SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-K
For the fiscal year ended December 31, 1997 Commission file number 1-3632
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________________ to ___________________
INTERSTATE POWER COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 42-0329500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Main St., P.O. Box 769, Dubuque, 52004-0769
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 319-582-5421
Securities registered pursuant to Section 12(b)
of the Act:
Name of each exchange on
Title of each class which registered
Common Stock Par Value $3.50 Per Share ) New York Stock Exchange
) Chicago Stock Exchange
) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: N O N E
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the
past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
As of March 1, 1998 the aggregate market value of the voting stock
held by non-affiliates of the registrant was $347,821,588.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock.
Shares
Outstanding
March 1,
1998
Common Stock Par Value $3.50 Per Share 9,763,413
Documents incorporated by reference - portions of the Exhibit EX-13
are incorporated by reference in Parts I, II and IV.
<PAGE>
INTERSTATE POWER COMPANY
1997 Form 10-K Annual Report
Table of Contents
Part I
Page
Item 1. Business 1
General 1
Construction Program 1
Electric Operations 1
Sources and Availability of Raw Materials 2
Duration and Effect of Electric Patents and Franchises 3
Electric Seasonal Business 3
Working Capital Items 3
Electric Governmental Regulations 3
Electric Competitive Conditions 5
Other Sources of Power 6
Other Electric Operations 7
Gas Operations 7
Gas Sources and Availability of Raw Materials 8
Duration and Effect of Gas Patents and Franchises 8
Gas Seasonal Business 9
Gas Governmental Regulations 9
Gas Competitive Conditions 9
Dependence of Segment Upon a Single Customer 10
Research and Development 10
Electric and Magnetic Fields 10
Environmental Regulations 10
Year 2000 12
Employees 12
Accounting Matters 13
Item 2. Properties 13
Electric Properties 13
Generating Stations 14
Gas Properties 15
General Properties 15
Titles 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Disagreements on Accounting and Financial Disclosure 17
Part III
Item 10. Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 19
Item 13. Certain Relationships and Related Transactions 19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 19
<PAGE>
PART I
ITEM 1. BUSINESS
(General)
Interstate Power Company (the company or IPC), is a public utility
incorporated in 1925 under the laws of the State of Delaware. The
company is engaged in the generation, purchase, transmission,
distribution and sale of electricity. It owns property in portions
of twenty-five counties in the northern and northeastern parts of
Iowa, in portions of twenty-two counties in the southern part of
Minnesota, and in portions of four counties in northwestern Illinois.
The company also engages in the distribution and sale of natural gas
in Albert Lea, Minnesota; Clinton, Mason City and Clear Lake, Iowa;
Fulton and Savanna, Illinois and in a number of smaller Minnesota,
Iowa and Illinois communities, and in the transportation of natural
gas within Iowa, Illinois and Minnesota, and in interstate commerce.
For information pertaining to industry segments and lines of business
please refer to page 28 of Exhibit EX-13.
(Construction Program)
The table below shows actual construction expenditures for 1997 and
estimated expenditures for the period 1998 through 2002:
(Thousands of Dollars)
1997 Actual $28,698
1998 Est. $31,274
1999 Est. $42,520
2000 Est. $46,566
2001 Est. $37,486
2002 Est. $39,726
Current projections of construction expenditures for the 1998 and
1999 periods do not indicate any need for permanent financing.
Refer to (Environmental Regulations) on page 11 for additional
information on construction expenditures related to compliance with
the regulations of the Clean Air Act of 1990.
(Electric Operations)
Of the 234 communities served with electricity, Dubuque, Iowa, is the
largest with a population of approximately 58,000. Other major
cities served are Albert Lea, Minnesota and Clinton and Mason City,
Iowa. The remainder of the communities served are under 15,000
population, of which 193 are less than 1,000 population. As of
December 31, 1997, the company sells electricity at wholesale to 10
small communities which have municipal distribution systems. During
1997, 3 firm municipal electric wholesale customers elected to
purchase from other utilities.
The estimated population of the company's service area is 340,000.
Six large industrial customers account for 33% of electric MWH sales.
A diverse mixture of residential, agricultural, and industrial
customers constitute the remainder of the company's 165,707 electric
customers.
There have been no significant changes since the beginning of the
fiscal year in the kind of products produced, services rendered,
markets or method of distribution.
The facilities owned or operated by the company include facilities
for the transmission of electric energy in interstate commerce or the
sale of electric energy at wholesale in interstate commerce.
(Sources and Availability of Raw Materials)
Electricity generated by the company in 1997 was 94% from coal as a
fuel and the remainder primarily from natural gas. Future sources of
generation are expected to be in the same proportions. Approximately
75% to 80% of the Company's coal requirements have been from
long-term contracts. These contracts have expiration dates ranging
through August 31, 1999.
The company has a contract for 450,000 tons per year of 0.5% sulfur
Colorado coal for its Kapp #2, a 217 MW unit at Clinton, Iowa. The
contract continues through August 1999, and will allow the company to
comply with sulfur dioxide restrictions mandated by the Clean Air Act
Amendments of 1990.
The company renegotiated in February 1998 a contract for 500,000 tons
for 1998 for its 260 MW Lansing #4 unit. Lansing Unit #4 requires
low sulfur coal, which is being purchased in the Powder River Basin
of Wyoming. The coal is shipped by rail and then transloaded to
barge at facilities near Keokuk, Iowa. A contract with Orba-Johnson
Transshipment Company, Inc., covers rail to barge coal transloading.
Coal required for generation at the Neal #4 unit, located near Sioux
City, Iowa, and the Louisa #1 unit, located near Muscatine, Iowa, is
contracted for by the operator, MidAmerican Energy Company, under
terms of the Unit Participation Agreements.
The company will purchase coal on an annual basis for the Dubuque
Power Plant and for Lansing Units #1, #2 and #3.
The company owns 120 coal cars and has an undivided ownership
(21.528%) in 372 coal cars in connection with Neal #4. The company
has an undivided ownership (4%) in 136 cars in connection with Louisa
#1. Coal requirements in 1998 will require using leased cars for the
Louisa #1 coal supply.
The company relies on spot purchases of oil. The company burned
676,810 gallons of No. 2 and No. 6 oil in 1997 and has 6,477,000
gallons of oil storage capacity in which to store adequate reserves
during periods of high demand on refineries.
The company presently has interruptible natural gas available for its
electric generation station at Clinton, Iowa through Natural Gas
Pipeline Company of America. At the Fox Lake and Dubuque plants,
interruptible gas is available through Peoples Natural Gas Company.
There is no assurance that interruptible gas will continue to be
available as fuel for electric generating plants.
(Duration and Effect of Electric Patents and Franchises)
The company owns no patents.
The company has, in the opinion of its legal counsel, all necessary
franchises or other rights from the incorporated communities and
other governmental subdivisions now served, required for the
operation of its properties. With 195 electric franchises in effect
in cities and villages, and with the majority of such franchises
being for a term of 25 years, the renewal of such franchises is a
continuing process.
(Electric Seasonal Business)
The effects of air conditioning in summer and heating in winter have
a seasonal impact. The air conditioning sales in the summer months
are primarily related to the residential and commercial customer
classes, however, the company does not meter air conditioning sales
separately. During the past five years, the highest and lowest
average residential consumption in the peak summer month has been 960
Kwh (August 1995) and 571 Kwh (June 1993), respectively, compared to
824 Kwh (January 1997) and 602 Kwh (March, 1992) during the peak
winter month. Refer to the (Electric Governmental Regulations)
section for a discussion of Iowa and Minnesota seasonal rates.
(Working Capital Items)
Three of the company's generating stations are located on the
Mississippi River at Clinton, Dubuque and Lansing, Iowa. The coal
supply for the three plants is delivered by barge during the shipping
season (approximately April 1st to December 1st). Refinements to the
company's fuel delivery process have decreased the amount of
inventory required to carry the company over the winter. Coal
shipments to the company's Neal #4 and Louisa #1 generating stations
are able to continue through the winter as river transportation is
not involved.
(Electric Governmental Regulations)
In August 1993, the company implemented a revised electric tariff
structure. The new tariffs give greater weight to the demand
component of electric usage, and include a provision for a higher
rate during the summer cooling season (June-September), but did not
change the company's overall annual electric revenue.
The company filed a Minnesota electric rate increase application in
June 1995. The application requested an annual increase of $4.6
million (later adjusted by the company to $3.3 million). Interim
rates were not requested. On April 10, 1996, the Commission issued
an order allowing an increase in electric rates of $2.3 million.
Rates reflecting the increase were implemented in August 1996. A
Commission order issued December 16, 1996, allowed the company to
recover approximately an additional $830,000 in 1997 applicable to
the time period from the original order to the date when new rates
were implemented.
Minnesota and Iowa regulations require that utilities conduct energy
efficiency and demand side management programs. Demand side
management expenditures applicable to the Minnesota jurisdiction in
an annual amount of approximately $1.8 million are currently being
recovered through rates. Iowa jurisdiction tariffs provide for the
recovery of demand side management costs incurred. The 1990, 1991
and 1992 DSM costs are being recovered over a four year period ($1.2
million per year) beginning in October 1994. The 1993, 1994 and 1995
DSM costs are being recovered over a four year period ($4.9 million
per year) beginning in May 1997. Cost recovery of the DSM costs for
1996 and through September 1997 began in October 1997 being recovered
over each of the next four years ($2.6 million per year). Effective
October 1997, DSM costs for the period of October 1997 through
September 1998 will be recovered as they are incurred.
In September 1997, IPC agreed with the Iowa Utilities Board (IUB) to
provide Iowa customers a four year retail electric and gas price
freeze commencing on the effective date of the Merger (refer to Part
II Item 5 for additional disclosure). The agreement excluded price
changes due to government-mandated programs, such as energy
efficiency cost recovery, or unforeseen dramatic changes in
operations. In addition, the price freeze does not preclude a review
by either the IUB or Office of Consumer Advocate (OCA) into whether
IPC is exceeding a reasonable return on common equity. IPC also
agreed with the Minnesota Public Utility Commission (MPUC) and
Illinois Commerce Commission to four year and three year rate
freezes, respectively, commencing on the effective date of the
Merger.
On September 30, 1997, the IUB approved a settlement between IPC and
the OCA which provided for an electric rate reduction of
approximately $3.2 million annually. The reduction applied to all
bills rendered on and after October 7, 1997.
The company's electric rate tariffs provide for recovery of the cost
of fuel through energy adjustment clauses. These clauses are subject
to revision from time to time by the regulatory authority having
jurisdiction, and are designed to pass on to the consumer the
increases or decreases in the cost of fuel without formal rate
proceedings. Purchased capacity costs are not recovered from
customers through energy adjustment clauses, but rather must be
addressed in base rates in a formal rate proceeding. In the
company's Iowa electric jurisdiction, the company is required to
return to customers any jurisdictional revenue from capacity sales to
other utilities.
(Electric Competitive Conditions)
The Illinois Commerce Commission entered an order in 1993 determining
that the company, and not Jo-Carroll Electric Cooperative, had the
right to provide electric service to a freezer service plant near
East Dubuque, IL. Upon judicial review sought by Jo-Carroll, the
Illinois 15th Judicial Circuit Court in 1994 remanded the proceeding
to the Commission for further hearings. The Commission entered an
order on remand in 1996 further determining that the company, and not
Jo-Carroll, had the right to provide such service. In proceedings
brought by Jo-Carroll for judicial review of the commission order on
remand, the court affirmed the Commission's order and company's right
to serve the freezer service plant and no appeal has been taken from
that order.
The National Energy Policy Act of 1992 (Act) addresses several
matters designed to promote competition in the electric wholesale
power generation market, including mandated open access to the
electric transmission system. At the federal level it allows
customers to purchase energy from alternative power suppliers and
then pay the local utility a fee for delivery of the energy. As
legislation, regulations, and economic changes occur, electric
utilities will be faced with increasing pressure to become more
competitive. The company cannot predict the long-term consequences
of these competitive issues on its results of operation or financial
condition. The company has experienced difficulty in retaining
electric wholesale customers which take service under one year
contracts. To date, 8 of the company's 18 firm municipal electric
wholesale customers have elected to purchase their requirements from
other utilities. The net impact on the company's financial condition
is not expected to be significant as these municipal customers are
required to pay the company a wheeling fee for use of the company's
transmission system to transport power from other utilities.
The company's industrial rates generally compare favorably with those
of neighboring utilities. For the company's six largest industrial
customers, the aggregate 1997 rate was approximately 3.3 cents per
KWH. The company's favorable rates mitigate the incentive that these
customers might otherwise have to relocate, self-generate or purchase
electricity from other suppliers. The company anticipates that its
generating cost will decline slightly over the next several years as
long-term coal purchase and transloading contracts expire and are
renegotiated.
The company currently has no competition from the same type of public
utility service in the sale of electricity in any of the incorporated
communities it serves. In the States of Iowa, Illinois and
Minnesota, territorial laws govern the question of possible service
to customers in unincorporated areas, and such laws regulate
competition in such areas.
Laws and statutory regulations in the different states in which
service is rendered provide, under varying terms and conditions, for
municipal ownership of electric generating plants and distribution
systems. Certain franchises under which utility service is rendered
give the municipality the right to purchase the system of the company
within said municipality upon certain terms and conditions. However,
no such purchase option and no right of condemnation of the company's
properties has been exercised and no municipal generating plant or
municipal distribution system has been established in the territory
now served by the company during the past twenty-five years.
The Iowa Utilities Board, the Illinois Commerce Commission and the
Minnesota Public Utilities Commission have each approved tariffs that
allow the company to offer interruptible electric service for
qualifying customers. The availability of this service provides
price incentives to those customers having the ability to interrupt
their connected load. The primary objective of the incentives is to
reduce the system peak. The incentives also serve to retain existing
customers and attract new customers. In addition, the State of
Illinois has passed electric deregulation legislation requiring
customer choice of electric supplier for all customers by May 1,
2002.
(Other Sources of Power)
The company has been a participant in the Mid-Continent Area Power
Pool (MAPP) since March 31, 1972. Membership in the Pool permits
sharing of reserve capacities of the members which affects reductions
in plant facilities investment for MAPP members. The minimum reserve
margin for participants in MAPP has been established at 15%.
A new Restated Agreement was approved by the MAPP membership and
after FERC review became effective November 1, 1996. MAPP is now
comprised of a Regional Transmission Committee (RTC), a Regional
Reliability Committee (RRC), and a Power and Energy Market (PEM).
With open membership MAPP has gained several new members and includes
investor-owned utilities, the United States (Western Area Power
Administration), a Canadian system, public power districts, rural
electric generating and transmission cooperative associations,
municipal electric supply agencies, municipal utilities, and power
marketers operating in Canada and the North Central region of the
United States. The Pool coordinates planning and reliability in
Minnesota, Wisconsin, Montana, Iowa, Nebraska, North Dakota, and
South Dakota. The Pool also provides a marketplace for economic
power supply in these States with an expanding influence in the
surrounding States through new utility and marketer membership. The
MAPP Agreement was filed with the FERC and accepted as an initial
rate filing effective December 1, 1972 and has been in operation
since that time. In 1995, MAPP implemented an intra-pool
transmission service fee. With an effective date of November 1, 1996
the Restated Agreement, in addition to opening membership,
implemented a revised rate schedule for transmission service for
transactions with terms of up to two years. The company has
insufficient historical data to use as a basis for quantifying the
potential maximum intra-pool transmission service fees that are now
required under the Restated MAPP Agreement. Current projections of
maximum charges would be up to three times the level incurred prior
to approval of the Restated Agreement. MAPP is presently working to
develop a region-wide tariff for transactions longer than two years.
The company cannot project the effective date nor the level of
charges of that long term tariff.
In addition to the MAPP membership, the company has interchange
agreements with certain Missouri and Illinois utilities through 345
KV transmission systems. Future interconnections are planned to meet
transmission requirements for the next ten years.
In 1992, the company entered into three long-term power purchase
contracts with other utilities. The contracts provide for the
purchase of 255 MW of capacity through April 2001. Energy is
available at the company's option at approximately 100% to 110% of
the monthly production costs for the designated units. The three
power purchase contracts required capacity payments of $24.9 million
in 1997. Over the remaining life of the contracts, total capacity
payments will be approximately $85 million. The purchase power
contract payments are not for debt service requirements of the
selling utility, nor do they transfer risk or rewards of ownership.
In Iowa the IUB has concluded that the capacity purchases were
prudent and allowed recovery of costs through rates. The rate
structure approved by the MPUC does not provide for full recovery of
purchased power applicable to the Minnesota jurisdiction. The 1996
rate order by the MPUC held that the company had 100 MW of excess
capacity and disallowed recovery of approximately $800,000 annually.
The company has not filed for rate recovery of approximately $2.5
million of the purchased power payments in the Illinois and FERC
jurisdictions. The company believes that increased margins from
sales growth in Illinois have largely offset the revenue deficiency.
The company has contracts with several governmental power agencies
whereby the company provides transmission service to their
customer/members. During 1997, the company either received, wheeled
power or provided transmission service to customers of the Western
Area Power Administration (WAPA), and Cooperative Power Association
(CPA). The company's contract with CPA also provides for payment by
the company for mutually utilized facilities constructed and owned by
CPA.
The Company and Southern Minnesota Municipal Power Agency (SMMPA)
prior to 1998 had a contract to compensate each other if over/under
investment in the shared transmission system occurs. That agreement
has been terminated. Effective January 1, 1998, SMMPA will be
receiving transmission services from the Company under FERC open
access transmission compliance tariffs.
The company's contract with Central Iowa Power Cooperative (CIPCO)
provides for compensation to each other if over/underinvestment in
the shared transmission system occurs.
(Other Electric Operations)
The 1997 peak of 938,120 KW occurred on July 16 between 12:00 and
1:00 in the afternoon. At the time of its 1997 peak the company had
a net effective electric capability of 1,310,600 KW. Of this net
effective capability, 903,300 KW was in steam generation, 113,500 KW
was in combustion turbine and the balance was in internal combustion
units and purchases. The previous historical system net peak load
for a sixty-minute period, of 1,010,821 KW, was reached on July 14,
1995.
(Gas Operations)
The company supplies retail gas service in 41 communities and serves
approximately 49,578 gas customers.
There have been no significant changes since the beginning of the
fiscal year in the kind of products produced, markets or methods of
distribution.
(Gas Sources and Availability of Raw Materials)
The company purchases pipeline transportation capacity from Northern
Natural Gas Company (NNG), Natural Gas Pipeline Company of America
(NGPL) and Northern Border Pipeline Company (NBPL). During 1997 the
company purchased gas from non-traditional suppliers, i.e. producers,
brokers and marketers, at market responsive rates. FERC Order 636
became effective in 1993. Order 636 unbundled pipeline supply from
its capacity. Subsequent to Order 636, FERC continues to approve the
tariffs of NNG and NGPL, but only with regard to capacity and storage
rates, subject to change as rate cases are filed.
Gas for the company's Mason City, Albert Lea and Savanna service
areas is transported by NNG under capacity contracts for 36,338 Mcf
daily, and for an additional 15,657 Mcf for the period November to
March. The majority, 26,999 Mcf, of the above capacity is from the
producing areas of Oklahoma and Texas. These contracts expire in
October, 1999. Gas is supplied by producers, marketers and brokers,
as well as from storage services, to meet the peak heating season
requirements. The company had 15,170 Mcf/d of storage, with the
necessary pipeline capacity, available for the 1996-1997 heating
season.
Gas for its Clinton service area is transported by NGPL under
capacity contracts for 17,750 Mcf annually, with expiration dates of
November 30, 1998, February 28, 1999, and two as of November 30,
2001. This gas is supplied by producers, marketers and brokers. The
company supplements this capacity with storage gas, which has the
pipeline capacity embedded in its FERC approved rate. The company
had 10,000 Mcf/d of storage available for the 1996-1997 heating
season.
The company's 1997 total throughput level of 37,742,756 Mcf
represents a 1.1% increase over 1996. The total throughput was
composed of sales gas (23.8%) and customer transportation gas
(76.2%).
During 1997, twenty-two of Interstate's customers transported a total
of 28,743,907 Mcf of their own gas over the company's pipeline and
distribution systems. The customer owned gas was delivered by
interstate pipeline companies for those customers' accounts to
Interstate's town border stations. The company subsequently
delivered the gas to customers under tariffs approved by respective
state commissions.
The company owns propane-air gas plants in Albert Lea, Minnesota and
Clinton and Mason City, Iowa. The daily output capacities are:
5,000 Mcf, 4,000 Mcf and 9,600 Mcf of propane-air mix gas
respectively.
(Duration and Effect of Gas Patents and Franchises)
The company owns no patents.
The company has, in the opinion of its legal counsel, all necessary
franchises or other rights from the incorporated communities and
other governmental subdivisions now served, required for the
operation of its properties. With 34 gas franchises in effect in
cities and villages, and with the larger majority of such franchises
being for a term of 25 years, the renewal of such franchises is a
continuing process.
(Gas Seasonal Business)
The effects of heating sales to the residential and commercial
classes of customers have a significant seasonal impact on the
company's business. The heating sales in the winter months account
for over 95% of the total annual sales to these classes of customers.
The average consumption for a residential customer during the peak
winter months is 18.8 Mcf compared to the average of 2.5 Mcf during
the summer. The average consumption for a commercial customer during
the peak winter months is 90.5 Mcf compared to the average of 12.9
Mcf during the summer.
