agreement under which WPLH guarantees the
maintenance of various debt service reserve funds. Under this support agreement,
if the various properties do not provide adequate cash flow to cover debt
service, WPLH is obligated to make certain payments into the reserve funds. The
obligation to make such payments irrevocably decreases as the reserve funds are
funded to specified levels.
In connection with a $40,000,000 revolving credit facility (the "HCC
Facility") provided by a group of banks to HCC, WPLH, HDC, HPI and Capital
Square have entered into support agreements with the banks. The purpose of the
HCC Facility is to provide funds for construction and bridge loans for
affordable housing projects. Loans from the revolving credit facility are repaid
from the proceeds of permanent mortgage financing when the projects are
completed. Under WPLH's support agreement, WPLH must (i) provide lines of credit
to HDC, HPI and Capital Square of $10 million, $25 million, and $10 million,
respectively, (ii) maintain HDC's tangible net worth at not less than $25
million, and (iii) maintain WPLH's quarterly pre-tax interest coverage ratio and
its consolidated leverage ratio within specified limits. In the case of the
lines of credit provided by WPLH to HPI and Capital Square, $15 million and $5
million, respectively, are reserved solely to fund obligations of the entities
under their respective support agreements.
In connection with the HCC Facility, HPI has entered into a support
agreement with the banks which requires HPI to (i) continue as manager of HCC
unless removed for cause, (ii) maintain quarterly interest coverage ratio within
specified limits, (iii) maintain HPI's $25 million line of credit with WPLH and
(iv) provide HCC with a $15 million line of credit under a revolving credit
agreement.
In connection with the HCC Facility, HDC has entered into a support
agreement with the banks which requires HDC to (i) maintain at least a 51%
ownership interest in HPI and Capital Square, (ii) maintain HDC's line of credit
with WPLH and (iii) provide an irrevocable and unconditional guaranty of 20% of
the principal amount of any outstanding loans from the banks to HCC.
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In connection with the HCC Facility, Capital Square has entered into a
support agreement with the banks which requires Capital Square to (i) repurchase
certain loans from the banks or from HCC and (ii) maintain its line of credit
with WPLH.
To support the business activities of the entities in which they
invest, HPI and HDC make loans and/or extend lines of credit to their respective
subsidiaries or entities in which they have substantial investments. As of May
31, 1996, HPI and HDC had made loans to affiliates totaling 3.655 million and
16.435 million, respectively.
IES maintains a money pool for the benefit of itself, Utilities and
Diversified. The money pool consists of funds available for investment by these
companies. The money pool funds can be borrowed to meet the daily financing
requirements, thereby minimizing the need for external short-term borrowing.
Promissory notes stating the terms of the agreement exist between IES, Utilities
and Diversified.
Investments in the money pool shall earn interest at the rate
determined by IES cash management personnel on the first business day of each
month. The rate of interest is based upon the investments selected for daily
cash liquidity. The rate of interest on money pool loans shall be the same as on
money pool investments.
Diversified also has a variable rate credit facility that extends
through November 9, 1998, with a one-year extension available to Diversified.
The facility also serves as a stand-by agreement for Diversified's commercial
paper program. The agreement provides for a combined maximum of $150 million of
borrowings under the agreement and commercial paper to be outstanding at any one
time. Interest rates and maturities are set at the time of borrowing for direct
borrowings under the agreement and for issuances of commercial paper. The
interest rate options are based upon quoted market rates and the maturities are
less than one year. This agreement is the main source of debt financing for
Diversified.
Diversified maintains a system of advances between itself and its
subsidiaries to supplement their internal cash flows. Long-term financing of
Diversified's subsidiaries is infused into the subsidiaries as equity by
Diversified.
Applicants hereby request that the Commission approve the continuance
of all outstanding and committed intercompany loans, guarantees and support
agreements.
C. Interstate Services
As described in Item 1.B.1.a.iii, Interstate Services may provide WP&L
(including South Beloit), Utilities and IPC, pursuant to the Services Agreement
and the Coordination Agreement, and the non-utility companies of the Interstate
Energy system (including Interstate Hold), pursuant to the Non-Utility Services
Agreement, with a variety of administrative, management and support services.
These services may include, without limitation, services relating to information
systems, meters, transportation, electric system
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maintenance, marketing and customer relations, electric transmission and
distribution engineering and construction, power engineering and construction,
human resources, materials management, facilities, accounting, power planning,
public affairs, legal, rates, finance, right of way, internal auditing,
environmental affairs, fuels, investor relations, planning, executive, gas
system maintenance, gas transmission and distribution engineering and
construction, gas acquisition and dispatch, gas production engineering and
construction, steam system maintenance, steam distribution engineering and
construction, steam supply engineering and construction, steam planning, water
system maintenance, water distribution engineering and construction, water
supply engineering and construction, and water planning. In accordance with the
Service Agreement, services provided by Interstate Services will be directly
assigned or allocated by activity, project, program, work order or other
appropriate basis. To accomplish this objective, employees of Interstate
Services will record transactions utilizing the existing data capture and
accounting systems of each client company. Costs of Interstate Services will be
accumulated in accounts of Interstate Services and directly assigned or
allocated to the appropriate client company in accordance with the guidelines
set forth in the Service Agreement. WPLH, IES and IPC are currently developing
the system and procedures necessary to implement the Service Agreement.
The Service Agreements give the system companies the explicit right, at
their sole discretion, to discontinue taking services from Interstate Services
under any circumstances where a company other than Interstate Services can
provide fully comparable quality services at a price that is lower than the
price charged by Interstate Services. Also, prior to filing any amendments to a
Service Agreement with the Commission, the parties to the Service Agreement must
file with the applicable state regulatory commissions, pursuant to law or
stipulation, a copy of such amendments. Under the Service Agreements, in the
event that a state commission does not object to an amendment within forty five
days of its filing with the state commission or issue a letter within that time
requiring that the amendment be held in abeyance until that state commission
completes its review, the parties to the Service Agreement will consider the
state commission to have acquiesced to the amendment.
The operation of Interstate Services will allow Interstate Energy to
capture economies of scale from the centralization of administrative and general
services to be provided to system companies. Since the cost of such services are
considered in rate cases, the benefits realized as a result of Interstate
Services will accrue to Interstate Energy's ratepayers. Virtually every
registered holding company has one or more subsidiary service companies
performing many of the same functions that Interstate Services will perform. The
utilization of Interstate Services as a service company subsidiary of Interstate
Energy is in the public interest, will not unduly complicate the capital
structure of Interstate Energy and will not cause the Interstate Energy system
to violate any other provision of the Act.