(Gas Governmental Regulations)
The company filed a Minnesota gas rate increase application in May
1995. The application requested an annual increase of $2.4 million,
including a return on common equity of 11.75%. Interim rates in an
annual amount of $1.5 million were placed in effect in June 1995. On
February 29, 1996, the Minnesota Public Utilities Commission (MPUC)
issued an order allowing an increase in gas rates of $2.1 million.
Rates reflecting the increase were implemented in September 1996.
The Minnesota Department of Public Service (DPS) and the Office of
Attorney General (OAG) appealed the Commission's decision. The
appeal was denied by the Minnesota Court of Appeals on February 18,
1997. On March 21, 1997, the Department of Public Service ad the
Office of Attorney General appealed the decision of the Court of
Appeals (and the Commission) to the Minnesota Supreme Court. On
January 8, 1998, the Minnesota Supreme Court upheld the MPUC initial
decision allowing the company to recover $4.9 million of clean up
expenses over a 10 year period.
FERC order 636 provides a mechanism under which gas pipelines can
recover transition costs from local distribution companies. The
company estimates its remaining share of transition costs will
aggregate approximately $1.3 million payable in declining annual
installments. The company is recovering transition costs from
customers.
(Gas Competitive Conditions)
The company has no competition from the same type of public utility
service in the sale of gas in any of the incorporated communities
serviced by it. Certain major industrial customers of the company
purchase their own gas supply from others and have that gas
transported by the company as described in the "Gas Sources and
Availability of Raw Materials" section. The Iowa Utilities Board has
also issued an order covering unbundling of natural gas rates for all
Iowa customers to be effective in 1999.
One customer recently constructed independent distribution facilities
to bypass the company's system. The company is continually
evaluating its bypass issue and developing policies to deal with
future competitive conditions which could result from potential
system bypass. The customers most likely to bypass the company's
distribution facilities are transportation customers. At the present
time the company has 22 gas transportation customers with total
revenues of $2.8 million (5.1% of gas revenues and 0.8% of total
company revenues). Over 60% of the $2.7 million of revenues occurs
in an area where the potential for bypass is considered to be
minimal. The loss of any one customer would not have a material
adverse impact on the company's financial condition.
(Dependence of Segment Upon a Single Customer)
In 1997, 1996 and 1995, the company had no single customer or
industry for which electric and/or gas sales accounted for 10% or
more of the company's consolidated revenues. In 1997, the company's
three largest industrial customers accounted for 1,387,045,000 Kwh of
electric sales ($45,770,000) and 26,369,000 Mcf of gas sales and
transportation ($1,850,000). The company's largest gas customer,
which represents 36% of the company's total gas throughput, is
committed by contract for the next four years.
(Research and Development)
The company has no full-time professional employees engaged in
research activities and had no company-sponsored research programs
during 1997, 1996 and 1995. In the public utility industry, research
is commonly and traditionally done by manufacturers of equipment,
trade organizations to which the company belongs, and university
research programs. In 1997 approximately $645,313 was paid for
research activities compared with $782,299 in 1996 and $1,054,925 in
1995 and $1,072,871 in 1994.
(Electric and Magnetic Fields)
Electric and magnetic fields, a topic that has been an issue for a
number of years, was clarified by a study of the National Research
Council. The committee spent two years analyzing about 500 studies
conducted since 1979, and concluded in its report issued in 1996 that
there was no evidence to clearly prove electric and magnetic fields
are harmful to health. The company expects there will be continuing
national debate as to whether or not electromagnetic fields are
harmful to health.
(Environmental Regulations)
The company is subject to various federal and state government
environmental regulations. The company meets or exceeds the existing
federal and state environmental regulations. The Federal Clean Air
Act Amendments of 1990 requires reductions in sulfur dioxide and
nitrogen oxide emissions from power plants. The most restrictive
provisions relate to sulfur dioxide emissions. Phase 1 of the Clean
Air Act became effective January 1, 1995, while Phase 2 is effective
January 1, 2000. To comply with Phase 1, the company switched to low
sulfur coal and installed low nitrogen oxide burners. Phase 2
regulations will affect approximately 87% of the company's current
generating capacity and will require some, but not significant,
capital, operating and maintenance costs beyond those required for
Phase 1.
The United States EPA and the states have promulgated discharge
limits necessary to meet water quality standards. A National
Pollutant Discharge Elimination System (NPDES) permit is required for
all discharges. The company has current NPDES permits for all
discharges and meets or is within the range of required discharge
limits.
Early this century, various utilities including the company operated
plants which manufactured gas for cooking and lighting. The
company's facilities ceased operations over 40 years ago when natural
gas pipelines were extended into the upper Midwest. Some of the
former gasification sites contain coal tar waste products which may
present an environmental hazard.
In 1957, the company purchased facilities in Mason City, Iowa, from
Kansas City Power & Light Company (KCPL) which included land
previously used for a coal gasification plant. Coal tar waste was
discovered on the property in 1984. In 1995, a settlement was
reached with KCPL for sharing of costs to remediate the site. As of
year end 1997, soil remediation of the site is complete. The
company's total share of cost from 1984 to 1997 at this site was $2.7
million.
The company formerly operated a manufactured gas plant in Rochester,
Minnesota. Soil remediation was completed in 1995 and post-
remediation groundwater monitoring is complete pending final review.
From 1991 through 1997, the company incurred costs aggregating $6.9
million applicable to the Rochester site. A rate order from the MPUC
in 1996 allowed the company to recover $4.9 million of this expense
over a ten year period.
The company has identified an additional seven sites, as described
below, which may contain hazardous waste from former coal
gasification plants and has recorded an estimated liability
applicable to the investigation of those sites. The company is
unable to determine, at this time, the extent, if any, of remediation
necessary at these seven sites.
In Minnesota, the company owned or operated four manufactured gas
plant sites: Albert Lea, Austin, New Ulm and Owatonna. Potentially
hazardous wastes associated with former coal gasification operations
have been identified at each site. The company incurred $0.2 million
in investigation costs for these sites in 1997, and $1.5 million
since the investigation process began. In 1995 and 1996, the company
received accounting orders from the MPUC which allow the deferral of
investigation and remediation costs applicable to the Minnesota sites
and further allows the company to seek recovery in a rate case.
In addition, the company has identified three other sites: Galena and
Savanna, Illinois, and Clinton, Iowa. Potentially hazardous wastes
associated with former coal gasification operations have been
identified at these sites. Little or no activity is expected at the
Illinois sites in 1998. In 1997, $3.8 million was expensed for
estimated investigation and remediation work expected at the Clinton
site in 1998.
Previous actions by Iowa and Illinois regulators have permitted
utilities to recover prudently incurred unreimbursed investigation
and remediation costs.
In 1994, the company filed a lawsuit against certain of its insurers
to recover the costs of investigating and remediating the former coal
gasification plants. Eight insurers paid the company a total of $9.6
million in 1995, 1996 and 1997 in order to be discharged from the
lawsuit. In 1997 the Iowa District Court granted the remaining
insurers motions for summary judgment and dismissed the Company's
claims against those defendants. The Company has appealed this
decision to the Iowa Supreme Court where the matter is currently
pending. As of December 31, 1997, $4.8 million is recorded as a
deferred credit pending regulatory disposition. Neither the company
nor its legal counsel is able to predict the amount of any additional
insurance recovery, and no potential recovery has been recorded.
Under the Federal Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA), a past waste generator can be designated
by the United States Environmental Protection Agency (U.S. EPA) as a
Potentially Responsible Party (PRP). Certain types of used
transformer oil (primarily those containing polychlorinated
biphenyls, or "PCBs") have been designated as hazardous substances by
the U.S. EPA.
In 1988, the U.S. EPA designated the company a PRP for the clean-up
of former salvage facilities operated by the Missouri Electric Works,
Inc. (MEW) in Cape Girardeau, Missouri. A portion of the
PCB-contaminated equipment found at the site was formerly owned by
the company. The company has notified the U.S. EPA that it disclaims
responsibility for the site, as the equipment was in proper operating
condition when sold by the company to a third party, which
subsequently made arrangements to transport this equipment to MEW.
The U.S. EPA has not responded to the company's disclaimer. The
company has not recorded any liability for the MEW site, and
management believes that it will be able to successfully defend
itself against any claims applicable to the site.
(Employees)
The company has 899 regular employees consisting of 872 full-time and
27 part-time employees. Labor unions represent 559 (or 62%) of the
total work force.
(Year 2000)
The Merged Company (Refer to Part II, Item 5 or Exhibit 13 for
further discussion of the Merger) utilizes software, embedded systems
and related technologies throughout its businesses that will be
affected by the date change in the Year 2000. An internal task force
has been assembled to review and develop the full scope, work plan
and cost estimates to ensure that the merged Company's systems
continue to meet its internal and customer needs.
Phase I of the project has been completed which encompasses a review
of the necessary software modifications that will need to be made to
the Merged Company's financial and customer systems. The Merged
Company currently estimates that the remaining costs to be incurred
on this phase of the project will be approximately $4 million to $8
million in the aggregate. The task force has also begun Phase II of
the project which is an extensive review of the Merged Company's
embedded operating systems for Year 2000 conversion issues. The
Merged Company is currently unable to estimate the costs to be
incurred on this phase of the project but does believe that the costs
will be significant. An estimate of the expenses to be incurred on
this phase of the project is expected to be available by the third
quarter of 1998.
(Accounting Matters)
Statements of Position (SOP) 96-1 on environmental liabilities was
issued by the American Institute of Certified Public Accountants in
1996. The company has reviewed the requirements of the SOP and is in
compliance with its provisions.
ITEM 2. PROPERTIES
The principal power plants and other materially important physical
properties of the company are maintained in accordance with sound
operating practices. Their general character and location are
described below:
(Electric Properties)
The company has been a participant in the Mid-Continent Area Power
Pool (MAPP) Agreement since March 31, 1972. As a part of this power
network the company is the owner of a 55.0 mile section of the 345 KV
transmission line extending from St. Louis, Missouri to Minneapolis,
Minnesota; a 15.5 mile section of the 345 KV transmission line
between Minneapolis, Minnesota and Kansas City, Missouri; a 5.0 mile
345 KV transmission line from near Clinton, Iowa to near Cordova,
Illinois; a 49.8 mile 345 KV transmission line from near Clinton,
Iowa to a substation south of Dubuque, Iowa; and three associated
345/161 KV substations.
The company's electric generating stations at year-end consist of six
steam plants, three combustion turbine stations, and four internal
combustion facilities. Pertinent information regarding each electric
generating station is shown on the following page:
<TABLE>
INTERSTATE POWER COMPANY GENERATING STATIONS
<CAPTION>
Net
Generating Units December 31, 1997 Output
Nameplate Capability in KWH
Unit Capacity Year KW KW (000's)
Location Number KW Installed (Gross) (Net) 1997
STEAM:
<S> <C> <C> <C> <C> <C> <C>
Dubuque, IA 2 15,000 1929 82,500 78,000 67,260
3 25,000 1952
4 33,000 1959
Clinton, IA 1 15,000 1947 254,900 235,000 939,575
(M.L.Kapp Plt.) 2 212,284 1967
Lansing, IA 1 15,000 1948 337,800 320,000 879,115
2 11,500 1949
3 33,000 1957
4 252,649 1977
Sherburn, MN 1 11,500 1950 113,500 108,000 195,055
(Fox Lake Plt.) 2 11,500 1951
3 75,000 1962
Sioux City, IA 4* 125,924 1979 142,000 134,300 975,148
(Neal Unit #4)
Louisa County, IA 1** 27,400 1983 29,400 28,000 180,966
(Louisa Unit #1) ---------- ---------- ---------
TOTAL STEAM 960,100 903,300 3,337,119
---------- ---------- ---------
GAS TURBINE:
Montgomery, MN 1 26,535 1974 22,200 22,200 41
Sherburn, MN 4 26,535 1974 21,300 21,300 374
(Fox Lake Plt.)
Mason City, IA 1 37,520 1991 70,400 70,000 4,618
(Lime Creek Plt.) 2 37,520 1991
---------- ---------- ----------
TOTAL GAS TURBINE 113,900 113,500 5,033
---------- ---------- ----------
INTERNAL COMBUSTION:
Dubuque, IA 1 2,000 1966 4,600 4,600 (81)
2 2,000 1966
Hills, MN 1 2,000 1996 4,000 4,000 (149)
2 2,000 1960
Lansing, IA 1 1,000 1970 2,000 2,000 4
2 1,000 1971
New Albin, IA 1 685 1970 700 700 (58)
---------- ---------- ---------
TOTAL INTERNAL COMBUSTION 11,300 11,300 (284)
---------- ---------- ---------
TOTAL COMPANY 1,085,300 1,028,100 3,341,868
========== ========== =========
* Interstate owns 21.528% of a 584,931 KW unit (turbine rating) operated by MidAmerican Energy Company.
** Interstate owns 4.0% of a 685,000 KW unit (turbine rating) operated by MidAmerican Energy Company.
</TABLE>
(Gas Properties)
The company owns and operates natural gas distributing systems in
Albert Lea, Minnesota; Savanna, Illinois; Clinton, Mason City and
Clear Lake, Iowa and in a number of smaller Minnesota, Illinois and
Iowa communities. At Albert Lea, the company owns 14 tanks with a
liquid propane storage capacity of 357,000 gallons; at Clinton, there
are 12 tanks with 306,000 gallons capacity and at Mason City, 22
tanks with 561,000 gallons capacity.
During 1996, in response to a request from the company's largest gas
customer to increase its firm contract from 35,000 MMBtu/d to 50,000
MMBtu/d, the company began construction of approximately 13.5 miles
of 10" steel pipeline. The project was completed and placed into
service on November 25, 1996.
The company owns 47 gas regulating stations and approximately 992
miles of gas distribution mains.
(General Properties)
The company owns numerous properties in various parts of its
territory which are used for office, service and other purposes. The
most important of these are three General Office buildings in Dubuque
and the district office buildings at Clinton, Decorah, Dubuque, Mason
City and Oelwein, Iowa and Albert Lea, and Winnebago, Minnesota and
the distribution service buildings in each of those locations. The
company, as lessee, leases office space at various locations. The
company also leases a few small parcels of land for storage of poles
and miscellaneous temporary uses.
(Titles)
In the opinion of legal counsel for the company, the company has
satisfactory title to its properties for use in its utility
businesses subject only to permitted liens as defined in the Bond
Indenture and to minor defects and encumbrances customarily found in
cases of like size and character and which do not materially
interfere with the use of such properties.
Properties such as electric transmission and electric and gas
distribution lines are constructed principally on rights-of-way which
are maintained under franchise or held by easement only.
All properties of the company, other than "excepted property" as
defined in the Bond Indenture, are subject to the lien of the
company's Bond Indenture dated as of January 1, 1948, as
supplemented, securing the company's outstanding First Mortgage
Bonds.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to "Electric Competitive Conditions" and
"Environmental Regulations" under "Item 1. Business" for certain
pending legal proceedings and proceedings known to be contemplated by
governmental authorities. Other than these items, there are no
material pending legal proceedings, or proceedings known to be
contemplated by governmental authorities, other than ordinary routine
litigation incidental to the business, to which the company is a
party or of which any of the company's property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders
during the fourth quarter of the 1997 year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(Proposed Merger)
WPL Holdings, Inc. (WPLH), IES Industries, Inc. (IES) and Interstate
Power Company (IPC) have entered into an Agreement and Plan of Merger
dated November 10, 1995, as amended May 22, 1996 and August 16, 1996,
(Merger Agreement), which provides for the combination of all three
companies. The new company will be named Interstate Energy
Corporation (IEC). See Note 2 of "Notes to Consolidated Financial
Statements" for additional information. Detailed pro forma financial
statements for IEC are included at EX-99.1.
IES is a holding company headquartered in Cedar Rapids, Iowa, and is
the parent company of IES Utilities Inc. (IES Utilities) and IES
Diversified Inc. (IES Diversified). IES Utilities supplies electric
and gas service to approximately 339,000 and 178,000 customers,
respectively, in Iowa. IES Diversified and its principal
subsidiaries are primarily engaged in the energy-related,
transportation and real estate development businesses. WPLH is a
holding company headquartered in Madison, Wisconsin, and is the
parent company of Wisconsin Power and Light Company (WP&L) and
Heartland Development Corporation (HDC). WP&L supplies electric and
gas service to approximately 393,000 and 155,000 customers,
respectively, in south and central Wisconsin. HDC and its principal
subsidiaries are engaged in business in three major areas:
environmental, energy and affordable housing services.
The proposed merger, which will be accounted for as a pooling of
interests, was approved by the respective Boards of Directors and
shareholders on September 5, 1996. The merger is conditioned on the
receipt of approvals of several federal and state regulatory
agencies. The status of these approvals is as follows:
The status of these approvals is as follows: On March 24, 1997, the
Minnesota Public Utilities Commission issued an order approving the
merger without hearings, subject to a number of technical conditions
that the parties are willing to meet. Included is a 4-year rate
freeze for IPC's Minnesota customers. On May 7, 1997, the Illinois
Commerce Commission (ICC) issued an order approving the proposed
merger. Included is a three-year rate freeze for IPC's Illinois
customers. On September 26, 1997, the Iowa Utilities board (IUB)
issued its order granting final approval of the proposed merger. The
order included a four-year rate freeze for Iowa customers. On
November 4, 1997, the Public Service Commission of Wisconsin (PSCW)
granted approval of the proposed merger. The approval include a
number of conditions, including a four-year rate freeze. The Federal
Energy Regulatory Commission (FERC) approved the merger on November
12, 1997. The Securities and Exchange Commission (SEC) comment
period ended November 5, 1996. Approval by the SEC is still pending.
An impact review of the merger on market power, which is required by
the Hart-Scott-Rodino Antitrust Improvements Act, was completed by
the Department of Justice(DOJ) in 1997. All requirements of the
review were satisfied.
The companies expect to receive final decisions on all outstanding
regulatory approvals relating to the merger in 1998.
For information pertaining to common stock market data required by Item
201 of Regulation S-K please refer to page 33 of Exhibit EX-13.
ITEM 6. SELECTED FINANCIAL DATA
For information pertaining to selected financial data required by
Item 301 of Regulation S-K please refer to page 32 of Exhibit EX-13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For information pertaining to management's discussion and analysis
required by Item 303 of Regulation S-K please refer to pages 1
through 8 of Exhibit EX-13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data incorporated by reference
to Exhibit EX-13.
Statements of Income Page 9
Balance Sheets Pages 10 & 11
Statements of Cash Flows Page 12
Statements of Capitalization Page 13
Statements of Retained Earnings Page 14
Notes to Financial Statements Pages 15 to 29
Independent Auditors' Report Page 30
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Offices Held Past 5 Years
M. R. Chase 59 5-7-91 - Vice President-Power Production
7-1-95 - Executive Vice President
10-1-96 - President & Chief Operating
Officer
1-1-97 - President & Chief Executive
Officer
R. R. Ewers 53 5-1-90 - Vice President-Administrative
Services
7-1-95 - Vice President-Administration
D. E. Hamill 61 9-1-80 - Vice President-Budgets &
Regulatory Affairs
(Retired 2-28-98)
J. C. McGowan 60 2-1-89 - Secretary & Treasurer
R. P. Richards 61 1-1-91 - Vice President-Gas Operations
(Retired 2-28-98)
D. R. Sharp 57 7-1-95 - Vice President-Power Production
1-1-96 - Vice President-Engineering
W. C. Troy 59 5-1-86 - Controller
All officers are elected and serve as such until the next annual
meeting of directors. There are no arrangements or understandings
with respect to election of any person as an officer.
For information pertaining to directors, and other data required by
Items 401 and 405 of Regulation S-K, refer to Exhibit 99.6.
ITEM 11. EXECUTIVE COMPENSATION
Refer to information on pages 3 to 6 of Exhibit 99.6.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Refer to information on page 6 and 7 of Exhibit 99.6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others:
In 1997 there were no transactions and there are presently proposed
no transactions with management, to which the company or its
subsidiary was or is to be a party, of the character as to which
answer is called for in response to Item 404(a) of Regulation S-K.
Indebtedness of Management:
No director or officer, or nominee for election as a director, or any
associate of any thereof, was indebted to the company or its
subsidiary during 1997, as to which answer is called for in response
to Item 404(b) of Regulation S-K.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1. The financial statements, including
supporting schedules, are listed in the Index to Financial
Statements, Schedules and Exhibits filed as part of this
Annual Report.
2. Exhibits which are filed herewith, including
those incorporated by reference are listed in the Index to
Financial Statements, Schedules and Exhibits filed as part
of this Annual Report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the last quarter of 1997.
(c) Refer to Index to Exhibits commencing on page 20.
(d) The Unaudited Pro Forma Combined Financial Information of
Interstate Energy Corporation is filed herewith as EX-99.1.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
The 1997, 1996 and 1995 financial statements, together with the
Independent Auditors' Report thereon of Deloitte & Touche LLP, dated
January 29, 1998, appearing on pages 9 through 29 of Exhibit EX-13, are
incorporated in this Form 10-K Annual Report. The following additional
data, as attached on EX-23 and S-1 should be read in conjunction with the
financial statements in such Exhibit EX-13.
Schedules and other historical financial information not included with
this additional financial data have been omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
Page or Exhibit Reference
Form
10-K ExhibitEX-13
Consent of Independent Auditors EX-23
Financial Statements:
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 9
Balance Sheets as of December 31, 1997 and 1996 10 & 11
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 12
Statements of Capitalization as of December 31,
1997 and 1996 13
Statements of Retained Earnings for the years
ended December 31, 1997, 1996 and 1995 14
Notes to Financial Statements 15 - 29
Selected Financial Data 32
Common Stock Market Data 33
Management's Discussion and Analysis 1 - 8
Schedule II: Valuation and Qualifying Accounts
and Provisions 27
Report of Independent Auditors 28
Exhibit
Number Description of Exhibit
2.1 Agreement and Plan of Merger, dated as of November 10, 1995, by
and among WPL Holdings, Inc., IES Industries Inc., Interstate
Power Company and AMW Acquisition, Inc. (incorporated by
reference to Exhibit 2.1 to the Form 8-K of Interstate Power
Company, a Delaware corporation, dated November 10, 1995). **
2.2 Amendment No. 1 to the Agreement and Plan of Merger and Stock
Option Agreements, dated May 22, 1996, by and among WPL
Holdings, Inc., IES Industries Inc., Interstate Power Company,
AMW Acquisition, Inc., WPLH Acquisition Co. and Interstate Power
Company (incorporated by reference to Exhibit 2.1 to the Form 8-
K of Interstate Power Company, a Delaware corporation, dated May
22, 1996). **
2.3 Amendment No. 2 to the Agreement and Plan of Merger, as amended,
dated August 16, 1996, by and among WPL Holdings, Inc., IES
Industries, Inc., Interstate Power Company, WPLH Acquisition Co.
and Interstate Power Company (incorporated by reference to
Exhibit 2.1 to the Form 8-K of Interstate Power Company, a
Delaware corporation, dated August 23, 1996). **
3.(i).1 Restated Certificate of Incorporation of Interstate Power
Company as originally filed April 18, 1925 and as amended
effective through October 21, 1993. **
3.(i).2 Certificate of Amendment to the Restated Certificate of
Incorporation of Interstate Power Company, effective March 4,
1997. **
3.(i).3 IPC Development Co. Articles of Incorporation, State of Iowa
dated May 24, 1978 (physically filed in Form 10-K for the Year
Ended December 31, 1978 as EXHIBIT G). **
3.(ii).1 By-Laws of Interstate Power Company as adopted April 20, 1925
and as amended October 1, 1996 (filed in Form 10-Q for the
Quarter Ended September 30, 1996 as EX-3.(ii)). **
3.(ii).2 IPC Development Co. By-Laws adopted May 10, 1978 (physically
filed in Form 10-K for the Year Ended December 31, 1978 as
EXHIBIT H). **
4.1 The Original through the Nineteenth Supplemental Indentures of
Interstate Power Company to The Chase Manhattan Bank and Carl E.
Buckley and C. J. Heinzelmann, as Trustees, dated January 1,
1948 securing First Mortgage Bonds (physically filed in
Registration Statement No. 33-59352 dated March 11, 1993 under
the Securities Act of 1933 as Exhibits (4)(b) through
(4)(t)). **
4.2 Twentieth Supplemental Indenture of Interstate Power Company to
The Chase Manhattan Bank and C. J. Heinzelmann, as Trustees,
dated May 15, 1993 (physically filed in Registration Statement
No. 33-59352 dated March 11, 1993 under the Securities Act of
1933 as Exhibit (4)(u)). **
4.3 Dividend Reinvestment and Stock Purchase Plan filed on
Form S-3 covering the registration of 500,000 shares of Common
Stock, dated May 11, 1993 (physically filed in Registration
Statement No. 33-62644 under the Securities Act of 1933). **
4.4 Post-Effective Amendment No. 1 to Registration Statement No. 33-
62644, Dividend Reinvestment and Stock Purchase Plan, providing
for expansion of the safekeeping option in the Plan, dated
December 19, 1996 and effective December 31, 1996 (filed in Form
S-3 on December 19, 1996). **
4.5 Guaranty Agreement between Interstate Power Company and Commerce
Union Bank as Trustee dated as of December 1, 1973 (City of
Dubuque, Iowa $4,400,000 Pollution Control Revenue Bonds)
(physically filed in Registration Statement No. 2-50685 as
EXHIBIT 5-GG.1a). **
4.6 Security Agreement dated as of December 1, 1973 between
Interstate Power Company (Guarantor) and Commerce Union Bank
(Trustee) (City of Dubuque, Iowa $4,400,000 Pollution Control
Revenue Bonds) (physically filed in Registration Statement No.
2-50685 as EXHIBIT 5-GG.1b). **
4.7 Guaranty Agreement between Interstate Power Company and Commerce
Union Bank as Trustee dated as of December 1, 1973 (Town of
Lansing, Iowa $3,700,000 Pollution Control Revenue Bonds)
(physically filed in Registration Statement No. 2-50685 as
EXHIBIT 5-GG.2a). **
4.8 Security Agreement dated as of December 1, 1973 between
Interstate Power Company (Guarantor) and Commerce Union Bank
(Trustee) (Town of Lansing, Iowa $3,700,000 Pollution Control
Revenue Bonds) (physically filed in Registration Statement No.
2-50685 as EXHIBIT 5-GG.2b). **
4.9 Guaranty Agreement between Interstate Power Company and Commerce
Union Bank as Trustee dated as of December 1, 1973 (City of
Clinton, Iowa $900,000 Pollution Control Revenue Bonds)
(physically filed in Registration Statement No. 2-50685 as
EXHIBIT 5-GG.3a). **
4.10 Security Agreement dated as of December 1, 1973 between
Interstate Power Company (Guarantor) and Commerce Union Bank
(Trustee) (City of Clinton, Iowa $900,000 Pollution Control
Revenue Bonds) (physically filed in Registration Statement No.
2-50685 as EXHIBIT 5-GG.3b). **
4.11 Registration Statement No. 33-32529 on Form S-8 covering the
registration of $10,000,000 of participation interests,
including the registration of up to 402,010 shares of Common
Stock, par value $3.50 per share, of Interstate Power Company
pursuant to its 401(k) Plan (filed with the Commission on
December 12, 1989). **
4.12 Statement regarding availability upon request of Loan Agreement
and Pollution Control Indenture (filed in Form 10-K for the Year
Ended December 31, 1994 as EX-4). **
10.1 P Gas Portfolio Management and Sales Contract between Interstate
Power Company and MidCon Gas Services Corp. filed under Form SE
as confidential and non-public. **
10.2 Mid-Continent Area Power Pool (MAPP) Restated Agreement dated
January 12, 1996. **
10.3 Mid-Continent Area Power Pool (MAPP) Center Agreement dated
December 2, 1996. **
10.4 Participation Power and Block Energy Agreement between United
Power Association and Interstate Power Company, dated August 7,
1991 (physically filed in Form 10-K for the Year Ended December
31, 1991 as EXHIBIT F). **
10.5 Unit Participation Power Agreement between Iowa Public Service
Company and Interstate Power Company, dated August 12, 1991
(physically filed in Form 10-K for the Year Ended December 31,
1991 as EXHIBIT G). **
10.6 Unit Participation Power Agreement between Minnesota Power and
Interstate Power Company, dated August 14, 1991 (physically
filed in Form 10-K for the Year Ended December 31, 1991 as
EXHIBIT H). **
10.7 Mid-Continent Area Power Pool Agreement Amendment dated January
1, 1991 (physically filed in Form 10-K for the Year Ended
December 31, 1991 as EXHIBIT I). **
10.8 Mid-Continent Area Power Pool Coordination Center Agreement
dated September 18, 1990 (physically filed in Form 10-K for the
Year Ended December 31, 1991 as EXHIBIT J). **
10.9 Coal Transportation Agreement ICC-BN-C-2536 between Interstate
Power Company and Burlington Northern Railroad Company dated
February 21, 1990 (physically filed in Form 10-K for the Year
Ended December 31, 1990 as EXHIBIT D). **
10.10 Third Amended and Restated Coal Supply Agreement between
Interstate Power Company and AMAX Coal Company and a fully
executed Release and Discharge Agreement for the previous
Agreement and Amendments. Both dated April 9, 1990 (physically
filed in Form 10-K for the Year Ended December 31, 1990 as
EXHIBIT E). **
10.11 Coal Transshipment Agreement by and between Interstate Power
Company and Orba-Johnson Transshipment Company dated December
20, 1979 (physically filed in Form 10-K for the Year Ended
December 31, 1979 as EXHIBIT F, and filed in Form 10-K/A for the
Year Ended December 31, 1995 as EX-10.b). **
10.12 Coal Transloading Agreement between Interstate Power Company and
Orba-Johnson Transshipment Company dated December 20, 1995
(filed in Form 10-K/A for the Year Ended December 31, 1995 as
EX-10.a). **
10.13 Barge Transportation Agreement dated March 1, 1990 between
Orgulf Transport Company and Interstate Power Company for the
shipment of coal from the Orba-Johnson Transshipment Terminal
near Keokuk, Iowa to the Unit 4 power-generating facility at
Lansing, Iowa (physically filed in Form 10-K for the Year Ended
December 31, 1990 as EXHIBIT J). **
10.14 Coal Supply Agreement between Interstate Power Company and
Powderhorn Coal Company filed under Form SE as confidential and
non-public (filed in Form 10-K for the Year Ended December 31,
1994 as EX-10.a). **
12 Statement re Computation of Ratios. *
13 The Company's 1997 Financial Statements, Management's Discussion
and Analysis, Selected Financial Data and Common Stock Market
Data. *
23 Consent of Independent Auditors. *
27 Financial Data Schedule (required for electronic filing only in
accordance with Item 601 (c) (1) of Regulation S-K). *
99.1 Unaudited Pro Forma combined Financial Information of Interstate
Energy Corporation. *
99.2 Summary Plan Description for the Interstate Power Company 401(k)
Plan dated November 30, 1993 (filed in Form 10-K for the Year
Ended December 31, 1993 as EX-99.c). **
99.3 Interstate Power Company Irrevocable Trust Agreement dated April
30, 1990 (filed in Form 10-K for the Year Ended December 31,
1993 as EX-99.f). **
99.4 Interstate Power Company Amended Deferred Compensation Plan as
amended through January 30, 1990 (filed in Form 10-K for the
Year Ended December 31, 1993 as EX-99.e). **
99.5 Interstate Power Company Supplemental Retirement Plan as amended
and restated November 10, 1995 and December 9, 1997. *
99.6 Supplemental information re: Directors and Executive officers as
required by Regulation S-K. *
99.7 Interstate Power Company Irrevocable Trust Agreement dated
December 1997.*
* Filed Herewith
** Previously Filed
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTERSTATE POWER COMPANY
Date March 27, 1998 By /s/ M. R. CHASE
(M. R. Chase,
President and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
/s/ M. R. CHASE President and Chief Executive
(M. R. Chase) Officer (Principal Executive
Officer and Principal
Financial Officer)
/s/ W. C. TROY Controller (Principal
(W. C. Troy) Accounting Officer)
/s/ W. H. STOPPELMOOR Chairman of the Board
(W. H. Stoppelmoor
/s/ A. B. ARENDS Director
(A. B. Arends)
/s/ J. E. BYRNS Director
(J. E. Byrns)
/s/ A. D. CORDES Director
(A. D. Cordes)
/s/ J. L. HANES Director
(J. L. Hanes)
/s/ G. L. KOPISCHKE Director
(G. L. Kopischke)
Date March 27, 1998
<PAGE>
<TABLE>
SCHEDULE II
INTERSTATE POWER COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND PROVISIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
(Thousands of Dollars)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
BALANCE AT CHARGED CHARGED DEDUCTION BALANCE
BEGINNING TO TO OTHER FROM AT END
DESCRIPTION OF YEAR INCOME ACCOUNTS RESERVES OF YEAR
<S> <C> <C> <C> <C> <C>
YEAR ENDED DEC. 31, 1997
Valuation account
deducted from caption
of which it applies -
accumulated provision
for doubtful accounts $200 $285 $172(a) $457 (b) $200
=========== ======== ========= ========= =======
Provision for medical
benefits, injuries
and damages $3,025 $5,069 $568 $5,709 (c) $2,953
=========== ======== ========= ========= =======
YEAR ENDED DEC. 31, 1996
Valuation account
deducted from caption
of which it applies -
accumulated provision
for doubtful accounts $200 $277 $143(a) $420 (b) $200
========= ========== ========== ========== =========
Provision for medical
benefits, injuries
and damages $4,682 $6,469 $1,215 $9,341 (c) $3,025
========= ========== ========== ========== =========
YEAR ENDED DEC. 31, 1995
Valuation account
deducted from caption
of which it applies -
accumulated provision
for doubtful accounts $200 $169 $144(a) $313 (b) $200
========= ========== ========== ========== =========
Provision for medical
benefits, injuries
and damages $4,671 $5,729 $1,081 $6,799 (c) $4,682
========= ========== ========== ========== =========
(a) Recoveries on accounts previously written off.
(b) Accounts written off.
(c) Claims and damages paid and expenses in connection therewith.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Interstate Power Company:
We have audited the financial statements of Interstate Power Company as of
December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated January
29, 1998; such financial statements and report are included elsewhere in
this Form 10-K Annual Report. Our audits also included the financial
statement schedule of Interstate Power Company, listed in Item 14. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Davenport, Iowa
January 29, 1998
<PAGE>
INDEX OF EXHIBITS FILED HEREWITH:
EX-12 Statement re Computation of Ratios
EX-13 The Company's 1997 Financial Statements, Management's
Discussion and Analysis, Selected Financial Data
and Common Stock Market Data
EX-23 Consent of Independent Auditors
EX-27 Financial Data Schedule (required for electronic filing
only in accordance with Item 601 (c) (1) of Regulation
S-K)
EX-99.1 Unaudited Pro Forma Combined Financial Information of
Interstate Energy Corporation
EX-99.5 Interstate Power Company Supplemental Retirement Plan
as amended and restated November 10, 1995 and
December 9, 1997
EX-99.6 Information regarding Directors and Executive Officers
required by Regulation S-K under Items 10, 11 and 12.
EX-99.7 Interstate Power Company Irrevocable Trust Agreement dated
December 1997.
Ex-12
Computation of Ratio of Earnings to Fixed Charges
Twelve Months Ended
Dec.31 Dec.31 Dec.31 Dec.31 Dec.31
1993 1994 1995 1996 1997
(Thousands of Dollars)
Fixed Charges, as defined:
Interest on long-term debt $16,166 15,405 14,811 14,587 13,880
Other interest 596 1,771 2,325 1,885 1,730
Interest component of rents
charged to operating expenses 183 177 227 231 264
------- ------ ------- ------- -------
Total Fixed Charges $16,945 17,353 17,363 16,703 15,874
======= ====== ======= ======= =======
Earnings, as defined:
Net income $18,987 20,667 27,656 28,323 29,168
Income taxes 9,464 9,188 19,453 18,133 17,685
Fixed charges 16,945 17,353 17,363 16,703 15,874
------- ------- ------- ------- -------
Total Earnings $45,396 47,208 64,472 63,159 62,727
======= ======= ======= ======= =======
Ratio-Earnings to Fixed Charges 2.68x 2.72x 3.71x 3.78x 3.95x
======= ======= ======= ======= =======
Computation of Ratio of Earnings to Fixed Charges
and Preferred & Preference Dividends
Twelve Months Ended
Dec.31 Dec.31 Dec.31 Dec.31 Dec.31
1993 1994 1995 1996 1997
(Thousands of Dollars)
Fixed Charges, as defined:
Interest on long-term debt $16,166 15,405 14,811 14,587 13,880
Other interest 596 1,771 2,325 1,885 1,730
Interest component of rents
charged to operating expenses 183 177 227 231 264
------- ------ ------- ------- -------
Total Fixed Charges $16,945 17,353 17,363 16,703 15,874
====== ====== ======= ======= =======
Preferred & Preference
Dividends, as defined (a) 4,287 3,545 4,187 4,040 3,966
------ ------ ------- ------- -------
Fixed Charges and Preferred &
Preference Dividends $21,232 20,898 21,550 20,743 19,840
====== ======= ====== ======= =======
Earnings, as defined:
Net income $18,987 20,667 27,656 28,323 29,168
Income taxes 9,464 9,188 19,453 18,133 17,685
Fixed charges 16,945 17,353 17,363 16,703 15,874
------- ------ ------- ------- -------
Total Earnings $45,396 47,208 64,472 63,159 62,727
======= ====== ======= ======= =======
Ratio-Earnings to Fixed
Charges and Preferred &
Preference Dividends 2.14x 2.26x 2.99x 3.04x 3.16x
======= ======= =============== =======
(a) Preferred and preference dividends have been adjusted by multiplying
the requirement by the ratio that income before income taxes bears to
net income. Such ratios were as follows: 150% in 1993, 145% in 1994,
170% in 1995, 164% in 1996 and 161% in 1997.
EX-13
INTERSTATE POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
MERGER
The Company, WPL Holdings, Inc. (WPLH) and IES Industries Inc. (IES) have
entered into an Agreement and Plan of Merger (Merger Agreement), dated
November 10, 1995, as amended on May 22, 1996, and August 16, 1996,
providing for: a) Interstate Power Company (IPC) becoming a wholly owned
subsidiary of WPLH and b) the merger of IES with and into WPLH, which
merger will result in the combination of IES and WPLH as a single holding
company. The new holding company will be named Interstate Energy
Corporation (Interstate Energy). The proposed merger, which will be
accounted for as a pooling of interests and is intended to be tax free for
federal income tax purposes, was approved by the shareholders of each
company on September 5, 1996. It is still subject to approval by the
Securities and Exchange Commission. The companies expect to receive
approval in 1998.
The business of Interstate Energy will consist of utility operations and
various non utility enterprises, and it is expected that its utility
subsidiaries will serve more than 897,000 electric customers and 383,000
natural gas customers in Iowa, Illinois, Minnesota and Wisconsin.
Under the terms of the Merger Agreement, the outstanding shares of WPLH's
common stock will remain unchanged and outstanding as shares of Interstate
Energy. Each outstanding share of IES common stock will be converted to
1.14 shares of Interstate Energy's common stock. Each share of the
Company's common stock will be converted to 1.11 shares of Interstate
Energy's common stock. It is anticipated that Interstate Energy will
retain WPLH's common share dividend payment level as of the effective time
of the merger. Currently that level represents an annual rate of $2.00
per share.
WPLH is a holding company headquartered in Madison, Wisconsin, and is the
parent company of Wisconsin Power and Light Company (WP&L) and Heartland
Development Corporation (HDC). WP&L supplies electric and gas service to
approximately 393,000 and 155,000 customers, respectively, in south and
central Wisconsin. HDC and its principal subsidiaries are engaged in
businesses in three major areas: environmental, energy services and
affordable housing services.
IES is a holding company headquartered in Cedar Rapids, Iowa, and is the
parent company of IES Utilities Inc. (Utilities) and IES Diversified Inc.
(Diversified). Utilities supplies electric and gas service to
approximately 339,000 and 178,000 customers, respectively, in Iowa.
Diversified and its principal subsidiaries are primarily engaged in the
energy related, transportation and real estate development businesses.
Interstate Energy will be the parent company of Utilities, WP&L and IPC
and will be registered under the Public Utility Holding Company Act of
1935 (1935 Act), as amended. The merger agreement provides that these
operating utility companies will continue to operate as separate entities
for a minimum of three years beyond the effective date of the merger. In
addition, the non utility operations of IES and WPLH will be combined
shortly after the effective date of the merger under one entity to manage
the diversified operations of Interstate Energy. The corporate
headquarters of Interstate Energy will be in Madison, Wisconsin.
The Securities & Exchange Commission (SEC) historically has interpreted
the 1935 Act to preclude registered holding companies, with limited
exceptions, from owning both electric and gas utility systems. Although
the SEC has recently recommended that registered holding companies be
allowed to hold both gas and electric utility operations if the affected
states agree, it remains possible that the SEC may require as a condition
to its approval of the Proposed Merger that the Company, WPLH and IES
divest their gas utility properties, and possibly certain non utility
ventures of IES and WPLH, within a reasonable time after the effective
date of the proposed merger.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $67 million in 1997 versus $63
million in 1996. The funds were primarily used to pay the company's
construction program and to pay common and preferred dividends. It is
management's opinion that the company has adequate access to capital
markets and will be able to satisfy anticipated capital requirements.
Construction expenditures were $29, $31 and $29 million in 1997, 1996 and
1995, respectively. For the five year period from 1998 through 2002,
construction expenditures are estimated to be $197 million. The company
anticipates that approximately 75% of the construction funds for years
1998 and 1999 will be generated internally. The 1998 and 1999 construction
programs are estimated to be $31 and $42 million, respectively.
The company has authorization from the Federal Energy Regulatory
Commission (FERC) to issue up to $75 million in short term debt. At year
end 1997, a $41.5 million line of credit was available. Lines of credit
are generally used in support of commercial paper, which is the primary
source of short term financing. At year end 1997, the company had $33.5
million of commercial paper payable.
At December 31, 1997, based upon the most restrictive earnings test
contained in the company's Indenture pursuant to which first mortgage
bonds are issued, the company could issue in excess of $200 million of
additional first mortgage bonds. The company's fixed charge coverage ratio
was 4.0 times for 1997, 3.8 times for 1996 and 3.7 times for 1995.
The company's stock price decreased from $33.125 at year end 1995 to $29
at year end 1996 but attained a record high of $37.44 at year end 1997.
Effective June 1996, the company elected to issue new shares of common
stock for the Dividend Reinvestment and Stock Purchase Plan rather than
purchasing shares on the open market. The company resumed open market
purchases to satisfy the Dividend Reinvestment and Stock Purchase Plan
requirements in 1997.