It is anticipated that Interstate Services will be staffed primarily by
transferring personnel from the current employee rosters of WP&L, IES and IPC
and their subsidiaries. Interstate Services' accounting and cost allocation
methods and procedures are structured so as to comply with the Commission
standards for service companies in registered holding-company systems and are
described in Exhibit N hereto. Interstate Services' billing system will use the
"Uniform System of Accounts for Mutual Service Companies and Subsidiary Service
Companies" established by the Commission for service companies of registered
holding-company systems.
As compensation for services, the Service Agreement provides for the
client companies to: "pay to [Interstate Services] all costs which reasonably
can be identified and related to particular services performed by [Interstate
Services] for or on behalf of" such client company. Where more than one company
is involved in or has received benefits from a service performed, the Service
Agreement provides that "costs of such service will be directly assigned or
allocated. . .between or among such [c]lient [c]ompanies on a basis reasonably
related to the service performed to the extent reasonably practicable," in
accordance with the methods set forth
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in Appendix A to the Service Agreement. Thus, charges for all services provided
by Interstate Services to affiliated utility companies will be on an "at cost"
basis as determined under Rules 90 and 91 of the Act. The Non-Utility Service
Agreement contains provisions similar to those of the Service Agreement, except
that the Non-Utility Service Agreement also permits charges for certain services
to be at fair market value to the extent permitted under the Act or authorized
by the Commission. Thus, except for the requested exceptions discussed below,
services provided by Interstate Services to non-utility associate companies
pursuant to the Non-Utility Service Agreement will also be charged on an "at
cost" basis as determined under Rules 90 and 91 of the Act.
Section 13(b) of the Act allows the Commission to exempt transactions,
by rule, regulation or order, from the provisions of Section 13(b) and the rules
promulgated thereunder if such transactions:
(1) are with any associate company which does not derive,
directly or indirectly, any material part of its income from sources
within the United States and which is not a public utility company
operating within the United States, or
(2) involve special or unusual circumstances or are not
in the ordinary course of business.
The Commission has utilized this exemptive power in the past under certain
circumstances(50) and recently with some frequency to generally allow
non-utility subsidiaries of registered holding companies to provide services to
certain FUCOs at market-based rates.(51) In addition, the Division recommended
in the 1995 Report that "the SEC should also issue exemptive orders under
Section 13 allowing more non-utility subsidiaries to charge market rates to
non-utility affiliates."(52) The Commission's principal concern under Section 13
of the Act is to protect the utility companies in a holding company system from
abusive cross-subsidization transactions with affiliates. Exemptions from Rules
90 and 91 for purely non-utility transactions will not interfere with this
mandate because all services to utility subsidiaries will be at cost in
accordance with Rules 90 and 91. In addition, exemptions from Rules 90 and 91
will benefit the holding company system by allowing it to offer competitively
priced services based on market considerations. Pursuant to Section 13(b)(1),
the Commission has adopted Rule 83(a), which provides that a subsidiary service
company, "which subsidiary is or is about to become engaged in the performance
of any service, sales, or construction contract for any associate company which
does not derive, directly or indirectly, a material part of its income from
sources within the United States and which is not a public-utility company
operating within the United States, may ...[obtain an] exemption...from the
standards established by Section 13(b) of the Act, and the [Commission's] rules
and regulations promulgated thereunder, relating to the performance of any
service, sales or construction contract for such associate companies."
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The Applicants hereby request on behalf of IEC an exemption under
section 13 of the Act and rules 90 and 91 thereunder from the at-cost
requirements in connection with the provision of goods and services, including
operation and maintenance services, at fair market prices by Interstate Services
to associate foreign utility companies ("FUCO's"), provided that no such
services will be rendered to an associate FUCO unless the FUCO derives no part
of its income, directly or indirectly, from the generation, transmission or
distribution of electric energy for sale within the United States. (53)
No material change in the organization of Interstate Services, the type
and character of the companies to be serviced, the methods of allocating costs
to associate companies, or in the scope or character of the services to be
rendered subject to Section 13 of the Act, or any rule, regulation or order
thereunder, shall be made unless and until Interstate Services shall first have
given the Commission written notice of the proposed change not less than 60 days
prior to the proposed effectiveness of any such change. If, upon the receipt of
any such notice, the Commission shall notify Interstate Services within the
60-day period that a question exists as to whether the proposed change is
consistent with the provisions of Section 13 of the Act, or of any rule,
regulation or order thereunder, then the proposed change shall not become
effective unless and until Interstate Services shall have filed with the
Commission an appropriate declaration regarding such proposed change and the
Commission shall have permitted such declaration to become effective.
Any modification of allocation factors which requires filing under
60-day letter procedures based on existing Commission guidelines will be filed
on a timely basis. The current guidelines require approval if the change will
cause the lesser of $50,000 or a 5% change in the allocation of cost between
companies. These guidelines are subject to change.
The applicants believe that the Service Agreement and the Non-Utility
Service Agreement are structured so as to comply with Section 13 of the Act and
the Commission's rules and regulations thereunder.
Rule 88: Rule 88(b) provides that "[a] finding by the Commission that
a subsidiary company of a registered holding company . . . is so organized and
conducted or to be conducted, as to meet the requirements of Section 13(b) of
the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by [Rule] 90), will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified in the instructions for that form,
by such company or the persons proposing to organize it." Notwithstanding the
foregoing language, the Commission has on at least two recent occasions made
findings under Section 13(b) based on information set forth in an
Application/Declaration on Form U-1, without requiring the formal filing of a
Form U-13-1. See CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21,
1994); UNITIL Corp., Holding Co. Act Release No. 25524 (April 24, 1992). In
this Application/Declaration, applicants have submitted substantially the same
applicable information as would have been submitted in a Form U-13-1.
Accordingly, it is submitted that it is appropriate to find that
Interstate Services is so organized and its business will be so conducted as to
meet the requirements of Section 13(b), and that the filing of a Form U-13-1 is
unnecessary, or, alternatively, that this Application/Declaration should be
deemed to constitute a filing on Form U-13-1 for purposes of Rule 88.