Electric and gas rates include an energy adjustment clause and a purchased
gas adjustment clause whereby increases or decreases in fuel and purchased
gas costs are included in current revenue without having changes in base
rates approved in formal hearings. Electric capacity costs are not
recovered from customers through energy adjustment clauses, but rather
must be addressed in base rates in a formal rate proceeding. However, any
Iowa jurisdictional revenue from electric capacity sales to other
utilities is returned to customers through the energy adjustment clause.
The company is subject to regulation which recognizes only original cost
rate base. This may result in economic losses when the effects of
inflation are not recovered from customers on a timely basis.
PURCHASED POWER CONTRACTS
In 1992, the company entered into three long term purchased power
contracts with other utilities. The contracts provide for the purchase of
255 MW of capacity through April 2001. Energy is available at the
company's option at approximately 100% to 110% of monthly production costs
for the designated units. The three purchased power contracts required
capacity payments of $24.9 million in 1997, and $24.6 in 1996 and 1995.
Over the remaining life of the contracts, total capacity payments will be
approximately $85.6 million. The purchased power contract payments are not
for debt service requirements of the selling utility, nor do they transfer
risk or rewards of ownership.
The rate structure approved by the Minnesota Public Utilities Commission
(MPUC) does not provide for full recovery of purchased power costs
applicable to the Minnesota jurisdiction. The 1996 rate order by the MPUC
held that the company had 100 MW of excess capacity and disallowed
recovery of approximately $800,000 annually.
The company has not filed for rate recovery of the allocable portions of
the purchased power payments in the Illinois and FERC jurisdictions. The
company believes that increased margins from sales growth in Illinois have
largely offset the revenue deficiency.
CLEAN AIR ACT
The company meets the existing federal and state environmental
regulations. The Federal Clean Air Act Amendments of 1990 requires
reductions in sulfur dioxide and nitrogen oxide emissions from power
plants. The most restrictive provisions relate to sulfur dioxide
emissions. Phase 1 of the Clean Air Act became effective January 1, 1995,
while Phase 2 is effective January 1, 2000. To comply with Phase 1, the
company has switched to low sulfur coal and installed low nitrogen oxide
burners. No significant costs will be incurred to comply with Phase 2
environmental standards, which take effect January 1, 2000.
COAL TAR DEPOSITS
Early this century, various utilities including the company operated
plants which produced manufactured gas for cooking and lighting. The
company's facilities ceased operations over 40 years ago when natural gas
pipelines were extended into the upper Midwest. Some of the former
gasification sites contain coal tar waste products which may present an
environmental hazard. The company has identified nine sites which may
contain hazardous waste from former coal gasification plants and has
recorded an estimated liability applicable to the sites.
In 1957, the company purchased facilities in Mason City, Iowa, from Kansas
City Power & Light Company (KCPL) which included land previously used for
a coal gasification plant. Coal tar waste was discovered on the property
in 1984. In 1995, a settlement was reached with KCPL for sharing of costs
to remediate the site. As of year end 1997, soil remediation of the site
is complete, however, ground water monitoring continues. The company's
total share of cost from 1984 to 1997 at this site is $2.7 million.
The company formerly operated a manufactured gas plant in Rochester,
Minnesota. Soil remediation was completed in 1995 and post remediation
groundwater monitoring is complete pending final review. From 1991 through
1997, the company incurred costs aggregating $6.9 million applicable to
the Rochester site. A MPUC decision allowed the company to recover $4.9
million over a 10 year period beginning in 1996.
The company has identified an additional seven sites, as described below,
which may contain hazardous waste from former coal gasification plants and
has recorded an estimated liability applicable to the investigation of
those sites. The company is unable to determine, at this time, the
extent, if any, of remediation necessary at these seven sites.
In Minnesota, the company owned or operated four manufactured gas plant
sites: Albert Lea, Austin, New Ulm and Owatonna. Potentially hazardous
wastes associated with former coal gasification operations have been
identified at each site. The company incurred $0.2 million in
investigation costs for these sites in 1997, and $1.5 million since the
investigation process began.
The company received accounting orders from the MPUC which allows the
deferral of investigation and remediation costs applicable to the
Minnesota sites and further allows the company to seek recovery in a rate
case.
In addition, the company has identified three other sites: Galena and
Savanna, Illinois, and Clinton, Iowa. Potentially hazardous wastes
associated with former coal gasification operations have been identified
at these sites. Little or no activity is expected at the Illinois sites in
1998. In 1997, $3.8 million was expensed for investigation and remediation
work expected at the Clinton site in 1998.
Previous actions by Iowa and Illinois regulators have permitted utilities
to recover prudently incurred unreimbursed investigation and remediation
costs.
In 1994, the company filed a lawsuit against certain of its insurers to
recover the costs of investigating and remediating the former coal
gasification plants. Eight insurers paid the company a total of $9.6
million in 1995, 1996 and 1997 in order to be discharged from the lawsuit.
As of December 31, 1997, $4.8 million is recorded as a deferred credit
pending regulatory disposition. Neither the company nor its legal counsel
is able to predict the amount of additional insurance recovery, and
accordingly, no potential recovery has been recorded.
LARGE ELECTRIC CUSTOMERS
The company's six largest electric customers consumed a total of 1,762,009
MWH of electricity in 1997, which accounts for over 33 percent of total
MWH sales. These customers are involved in the production of agricultural,
chemical and cement products and their usage is generally not affected by
weather variations. The company is not aware of any plan by these
customers to significantly reduce consumption. Electric consumption by
these customers increased 1.0 percent from 1996, while 1996 consumption
was 0.4 percent less than 1995. The aggregate 1997 rate for these
customers was approximately 3.3 cents per KWH.
DEMAND SIDE MANAGEMENT COSTS
Regulations in Iowa and Minnesota require that utilities conduct demand
side management or energy efficiency programs. The company's long term
forecast projects that these programs may offset the need for
approximately 150 MW of generating capacity by the year 2001. Program
costs are subject to regulatory reviews.
The company's Minnesota rates recover jurisdictional demand side
management expenditures and lost revenues. The Iowa Utilities Board (IUB)
allows recovery of deferred Iowa costs. The 1990, 1991 and 1992 DSM costs
are being recovered over a four year period which began in October 1994.
The 1993, 1994 and 1995 DSM costs are being recovered over a four year
period which began in May 1997. Cost recovery of the DSM costs for 1996
and through September 1997 began in October 1997 and are being recovered
over a four year period. Effective October 1997, DSM costs for the period
of October 1997 through September 1998 will be recovered as they are
incurred.
ORDER 636
FERC Order 636, effective in late 1993, shifted primary responsibility for
gas supply acquisition from pipelines to local distribution companies such
as the company.
Order 636 provides a mechanism under which pipelines can recover prudent
transition costs associated with the restructuring process. The company is
currently recovering these costs from customers through the purchased gas
adjustment clause. The company anticipates that under customary ratemaking
practices, future transition costs will be recovered from customers, and
has recorded on its balance sheet a liability and a corresponding
regulatory asset in the amount of $1.3 million.
INDUSTRIAL AND COMMERCIAL GAS CUSTOMERS
Current regulatory rules allow industrial and commercial customers to
purchase their gas supply directly from producers and use the company's
facilities to transport the gas. Transportation customers pay the company
a fee equivalent to the margin on a retail sale. Acting as a gas
transporter, rather than as a merchant, reduces the risk applicable to
taking ownership of the gas. Twenty two large customers currently purchase
a majority of their gas requirements from producers or gas marketers.
Consumption for the three largest gas customers was up 12% over 1996 and
currently accounts for approximately 70% of system throughput. The
company's largest gas customer, which represents 36% of the company's
total gas throughput, is committed by contract for the next four years.
RATE MATTERS
The company filed a Minnesota electric rate increase application in June
1995. The application requested an annual increase of $4.6 million (later
adjusted by the company to $3.3 million). Interim rates were not
requested. On April 10, 1996, the Commission issued an order allowing an
increase in electric rates of $2.3 million. The company and the Department
of Public Service filed for reconsideration by the Commission. A
Commission order issued June 26, 1996, denied reconsideration. Rates
reflecting the increase granted were implemented in August 1996. A
Commission order issued December 16, 1996, allowed the company to recover
approximately an additional $830,000 in 1997 applicable to the time period
from the original order to the date when new rates were implemented.
The company filed a Minnesota gas rate increase application in May 1995.
The application requested an annual increase of $2.4 million, including a
return on common equity of 11.75%. Interim rates in an annual amount of
$1.5 million were placed in effect in June 1995. On February 29, 1996, the
Commission issued an order allowing an increase in gas rates of $2.1
million. The company, the Department of Public Service and the Office of
Attorney General filed for reconsideration by the Commission. A Commission
order after reconsideration issued July 2, 1996, affirmed the level of
increased rates at approximately $2.1 million. Rates reflecting the
increase granted were implemented in September 1996. The Department of
Public Service and the Office of Attorney General appealed the
Commission's decision. The appeal was denied by the Minnesota Court of
Appeals on February 18, 1997. On March 21, 1997, the Department of Public
Service and the Office of Attorney General appealed the decision of the
Court of Appeals (and the Commission) to the Minnesota Supreme Court. On
January 8, 1998, the Minnesota Supreme Court upheld the MPUC initial
decision allowing the company to recover $4.9 million of clean up expenses
over a 10 year period.
CHANGING STRUCTURE OF THE ELECTRIC INDUSTRY
The National Energy Policy Act of 1992 addresses several matters designed
to promote competition in the electric wholesale power generation market,
including mandated open access to the electric transmission system. As
legislation, regulations, and economic changes occur, electric utilities
will be faced with increased competitive pressure. The company currently
faces competition from other suppliers of electrical energy to wholesale
customers and from alternative energy sources and self-generation for
other customer groups, primarily industrial customers.
As a result of cost-based regulation, the company follows the accounting
practices set forth in Statement of Financial Accounting Standard (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Under SFAS 71 regulators can create assets and impose liabilities that
would not be recorded by non-regulated entities. Regulatory assets and
liabilities represent probable future revenues that will be recovered from
or refunded to customers through the ratemaking process. Recoverability
of regulatory assets is assessed at each reporting period. Should the
basis of regulation for some or all of the company's business change from
cost-based regulation, existing regulatory assets and liabilities would
have to be written off unless regulators specify an alternative means of
recovery.
Year 2000
The Merged Company (see above for further discussion of the Merger)
utilizes software, embedded systems and related technologies throughout
its businesses that will be affected by the date change in the Year 2000.
An internal task force has been assembled to review and develop the full
scope, work plan and cost estimates to ensure that the merged Company's
systems continue to meet its internal and customer needs.
Phase I of the project has been completed which encompasses a review of
the necessary software modifications that will need to be made to the
Merged Company's financial and customer systems. The Merged Company
currently estimates that the remaining costs to be incurred on this phase
of the project will be approximately $4 million to $8 million in the
aggregate. The task force has also begun Phase II of the project which is
an extensive review of the Merged Company's embedded operating systems for
Year 2000 conversion issues. The Merged Company is currently unable to
estimate the costs to be incurred on this phase of the project but does
believe that the costs will be significant. An estimate of the expenses
to be incurred on this phase of the project is expected to be available by
the third quarter of 1998.
RESULTS OF OPERATIONS
The company's results of operations and financial condition are affected
by numerous factors, including weather, general economic conditions and
rate changes.
Earnings per share of common stock were $2.74 for 1997, compared with
$2.69 for 1996 and $2.63 for 1995. Increased sales, electric and gas rate
increases and continuing efforts to control costs contributed to the
increased earnings. The 1997 return on common equity was 12.7%, compared
with 12.9% for 1996 and 13.0% in 1995.
Electric residential sales for 1995 were unusually high primarily because
of warm and humid weather during the air conditioning season. The 1996 and
1997 summers returned to a more normal weather pattern. KWH use per
residential customer was 7,893 for 1997; 7,972 for 1996; and 8,280 for
1995.
Electric "margin" is defined as electric revenue less certain other costs
(primarily fuel and purchased power). Electric margins for years 1997,
1996 and 1995 were $154.8, $153.5 and $151.8 million, respectively. The
Iowa electric rate increase implemented in June 1995 and the Minnesota
electric rate increase in August 1996 were the primary reasons for the
increased electric margin. Gas "margin" is defined as gas revenue less
certain other costs (primarily purchased gas cost). The gas margins for
1997, 1996 and 1995 were $19.2, $17.2 and $17.3 million, respectively.
Rate increases in the states of Minnesota and Iowa contributed to a higher
gas margin. The gas margin for 1996 was depressed due to a sharp increase
in gas costs in December of 1996. Under existing purchase gas adjustment
clauses, there normally is a delay of at least a month in collecting (or
refunding) any variations in gas costs.
Other operating expenses were $64.7, $51.7 and $50.0 million for 1997,
1996 and 1995, respectively. Other operating expenses include $1.5, $2.7
and $1.3 million for 1997, 1996 and 1995, respectively, for merger related
expenses. Other operating expenses for the years 1997, 1996 and 1995,
include $3.8, $0.4 and $1.0 million, respectively, for environmental
investigation, remediation and litigation costs.
Maintenance expense for 1997 was $17.8 million, compared to $16.2 million
in 1996 and $14.9 million in 1995. Several maintenance projects postponed
in 1995 were completed in 1996 and 1997.
Depreciation expense was $31.2, $30.6 and $29.3 million, for 1997, 1996
and 1995, respectively. The increase is primarily due to additional
investment and the implementation of higher depreciation rates approved by
the MPUC.
Interest on long-term debt was $13.9, $14.6 and $14.8 million for 1997,
1996 and 1995, respectively. On May 1, 1997, $17 million of 6 1/8% First
Mortgage Bonds were retired. As a result, the percentage of total
capitalization attributable to long term debt has declined from 44.8% at
year end 1995 to 39.8% at year end 1997.
Interest on commercial paper payable was $1.5, $1.6 and $2.1 million for
1997, 1996 and 1995, respectively. The decreased commercial paper interest
expense is primarily attributable to a slightly higher average balances
outstanding offset by lower interest rates. At year end 1997, the company
had $33.5 million of short term commercial paper payable, compared with
$28.7 million at year end 1996.
The company's investment in coal stockpiles was $10.2 million at December
31, 1997 and $13.3 million at December 31, 1996. Refinements to the
company's fuel delivery process have decreased the amount of inventory
required to carry the company over the winter. The company's investment
in gas stored underground was $2.7, $2.3 and $2.4 million at December 31,
1997, 1996 and 1995, respectively.
<PAGE>
Statements of Income
For the years ended December 31 1997 1996 1995
(Thousands of Dollars)
Operating Revenues:
Electric $277,340 $276,620 $274,873
Gas 54,507 49,464 43,669
------- ------- -------
Total operating revenues 331,847 326,084 318,542
------- ------- -------
Operating Expenses:
Operation:
Fuel for electric generation 55,402 57,560 62,164
Power purchased 56,770 61,556 57,566
Cost of gas sold 33,324 31,617 25,888
Other operating expenses 64,685 51,707 44,581
Maintenance 17,782 16,164 14,881
Depreciation and amortization 31,676 31,087 29,560
Income Taxes:
Federal current 10,233 11,389 11,608
State current 3,080 3,434 3,549
Deferred taxes - net 2,430 2,787 6,506
Investment tax credit
amortization (1,028) (1,028) (1,028)
Property and other taxes 16,708 16,064 15,990
------- ------- -------
Total operating expenses 291,062 282,337 271,265
------- ------- -------
Operating Income 40,785 43,747 47,277
Other Income and Deductions 3,819 798 (2,826)
------- ------- -------
Income Before Interest Charges 44,604 44,545 44,451
------- ------- -------
Interest Charges:
Long-term debt 13,880 14,587 14,811
Other interest charges 1,730 1,885 2,325
Borrowed funds used during
construction (174) (250) (341)
------- ------- -------
Total interest charges 15,436 16,222 16,795
------- ------- -------
Net Income 29,168 28,323 27,656
Preferred Stock Dividends (2,469) (2,463) (2,458)
Income Available for Common
Stock $26,699 $25,860 $25,198
======= ======= =======
Earnings Per Average Common
Share Outstanding based on
9,724,974: 9,593,664 and
9,564,287 shares, respectively $2.74 $2.69 $2.63
======= ====== ======
Dividends Paid Per Common Share $2.08 $2.08 $2.08
======= ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
Balance Sheets
ASSETS
As of December 31 1997 1996
(Thousands of Dollars)
Utility Plant:
In Service:
Electric:
Production $377,432 $376,338
Transmission 191,068 187,911
Distribution 246,553 234,320
General 54,071 53,847
-------- --------
Total Electric 869,124 852,416
Gas 70,201 68,047
-------- --------
939,325 920,463
Less - accumulated depreciation 450,595 426,471
-------- --------
488,730 493,992
Held for future use 591 591
Construction work in progress 5,276 3,129
-------- --------
Net utility plant 494,597 497,712
-------- --------
Other Property and Investments 6,186 453
-------- --------
Current Assets:
Cash and cash equivalents 2,897 3,072
Accounts receivable, less reserves
of $200 27,061 28,227
Inventories - at average cost:
Fuel 13,888 16,623
Materials and supplies 6,297 6,214
Prepaid pension cost 3,487 3,331
Prepaid income tax 11,317 9,483
Other prepayments and current assets 1,049 683
-------- --------
Total current assets 65,996 67,633
-------- --------
Deferred Debits:
Regulatory assets 65,818 66,786
Unamortized debt expense 5,503 5,710
Other 649 906
-------- --------
Total deferred debits 71,970 73,402
-------- --------
Total $638,749 $639,200
======== ========
The accompanying notes are an integral part of these finanical statements.
<PAGE>
Balance Sheets
Capitalization and Liabiities
As of December 31 1997 1996
(Thousands of Dollars)
Capitalization, per accompanying statements:
Common stock, par value $3.50 per share;
authorized - 30,000,000 shares; issued
and outstanding - 9,760,821 in 1997 and
9,670,866 in 1996 $34,163 $33,848
Additional paid-in capital 108,292 105,959
Retained earnings 73,166 66,251
-------- --------
Total common equity 215,621 206,058
-------- --------
Preferred stock (optional sinking fund) 10,819 10,819
Preferred stock (mandatory sinking fund) 24,267 24,147
Long-term debt 165,280 171,506
-------- --------
Total capitalization 415,987 412,530
-------- --------
Current liabilities:
Commercial paper 33,500 28,700
Long-term debt maturing within one year 6,300 17,225
Accounts payable 13,208 14,013
Dividends payable - preferred stock 599 599
Payrolls accrued 3,385 3,291
Taxes accrued 16,014 16,953
Interest accrued 2,638 2,817
FERC order 636 transition costs 1,300 2,200
Other 4,537 2,878
-------- --------
Total current liabilities 81,481 88,676
-------- --------
Deferred Credits and Other Non-Current
Liabilities:
Accumulated deferred income taxes 104,669 99,303
Accumulated deferred investment
tax credits 15,985 17,013
Deferred pension costs 7,613 7,115
Environmental clean-up costs 5,794 7,234
Other 7,220 7,329
-------- --------
Total deferred credits and other
non-current liabilities 141,281 137,994
-------- --------
Commitments and Contingencies (Notes 1, 3 and 9)
Total $638,749 $639,200
======== ========
The accompanying notes are an integral part of these finanical statements.
<PAGE>
Statements of Cash Flows
For the years ended December 31 1997 1996 1995
(Thousands of Dollars)
Reconciliation of Net Income to
Cash Flows
From Operating Activities:
Net Income $29,168 $28,323 $27,656
Adjustments for non-cash items:
Depreciation and amortization 31,676 31,087 29,560
Deferred income taxes 4,593 4,916 6,912
Investment tax credit
amortization (1,028) (1,028) (1,028)
Equity funds used during
construction (AFUDC) (16) (13) 0
Prepaid pension cost 672 99 74
Changes in assets and liabilities:
Accounts receivable - net 1,166 (430) (5,447)
Inventories 2,658 2,016 4,599
Accounts payable and other
current liabilities 3,885 73 (2,946)
Accrued and prepaid taxes (3,009) (2,500) 2,379
Interest accrued (179) (2) (111)
Other prepayments and
current assets (622) 470 1,469
Rate refund payable 0 (256) 256
Regulatory assets - deferred demand
side management costs (91) (6,718) (6,177)
Regulatory assets - other (3,005) 2,648 794
Other operating activities 877 4,018 3,275
------- ------- -------
Cash flows from operating
activities 66,745 62,703 61,265
------- ------- -------
Cash Flows From Investing Activities:
Additions to utility plant (28,698) (30,734) (28,238)
Borrowed funds used during
construction (AFUDC) (174) (250) (341)
Other (5,697) (243) 127
------- ------- -------
Cash flows from investing
activities (34,569) (31,227) (28,452)
------- ------- -------
Cash Flows From Financing Activities:
Issuance of common stock 2,694 3,228 0
Retirement of long-term debt (17,225) (225) (14,225)
Dividends on common and preferred
stock (22,620) (22,344) (22,288)
Commercial paper - net 4,800 (10,600) 3,700
------- ------- -------
Cash flows from financing
activities (32,351) (29,941) (32,813)
------- ------- -------
Net Increase (Decrease) in Cash and
Cash Equivalents ($175) $1,535 $0
Cash and Cash Equivalents:
Beginning of year 3,072 1,537 1,537
------- ------- -------
End of year $2,897 $3,072 $1,537
======= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of interest
capitalized) $15,533 $15,678 $16,655
Income taxes $17,210 $16,330 $11,134
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statements of Capitalization
As of December 31 1997 1996
Common Equity $215,621 51.8% $206,058 49.9%
------- -------
Cumulative Preferred Stocks:
Authorized:
Preferred - 2,000,000 shares at
$50.00 par value
Preference - 2,000,000 shares at
$1.00 par value (A)
Issued and outstanding (B):
Redemption
Series Shares Price
Preferred with optional sinking
fund provisions:
4.36% 60,455 $52.30 3,023 3,023
4.68% 55926 $51.62 2,796 2,796
7.76% 100000 $52.03 5,000 5,000
------- -------
10,819 2.6% 10,819 2.6%
------- -------
Preferred with mandatory sinking
fund provisions:
6.40% 545000 $53.20 27,250 27,250
Unamortized Discount on 6.40%
Preferred Stock (1,847) (1,921)
Unamortized Issuance Expense on
6.40% Preferred Stock (97) (101)
Unamortized Call Premiums on
Preferred Stock (1,039) (1,081)
------- -------
24,267 5.8% 24,147 5.9%
------- -------
Long-Term Debt:
First Mortgage Bonds:
8 % Series due 2007 25,000 25,000
8 5/8% Series due 2021 25,000 25,000
7 5/8% Series due 2023 94,000 94,000
------- -------
144,000 144,000
------- -------
Pollution Control Revenue Bonds:
5.95% due 1997 to 1998 - 5,850
6 3/8% due 1998 to 2007 10,950 11,400
5.75% due 2003 1,000 1,000
6.25% due 2009 1,000 1,000
6.30% due 2010 5,600 5,600
6.35% due 2012 5,650 5,650
------- -------
24,200 30,500
------- -------
Other Long-Term Debt 86 95
------- -------
Unamortized Discount on
Long-Term Debt (3,006) (3,089)
------- -------
Total Long-Term Debt - net 165,280 39.8% 171,506 41.6%
------- -------
Total Capitalization $415,987 100.0% $412,530 100.0%
======= =======
(A) None outstanding.