Services will be the central control point for all services provided by
Services or through Services and during the interim before personnel are moved
into Services, from one affiliated company to another. Services will maintain
policies and procedures to accurately account for services requested by
affiliates, the cost of providing such services and, if necessary, the cost to
Services of procuring such services. This system of policies and procedures will
be maintained on line for all to use. IEC will have a separate account with
Services for executive functions that are not related to utility affairs. This
account will include charges that are appropriately included in it alone and
which, under the executive allocation formula, will be allocated to the account.
Such functions will include, for example, strategic planning by executives of
merger and acquisition activities.
Included as Exhibits D-6 and D-7 are the updated Utility and
Non-Utility Service Agreements, respectively, that have been revised pursuant to
the order of the PSCW. The PSCW ordered two basic changes to the Services
Agreements. First, the Applicants added language to the Service Agreements to
give WP&L the right to discontinue taking services from Services if the cost for
those particular services exceeds the fair market value for the services (please
see discussion below). Second, language was added to require the Applicants,
prior to making any amendment to the Service Agreements, to file the amendment
for approval with each of the state commissions with jurisdiction over the
holding company's activities. Under this provision, if any of the state
commissions does not object to the amendment or issue a letter requiring that
the amendment be held in abeyance until the state commission issuing the letter
completes its review, the Applicants will be able to file the amendment with the
Commission. Also, under the Service Agreements, prior to the filing of any
amendment relating to the cost allocation methods to be utilized by Services,
Services and each of the other parties to the Service Agreements would have to
approve the change.
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D. Other Services
In addition to the services to be provided by Interstate Services,
WP&L, South Beloit, Utilities and IPC may, as permitted by Rule 87(a)(3),
provide one another with certain services incidental to their utility
businesses, such as meter reading, materials management, gas purchasing,
transportation, and services of linemen and gas trouble crews. Such services
will be provided at cost in accordance with the standards of the Act and the
Commission's rules and regulations thereunder.
IES has subsidiaries that may provide services (including operation and
maintenance) and sell goods to entities that will qualify as FUCOs following the
Transaction. The applicants request that the Commission permit such subsidiaries
to enter into such transactions without compliance with the at cost provisions
of Section 13(b) and the rules and regulations thereunder.
The Commission has previously granted authority to provide goods and
services to existing and future FUCOs without compliance with the at cost
provisions to affiliates of registered holding companies that fall within one of
the following categories:
1) the project is a FUCO or an EWG that derives no part
of its income, directly or indirectly, from the generation,
transmission or distribution of electric energy for sale within the
United States;
2) the project is an EWG that sells electricity at
market-based rates which have been approved by the FERC or the
appropriate state public utility commission, provided that the
purchaser is not an Excepted Company;(54)
3) the project is a QF that sells electricity exclusively at
rates negotiated at arms's length to one or more industrial or
commercial customers purchasing such electricity for their use and not
for resale, or to an electric utility company other than an Excepted
Company; or
4) the project is an EWG or a QF that sells electricity at
rates based upon its cost of service, as approved by FERC or any state
public utility commission having jurisdiction, provided that the
purchaser is not an Excepted Company.
Entergy Corp., Holding Co. Act Release No. 26322 (June 30, 1995).
In the Entergy order quoted above, the Commission granted Entergy
Enterprises, a wholly owned subsidiary of Entergy, authority to provide
consulting services to associate companies, including FUCOs, and operations and
management services, either directly or through newly-established subsidiaries
of Entergy or Entergy Enterprises, to associate
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companies, including FUCOs, without complying with the at cost provisions of
Section 13(b) and the rules and regulations thereunder.
In CINergy Corp., Holding Co. Act Release No. 26376 (September 21,
1995), the Commission authorized CINergy and CINergy Investments, a wholly-owned
subsidiary of CINergy, to acquire securities of new special purpose subsidiaries
("NSPSs") and to make additional investments in existing special purpose
subsidiaries ("ESPSs"). ESPSs and NSPSs acquire, own or hold securities of, and
provide services to, FUCOs. The Commission also authorized ESPSs and NSPSs and
CINergy Services to provide administrative, management and support services to
other ESPSs and NSPSs and their subsidiaries without complying with the at cost
provisions of Section 13(b) and the rules and regulations thereunder. See also
General Public Utilities Corp., Holding Co. Act Release No. 26457 (January 18,
1996). (Pending completion of the record, the Commission reserved jurisdiction
over whether subsidiaries formed to directly or indirectly acquire the
securities of FUCOs could sell goods and services to associate FUCOs without
complying with the at cost provisions of Section 13(b) and the rules and
regulations thereunder.)
The applicants request that the Commission permit the present and
future subsidiaries of Applicants, which will become subsidiaries of Interstate
Energy, to provide services or sell goods to FUCOs and to entities that will
qualify as FUCOs following the Transaction to the same extent permitted by the
Commission in the above-cited orders.
Other than permitted "incidental services," the services provided by
WP&L, South Beloit, Utilities and IPC will only be provided in the interim
period between the consummation of the merger and the completion of the transfer
of necessary employees from the companies to Services. The completion of all of
the employee transfers, however, cannot be accomplished simultaneously. All
services will nevertheless still be provided through Services. Employees will
simply be secunded from the appropriate companies to Services to provide needed
services; these services will be billed at cost to Services by the companies and
will be accounted for on Services' accounts. Ultimately, after the transition of
employees is completed, all of these services will be performed directly by
Services through its own employees.
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Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that the
applicants have obtained or expect to obtain in connection with the Transaction.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide that
certain transactions (including the Transaction) may not be consummated until
certain information has been submitted to the DOJ and FTC and specified HSR Act
waiting period requirements have been satisfied. Applicants have fully
satisfied the requirements of the HSR Act and are free to consummate the
merger with no further obligations thereunder.
The Applicants fully satisfied the requirements under the HSR Act on
July 7, 1996. However, because the Applicants did not consummate the Transaction
within one year of that date, the Applicants were obliged to re-notify the DOJ
and FTC of the proposed Transaction. The Applicants resubmitted the necessary
filings under the HSR Act on September 3, 1997. The HSR Act imposes a 30-day
waiting period for the consummation of each merger comprising the Transaction
subject to the HSR Act's prenotification requirement. The Applicants, however,
requested and were granted early termination of that waiting period by the FTC
on September 12, 1997.
B. Federal Power Act
Section 203 of the Federal Power Act of 1935, as amended (the "Federal
Power Act"), provides that no public utility shall sell or otherwise dispose of
its jurisdictional facilities or directly or indirectly merge or consolidate
such facilities with those of any other person or acquire any security of any
other public utility, without first having obtained authorization from the FERC.
On March 1, 1996, WP&L, HES, South Beloit, IPC, Utilities and IEA submitted a
joint application to the FERC for approval of the Transaction under Section 203
and Part 33 of the FERC's regulations. This filing was supplemented on June 5,
1996. On March 1, 1996, WP&L, South Beloit, IPC and Utilities also filed
transmission tariffs with FERC offering open access transmission service over
their combined facilities.
The Administrative Law Judge presiding over the FERC proceeding issued
his Initial Decision on Rate and Merger Issues in Docket Nos. EC96-13-000,
ER96-1236-000 and ER96-2560-000 approving the Transaction, subject to
conditions, on July 3, 1997. The Initial FERC Decision was subject to FERC
review; the subsequent FERC order, Opinion No. 419, approving the transaction,
was issued on November 12, 1997.
The FERC's competitive analysis in Opinion No. 419, issued on November
12, 1997, focused primarily on the effect of the merger on the control of
transfer capability into WUMS and the potential that IEC would use any such
enhanced control to reduce the ability of other competing utilities from
accessing lower-cost power from outside of WUS. In response to this concern, the
FERC agreed with the conclusion of the Administrative Law Judge in the Initial
Decision on Rate and Merger Issues in Docket Nos. EC96-13-000, ER96-1236-000 and
ER96-2560-000, issued on July 3, 1997, that the Competition Stipulation
("Stipulation") entered into by the Applicants and FERC trial staff would
sufficiently mitigate any adverse competitive effects that may arise as a result
of the merger. One of the points in the Stipulation required IEC to delay the
construction of the two proposed transmission ties between IEC East and IEC West
until it is determined that the ties, either by themselves or in combination
with other transmission facility additions, will increase the simultasneous
import capability into WUMS by a minimum of 400MW over existing capability. The
Applicants proposed that IEC would make eight specified transmission system
improvements to increase simultaneous transfer capability into WUMS by
400-600MW. The cost of the improvements will be approximately $4 million. The
determination of whether the enhanced capability goal has been met shall be
conducted, under FERC Opinion No. 419, by a Facilities Study Group described in
the FERC Opinion. In addition, the Applicants agreed that they would not at any
time claim more than 250MW of capacity of the 400 MW of additional capacity.
FERC stated that the net effect of the Applicants' commitments would be at least
an additional 150MW of transfer capability into WUMS and that such an additional
capability mitigates any competitive concerns. Thus, the FERC did not prohibit
the construction of the tie-lines, but merely delayed the start of the
construction until they were made part of an overall design plan to provide
additional simultaneous transfer capability into WUMS.
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WP&L, IPC and Utilities plan to file with FERC, under Sections 203 and
205 of the Federal Power Act, a coordination agreement providing for the joint
operation of the electric facilities, including certain exchanges of capacity
and energy among the three companies. In Order 888, FERC has determined that
each public utility must provide comparable, open access transmission service to
all potential wholesale users of its transmission system. WP&L (together with
South Beloit), IPC and Utilities have filed open access tariffs to comply with
the requirements of Order 888. A tariff providing for service over the combined
facilities of WP&L, South Beloit, IPC and Utilities is expected to be filed in
the near future to supersede the March 1, 1996 tariff filing.
C. Atomic Energy Act
Utilities holds an NRC operating license authorizing Utilities to hold
an ownership interest in the Duane Arnold Energy Center and to operate the
facility. WP&L also holds an NRC operating license authorizing WP&L to hold an
ownership interest in the Kewaunee nuclear generating facility. The Atomic
Energy Act provides that no such NRC license or any rights thereunder may be
transferred or in any manner disposed of, directly or indirectly, through
transfer of control of such license to any person unless the NRC finds that such
transfer is in accordance with the Atomic Energy Act and consents to the
transfer. Pursuant to the Atomic Energy Act, Utilities and WP&L have
reviewed approvals from the NRC to reflect the fact that Utilities and WP&L will
continue to hold their existing NRC licenses as operating company
subsidiaries of Interstate Energy upon consummation of the Transaction. The NRC
approved the Transaction relative to the Duane Arnold Energy Center on August
28, 1997. Pursuant to the Order, parties had until October 6, 1997 to request a
hearing on the Order; no such hearing was requested.
D. State Public Utility Regulation
The PSCW, IUB, MPUC and ICC have jurisdiction over various aspects of
the Transaction. Reference is made to Exhibits O-1 through 0-4 with respect to
the applications filed or to be filed before such commissions.
Utilities and IPC possess municipal franchise and environmental permits
and licenses that may need to be renewed or replaced as a result of the
Transaction if the Reincorporation Mergers are affected. Utilities and IPC do
not anticipate any difficulties in obtaining such renewals or replacements.
The MPUC approved the Transaction in Minnesota Public Utilities
Commission Opinion and Order at Docket No. E, 6-100/PA-96- 184 (March 24, 1997).
The ICC approved the Transaction in Illinois Commerce Commission Opinion and
Order in Matter No. 96-0122 (May 7, 1997) (filed as Exhibits O-3- (a) and
O-4-(a)). The IUB approved the Transaction at Docket No. SPU-96-6 on September
26, 1997 (filed as Exhibit 0-5-(a)). The PSCW, in an Order relating to Docket
No. 6680-UM-100, effective November 6, 1997, approved the merger subject to
conditions (filed as Exhibit 0-6-(a)).
Pursuant to the Applicants' agreement with the PSCW and in response to
the PSCW Order effective November 6, 1997, the Applicants hereby request that
the Commission include in any order approving IEC as a registered holding
company:
Approval of the Application in no way precludes the Public Service
Commission of Wisconsin, the Iowa Utilities Board, the Minnesota
Utility Commission, the Illinois Commerce Commission or any other state
regulatory authority from scrutinizing and disallowing the pass through
of costs and rates for services rendered to customers of the client
companies. It is the SEC's intention that each state commission having
jurisdiction over a client company will retain the right to review and
disallow cost of services provided to a client company by Interstate
Services, Inc., that may be subject to recovery in rates.