(B) Redeemable at the option of the company upon 30 days notice at the
current prices shown.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statements of Retained Earnings
For the years ended December 31 1997 1996 1995
(Thousands of Dollars)
Retained Earnings, Beginning
of Year $66,251 $61,150 $55,893
Net Income 29,168 28,323 27,656
Dividends on Common Stock (20,225) (19,950) (19,941)
Dividends on Preferred Stock (2,469) (2,463) (2,458)
Additional Minimum Liability of
Non-Qualified Pension Plan at
December 31 - net of taxes (347) (809) -
Unrealized Gain on Subsidiary
Securities 788 -
------- ------- -------
Retained Earnings, End of Year $73,166 $66,251 $61,150
======= ======= =======
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(dollars in millions except as otherwise indicated)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General
Interstate Power Company (the Company or IPC) is an investor-owned public
utility engaged principally in the generation, transmission, distribution
and sale of electricity and the purchase, distribution, transportation and
sale of natural gas in Iowa, Minnesota and Illinois.
Refer to Note 2 for discussion of the proposed merger of the Company.
Certain reclassifications have been made to the prior years financial
statements to conform with the 1997 presentation.
b. Regulation
The financial statements are based on generally accept accounting
principles, which give recognition to the ratemaking and accounting
practices of the Federal Energy Regulatory Commission (FERC) and state
commissions having regulatory jurisdiction over the Company.
c. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
d. Cash and Equivalents
Cash and equivalents are stated at cost, which approximates fair market
value, and consist of short-term liquid investments with a maturity of
three months or less from the date of acquisition.
e. Utility Plant and Other Property and Equipment
Utility plant and other property and equipment is recorded at original
cost. Utility plant costs include financing costs that are capitalized
using the FERC method for allowance for funds used during construction
(AFUDC), including approval to incorporate demand side management costs in
the formula. The AFUDC capitalization rates for 1997, 1996 and 1995 were
6.0%, 5.8% and 6.0%, respectively. Consistent with current rate making
practices, these capitalized costs are expected to be recovered in future
rates as the cost of the utility plant is depreciated.
Normal repairs, maintenance and minor items of utility plant and other
property and equipment are expensed. Ordinary utility plant retirements,
including removal costs less salvage value, are charged to accumulated
depreciation upon removal from utility plant accounts.
Substantially all property is subject to the lien of the First Mortgage
Bond Indenture.
f. Depreciation
Depreciation is computed on the straight-line method based on net salvage
values and the estimated remaining service lives of depreciable property.
The provision for book depreciation as a percentage of the average balance
of depreciable property in service is as follows:
1997 1996 1995
Electric 3.6% 3.6% 3.5%
Gas 3.4% 3.4% 3.5%
g. Regulatory Assets and Liabilities
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," provides that rate-regulated
public utilities, such as the Company, record certain costs and credits
allowed in the ratemaking process in different periods than for
unregulated entities. These are deferred as regulatory assets or
regulatory liabilities and are recognized in the statements of income at
the time they are reflected in rates. If a portion of the Company's
operations are no longer subject to the provisions of SFAS No. 71, a
write-off of regulatory assets and liabilities would be required, unless
some form of transition cost recovery is established by the appropriate
regulatory body. In addition, the Company would be required to determine
any impairment to other assets and write-down such assets to their fair
value.
As of December 31, 1997 and 1996, regulatory created assets include the
following:
1997 1996
Deferred income taxes (Note 5) $27.2 $26.6
Deferred demand side management 30.0 29.9
Environmental clean-up (Note 9 b) 6.2 6.4
FERC order No. 636 transition costs 1.3 2.2
Employee/retiree benefits (Note 4) 1.1 1.7
----- -----
$65.8 $66.8
===== =====
Refer to the individual notes referred above for a further discussion of
certain items reflected in regulatory assets. Regulators allow the
Company to earn a return on the deferred demand side managements costs but
not on the other regulatory assets. As of December 31, 1997 and 1996, the
Company had recorded regulatory related liabilities of $5.7 and $5.0,
respectively, which are primarily related to pensions.
h. Revenue and Fuel Costs
Annual revenues do not include unbilled revenues for service rendered from
the date of the last meter reading to year end.
The Company's tariffs provide for subsequent adjustment to its electric
and natural gas rates for changes in the cost of fuel and purchased energy
and in the cost of natural gas purchased for resale. Changes in the
under/over collection of these costs are reflected in "Fuel for
production" and "Gas purchased for resale" in the statements of income.
The cumulative under or over collection is reflected in the consolidated
balance sheets as a current asset or current liability. Purchased capacity
costs are not recovered from electric customers through energy adjustment
clauses. Instead, these costs must be addressed in base rates in a formal
rate proceeding.
i. Rate Matters
MINNESOTA
In May, 1995 the Company filed an application with the Minnesota Public
Utilties Commission (MPUC) for an increase in gas rates in an annual
amount of $2.4 million. Increased interim rates in an annual amount of
$1.5 million were placed in effect in June, 1995. On February 29, 1996,
the Commission issued an order allowing an increase in gas rates of $2.1
million. Rates reflecting the increase were implemented in September,
1996. The Department of Public Service and the Office of Attorney General
appealed the Commission's decision. The appeal was denied by the Minnesota
Court of Appeals on February 18, 1997. On March 21, 1997, the Department
of Public Service and the Office of Attorney General appealed the decision
of the Court of Appeals (and the Commission) to the Minnesota Supreme
Court. On January 8, 1998, the Minnesota Supreme Court upheld the MPUC
initial decision.
FEDERAL ENERGY REGULATORY COMMISSION (FERC)
The Company, IES Utilities Inc. and Wisconsin Power & Light Company (WP&L)
proposed to freeze their wholesale electric prices for four years from the
effective date of the merger as part of their merger filing with the FERC.
The Company does not expect the merger-related proposals to have a
material adverse effect on its financial position or results of
operations.
DEMAND SIDE MANAGEMENT COSTS
The 1990, 1991 and 1992 DSM costs are being recovered over a four year
period beginning in October 1994. The 1993, 1994 and 1995 DSM costs are
being recovered over a four year period beginning in May 1997. The DSM
costs for 1996 and through September 1997 are being recovered over a four
year period beginning in October 1997. Effective October 1997, DSM costs
for the period of October 1997 through September 1998 will be recovered as
they are incurred.
j. Income Taxes
The Company follows the liability method of accounting for deferred income
taxes, which requires the establishment of deferred tax liabilities and
assets, as appropriate, for all temporary differences between the tax
basis of assets and liabilities and the amounts reported in the financial
statements using currently enacted tax rates as shown in Note 5.
Except as noted below, income tax expense includes provisions for deferred
taxes to reflect the tax effects of temporary differences between the time
when certain costs are recorded in the accounts and when they are deducted
for tax return purposes. As these normalized temporary differences
reverse, the related accumulated deferred inome taxes are reversed to
income. Investment tax credits are accounted for on a deferred basis and
reflected in income ratably over the life of the related utility plant.
Consistent with rate making practices for the Company, deferred tax
expense is not recorded for certain temporary differences (primarily
related to utility property, plant and equipment). As the current taxes
become payable, over periods exceeding 30 years for some generating plant
differences, they are eligible for recovery through rates. Accordingly,
the Company has recorded deferred tax liabilities and regulatory assets,
as identified in Note 1 (g).
k. Concentration of Sales
The Company provides service to 6 large electric customers which accounts
for over 33% of total electric MWH sales. The Company provides
transportation service to 3 large gas customers which accounts for 70% of
system throughput. Title to the gas consumed remains with these
transportation customers.
l. Debt Reacquisition Premium
In accordance with normal regulatory practices, the Company defers debt
redemption premiums and amortizes such costs over the life of the
replacement bonds.
NOTE 2. PROPOSED MERGER OF THE COMPANY
(Unaudited)
On November 10, 1995, the Company, IES Industries Inc. (IES), and WPL
Holdings, Inc. (WPLH) entered into an Agreement and Plan of Merger, as
amended (Merger Agreement), providing for: a) the Company becoming a
wholly-owned subsidiary of WPLH, and b) the merger of IES with and into
WPLH, which merger will result in the combination of IES and WPLH as a
single holding company (collectively, the Proposed Merger). The new
holding company will be named Interstate Energy Corporation (IEC). The
Proposed Merger, which will be accounted for as a pooling of interests and
is intended to be tax-free for federal income tax purposes, has been
approved by the respective Boards of Directors, shareholders and most of
the federal and state regulatory agencies. It is still subject to
approval by the Securities and Exchange Commission (SEC). The companies
expect to receive the SEC approval in 1998.
The summary below contains selected unaudited pro forma financial data for
the year ended December 31, 1997. The financial data should be read in
conjunction with the historical financial statements and related notes of
the Company, IES and WPLH and in conjunction with the unaudited pro forma
combined financial statements and related notes of IEC included in the
Form 10-K Annual Report of the Company. The pro forma combined earnings
per share reflect the issuance of shares associated with the exchange
ratios discussed below.
<TABLE>
<CAPTION>
WPLH IES IPC PRO FORMA
(in millions except per (as (as (as Pro Forma COMBINED
share data) reported) reported) reported) Adjustments (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Revenues $919.3 $930.7 $331.8 $118.8 $2300.6
Income from Continuing $61.3 $66.3 $26.7 $- $154.3
Operations
Earnings per share from $1.99 $2.18 $2.74 $- $2.02
Continuing Operations
Assets at December 31, 1997 $1861.8 $2457.2 $638.7 ($6.1) $4951.3
Long-term obligations, net $526.0 $882.4 $195.8 $- $1604.3
at December 31, 1997
</TABLE>
Under the terms of the Merger Agreement, the outstanding shares of WPLH's
common stock will remain unchanged and outstanding as shares of IEC. Each
outstanding share of IES common stock will be converted to 1.14 shares of
IEC common stock. Each share of the Company's common stock will be
converted to 1.11 shares of IEC common stock. It is anticipated that IEC
will retain WPLH's common share dividend payment level as of the effective
time of the merger.
The Company, an operating public utility headquartered in Dubuque, Iowa,
supplies electric and gas service to approximately 166,000 and 50,000
customers, respectively, in northeast Iowa, northwest Illinois and
southern Minnesota. IES is a holding company headquartered in Cedar
Rapids, Iowa, and is the parent company of IES Utilities Inc. (IES
Utilities) and IES Diversified Inc. (IES Diversified). IES Utilities
supplies electric and gas service to approximately 339,000 and 178,000
customers, respectively, in Iowa. IES Diversified and its principal
subsidiaries are primarily engaged in the energy-related, transportation
and real estate development businesses. WPLH is a holding company
headquartered in Madison, Wisconsin, and is the parent company of
Wisconsin Power and Light Company (WP&L) and Heartland Development
Corporation (HDC). WP&L supplies electric and gas service to approximately
393,000 and 155,000 customers, respectively, in south and central
Wisconsin. HDC and its principal subsidiaries are engaged in business in
three major areas: environmental, energy and affordable housing services.
IEC will be the parent company of WP&L, IES Utilities and IPC and will
be registered under the Public Utility Holding Company Act of 1935, as
amended (1935 Act). The Merger Agreement provides that these operating
utility companies will continue to operate as separate entities for a
minimum of three years beyond the effective date of the merger. In
addition, the non-utility operations of the Company and IES Diversified
will be combined shortly after the effective date of the merger under one
entity to manage the diversified operations of IEC. The corporate
headquarters of IEC will be in Madison, Wisconsin.
The Securities and Exchange Commission (SEC) historically has interpreted
the 1935 Act to preclude registered holding companies, with limited
exceptions, from owning both electric and gas utility systems. Although
the SEC has recommended that registered holding companies be allowed to
hold both gas and electric utility operations if the affected states
agree, it remains possible that the SEC may require as a condition to its
approval of the Proposed Merger that the Company, IES and WPLH divest
their gas utility properties, and possibly certain non-utility ventures of
WPLH and IES, within a reasonable time after the effective date of the
Proposed Merger.
NOTE 3. JOINTLY OWNED UTILITY PLANTS
The Company participates with other utilities in the construction and
operation of several jointly owned utility generating plants. Each of the
respective owners is responsible for the financing of its portion of the
construction costs. Kilowatt-hour generation and operating expenses are
divided on the same basis of ownership with each owner reflecting its
respective costs in its statements of income. The chart below represents
the proportionate share of such plants as reflected in the balance sheets
at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
Plant Accumulated Accumulated
Ownership Inservice MW Plant in Provision for Plant in Provision for
Interest % Date Capacity Service Depreciation CWIP Service Depreciation CWIP
<S> <C> <C> <C> <C> <C> <C> <C>
Coal:
Neal #4 21.5% 1979 640 $82.2 $45.8 $0 $82.4 $43.3 $0
Louisa #1 4.0% 1983 738 $24.7 $10.9 $0 $24.7 $10.2 $0
----- ----- ----- ----- ----- -----
$106.9 $56.7 $0 $107.1 $53.5 $0
===== ===== ===== ===== ===== =====
</TABLE>
NOTE 4. EMPLOYEE BENEFIT PLANS
a. Pension Plans
The Company has a noncontributory, defined benefit retirement plan for all
full-time employees. The benefits are based upon years of service and
levels of compensation. The projected unit credit actuarial cost method
was used to compute net pension costs and the accumulated and projected
benefit obligations. The Company's policy is to fund the plan under the
"aggregate" actuarial cost method to the extent deductible under tax
regulations. Plan assets consist of high-grade bonds, commercial
mortgages and other fixed income investments. Contributions to the plan
for the years ended December 31, 1997, 1996 and 1995 were $3.9, $3.7 and
$3.4 million, respectively.
The following table sets forth the funded status of the plans and amounts
recognized in the Company's balance sheets at December 31, 1997 and 1996:
1997 1996
Accumulated benefit obligation
Vested benefits $39.7 $34.7
Non-vested benefits 1.1 1.3
----- -----
Total 40.8 36.0
Projected benefit obligation 56.2 51.6
Plan assets at fair value 51.6 51.3
----- -----
Plan assets greater or (less) than the (4.6) (0.3)
projected benefit obligation
Unrecognized net transition obligation 1.7 2.1
Unrecognized prior service cost 3.5 2.1
Unrecognized net loss 6.2 1.8
----- -----
Prepaid pension costs $6.8 $5.7
===== =====
Assumed rate of return on plan assets 8.0% 8.0%
===== =====
Discount rate of projected benefit 7.25% 7.5%
obligation ===== =====
Range of assumed rate increases for 5.0% 5.0%
future compensation levels ===== =====
Discount rate for expense 7.5% 7.5%
===== =====
The net pension cost (benefit) recognized in the statements of income for
1997, 1996 and 1995 included the following components:
1997 1996 1995
Service cost $2.4 $2.3 $2.3
Interest cost on projected 3.7 3.7 3.6
Actual return on assets (1.8) (3.6) (3.5)
Amortization and deferrals (1.8) 0.1 0.2
---- ---- ----
Net pension cost $2.5 $2.5 $2.6
==== ==== ====
The Company is collecting an annual funding amount in customer rates and
anticipates that it will continue to do so. The cumulative difference
between the higher funded amount and the accounting pension cost amount is
a deferred credit on the balance sheet.
In addition to the pension plan, the Company has a non-qualified
supplemental retirement plan (SRP), as amended in 1995 and 1997, which
provides a retirement benefit for officers of the Company. Corporate owned
life insurance policies were purchased to provide funding for future cash
requirements. The cash value of such insurance was $1.3 million, $0.9
million and $0.6 million as of December 31, 1997, 1996 and 1995
respectively. The total accumulated benefit obligation for the SRP at
December 31, 1997 and 1996 was $3.7 million and $2.9 million,
respectively. An additional minimum liability was recorded on the balance
sheet in 1997 and 1996 for the supplemental retirement plan due to the
accumulated benefit obligation exceeding the fair value of plan assets.
b. Other Postretirement Benefits
In addition to providing pension benefits, the Company provides life
insurance for retired employees and health care benefits for 930 retirees
and spouses. Substantially all of the 872 full time employees and spouses
become eligible for benefits if they reach retirement age while working
for the Company. The estimated future cost of providing these
postretirement benefits is accrued during the employees' service periods,
and was $4.7, $4.3 and $4.1 million for 1997, 1996 and 1995, respectively.
Funding of the benefit obligation is concurrent with recovery in customer
rates. Plan assets consist of high grade debt securities. Assuming a one
percent increase in the medical cost trend rate, the 1997 cost of
postretirement benefits would increase by $0.7 million and the accumulated
benefit obligation would increase by $6.1 million.
The following table sets forth the funded status of the plans and amounts
recognized in the Company's balance sheets at December 31, 1997 and 1996:
1997 1996
Accumulated benefit obligation
Retirees $27.8 $26.0
Fully eligible active plan 18.4 14.0
----- -----
Total 46.2 40.0
Plan assets at fair value 14.7 11.1
----- -----
Accumulated benefit obligation in excess 31.5 28.9
Unrecognized transition obligation (21.5) (22.7)
Unrecognized net loss (8.4) (3.4)
----- -----
Accrued postretirement benefits $1.6 $2.8
===== =====
Assumed rate of return on plan assets 8.00% 8.00%
===== =====
Discount rate of projected benefit 7.25% 7.50%
===== =====
Discount rate for expense 7.50% 7.50%
===== =====
Medical cost trend on paid charges:
Initial trend rate 9.00% 8.00%
===== =====
Ultimate trend rate 6.00% 6.00%
===== =====
The net postretirement benefits cost recognized in the statements of
income for 1997, 1996 and 1995 included the following components:
1997 1996 1995
Service cost $1.3 $1.2 $1.1
Interest cost on projected
benefit obligation 2.9 2.5 2.3
Actual return on assets (0.8) (0.5) (0.4)
Amortization of transition
obligation 1.5 1.5 1.5
Amortization and deferrals (0.2) (0.4) (0.4)
---- ---- ----
Net pension cost
(benefit) $4.7 $4.3 $4.1
==== ==== ====
NOTE 5. INCOME TAXES
The following table reconciles the statutory federal income tax rate to
the effective income tax rate:
1997 1996 1995
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit 5.5 5.2 5.7
Investment tax credits restored (2.2) (2.2) (2.2)
Excess book over tax depreciation 0.6 1.3 1.5
Other differences, net (1.1) (0.3) 1.3
----- ----- -----
Effective income tax 37.8% 39.0% 41.3%
===== ===== =====
The breakdown of income tax expense as reflected in the statements of
income is as follows:
1997 1996 1995
Federal and state currently
payable $13.3 $14.8 $15.1
Deferred income tax - federal
and state
Additional tax depreciation -
net 2.2 3.0 3.7
Energy efficiency cost 0.4 2.7 2.4
Environmental costs - net 0.8 (2.4) 0.2
Other (0.9) (0.5) 0.3
Investment tax credit restored (1.0) (1.0) (1.0)
Federal and state currently
payable - other income and
deductions 2.9 1.5 (1.2)
---- ---- ----
$17.7 $18.1 $19.5
==== ==== ====
The temporary differences that resulted in accumulated deferred income
taxes (assets) and liabilities as of
December 31, 1997 and 1996, are as follows:
1997 1996
Property $89.3 $86.7
Energy conservation costs 10.7 10.3
Call premiums on reacquired bonds 1.8 1.9
Environmental costs - net (1.8) (2.6)
Unbilled revenue (3.3) (3.5)
Other (3.3) (3.0)
----- -----
$93.4 $89.8
===== =====
Gross deferred assets $(11.3) $(9.5)
Gross deferred liabilities 104.7 99.3
----- -----
$93.4 $89.8
===== =====
NOTE 6. SHORT-TERM DEBT AND LINES OF CREDIT
The Company had bank lines of credit aggregating $52.5 million at December
31, 1997, most of which are at the bank prime rates. Information
regarding short-term debt and lines of credit is as follows:
1997 1996 1995
As of year end--
Lines of credit available $52.5 $42.5 $55.0
Commercial paper outstanding $33.5 $28.7 $39.3
Notes payable outstanding - - -
Discount rates on commercial paper 5.88% 5.48% 5.85%
Interest rates on notes payable - - -
For the year ended--
Maximum month-end amount of $38.7 $32.8 $46.8
short-term debt
Average amount of short-term debt
(based on daily outstanding $28.1 $27.0 $36.2
balances)
Average interest rate on 5.60% 5.48% 5.96%
short-term debt
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Current Assets and Current Liabilities - The carrying amount approximates
fair value due to the short maturities of these financial instruments.