In its Order relating to Docket No. 6680-UM-100, effective November 6,
1997, the PSCW recognized that a conflict could arise between it and the
Commission if it applied the usual PSCW pricing standards for transactions
between Services and the utility operating companies such as WP&L. The PSCW
acknowledged that the Commission requires that such services be billed "at
cost," in contrast to its own pricing standards, which generally require billing
at the lower of at cost or "fair market value." In order to prevent a conflict
between the provisions but maintain its policy of trying to "protect ratepayers
from paying higher than market prices," the PSCW required that the Applicants
add language to the Service Agreements that gives WP&L the explicit right to
discontinue taking services from Services any time the cost for such services
exceeds the fair market value for the services. Thus, the PSCW reached a balance
between its pricing standards and those of the Commission because (i) it did not
require Services to provide services to WP&L at a price level that would deviate
from the at cost price standards of the Commission, but (ii) did require WP&L to
look elsewhere for services when the price of the services provided by Services
exceeded the fair market value for those services.
Except as set forth above, no other state or local regulatory body or
agency and no other federal commission or agency has jurisdiction over the
transactions proposed herein.
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Item 5. Procedure
The Commission is respectfully requested to enter an order not
later than February 20, 1998 granting and permitting this
Application/Declaration to become effective.
It is submitted that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for approval of the
proposed Transaction. The Division of Investment Management may assist in the
preparation of the Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
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<TABLE>
<S> <C> <C>
Item 6. Exhibits and Financial Statements
A. Exhibits
P Exhibit A Proposed Corporate Structure of Interstate Energy following Transaction.
Exhibit B Agreement and Plan of Merger dated as of
November 10, 1995, as amended, by and among WPLH,
IES, IPC, Acquisition and New IPC. [Incorporated
by reference to Exhibit 2.1 of the Joint
Registration Statement on Form S-4 (including the
Joint Proxy Statement/Prospectus of WPLH, IES and
IPC) filed by WPLH and New IPC (Registration No.
333-07931)]
P Exhibit C-1 Service Territory of WP&L and South Beloit.
Exhibit C-2 Restated Articles of Incorporation of WPLH. [Incorporated by reference to Exhibit (4.1)
to WPLH's Form S-3 Registration Statement (Registration No. 33-59972)]
Exhibit C-3 Restated Articles of Incorporation of WP&L. [Incorporated by reference to Exhibit 3.1 to
WP&L's Quarterly Report on Form 10-K for the quarter ended June 30, 1994]
Exhibit C-4 Annual Report on Form 10-K for the year ended December 31, 1995 of WPLH. [Incorporated
by reference in File No. 1-9894]
Exhibit C-5 Annual Report on Form 10-K for the year ended December 31, 1995 of WP&L. [Incorporated
by reference in File No. 0-337]
Exhibit C-6 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of WPLH.
[Incorporated by reference in File No. 1-9894]
Exhibit C-7 Quarterly Reported on Form 10-Q for the quarter ended March 31, 1996 of WP&L.
[Incorporated by reference in File No. 0-337]
Exhibit D-1 Form of Service Agreement.
Exhibit D-2 Form of System Coordination and Operating Agreement.
Exhibit D-3 Form of Non-Utility Service Agreement.
Exhibit D-4 Revised Public Utility Service Agreement.
Exhibit D-5 Revised Non-Utility Service Agreement.
Exhibit D-6 Second Revised Public Utility Service Agreement.
Exhibit D-7 Second Revised Non-Utility Service Agreement.
Exhibit D-8 Description of Interstate Services' Accounting and Cost Allocation and Other Policies
and Procedures.
Exhibit E-1 Report on Form U-3A-2 for the year ended December 31, 1995 of IES. [Incorporated by
reference in File No. 069-00319]
P Exhibit E-2 Service Territory of Utilities.
Exhibit E-3 Restated Articles of Incorporation of IES. [Incorporated by reference to Exhibit 3(a) to
IES' Annual Report on Form 10-K for the year ended December 31, 1993]
</TABLE>
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<TABLE>
<S> <C> <C>
Exhibit E-4 Amended and Restated Articles of Incorporation of Utilities. [Incorporated by reference
to Exhibit 3(a) to Utilities' Current Report on Form 8-K, dated January 7, 1994]
Exhibit E-5 Annual Report on Form 10-K for the year ended December 31, 1995 of IES. [Incorporated by
reference in File No. 1-9187]
Exhibit E-6 Annual Report on Form 10-K for the year ended December 31, 1995 of Utilities.
[Incorporated by reference in File No. 0-4117-1]
Exhibit E-7 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of IES. [Incorporated
by reference in File No. 1-9187]
Exhibit E-8 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of Utilities.
[Incorporated by reference in File No. 0-4117-1]
P Exhibit F-1 Service Territory of IPC.
Exhibit F-2 Restated Certificate of Incorporation of IPC. [Incorporated by reference to Exhibit 3.a
to IPC's Annual Report on Form 10-K for the year ended December 31, 1993]
Exhibit F-3 Annual Report on Form 10-K for the year ended December 31, 1995 of IPC. [Incorporated by
reference in File No. 1-3632]
Exhibit F-4 Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 of IPC. [Incorporated
by reference in File No. 1-3632]
P Exhibit G-1 Major Electric Transmission Lines of WP&L.
P Exhibit G-2 Major Electric Transmission Lines of Utilities.
P Exhibit G-3 Major Electric Transmission Lines of IPC.
P Exhibit G-4 Electric Interconnections of WP&L, Utilities and IPC.
P Exhibit G-5 Combined Gas Service Territory of WP&L, Utilities and IPC.
P Exhibit G-6 Major Gas Supply Pipelines and Underground Storage Facilities in Illinois, Iowa,
Minnesota and Wisconsin.
P Exhibit H-1 Corporate Structure of WPLH and its Subsidiaries.
P Exhibit H-2 Corporate Structure of IES and its Subsidiaries.
Exhibit I-1 Registration Statement on Form S-4 of WPLH and New IPC. [Incorporated by reference to
Registration No. 333-07931]
Exhibit I-2 Employment Agreements with Lee Liu, Erroll B. Davis, Jr., Wayne Stoppelmoor and Michael
Chase [Incorporated by reference to Annexes H-K of the Joint Proxy Statement/Prospectus]
</TABLE>
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<TABLE>
<S> <C> <C>
Exhibit I-3 Registration Statement on Form S-3 of WPLH [Incorporated by reference to Registration No.
33-21482]
Exhibit I-4 Long Term Plan of Interstate Energy
[Incorporated by reference to Exhibit 4.1 to
WPLH's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994]
Exhibit I-5 Rights Agreement [Incorporated by reference to
Exhibit 4 to WPLH's Current Report on Form 8-K,
dated February 27, 1989]
Exhibit J-1 Amended and Restated Articles of Incorporation of Interstate Energy.
Exhibit J-2 Amended Bylaws of Interstate Energy.
P Exhibit K-1 Testimony of Rodney Frame before FERC.
P Exhibit K-2 Application filed by WPLH, IES and IPC with FERC.
Exhibit K-3 Order of the Administrative Law Judge at the Federal Energy Regulatory Commission
Exhibit L-1 Memorandum in Support of the Retention by
Interstate Energy of the Gas Properties of WP&L,
South Beloit, Utilities and IPC.
P Exhibit L-2 Analysis of Economic Impact of a
Divestiture of the Gas Operations of WP&L and
South Beloit.
P Exhibit L-3 Analysis of Economic Impact of a Divestiture of the Gas
Operations of Utilities.
P Exhibit L-4 Analysis of Economic Impact of a Divestiture of the Gas
Operations of IPC.
Exhibit L-5 Summary of Lost Economies Resulting from SEC Ordered Divestitures of Gas Operations.
Exhibit L-6 Supplemental Analysis of the Economic Impact/Last Economies Resulting of a Divestiture of the Gas
Operating of WPLH, IES and IPC (the "Supplemental Study")
P Exhibit M-1 Corporate Structure of WPLH Subsidiaries, including non-utility subsidiaries.
P Exhibit M-2 Corporate Structure of IES Subsidiaries, including non-utility subsidiaries.
Exhibit M-3 Discussion of Retention of Non-Utility Business
Exhibit M-4 Revised Discussion of Retention of Non-Utility Business
Exhibit M-5 Second Revised Appendix of Non-Utility Businesses
Exhibit M-5.1 Schedules of Compliance Periods of Properties of Heartland Properties, Inc.
Exhibit N Accounting and Cost Allocation Procedures of Interstate Services.
P Exhibit N-3 Order of Federal Energy Regulatory Commission
P Exhibit O-1 Application filed by WPLH with the PSCW.
P Exhibit O-2 Application filed by IES and IPC with the IUB.
P Exhibit O-3 Application filed by IPC with the MPUC.
Exhibit 0-3-(a) Order of the Minnesota Public Utilities Commission
P Exhibit O-4 Application filed by IPC and South Beloit with the ICC.
Exhibit O-4-(a) Order of the Illinois Commerce Commission
Exhibit O-5-(a) Order of the Iowa Utilities Board
Exhibit O-6-(a) Order of the Public Service Commission of Wisconsin
Exhibit P-1 Preliminary Opinion of Counsel
Exhibit P-2 Opinion of Counsel (past tense)
Exhibit Q Proposed Form of Notice
</TABLE>
In accordance with Rule 202 of Regulation S-T, several of these Exhibits were
filed with the Commission in paper on November 17, 1997, December 31, 1997 and
February 9, 1998, pursuant to a continuing hardship exemption.
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B. Financial Statements
<TABLE>
<S> <C>
FS-1 Interstate Energy Unaudited Pro Forma Condensed Consolidated Balance Sheets as of March 31, 1996 (see Registration
Statement on Form S-4 of Interstate Energy (Exhibit I-1 hereto).
FS-2 Interstate Energy Unaudited Pro Forma Condensed Consolidated
Statements of Income for the years ended December 31, 1995,
1994 and 1993 and the 12 months ended March 31, 1996. (See
Registration Statement on Form S-4 of Interstate Energy
(Exhibit I-1 hereto).
FS-3 WPLH Consolidated Balance Sheet as of December 31, 1995 (see Annual Report of WPLH on Form 10-K for the year ended
December 31, 1995 (Exhibit C-4 hereto).
FS-4 WPLH Consolidated Statements of Income for its last three
fiscal years (see Annual Report of WPLH on Form 10-K for the
year ended December 31, 1995 (Exhibit C-4 hereto).
FS-7 IES Consolidated Balance Sheet as of December 31, 1995 (see Annual Report of IES on Form 10-K for the year ended
December 31, 1995 (Exhibit E-5 hereto).
FS-8 IES Consolidated Statements of Income for its last three fiscal years (see Annual Report of IES on Form 10-K for
the year ended December 31, 1995 (Exhibit E-5 hereto).
FS-9 IPC Balance Sheet as of December 31, 1995 (see Annual Report of IPC on Form 10-K for the year ended December 31,
1995 (Exhibit F-3 hereto).
FS-10 IPC Statements of Income for its last three fiscal years (see Annual Report of IPC on Form 10-K for the year ended
December 31, 1995 (Exhibit F-3 hereto).
</TABLE>
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Item 7. Information as to Environmental Effects
The Transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. The only federal actions related to the Transaction pertain to
the Commission's declaration of the effectiveness of Registration Statement of
WPLH and IPC on Form S-4, the approvals and actions described under Item 4 and
Commission approval of this Application/Declaration. Consummation of the
Transaction will not result in changes in the operations of WP&L, Utilities or
IPC that would have any impact on the environment. No federal agency is
preparing an environmental impact statement with respect to this matter.
98
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, each of the undersigned companies has duly caused this
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: February 9, 1998
WPL HOLDINGS, INC.
By: /s/ Erroll B. Davis, Jr.
---------------------------------
Erroll B. Davis, Jr.
President and Chief Executive Officer
IES INDUSTRIES INC.
By: /s/ Lee Liu
---------------------------------
Lee Liu
Chairman of the Board &
Chief Executive Officer
INTERSTATE POWER COMPANY
By: /s/ Michael R. Chase
---------------------------------
Michael R. Chase
President and Chief Executive Officer
<PAGE> 104
1. Utilities and IPC are already directly physically interconnected
through numerous transmission lines that they own, including three 161
KV lines and the East 345 KV Line which runs from Minneapolis/St. Paul
to St. Louis in which Utilities and IPC participate along with other
neighboring utilities.
2. WP&L and South Beloit are already directly physically interconnected
by two 69 KV transmission lines.