Preferred Stock - Based on quoted market prices for the same or similar
issues.
Long-Term Debt - Based upon the market yield of similar securities and
quoted market prices on the current rates for debt of the same remaining
maturities.
The estimated fair values of financial instruments at December 31, 1997
and 1996 are as follows:
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Preferred stock 24.2 29.2 24.1 24.9
Long-term debt, including
current portion 165.2 173.0 171.4 177.9
NOTE 8. CAPITALIZATION
a. Common Shareowners' and Preferred Stock Investment
In 1993, the Company issued 545,000 shares of 6.40%, $50 par value
preferred stock with a final redemption date of May 1, 2022. Under the
provisions of the mandatory sinking fund, beginning in 2003, the Company
is required to redeem annually $1.4 million of 6.40% preferred stock
(27,250 shares). The discount and other issuance expenses in the amount
of $1.9 million at December 31, 1997 are reflected as an offset to
preferred stock and are being amortized to common equity.
Call premiums related to the 1993 retirement of the preferred and
preference stock in the amount of $1.0 million at December 31, 1997 are
reflected as an offset to preferred stock and are being amortized to
common equity. The amortization transfers the amount of the call premiums
from preferred to common equity over the life of the refunding 6.40%
issue. This amortization has no effect on net income.
The Company's Common Stock Dividend Reinvestment and Stock Purchase Plan
provides for the option of issuing new stock or purchasing shares on the
open market. The Dividend Reinvestment Plan acquired 53,908, 39,326 and
176,971 shares of common stock on the open market during 1997, 1996 and
1995, respectively. The Company received $2.7 million for 89,955 shares
of new common stock in 1997 and $3.2 million for 106,579 shares of new
common stock issued in 1996. None of the authorized shares of preferred,
preference or common stock are reserved for officers and employees or for
options, warrants, conversions or other rights.
b. Long-Term Debt
In 1998, $5.85 million of 5.95% Pollution Control Bonds and $0.45 million
of 6.375% Pollution Control Bonds will mature. Total debt maturities for
the years 1998 through 2002 are $6.3, $0.4, $0.4, $0.4 and $0.4 million,
respectively.
Annual sinking fund requirements are $1.8 million for the years 1998
through 2001and $1.7 million for 2002. Such sinking fund requirements for
first mortgage bonds may be satisfied with property additions at the rate
of 167% of such requirements. Sinking fund requirements for 1997 were met
by property additions.
NOTE 9. COMMITMENTS AND CONTINGENCIES
a. Purchased Power, Coal and Gas
The Company has entered into purchased power capacity, coal and gas
contracts. Its minimum commitments are as follows:
<TABLE>
<CAPTION>
Power Gas Coal
Dollars MWs Dollars Therms Dollars Tons
<S> <C> <C> <C> <C> <C> <C>
1998 $27.8 280 $10.6 24,107 $32.6 950
1999 $28.5 280 $10.5 24,107 $14.0 450
2000 $28.2 280 $10.3 24,107 - -
2001 $9.0 25 $10.2 24,107 - -
2002 $2.0 25 $10.1 24,107 - -
Thereafter $2.0 25 $10.0 24,107 - -
</TABLE>
The four purchased power contracts required annual capacity payments of
$27.0 million in 1997 and $26.6 million in 1996 and 1995. Over the
remaining period of the contracts, total capacity payments will be
approximately $97.3 million. In Iowa, IUB has concluded that the capacity
purchases were prudent and allowed recovery of costs in rates.
The rate structure approved by the MPUC does not provide for full recovery
of purchased power applicable to the Minnesota jurisdiction. The 1996
rate order by the MPUC held that the Company had 100 MW of excess capacity
and disallowed recovery of approximately $0.8 million annually.
The Company has not filed for rate recovery of the allocable portions of
the purchased power payments in the Illinois and FERC jurisdictions.
Increased margins from sales growth in Illinois have largely offset the
revenue deficiency.
b. Environmental
The Company is subject to various federal and state government
environmental regulations. The Company meets existing air and water
regulations. The Federal Clean Air Act (the Act) requires reductions in
certain emissions from power plants. The Company switched to a low sulfur
coal and installed low nitrogen oxide burners at the 217 MW plant affected
by Phase 1 of the Act, which became effective January 1, 1995. No
significant costs will be incurred to comply with Phase 2 environmental
standards, which take effect January 1, 2000.
In 1957, the Company purchased facilities in Mason City, Iowa, from Kansas
City Power & Light Company (KCPL) which included land previously used for
a coal gasification plant. Coal tar waste was discovered on the property
in 1984. In 1995, a settlement was reached with KCPL for sharing of
costs to remediate the site. As of year end 1997, soil remediation of the
site is complete, however, ground water monitoring continues. The
Company's total share of cost from 1984 to 1997 at this site was $2.7
million.
The Company formerly operated a manufactured gas plant in Rochester,
Minnesota. Soil remediation was completed in 1995 and post remediation
groundwater monitoring is complete pending final review. From 1991 through
1997, the Company incurred costs aggregating $6.9 million applicable to
the Rochester site.
The Company has identified an additional seven sites, as described below,
which may contain hazardous waste from former coal gasification plants and
has recorded an estimated liability applicable to the investigation of
these sites. The Company is unable to determine, at this time, the extent
of remediation necessary at these seven sites.
In Minnesota, the Company owned or operated four manufactured gas plant
sites: Albert Lea, Austin, New Ulm and Owatonna. Potentially hazardous
wastes associated with former coal gasification operations have been
identified at each site. The Company incurred $0.2 million in
investigation cost for these sites in 1997 and $1.5 million since the
investigation process began.
The Company received accounting orders from the Minnesota Public Utilities
Commission (MPUC) which allows the deferral of investigation and
remediation costs applicable to the Minnesota sites and further allows the
Company to seek recovery in a rate case.
In addition, the Company has identified three other sites: Galena and
Savanna, Illinois, and Clinton, Iowa. Potentially hazardous wastes
associated with former coal gasification operations have been identified
at these sites. Little or no activity is expected at the Illinois sites in
1998. In 1997, $3.8 million was expensed for additional investigation and
remediation work expected at the Clinton site.
Previous actions by Iowa and Illinois regulators have permitted utilities
to recover prudently incurred unreimbursed investigation and remediation
costs.
In 1994, the Company filed a lawsuit against certain of its insurers to
recover the costs of investigating and remediating the former coal
gasification plants. Eight insurers paid the Company a total of $9.6
million in 1995 and 1996 in order to be discharged from the lawsuit. As of
December 31, 1997, $4.8 million is recorded as a deferred credit pending
regulatory disposition. Neither the Company nor its legal counsel is able
to predict the amount of any additional insurance recovery, and no
potential recovery has been recorded.
c. Planned Capital Expenditures
Plans for the construction and financing of future additions to utility
plant can be found elsewhere in this report in "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
NOTE 10. SEGMENT INFORMATION
The following table sets forth certain information relating to the
Company's operations:
1997 1996 1995
Operation information:
Customer revenues--
Electric $277.3 $276.6 $274.9
Gas 54.5 49.5 43.7
Operating income
Electric $52.8 $54.8 $57.3
Gas 2.7 4.1 9.5
Investment information:
Identifiable assets,
including allocated
common plant at
December 31--
Electric-utility $452.0 $455.4 $459.3
Gas-utility 42.6 42.3 39.3
Other information:
Construction expenditures--
Electric-utility $26.3 $25.7 $26.6
Gas-utility 2.6 5.3 2.0
Depreciation and amortization
expense
Electric $29.4 $28.9 $27.4
Gas 2.3 2.2 2.1
NOTE 11. QUARTERLY INFORMATION
(Unaudited)
The following table sets forth quarterly information relating to the
Company's operations:
(Thousands of Dollars)
(Except Earnings Per Share)
1997 March 31 June 30 Sept. 30 Dec. 31
Operating revenues $88,873 $71,211 $88,857 $82,906
Operating income 12,916 7,383 14,143 6,343
Net income 9,332 4,119 10,948 4,769
Earnings per share of 0.90 0.36 1.05 0.42
common stock
1996 March 31 June 30 Sept. 30 Dec. 31
Operating revenues $87,049 $76,298 $83,482 $79,255
Operating income 13,140 7,649 12,762 10,196
Net income 9,541 3,927 9,821 5,034
Earnings per share of 0.93 0.34 0.95 0.45
common stock
The quarterly information has not been audited but, in the opinion of the
company, reflects all adjustments necessary for the fair statement of the
results of operations for each period.
The quarterly data shown below reflects seasonal and timing variations
which are common in the utility industry. Net income for the fourth
quarter of 1997 was $4.8 million, compared with $5.0 million in 1996.
Factors contributing to the lower net income included decreased gas sales,
increased operation and maintenance expense, and the recognition of
insurance proceeds to offset previously incurred legal expenses.
Total electric sales for the fourth quarter of 1997 decreased 3.8% over
the same period in 1996. Residential electric sales increased 0.3%, while
commercial and farm sales decreased 3.0% primarily due to decreased crop
drying. Large power and light sales increased 3.4%.
Total gas volumes decreased 3.6%, due primarily to warm weather. Gas
revenues were $16.1 million for the fourth quarter of 1997, compared to
$14.9 million for the fourth quarter of 1996. The increased revenues
reflect rate increases.
Maintenance expense for the fourth quarter of 1997 was $5.2 million
compared to $3.8 million for the fourth quarter of 1996. The variation for
the fourth quarter is primarily due to differences in the timing of
maintenance projects. For the calendar year, maintenance expense for 1997
was $17.8 million, compared to $16.2 million for 1996.
Other operating expense for the fourth quarter of 1997 reflects the
recognition of approximately $1.9 million received from insurance
companies in partial settlement of environmental litigation proceedings.
The proceeds offset environmental litigation expenses incurred by the
company in 1997. Other operating expense for the fourth quarter of 1997
also reflects a provision of $3.8 million related to anticipated future
environmental investigation expense.
Other operating expense includes expenses for the proposed merger of
Interstate Power Company, IES Industries and WPL Holdings were $0.7
million in the fourth quarter of 1997, compared to $1.2 million for the
fourth quarter of 1996.
Depreciation expense was $8.0 million for the fourth quarter of 1997,
compared to $7.9 million for the corresponding period of 1996. The small
increase is attributable to increased investment in plant.
<PAGE>
Independent Auditors' Report
DELOITTE & TOUCHE LLP
To the Stockholders and Board of Directors of Interstate Power company:
We have audited the accompanying balance sheets and statements of
capitalization of Interstate Power Company as of December 31, 1997 and
1996 and the related statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the company at December 31, 1997 and
1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Davenport, Iowa
January 29, 1998
<PAGE>
REPORT OF MANAGEMENT ON FINANCIAL STATEMENT RESPONSIBILITY
Company management has prepared and is responsible for the integrity and
objectivity of the financial statements and related financial information
included in this Annual Report to Stockholders. These statements have
been prepared in conformity with generally accepted accounting principles
and necessarily included amounts based on informed judgments and estimates
with appropriate consideration to materiality of events pending at year
end.
In meeting its responsibility, management has implemented an internal
accounting system designed to safeguard the assets of the company and
assure that transactions are executed in accordance with its directives.
An organizational structure has been developed that provides for
appropriate functional responsibilities. A qualified internal audit staff
is responsible for monitoring the system of policies, procedures and
methods of operation. The company believes its system of internal
controls appropriately balances the cost/benefit relationship, and that
errors or irregularities will be detected and corrected on a timely basis.
The Audit committee of the Board of Directors, comprised of three
directors who are not employees, periodically meets with management and
with the independent certified public accountants to discuss and evaluate
auditing, internal control and financial reporting matters.
Management believes that these policies and procedures provide reasonable
assurance that the operations of the company are in accordance with the
standards and responsibilities entrusted to management.
/s/ Michael R. Chase
Michael R. Chase
Executive Officer
President and Chief
<TABLE>
<CAPTION>
Selected Financial Data
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues $331,847 $326,084 $318,542 $307,650 $309,468
-------- -------- -------- -------- --------
Operation 210,181 202,440 190,199 202,545 204,871
Maintenance 17,782 16,164 14,881 17,160 16,771
Depreciation and amortization 31,676 31,087 29,560 28,212 26,955
Income taxes 14,715 16,582 20,635 7,913 8,967
Property and other taxes 16,708 16,064 15,990 16,298 17,080
------- ------- ------- ------- -------
291,062 282,337 271,265 272,128 274,644
------- ------- ------- ------- -------
Operating income 40,785 43,747 47,277 35,522 34,824
Other income (deductions) - net 3,819 798 (2,826) 1,990 780
------- ------- ------- ------- -------
Income before interest charges 44,604 44,545 44,451 37,512 35,604
Interest charges 15,436 16,222 16,795 16,845 16,617
------- ------- ------- ------- -------
Net income 29,168 28,323 27,656 20,667 18,987
Preferred dividends 2,469 2,463 2,458 2,454 2,861
------- ------- ------- ------- -------
Earnings available for common
stock $26,699 $25,860 $25,198 $18,213 $16,126
========= ========= ========= ========= =========
Average number of common shares
outstanding 9,724,974 9,593,664 9,564,287 9,478,741 9,316,387
========= ========= ========= ========= =========
Earnings per common share $2.74 $2.69 $2.63 $1.92 $1.73
========= ========= ========= ========= =========
Common dividends declared per
share $2.08 $2.08 $2.08 $2.08 $2.08
========= ========= ========= ========= =========
Total assets $638,749 $639,200 $634,316 $628,845 $604,361
========= ========= ========= ========= =========
Long-term debt and mandatory
sinking fund preferred stock $189,997 $195,878 $212,916 $212,965 $227,007
========= ========= ========= ========= =========
</TABLE>
Common Stock Market Data
The company's common stock (IPW) is listed on the New York, Midwest and
Pacific Stock Exchanges. The company's preferred stock and first mortgage
bonds are traded in the over-the-counter market. The company was
reorganized as of March 31, 1948, and dividends on common stock have been
paid each quarter since September 20, 1948, with the annual payments
rising from $0.60 per share to $2.08 per share. As of December 31, 1997,
there were 12,446 holders of common stock and 138 holders of preferred
stock. Historical quarterly data for the company's common stock is shown
below:
Avg. Shares
Dividends Price Range Outstanding
Quarter Ended Paid High Low 12 Months Ended
March 31, 1995 $0.52/Share 25 1/4 - 23 9,519,098
June 30, 1995 $0.52/Share 25 - 23 1/2 9,548,054
Sept. 30, 1995 $0.52/Share 27 1/4 - 23 1/4 9,563,020
Dec. 31, 1995 $0.52/Share 33 1/4 - 27 1/8 9,564,287
March 31, 1996 $0.52/Share 33 1/2 - 30 9,564,287
June 30, 1996 $0.52/Share 32 1/2 - 29 7/8 9,565,211
Sept. 30, 1996 $0.52/Share 32 1/2 - 28 7/8 9,574,607
Dec. 31, 1996 $0.52/Share 31 1/2 - 28 3/4 9,593,664
March 31, 1997 $0.52/Share 30 1/4 - 28 1/8 9,621,936
June 30, 1997 $0.52/Share 29 5/8 - 27 7/8 9,659,206
Sept. 30, 1997 $0.52/Share 32 1/8 - 29 1/8 9,696,735
Dec. 31, 1997 $0.52/Share 37 1/2 - 31 5/8 9,724,974
EX-23
Deloitte & Touche LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-62644 on Form S-3 and Registration Statement No. 33-32529 on Form S-8 of
Interstate Power Company of our reports dated January 29, 1998, appearing
in the Annual Report on Form 10-K of Interstate Power Company for the year
ended December 31, 1997.
/s/ Deloitte & Touche LLP
Davenport, Iowa
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 494,597
<OTHER-PROPERTY-AND-INVEST> 6,186
<TOTAL-CURRENT-ASSETS> 65,996
<TOTAL-DEFERRED-CHARGES> 71,970
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 638,749
<COMMON> 34,163
<CAPITAL-SURPLUS-PAID-IN> 108,292
<RETAINED-EARNINGS> 73,166
<TOTAL-COMMON-STOCKHOLDERS-EQ> 215,621
24,267
10,819
<LONG-TERM-DEBT-NET> 165,280
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 33,500
<LONG-TERM-DEBT-CURRENT-PORT> 6,300
0
<CAPITAL-LEASE-OBLIGATIONS> 85
<LEASES-CURRENT> 14
<OTHER-ITEMS-CAPITAL-AND-LIAB> 182,863
<TOT-CAPITALIZATION-AND-LIAB> 638,749
<GROSS-OPERATING-REVENUE> 331,847
<INCOME-TAX-EXPENSE> 14,715
<OTHER-OPERATING-EXPENSES> 276,347
<TOTAL-OPERATING-EXPENSES> 291,062
<OPERATING-INCOME-LOSS> 40,785
<OTHER-INCOME-NET> 3,819
<INCOME-BEFORE-INTEREST-EXPEN> 44,604
<TOTAL-INTEREST-EXPENSE> 15,436
<NET-INCOME> 29,168
2,469
<EARNINGS-AVAILABLE-FOR-COMM> 26,699
<COMMON-STOCK-DIVIDENDS> 20,225
<TOTAL-INTEREST-ON-BONDS> 13,590
<CASH-FLOW-OPERATIONS> 66,745
<EPS-PRIMARY> 2.74
<EPS-DILUTED> 2.74
</TABLE>
EX-99.1
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
WPL Holdings, Inc. (WPLH), IES Industries Inc. (IES), Interstate Power
Company (IPC), and certain related parties have entered into an Agreement
and Plan of Merger, dated as of November 10, 1995, as amended (the Merger
Agreement), providing for (a) the merger of IES with and into WPLH and (b)
the merger of IPC with a subsidiary of WPLH pursuant to which IPC will
become a subsidiary of WPLH (the above referenced mergers are collectively
referred herein to as the Mergers). In connection with the consummation
of the Mergers, WPLH will change its name to Interstate Energy
Corporation. Detailed information with respect to the Merger Agreement
and the proposed Mergers is contained in the Joint Proxy
Statement/Prospectus, dated July 11, 1996, as supplemented by the
Supplement to Joint Proxy Statement/Prospectus, dated August 21, 1996,
contained in IPC's Registration Statements on Form S-4, Registration Nos.
333-07931 and 333-10401 relating to the meetings of shareowners of WPLH,
IES and IPC to vote on the Merger Agreement and related matters.
The unaudited pro forma combined financial statements for Interstate
Energy Corporation (Merged Company) combine the historical consolidated
balance sheets and statements of income of IES Industries Inc. (IES),
Interstate Power Company (IPC) and WPL Holdings, Inc. (WPLH) as adjusted
by various pro forma adjustments identified in Note 1. All material
adjustments known at this time which impact the reporting periods shown
have been included. The combination of WPLH, IES and IPC is referred to
herein as the "Merger."
These pro forma combined financial statements set forth the restated
combined financial data that will be presented for future comparative
financial data for the Merged Company. The pro forma balance sheet that
will be filed with the Securities and Exchange Commission following
consummation of the Merger will also include an additional pro forma
adjustment for certain merger-related costs to be recorded upon completion
of the Merger.
These statements are prepared on the basis of accounting for the Merger as
a pooling of interests and are based on the assumptions set forth in the
notes thereto. The historical data for WPLH have been adjusted to reflect
the restatement of such data to account for certain discontinued
operations as discussed in Note 6.
The following information is not necessarily indicative of the financial
position or operating results that would have occurred had the Merger been
consummated on the date, or at the beginning of the periods, for which the
Merger is being given effect nor is it necessarily indicative of future
operating results or financial position.