3. The Applicants have entered into a firm contract for the transmission
of up to 200 MW of power with ComEd and DPC for a three year period
that commenced on October 1, 1997.
4. WP&L, Utilities and IPC are members of the MAPP Regional Transmission
Committee ("RTC") and the MAPP Power and Energy Marketing Committee
("PEM"). Membership in the RTC joins the transmission resources of all
three Applicants to the MAPP transmission pool and permits
participation in the MAPP transmission pool by the Applicants through
the use of MAPP Schedule F. Membership in PEM allows the Applicants to
engage in capacity and energy transactions using MAPP Schedule K.
5. The transmission lines proposed to be constructed include a 69 KV tie-
line between Prairie du Chien, Wisconsin and MacGregor, Iowa and a 161
KV line connecting WP&L's Nelson Dewey generating plant on the east
side of the Mississippi River to IPC's Turkey River substation on the
west side of the Mississippi River.
6. See endnote 3. Pursuant to the competitive stipulation, Applicants
agreed to offer 50 MW of their transmission rights to WUMS loads on a
first come, first served basis.
7. See endnote 5.
8. See, e.g., CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21,
1994).
9. Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
10. E.g., the reduced regulatory burdens associated with routine
financings. 1995 Report at 50.
11. E.g., the Commission should apply a more flexible interpretation of
the integration requirements under the Act; interconnection through
power pools, reliability councils and wheeling arrangements can
satisfy the physical interconnection requirement of section
2(a)(29); the geographic requirements of section 2(a)(29) should be
interpreted flexibly, recognizing technical advances consistent with
the purposes and provisions of the Act; the Commission's analysis
should focus on whether the resulting system will be subject to
effective regulation; the Commission should liberalize its
interpretation of the "A-B-C" clauses and permit combination
systems where the affected states agree, and the Commission should
"watchfully defer" to the work of other regulators. 1995 Report at
71-7.
12. E.g., the Commission should promulgate rules to reduce the regulatory
burdens associated with energy-related diversification and the
Commission should adopt a more flexible approach in considering all
other requests to enter into diversified activities.
1995 Report at 88-90.
13. The applicants acknowledge the requirements of Section 17(c) of the Act
and Rule 70 thereunder with respect to limitations upon directors and
officers of registered holding companies and subsidiary companies
thereof having affiliations with commercial banking institutions and
investment bankers, and undertake that, upon completion of the
Transaction, they will be in compliance with the applicable provisions
thereof.
14. 1995 Report at 73-4.
15. The shares of Utilities Preferred Stock and IPC Preferred Stock
outstanding at the time of the consummation of the Transaction will
remain outstanding preferred stock of Utilities and IPC respectively;
provided that, if Reincorporation Mergers are effected, the Utilites
Prepared Stock will be redeemed, and each share of IPC Preferred Stock
(other than IPC Dissenting Shares) will be converted into one share of
New IPC Preferred Stock with terms and designations substantially
identical to those of the IPC Preferred Stock.
16. This number is a preliminary estimate only, and will be updated as
necessary.
17. By their terms, Sections 8 and 11 only apply to registered holding
companies and are therefore inapplicable at present to WPLH, since it
is not now a registered holding company. The following discussion of
Sections 8 and 11 is included only because, under the present
transaction structure, Interstate Energy will register as a holding
company after consummation of the Transaction.
<PAGE> 105
18. See, e.g., In re Columbia Gas & Electric Corp., 8 S.E.C. 443 at 463
(1941); In re United Gas Improvement Co., Holding Co. Act Release No.
2692 (April 15, 1941); S.E.C. v. New England Electric System, 384 U.S.
176 (1966). It should be noted that the Commission continued to give
primacy to state utility commission determinations in making decisions
regarding combination exempt holding companies. See, e.g., In re
Northern States Power Co., Holding Co. Act Release No. 12655 (Sept. 16,
1954); Delmarva Power & Light Co., 46 S.E.C 710 (1976); WPL Holdings,
Holding Co. Act Release No. 24590 (Feb. 26, 1988).
19. 1995 Report at 15-6.
20. Mississippi Valley Generating Co., 36 S.E.C. 159 (1955) (noting that
Congress intended the concept of integration to be flexible); UNITIL
Corp., Holding Co. Act Release No. 25524 (April 24, 1992) (noting that
section 11 contains a flexible standard designed to accommodate changes
in the industry).
21. 1995 Report at 74.
22. New England Electric System, 41 S.E.C. 888 (1964), aff'd, 384 U.S. 176
(1966) and 390 U.S. 207 (1968).
23. 1995 Report at 74, 75, 76. Footnotes omitted.
24. See e.g., S.E.C. v. New England Electric System, et al., 384 U.S. 176,
183-184 (1966). It is important to note that this issue - basically an
anti-trust issue - was the principal concern in previous decisions
ordering the separation of gas and electric systems and clearly is no
longer applicable to the changed utility competitive environment.
25. On December 12, 1995, the PSCW announced a determination outlining the
general direction of electric utility regulation in Wisconsin. It
includes a restructuring of the industry providing choice of
electricity provider for all consumers by the year 2000 as well as
establishment of a competitive generation business. The transmission
and distribution functions would remain regulated. In a February 22,
1996 report to the Wisconsin legislature, the PSCW identified a 32 step
plan that it would follow for electric utility restructuring in
Wisconsin. In the plan, the PSCW indicated that during 1996 it will
begin activities on 12 of these steps, some of which would seek changes
in applicable administrative rules under its jurisdiction, including
affiliated interest standards and quality of service standards. The
PSCW expects to present an electric utility restructuring plan to the
Wisconsin Legislature in 1997.
The PSCW also continued a generic investigation of the natural gas
industry in Wisconsin and addressed the extent to which traditional
regulations should be replaced with a different approach. In
conjunction with this generic investigation, the PSCW staff is
reviewing the use of the current purchased gas adjustment ("PGA")
mechanism which is designed to pass on to gas customers increases or
decreases in the cost of natural gas purchased for resale. A separate
docket has been established to review the PGA.
26. See New Century Energies, Inc. Holding Co. Act Release No. 26748 (Aug.
1, 1997) (New Century Energies Inc., a registered holding company, is
the result of the combination of Public Service Company of Colorado and
Southwestern Public Service Company.); TUC Holding Company, Holding Co.
Act Release No. 26749 (Aug. 1, 1997) (TUC Holding Company, an exempt
holding company, is the result of the combination of Texas Utilities
Company and ENSERCH Corporation.); and Houston Industries Incorporated,
Holding Co. Act Release No. 26744 (July 24, 1997) (Houston Industries
Incorporated, an exempt holding company, is the result of the
combination of Houston Industries Incorporated and NorAm Energy Corp.)
<PAGE> 106
27. See, e.g., Michigan Consolidated Gas Co., 44 S.E.C. 361, 365 (1970),
aff'd, 444 F.2d 913 (D.C. Cir. 1971) (quoting General Public Utilities
Corp., 32 S.E.C. 807, 839 (1951)); United Light and Railways Co., 35
S.E.C. 516, 519 (1954).
28. CSW Credit, Inc., Holding Co. Act Release No. 25995 (1994); Jersey
Central Power & Light Co., Holding Co. Act Release No. 24348 (March 18,
1987).
29. United Light and Railways Co., 35 S.E.C. at 519.
30. 1995 Report at 89-90. The Division also recommended a flexible
approach with respect to investments which neither met the
energy-related test of proposed Rule 58 and exceeded the de minimums
amount.
31. In the 1995 Report, the Division noted a comment by Wisconsin Electric
Power Company regarding the scope of the Wisconsin Act. 1995 Report at
91.
32. 1995 Report at 71.
33. In re North American Co. and Its Subsidiaries, Holding Co. Act Release
No. 4505 (Apr. 15, 1942). See also, In re Hudson River Power Corp.,
Holding Co. Act Release No. 2415 (Dec. 9, 1940) (integration standard
not met where "the record discloses no definite plan for bringing about
any such interconnection"); In re Cities Service Power & Light Corp.,
Holding Co. Act Release No. 5256 (Aug. 30, 1944) (integration standard
met where "Derby contemplates the construction of such interconnection
facilities").
34. In one instance, the Commission noted that while "we are not aware of
any plans for undertaking these interconnections in the near future ...
[w]e find ... no occasion to doubt the validity of the estimates of
benefits to be derived therefrom," in its holding that such facilities
were considered capable of interconnection. In re Cities Service Power
& Light Co., Holding Co. Act Release No. 4489 (Aug. 18, 1943).
35. See In re Union Electric Co., Holding Co. Act Release No. 18368 (Apr.
10, 1974) (holding that in the absence of special circumstances,
physical interconnection that might be built in ten years if economical
does not meet integration requirement).
36. 1995 Report at 72-74.
37. 1995 Report at 73.
38. 1995 Report at 74.
39. Utilities and IPC are already directly physically interconnected
through numerous transmission lines that they own, including three 161
KV lines and the East 345 KV Line which runs from Minneapolis/St. Paul
to St. Louis in which Utilities and IPC participate along with other
neighboring utilities.
40. WP&L and South Beloit are already directly physically interconnected
by two 69 KV transmission lines.
41. The Applicants have entered into a firm contract for the transmission
of up to 200 MW of power with ComEd and DPC for a three year period
that commenced on October 1, 1997
42. WP&L, Utilities and IPC are members of the MAPP Regional Transmission
Committee ("RTC") and the MAPP Power and Energy Marketing Committee
("PEM"). Membership in the RTC joins the transmission resources of all
three Applicants to the MAPP transmission pool and permits
participation in the MAPP transmission pool by the Applicants through
the use of MAPP Schedule F. Membership in PEM allows the Applicants to
engage in capacity and energy transactions using MAPP Schedule K.
43. The transmission lines proposed to be constructed include a 69 KV
tie-line between Prairie du Chien, Wisconsin and MacGregor, Iowa and a
161 KV line connecting WP&L's Nelson Dewey generating plant on the east
side of the Mississippi River to IPC's Turkey River substation on the
west side of the Mississippi River.
44. See endnote 41. Pursuant to the competitive stipulation, Applicants
agreed to offer 50 MW of their transmission rights to WUMS loads on a
first come, first served basis.
45. See endnote 43.
46. See In re Penzoil Co., 43 S.E.C. 709 (1968) (finding an integrated
system where facilities both connected with an unaffiliated
transmission company but not each other). See also, American Natural
Gas Co., 43 S.E.C. 203 (1966) ("It is clear the integrated or
coordinated operations of a gas system under the Act may exist in the
absence of such interconnection").
<PAGE> 107
47. See, e.g., In re Philadelphia Co. and Standard Power and Light Co., 28
S.E.C. 35 (1948) ("most of the gas used by these companies in their
operations is obtained from common sources of supply"); Consolidated
Natural Gas Co., Release No. 35-25040 (February 14, 1990) (finding
integrated system where each company derived natural gas from two
transmission companies, although one such company also received gas
from other sources).
48. In re North American Co., 31 S.E.C. 463 (1950) (finding Panhandle
Eastern pipeline to be a common source of supply).
49. See In re Central Power Co. and Northwestern Public Service Co., 8
S.E.C. 425 (1941), in which the Commission declared an integrated
system to exist where two entities purchase from different pipeline
companies since "both pipelines run out of the Otis field, side by
side, and are interconnected at various points in their transmission
system; and that they are within two miles of each other at Kearney."
50. See, e.g., New England Electric System, Holding Co. Act Release No.
22309 (Dec. 9, 1981) (utility permitted to enter into lease with
affiliated joint venture with lease payments based on market price);
EUA Cogenex Corp., Holding Co. Act Release No. 263731 (Sept. 14, 1995)
(authorizing service companies of two registered holding companies to
provide services to affiliated joint venture at market based rates in
certain circumstances).
51. See, e.g., Entergy Corp., Holding Co. Act Release No. 26322 (June 30,
1995); General Public Utilities Corp., Holding Co. Act Release No.
26307 (June 14, 1995) and Southern Co., Holding Co. Act Release No.
26212 (Dec. 30, 1994).
52. 1995 Report at 102.
53. The Commission has granted similar requests by other registered system
companies. See, e.g., New Century Energies, Inc., Holding Co. Act
Release No. 26748 (Aug. 1, 1997); Entergy Corp. Holding Co. Act Release
No. 26322 (June 30, 1995).
54. An Excepted Company was defined as any subsidiary whose activities and
operations were primarily related to the domestic sale of electric
energy at retail or at wholesale to affiliates or providing goods and
services to such affiliates.