<TABLE>
<CAPTION>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE
SHEET
12/31/97
(In thousands)
Pro Forma
ASSETS WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
UTILITY PLANT
Electric $1,790,641 $2,072,866 $869,715 $ - $4,733,222
Gas 237,856 187,098 70,201 - 495,155
Other 220,679 145,716 - - 366,395
--------- --------- -------- --------- -----------
Total 2,249,176 2,405,680 939,916 - 5,594,772
Less: Accumulated provision for 1,065,726 1,115,261 450,595 - 2,631,582
depreciation
Construction work in progress 42,312 38,923 5,276 - 86,511
Nuclear fuel--net 19,046 36,731 - - 55,777
--------- -------- -------- --------- -----------
Net utility plant 1,244,808 1,366,073 494,597 - 3,105,478
OTHER PROPERTY, PLANT AND EQUIPMENT
---NET AND OTHER INVESTMENTS 139,548 319,657 4,746 (125) 463,826
CURRENT ASSETS
Cash and cash equivalents 13,987 10,143 2,897 302 27,329
Accounts receivable ---net 78,082 52,295 27,061 12,489 169,927
Fossil fuel inventories, at average 18,857 10,579 11,220 - 40,656
cost
Materials and supplies, at average 19,274 24,274 6,297 - 49,845
cost
Prepayments and other 42,808 69,920 15,035 (3,278) 124,485
--------- -------- ------- -------- --------
Total current assets 173,008 167,211 62,510 9,513 412,242
EXTERNAL DECOMMISSIONING FUND 112,356 77,882 - - 190,238
INVESTMENT IN MCLEODUSA INC. - 326,582 1,440 - 328,022
DEFERRED CHARGES AND OTHER 192,087 199,814 75,456 (15,442) 451,915
--------- -------- ------- -------- -------
TOTAL ASSETS $1,861,807 $2,457,219 $638,749 ($6,054) $4,951,721
========= ======== ======= ======== =========
CAPITALIZATION
Common Stock Equity:
Common stock $308 $- $34,163 ($33,706) $765
Other stockholders' equity 607,275 818,133 181,457 38,404 1,645,269
-------- --------- -------- -------- ---------
Total common stock equity 607,583 818,133 215,620 4,698 1,646,034
Preferred stock not mandatorily redeemable 59,963 18,320 10,819 - 89,102
Preferred stock mandatory sinking fund - - 24,267 - 24,267
Long-term debt---net 457,520 845,189 165,194 - 1,467,903
--------- --------- -------- -------- ---------
Total capitalization 1,125,066 1,681,642 415,900 4,698 3,227,306
CURRENT LIABILITIES
Current maturities, sinking funds, and
capital lease obligations 11,528 13,684 6,314 - 31,526
Commercial paper, notes payable and other 123,095 - 33,500 - 156,595
Variable rate demand bonds 56,975 - - - 56,975
Accounts payable and accruals 91,175 78,702 13,208 9,549 192,634
Taxes accrued 412 62,432 16,014 65 78,923
Other accrued liabilities 55,987 67,174 12,445 (2,468) 133,138
--------- -------- -------- -------- --------
Total current liabilities 339,172 221,992 81,481 7,146 649,791
OTHER LIABILITIES
Deferred income taxes 253,519 372,837 104,670 - 731,026
Deferred investment tax credits 35,039 31,838 15,985 - 82,862
Accrued environmental remediation costs 9,238 46,989 5,794 - 62,021
Capital lease obligations - 23,548 86 - 23,634
Other liabilities and deferred credits 99,773 78,373 14,833 (17,898) 175,081
-------- -------- -------- ------- --------
Total other liabilities 397,569 553,585 141,368 (17,898) 1,074,624
-------- -------- -------- ------- --------
TOTAL CAPITALIZATION AND LIABILITIES $1,861,807 $2,457,219 $638,749 ($6,054) $4,951,721
========= ========== ======== ======= =========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
<CAPTION> Pro Forma
WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $634,143 $604,270 $277,340 $ - $1,515,753
Gas utility 155,883 183,517 54,507 - 393,907
Other 129,229 142,912 - 118,826 390,967
--------- ------- -------- ------- ---------
Total operating revenues 919,255 930,699 331,847 118,826 2,300,627
Operating Expenses
Electric and steam production 116,812 108,344 55,402 - 280,558
fuels
Purchased power 125,438 74,098 56,770 - 256,306
Cost of gas sold 99,267 126,631 33,324 - 259,222
Other operation 254,796 231,481 64,685 119,306 670,268
Maintenance 48,058 57,185 17,782 96 123,121
Depreciation and amortization 111,289 114,122 31,676 245 257,332
Taxes other than income taxes 34,988 51,701 16,708 - 103,397
--------- ------- -------- ------- ---------
Total operating expenses 790,648 763,562 276,347 119,647 1,950,204
Operating Income 128,607 167,137 55,500 (821) 350,423
Other Income (Expense)
Allowance for funds used
during construction 2,775 2,309 190 - 5,274
Other income and deductions, 4,432 1,850 6,772 856 13,910
net --------- ------- -------- -------- ---------
Total other income 7,207 4,159 6,962 856 19,184
(expense)
Interest Charges 42,535 64,383 15,610 35 122,563
--------- ------- ------- -------- ---------
Income from Continuing Operations
before Income Taxes and
Preferred Dividends 93,279 106,913 46,852 - 247,044
Income Taxes 28,715 39,662 17,684 - 86,061
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,469 - 6,693
--------- -------- -------- -------- ---------
Income from Continuing
Operations $61,254 $66,337 $26,699 $ - $154,290
========= ======== ======== ======== =========
Average Common Shares
Outstanding 30,782 30,380 9,725 5,323 76,210
Earnings per Share of Common
Stock from Continuing
Operations (Basic and diluted) $1.99 $2.18 $2.74 N/A $2.02
========= ======== ======== ========= =========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $589,482 $574,273 $276,620 $- $1,440,375
Gas utility 165,627 273,979 49,464 (113,115) 375,955
Other 177,735 125,660 - 113,115 416,510
--------- --------- --------- --------- ----------
Total operating revenues 932,844 973,912 326,084 - 2,232,840
Operating Expenses
Electric and steam production 114,470 84,579 57,560 - 256,609
fuels
Purchased power 81,108 88,350 61,556 - 231,014
Cost of gas sold 104,830 217,351 31,617 (113,474) 240,324
Other operation 317,608 212,501 51,707 113,474 695,290
Maintenance 46,492 49,001 16,164 - 111,657
Depreciation and amortization 90,683 107,393 31,087 - 229,163
Taxes other than income taxes 34,603 48,171 16,064 - 98,838
-------- -------- -------- -------- ----------
Total operating expenses 789,794 807,346 265,755 - 1,862,895
-------- -------- -------- -------- ----------
Operating Income 143,050 166,566 60,329 - 369,945
Other Income (Expense)
Allowance for funds used
during construction 3,208 2,103 263 - 5,574
Other income and deductions, net 14,098 (4,591) 2,336 - 11,843
-------- ------- -------- -------- ---------
Total other income (expense) 17,306 (2,488) 2,599 - 17,417
Interest Charges 42,027 54,822 16,472 - 113,321
-------- ------- -------- -------- ---------
Income from Continuing Operations
before Income Taxes and
Preferred Dividends 118,329 109,256 46,456 - 274,041
Income Taxes 41,814 47,435 18,133 - 107,382
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,463 - 6,687
--------- -------- -------- -------- ---------
Income from Continuing
Operations (Notes 3 and 6) $73,205 $60,907 $25,860 $- $159,972
========= ======== ======== ======== =========
Average Common Shares
Outstanding 30,790 29,861 9,594 5,236 75,481
Earnings per Share of Common
Stock from Continuing
Operations (Basic and diluted) $2.38 $2.04 $2.69 N/A $2.12
========= ======== ======== ========= =========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $546,324 $560,471 $274,873 $- $1,381,668
Gas utility 139,165 190,339 43,669 (53,047) 320,126
Other 121,766 100,200 - 53,047 275,013
-------- -------- -------- --------- ---------
Total operating revenues 807,255 851,010 318,542 - 1,976,807
Operating Expenses
Electric and steam production fuels 116,488 96,256 62,164 - 274,908
Purchased power 44,940 66,874 57,566 - 169,380
Cost of gas sold 84,002 141,716 25,888 (50,519) 201,087
Other operation 252,722 199,768 44,581 50,519 547,590
Maintenance 42,043 46,093 14,881 - 103,017
Depreciation and amortization 86,319 97,958 29,560 - 213,837
Taxes other than income taxes 34,188 49,011 15,990 - 99,189
-------- -------- ------- --------- ---------
Total operating expenses 660,702 697,676 250,630 - 1,609,008
-------- -------- ------- --------- ---------
Operating Income 146,553 153,334 67,912 - 367,799
Other Income (Expense)
Allowance for funds used
during construction 2,088 3,424 341 - 5,853
Other income and deductions, net 5,954 1,548 (4,008) - 3,494
-------- ------- ------- --------- --------
Total other income (expense) 8,042 4,972 (3,667) - 9,347
Interest Charges 43,559 50,727 17,136 - 111,422
-------- ------- ------- --------- --------
Income from Continuing Operations
before Income Taxes and
Preferred Dividends 111,036 107,579 47,109 - 265,724
Income Taxes 36,108 42,489 19,453 - 98,050
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,458 - 6,682
-------- ------- -------- --------- --------
Operations (Note 6) $71,618 $64,176 $25,198 $- $160,992
======== ======= ======== ========= ========
Average Common Shares
Outstanding 30,774 29,202 9,564 5,140 74,680
Earnings per Share of Common
Stock from Continuing
Operations (Basic and diluted) $2.33 $2.20 $2.63 N/A $2.16
======== ======== ======= ========= =======
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
</TABLE>
<TABLE>
INTERSTATE ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
<CAPTION>
1. Pro Forma Adjustments
Merged
Consolidation Eliminations Company IPC IES
of for Common Stock Unbilled Pension Total
IEA-HES LLC IEA-HES LLC Adjustment Revenue Liability Pro Forma
December 31, 1997 BALANCE SHEET (Note 1(a)) (Note 1(b)) (Note 1(c)) (Note 1(d) (Note 1(e)) Adjustments
<S> <C> <C> <C> <C> <C> <C>
ASSETS
OTHER PROPERTY, PLANT AND EQUIP $3,458 ($3,583) $ - $ - $ - ($125)
-- NET AND OTHER INVESTMENTS
CURRENT ASSETS
Cash and cash equivalents 3,308 (3,006) - - - 302
Accounts receivable -- net 8,932 (1,965) - 5,522 - 12,489
Prepayments and other 2 - - (3,280) - (3,278)
------- ------- ------- -------- ------- -------
Total current Assets 12,242 (4,971) - 2,242 - 9,513
DEFERRED CHARGES AND OTHER - - - 2,456 (17,898) (15,442)
------- ------- ------- -------- ------- -------
TOTAL ASSETS $15,700 ($8,554) - $4,698 ($17,898) ($6,054)
======= ======= ======= ======== ======= =======
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity:
Common stock $ - $ - ($33,706) $ - $ - ($33,706)
Other stockholders' equity 3,583 (3,583) 33,706 4,698 - 38,404
------- ------- ------- -------- ------ --------
Total common stock equity 3,583 (3,583) - 4,698 - 4,698
CURRENT LIABILITIES
Accounts payable and accruals 11,514 (1,965) - - - 9,549
Taxes accrued 65 - - - - 65
Other accrued liabilities 538 (3,006) - - - (2,468)
------- ------- ------- -------- ------ --------
Total current liabilities 12,117 (4,971) - - - 7,146
OTHER LIABILITIES
Other liabilities and deferred - - - - (17,898) (17,898)
credits
------- ------- ------- -------- ------- -------
Total other liabilities - - - - (17,898) (17,898)
------- ------- ------- -------- ------- -------
TOTAL CAPITALIZATION AND LIAB. $15,700 ($8,554) $ - ($4,698) $17,898 ($6,054)
======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Merged
Consolidation Eliminations Company
of for Common Stock Total
IEA-HES LLC IEA-HES LLC Adjustment Pro Forma
1997 INCOME STATEMENT (Note 1(a)) (Note 1(b)) (Note 1(c)) Adjustments
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas Utility $ - $ - $ - $-
Other $118,826 $ - $ - 118,826
--------- ------- -------- -------
Total operating revenues 118,826 - - 118,826
OPERATING EXPENSES:
Cost of gas sold - - - -
Other operation 119,306 - 119,306
Maintenance 96 - - 96
Depreciation and amortization 245 - - 245
--------- ------- -------- -------
Total operating expenses 119,647 - - 119,647
OPERATING INCOME (821) (821)
OTHER INCOME (EXPENSE)
Other income and deductions, net 61 795 - 856
--------- ------- -------- -------
Total other income (expense) 61 795 - 856
INTEREST CHARGES 35 - - 35
--------- ------- -------- --------
INCOME FROM CONTINUING OPER. ($795) $795 $ - $ -
========= ======= ======== ========
AVERAGE COMMON SHARES - - 5,323 5,323
</TABLE>
<TABLE>
<CAPTION>
1996 INCOME STATEMENT Merged
Company
Common Stock IEA Total
Adjustment Gas Activity Pro Forma
(Note 1(c)) (Note 1(f)) Adjustments
<S> <C> <C> <C>
OPERATING REVENUES:
Gas Utility $ - ($113,115) ($113,115)
Other - 113,115 113,115
------ --------- ---------
Total operating revenues - - -
------ --------- ---------
OPERATING EXPENSES:
Cost of gas sold - (113,474) (113,474)
Other operation - 113,474 113,474
------- --------- ---------
Total operating expenses - - -
------- --------- ---------
INCOME FROM CONTINUING OPERATIONS $ - $ - $ -
======= ========= =========
AVERAGE COMMON SHARES 5,236 - 5,236
<CAPTION>
1995 INCOME STATEMENT Merged
Company
Common Stock IEA Total
Adjustment Gas Activity Pro Forma
(Note 1(c)) (Note 1(f)) Adjustments
<S> <C> <C> <C>
OPERATING REVENUES:
Gas utility $ - ($53,047) ($53,047)
Other - 53,047 53,047
----- -------- --------
Total operating revenues - - -
OPERATING EXPENSES:
Cost of gas sold - (50,519) (50,519)
Other operation - 50,519 50,519
------ ------- --------
Total operating expenses - - -
------ ------- --------
INCOME FROM CONTINUING OPERATIONS $ - $ - $ -
====== ======= ========
AVERAGE COMMON SHARES 5,140 - 5,140
</TABLE>
(a) Consolidation of IEA-HES L.L.C.
In January 1997, IES and WPLH formed a gas marketing joint venture named
IEA-HES L.L.C. Pursuant to the applicable accounting rules, IES and WPLH
each accounted for this joint venture in 1997 under the equity method of
accounting with their investment recorded on the balance sheet in "Other
Property, Plant and Equipment -- Net and Other Investments" and their
allocated portion of earnings on the income statement in "Other Income and
Deductions, Net". This pro forma adjustment reflects the financial
results of IEA-HES L.L.C. as a consolidated subsidiary.
(b) Eliminations for IEA-HES L.L.C.
This pro forma adjustment reflects the elimination of intercompany
balances of IEA-HES L.L.C. and also eliminates the equity investments of
IES and WPLH and their allocated portion of revenues and expenses.
(c) Merged Company Common Stock Adjustment
The pro forma combined financial statements reflect the conversion of each
share of IES Common Stock (no par value) outstanding into 1.14 shares of
Merged Company Common Stock ($.01 par value) and the conversion of each
share of IPC Common Stock ($3.50 par value) into 1.11 shares of Merged
Company Common Stock ($.01 par value), and the continuation of each share
of WPLH Common Stock ($.01 par value) outstanding as one share of Merged
Company Common Stock, as provided in the Merger Agreement. The pro forma
adjustment to common stock equity restates the common stock account to
equal par value for all shares to be issued ($.01 par value per share of
Merged Company Common Stock) and reclassifies the excess to other
stockholders' equity. The average number of shares of common stock used
for calculating per share amounts is based on the exchange ratios shown
below.
<TABLE>
<CAPTION>
Exchange As reported Pro forma As reported Pro forma As reported Pro forma
Ratio 12/31/97 12/31/97 12/31/96 12/31/96 12/31/95 12/31/95
<S> <C> <C> <C> <C> <C> <C> <C>
WPLH N/A 30,782 30,782 30,790 30,790 30,774 30,774
IES 1.14 30,380 34,633 29,861 34,042 29,202 33,290
IPC 1.11 9,725 10,795 9,594 10,649 9,564 10,616
</TABLE>
The number of shares of common stock at December 31, 1997 used for
calculating the par value of common stock is based on the exchange ratios
shown below.
Exchange As reported Pro forma
Ratio 12/31/97 12/31/97
WPLH N/A 30,789 30,789
IES 1.14 30,577 34,858
IPC 1.11 9,761 10,835
(d) IPC Unbilled Revenues
The financial results of IPC do not include accrued revenues for services
rendered but unbilled at month-end. The pro forma adjustment reflects the
impact of adopting unbilled revenues, including the tax impact of the
adoption. The change is being implemented to conform to the method
currently utilized by WPLH and IES.
(e) IES Pension Liability
The accrued pension liability (and offsetting regulatory asset), included
in the financial results of IES, was calculated using a five-year smoothed
method of recognizing deferred asset gains. The pro forma adjustment
reflects a change to the straight market value method which recognizes
deferred asset gains sooner. The change is being implemented to conform
to the method currently utilized by WPLH and IPC.
(f) IEA Gas Activity
The gas revenues and cost of gas sold of Industrial Energy Applications,
Inc. (IEA), a subsidiary of IES, for 1996 and 1995 have been reclassed
into "Other" operating revenues and "Other operation" expenses,
respectively, consistent with the 1997 presentation.
2. Preferred Stock Dividends of IPC
The Preferred Stock Dividends of IPC have been reclassified in the
unaudited pro forma combined statements as "Preferred Dividends of
Subsidiaries" and deducted in the determination of income from continuing
operations which reflects the holding company structure of the Merged
Company.
3. Nonrecurring Material Items Included in Historical Financial Results
IES's income from continuing operations for the year ended December 31,
1996 included costs incurred relating to its successful defense of a
hostile takeover attempt mounted by MidAmerican Energy Company. The
after-tax impact on income from continuing operations was a decrease of
$4.6 million.
Nonrecurring items affecting WPLH's performance for the year ended
December 31, 1996 included the impact of the sale of a combustion turbine
and the sale of WPLH's assisted-living real estate investments. The
after-tax impact of these items on continuing operations was an increase
of $5.9 million.
4. Estimated Costs and Cost Savings of Proposed Merger
The allocation between WPLH, IES and IPC and their customers of the
estimated cost savings of approximately $749 million over ten years
resulting from the merger, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval. Costs arising
from the Merger are currently estimated to be approximately $78 million.
Approximately $22 million of these costs had been incurred through
December 31, 1997 and are reflected in results of operations. The
estimate of potential cost savings constitutes a forward-looking statement
and actual results may differ materially from this estimate. The estimate
is necessarily based upon various assumptions that involve judgments with
respect to, among other things, future national and regional economic and
competitive conditions, technological developments, inflation rates,
regulatory treatment, weather conditions, financial market conditions,
future business decisions and other uncertainties. No assurance can be
given that the estimated cost savings will actually be realized. None of
the estimated cost savings, or costs to be incurred subsequent to December
31, 1997 to achieve such savings, have been reflected in the unaudited pro
forma combined financial statements.
5. Intercompany Transactions
Intercompany transactions (including purchased and exchange power
transactions) between WPLH, IES and IPC during the periods presented were
included in the determination of regulated rates and/or were not material.
Accordingly, no pro forma adjustments were made to eliminate such
transactions.
6. Discontinued Operations
The financial statements of WPLH reflect the discontinuance of operations
of its utility energy and marketing consulting business in 1995. The
discontinuance of this business resulted in a pre-tax loss in the fourth
quarter of 1995 of $7.7 million. The after-tax loss on disposition was
$11.0 million reflecting the associated tax expense on disposition due to
the non-deductibility of the carrying value of goodwill at sale. During
1996, WPLH recognized an additional loss of $1.3 million, net of
applicable income tax benefit, associated with the final disposition of
the business. Operating revenues, operating expenses, other income and
expense and income taxes for the discontinued operations for the time
periods presented have been excluded from income from continuing
operations. Interest expense has been adjusted for the amounts associated
with direct obligations of the discontinued operations.
EX-99.5
INTERSTATE POWER COMPANY
SUPPLEMENTAL RETIREMENT PLAN
AS AMENDED AND RESTATED
DECEMBER 9, 1997
<PAGE>
INTERSTATE POWER COMPANY
SUPPLEMENTAL RETIREMENT PLAN
AS AMENDED AND RESTATED
Table of Contents
Page
ARTICLE I - INTRODUCTION . . . . . . . . . . . . . . . . . . . 1
1.1 Purpose . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - DEFINITIONS . . . . . . . . . . . . . . . . . . . 2
2.1 Accrued Benefit . . . . . . . . . . . . . . . . 2
2.2 Board or Board of Directors . . . . . . . . . . 2
2.2.5 Change in Control . . . . . . . . . . . . . . . 2
2.3 Code . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Compensation . . . . . . . . . . . . . . . . . . 3
2.5 Early Retirement Date . . . . . . . . . . . . . 3
2.6 Effective Date . . . . . . . . . . . . . . . . . 3
2.7 Employer . . . . . . . . . . . . . . . . . . . . 4
2.8 Normal Retirement Date . . . . . . . . . . . . . 4
2.9 Officer . . . . . . . . . . . . . . . . . . . . 4
2.9.5 Participant . . . . . . . . . . . . . . . . . . 4
2.10 Plan . . . . . . . . . . . . . . . . . . . . . . 4
2.11 Plan Administrator . . . . . . . . . . . . . . . 4
2.12 Plan Year . . . . . . . . . . . . . . . . . . . 4
2.12.5 Re-entry Date . . . . . . . . . . . . . . . . . 4
2.13 Retirement Plan . . . . . . . . . . . . . . . . 4
2.14 Social Security Benefit . . . . . . . . . . . . 4
2.15 Spouse . . . . . . . . . . . . . . . . . . . . . 5
2.16 Trust . . . . . . . . . . . . . . . . . . . . . 5
2.17 Trust Fund . . . . . . . . . . . . . . . . . . . 5
2.18 Trustee . . . . . . . . . . . . . . . . . . . . 5
2.19 Year(s) of Benefit Service . . . . . . . . . . . 5
ARTICLE III - PARTICIPATION . . . . . . . . . . . . . . . . . . 6
3.1 Participation . . . . . . . . . . . . . . . . . 6
3.2 Death . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE IV - CONTRIBUTIONS . . . . . . . . . . . . . . . . . . 7
4.1 Employer Contributions . . . . . . . . . . . . . 7
4.2 Change in Control . . . . . . . . . . . . . . . 7
4.3 Binding Effect on Successor . . . . . . . . . . 7
ARTICLE V - BENEFITS . . . . . . . . . . . . . . . . . . . . . 8
5.1 Normal Retirement Pension . . . . . . . . . . . 8
5.2 Early Retirement Pension . . . . . . . . . . . . 8
5.3 Prior Employer's Plan . . . . . . . . . . . . . 9
5.4 Form of Payment . . . . . . . . . . . . . . . . 9
5.5 Suspension of Benefits . . . . . . . . . . . . 10
5.6 Termination for Cause . . . . . . . . . . . . 10
5.7 Surviving Spouse Benefits . . . . . . . . . . 11
5.8 Claims Procedure . . . . . . . . . . . . . . . 11
5.9 Forfeiture of Benefits . . . . . . . . . . . . 13
ARTICLE VI - ADMINISTRATION OF PLAN . . . . . . . . . . . . . 14
6.1 Administration . . . . . . . . . . . . . . . . 14
6.2 Records . . . . . . . . . . . . . . . . . . . 15
6.3 Information Available . . . . . . . . . . . . 15
6.4 Expenses . . . . . . . . . . . . . . . . . . . 15
ARTICLE VII - AMENDMENT AND TERMINATION . . . . . . . . . . . 16
7.1 Right to Amend or Terminate Plan . . . . . . . 16
7.2 Amendments . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII - MISCELLANEOUS PROVISIONS . . . . . . . . . . . 17
8.1 No Employment Rights . . . . . . . . . . . . . 17
8.2 Non-alienability . . . . . . . . . . . . . . . 17
8.3 Facility of Payment . . . . . . . . . . . . . 17
8.4 Severability . . . . . . . . . . . . . . . . . 17
8.5 Headings . . . . . . . . . . . . . . . . . . . 17
8.6 Number and Gender . . . . . . . . . . . . . . 18
8.7 Governing Law . . . . . . . . . . . . . . . . 18
<PAGE>
INTERSTATE POWER COMPANY
SUPPLEMENTAL RETIREMENT PLAN
AS AMENDED AND RESTATED
ARTICLE I - INTRODUCTION
1.1 Purpose
Interstate Power Company ("Employer"), is establishing the
Supplemental Retirement Plan ("Plan") for the purpose of providing
defined benefit retirement income supplement for the officers of the
Employer. The Plan has been designed as, and is intended to be, an
unfunded plan for purposes of the Employee Retirement Income Security
Act of 1974, as amended, except as otherwise specifically provided
under the terms of this Plan. The Plan has also been designed as,
and is intended to be, a non-qualified plan for purposes of Section
401 of the Internal Revenue Code of 1986, as amended. The Plan shall
be effective April 30, 1990 as amended and restated December 9, 1997.
ARTICLE II - DEFINITIONS
Capitalized terms as described in this Article II shall have the meanings
as described herein unless a different meaning is clearly required by the
context of the Plan.
2.1 Accrued Benefit shall mean the retirement benefit that the
Officer would receive upon such Officer's Normal Retirement
Date, as provided in Section 5.1.
2.2 Board or Board of Directors shall mean the Board of
Directors of the Employer.
2.2.5 Change in Control of the Employer shall have the following
meaning and shall be deemed to have occurred if:
(i) any Person is or becomes the Beneficial Owner (as that
term is defined in Rule 13d-3 under the Securities Exchange Act
of 1934 (the "Exchange Act")), directly or indirectly, of
securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired
directly from the Company) representing twenty-five percent
(25%) or more of the combined voting power of the Company's then
outstanding securities; or
(ii) during any period of twenty-four (24) consecutive
months (not including any period prior to November 1, 1995),
individuals who at the beginning of such period constitute the
Board and any new director (other than a director designated by
a Person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii) or (iv) of
this definition or any such individual whose initial assumption
of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents) whose
election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either
were directors at the beginning of such period or whose election
or nomination for election was previously so approved, cease for
any reason to constitute a majority of the Board; or
(iii) the shareholders of the Company approve a
reorganization, merger or consolidation, other than a
reorganization, merger or consolidation with respect to which
all or substantially all of the individuals and entities who
were Beneficial Owners, immediately prior to such
reorganization, merger or consolidation, of the combined voting
owner of the Company's then outstanding securities beneficially
own, directly or indirectly, immediately after such
reorganization, merger or consolidation, more then seventy-five
percent (75%) of the combined voting power of the securities of
the corporation resulting from such reorganization, merger or
consolidation in substantially the same proportions as their
respective ownership, immediately prior to such reorganization,
merger or consolidation, of the combined voting owner of the
Company's securities; or
(iv) the shareholders of the Company approve (a) the sale
or disposition by the Company (other than to a subsidiary of the
Company) of all or substantially all of the assets of the
Company (or any such sale or disposition is effected through
condemnation proceedings), or (b) a complete liquidation or
dissolution of the Company.
Notwithstanding the foregoing, a Change in Control shall not
include any event, circumstance or transaction which results
from the action (excluding the Executive's employment activities
with the Company or any of its affiliates) of any Person or
group of Persons which includes, is directly affiliated with or
is wholly or partly controlled by one or more executive officers
of the Company and in which the Executive actively participates.
2.3 Code shall mean the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
2.4 Compensation shall mean the Officer's highest consecutive
twelve (12) months of compensation, consisting of amounts which
are actually paid to the Officer during the calendar year,
including salary deferrals to any qualified plan sponsored by
the Employer, but excluding any nonqualified plan deferrals,
expense reimbursements and taxable employee benefits. Bonus
Awards shall not be treated as compensation for purposes of the
Plan.
2.5 Early Retirement Date shall mean the first day of the month
on or after the Officer reaches age fifty-five (55).
2.6 Effective Date shall mean April 30, 1990 as amended and
restated December 9, 1997.
2.7 Employer shall mean Interstate Power Company. This will
also include any successor corporation or firm of the Employer
which shall, by written agreement, assume the obligations of
this Plan.
2.8 Normal Retirement Date shall mean the date that the Officer
reaches age sixty-five (65).
2.9 Officer shall mean an employee of the Employer who is
determined by the Employer to be eligible to participate in this
Plan. Notwithstanding anything contained herein to the
contrary, the term "Officer" shall include any employee who is
an assistant officer.
2.9.5 Participant shall mean an officer or former Officer of
Employer who has been determined by the Employer eligible to
participate in the Plan or who has entered into the Plan. See
3.1.
2.10 Plan shall mean this Interstate Power Company Supplemental
Retirement Plan, as set forth herein or in any amendments
hereto.
2.11 Plan Administrator shall mean the Employer or the
individual or committee duly appointed or duly authorized by the
Employer or by the Board of Directors to administer the terms of
the Plan.
2.12 Plan Year shall mean the twelve (12) consecutive month
period beginning with January 1 and ending December 31.
2.12.5 Re-entry Date shall mean the date a former active Officer
re-enters the plan.
2.13 Retirement Plan shall mean the plan sponsored by the
Employer, known as the Interstate Power Company Retirement
Income Plan, which is qualified under Section 401 and 501 of the
Code.
2.14 Social Security Benefit shall mean the maximum benefit that
the Officer is eligible to receive from Social Security:
(a) at age sixty-two (62), if the Officer retires at age Sixty-
two (62); or
(b) on the date that the Officer retires, if the Officer
retires after age sixty-two (62); or
(c) at age sixty-two (62), assuming that the Officer continues
to earn zero Compensation from the date of Retirement until
the Officer reaches age sixty-two (62), if the Officer
retires before age sixty-two (62).
2.15 Spouse shall mean a person to whom the Officer was legally
married on the date of the Officer's death.
2.16 Trust shall mean the agreement of trust, called Interstate
Power Company Irrevocable Trust Agreement, 1990, between the
Interstate Power Company and the trustee established for the
purpose of holding the assets of the Trust Fund under the
provisions of this Plan and any other trust established by the
Company to provide any benefits under this Plan.
2.17 Trust Fund shall mean the total funds held under the Trust
for purpose of providing benefits for the Participants. These
funds result from a transfer of general assets of the Employer
made under the Plan which are forwarded to the Trustee to be
deposited in the Trust Fund. In the event of the Employer's
insolvency, assets in the trust Fund are subject to the claims
of the Employer's general creditors.
2.18 Trustee shall mean the trustee or trustees under the Trust.
The term Trustee as it is used in this Plan is deemed to include
the plural unless the context clearly indicates otherwise.
2.19 Year(s) of Benefit Service shall mean an Officer's total
period of service as an employee of the Employer, beginning with
such Officer's employment commencement date expressed in years
and months, including fractions of years, and ending on the date
that the employee's employment with the Employer is terminated.
For purposes of this Section 2.19 any part of a month shall be
deemed to be a whole month. "Years of Benefit Service" shall
include years (and fractions of years) for which an Officer has
received payments pursuant to an individual Severance Agreement
between the Officer and the Company.
ARTICLE III - PARTICIPATION
3.1 Participation.
The only employees eligible to participate in this plan are
Officers. Participation in the Plan shall commence upon the
notification to the Officer by the Employer of such Officer's
eligibility to participate in this Plan and upon the Officer's
entry into this Plan. The Employer shall determine the
Officer's entry date into this Plan. See 5.5 Suspension of
Benefits.
3.2 Death.
If an Officer dies while actively employed by the Employer, a
benefit shall be payable under this Plan. The benefit shall be
payable as provided in Section 5.7. See 5.5 Suspension of
Benefits.
ARTICLE IV - CONTRIBUTIONS
4.1 Employer Contributions.
(a) All contributions under this Plan are made by the Employer.
(b) In establishing this Plan and the Trust, the Employer
agrees and undertakes to make the Trust Fund subject to the
claims of the Employer's general creditors. The right of
any Participant to payment of benefits from the Employer's
general assets shall be no greater than that of any other
general unsecured creditor of the Employer.
4.2 Change in Control, Funding.
In the event that a change in control of the Employer occurs or
in the event of a change in the ownership of all or
substantially all of the assets of the Employer occurs as
defined in Section 2.2.5 this Plan shall become funded upon the
date that the Securities and Exchange Commission is notified of
such change. The amount of such funding shall be equal to the
present value of the Officer's Accrued Benefit (See Definition
2.1) based upon 7% interest per annum and the 1983 Group Annuity
Mortality Table for males. All Plan participants shall become
one hundred percent (100%) vested in their Accrued Benefit.
Funding under this Section 4.2 shall be effective through
contributions to a "Rabbi Trust" to be established by the
Company.
4.3 Binding Effect on Successor.
The Plan shall be binding upon and inure to the benefit of any
successor to the Employer or its business as the result of
merger, consolidation, reorganization, transfer of assets or
otherwise and any subsequent successor thereto. In no event
shall such merger, consolidation, reorganization, transfer of
assets or other similar transaction suspend or delay the rights
of any Participant to receive benefits hereunder.
ARTICLE V - BENEFITS
5.1 Normal Retirement Pension.
(a) An Officer shall be eligible for a normal retirement
pension under this Section 5.1 if the Officer terminates
service with the Employer on or after such Officer's Normal
Retirement Date.
(b) An Officer's monthly normal retirement pension is based
upon one twelfth (1/12th) of the following formula, based
on a single life annuity:
three and three-fourths percent (3-3/4%) multiplied by
Years of Benefit Service (not in excess of 20)
multiplied by Compensation minus the Officer's annual
accrued benefit from the Retirement Plan payable as a
single life annuity, any other employer's annual
retirement pension and the Officer's annual Social
Security Benefit.
5.2 Early Retirement Pension.
(a) If the Officer terminates service with the Employer on or
after such Officer's Early Retirement Date, the Officer
shall receive an early retirement pension or a normal
retirement pension as provided under this Section 5.2. If
the Officer terminates service with the Employer before
such Officer's Early Retirement Date, no benefits will be
payable to such Officer under this Plan.
(b) An Officer's monthly early retirement pension is based upon
one twelfth (1/12th) of the following formula, based upon a
single life annuity:
three and three-fourths percent (3-3/4%) multiplied
by Years of Benefit Service (not in excess of 20 and
determined on the date that the Officer terminates
service with the Employer) multiplied by Compensation
(determined on the date that the Officer terminates
service with the Employer) minus the Officer's annual
accrued benefit from the Retirement Plan payable as a
single life annuity, any other employer's annual
retirement pension and the Officer's annual Social
Security Benefit.
(c) If the Officer commences benefit on his Early Retirement
Date, the Officer will receive the following percentage of
such Officer's pension:
Age When Benefits Begin Percentage of Benefit Received
65 100.00%
64 97.50%*
63 95.00%*
62 92.50%*
61 90.00%
60 80.00%
59 70.00%
58 60.00%
57 50.00%
56 40.00%
55 30.00%
* These percentages are subject to subsection (d) below.
(d) Notwithstanding anything contained in this Plan to the
contrary, if the Officer commences benefits on or after age
sixty-two (62) with thirty-five (35) or more Years of
Benefit Service with the Employer, the Officer may retire
and qualify for 100% of the Officer's benefit under this
Plan.
5.3 Prior Employer's Plan.
If the Officer is eligible to receive a benefit from a previous
employer's defined benefit retirement plan, the Officer's
benefit under this Plan shall be reduced. The amount of the
reduction is equal to the monthly pension benefit the Officer
earned from the prior employer's plan payable as a single life
annuity at such Officer's retirement date.
5.4 Form of Payment.
(a) Benefits under this Plan shall be paid on the Officer's
Normal Retirement Date or Early Retirement Date in the form
selected by the Officer. The forms of payments which are
available for selection under this Plan are the same
options which are available under the Retirement Plan, as
provided in subsection (b) below. The Officer may choose a
different form of payment under this Plan from the form
selected under the Retirement Plan.
(b) The optional forms of retirement benefit for the benefit
derived from the Officer's Accrued Benefit shall be the
following:
(i) a straight life annuity;
(ii) a straight life annuity with Social Security
adjustment option;
(iii) single life annuities with period certain of
five (5), ten (10) or fifteen (15) years; and
(iv) survivorship life annuities with
survivorship percentages of 50, 66 2/3 or 100.
The benefit payable under any optional annuity form (except for
subsection (ii) and the normal form of payment under the
retirement Plan) shall be the actuarial equivalent (as defined
in the Retirement Plan) of the normal form of payment under the
Retirement Plan.
5.5 Suspension of Benefits.
If the Officer terminates service with the Employer and is
rehired after commencement of benefits but prior to attaining
age sixty-five (65), payment of benefits under this Plan shall
cease. Payment of benefits under this Plan shall resume when
the Officer again terminates service with the Employer.
5.6 Termination for Cause.
If the Officer is terminated for cause, the Officer will not
receive any benefits under this Plan. Termination for cause
shall be determined by the Board of Directors and will include,
but shall not be limited to:
(a) embezzlement of Employer funds;
(b) fraud; and
(c) acts which cause harm to the Employer or its reputation.
5.7 Surviving Spouse Benefits.
(a) If the Officer is unmarried and dies prior to retirement,
no benefits are payable under this Plan. If the Officer is
married and dies prior to retirement, the Officer's Spouse
will receive a pre-retirement survivor annuity.
(b) The Spouse shall receive a lifetime monthly pension equal
to the percent from the table below of the Officer's
Accrued Benefit:
Percentage of Benefit
Age at Time of Death Spouses Receives
64 48%
63 46%
62 44%
61 42%
60 40%
59 38%
58 36%
57 34%
56 32%
55 and under 30%
(c) If the Officer dies after such Officer's Early Retirement
Date, the pension amount is determined as if the Officer
retired on such Officer's date of death. The Spouse
commences payments as of the Officer's date of death.
(d) If the Officer dies before such Officer's Early Retirement
Date, the pension amount is determined as if the Officer
terminated service with the Employer on the date of death.
The Spouse shall commence payments on the earliest date
that the Officer was eligible to retire.
(e) If the Officer dies after the Officer retired and commenced
payments, the death benefit payable will be based on the
form of payment selected by the Officer.
5.8 Claims Procedure.
(a) Filing a Claim.
Any Officer or Spouse may file a written claim for a Plan
benefit with the Plan Administraton.
(b) Notice of Denial of Claim.
In the event of a denial or limitation of any benefit or
payment due to a claimant, the claimant shall be given a
written notification containing specific reasons for the
denial or limitation of such claimant's benefit. The
written notification shall contain specific reference to
the pertinent Plan provisions on which the denial or
limitation of his benefit is based. In addition, it shall
contain a description of any other material or information
necessary for the claimant to perfect a claim and an
explanation of why such material or information is
necessary. The notification shall further provide
appropriate information as to the steps to be taken if the
claimant wishes to submit the claim for review. This
written notification shall be given to a claimant within
ninety (90) days after receipt of the claim by the Plan
Administrator unless special circumstances require an
extension of time for processing the claim. If such an
extension of time is required, written notice of the
extension shall be furnished to the claimant prior to the
termination of said ninety (90) day period, and such notice
shall indicate the special circumstances which make the
postponement appropriate.
(c) Right of Review.
In the event of a denial or limitation of his benefit, the
claimant shall be permitted to review pertinent documents
and to submit to the Plan Administrator issues and comments
in writing. In addition, the claimant may make a written
request for a full and fair review of the claim and its
denial by the Plan Administrator, provided, however, that
such written request is received by the Plan Administrator
within sixty (60) days after receipt by the claimant of
written notification of the denial or limitation of the
claim. The sixty (60) day requirement may be waived by the
Plan Administrator in appropriate cases.
(d) Decision on Review.
A decision shall be rendered by the Plan Administrator
within sixty (60) days after the receipt of the request for
review, provided that where special circumstances require
an extension of time for processing the decision, it may be
postponed with written notice to the claimant (prior to the
expiration of the initial sixty (60) day period) for an
additional sixty (60) days, but in no event shall the
decision be rendered more than one hundred twenty (120)
days after the receipt of such request for review. Any
decision by the Plan Administrator shall be furnished to
the claimant in writing and shall set forth the specific
reason for the decision and the specific Plan provisions on
which the decision is based.
(e) Court Action.
No Officer or Spouse shall have the right to seek judicial
review of a denial of benefits or to bring any action in
any court to enforce a claim for benefits prior to filing a
claim for benefits or exhausting the rights to review under
this Section 5.8.
5.9 Forfeiture of Benefits.
Upon the occurrence of the following events, the Officer's
benefits under this Plan shall be forfeited and no benefits
shall be payable to the Officer under this Plan:
(a) as provided in Sections 3.2, 5.2(a), 5.6, and 5.7(a);
(b) if the Plan terminates, no further benefits shall be
accrued under this Plan. The Officer's Accrued Benefit
under this Plan shall be the benefit accrued as of the date
the Plan is terminated;
(c) if the Officer terminates service with the Employer and
begins employment with an employer which the Board of
Directors determines to be a competitor of the Employer or
with any employer in the utility industry. This limitation
does not, however, apply to successors and assigns of
Employer.
ARTICLE VI - ADMINISTRATION OF PLAN
6.1 Administration.
(a) Subject to this Article VI, the Plan administrator has
complete control of the administration of the Plan. The
Plan Administrator has all the powers necessary to properly
carry out its administrative duties. Not in limitation,
but in amplification of the foregoing, the Plan
Administrator has the power in its sole and complete
discretion to construe the terms of the Plan, to interpret
and resolve any ambiguity which may arise under the Plan
and all questions which may arise under the Plan, including
questions relating to the eligibility of officers to
participate in the Plan and the amount of benefit to which
any Participant may become entitled. The Plan
Administrator's decisions upon all matters within the scope
of its authority shall be final.
(b) Unless otherwise set out in the Plan, the Plan
Administrator may delegate recordkeeping and other duties
which are necessary to assist it with the administration of
the Plan to any person or firm which agrees to accept such
duties. The Plan Administrator shall be entitled to rely
upon all tables, valuations, certificates and reports
furnished by the consultant or actuary appointed by the
Plan Administrator and upon all opinions given by any
counsel selected or approved by the Plan Administrator.
(c) The Plan Administrator shall receive all claims for
benefits by Participants or former Participants. The Plan
Administrator shall determine all facts necessary to
establish the right of any claimant to benefits and the
amount of those benefits under the provisions of the Plan.
The Plan Administrator may establish rules and procedures
to be followed by claimants in filing claims for benefits,
in furnishing and verifying proof necessary to determine
age, and in any other matters required to administer the
Plan
6.2 Records.
(a) All acts and determination of the Plan Administrator shall
be duly recorded. All these records, together with other
documents necessary for the administration of the Plan,
shall be preserved in the Plan Administrator's custody.
(b) Writing (handwriting, typing, printing), photo-stating,
photographing, microfilming, magnetic impulse, mechanical
or electrical recording or other forms of data compilation
shall be acceptable means of keeping records.
6.3 Information Available.
Any participant in the Plan may examine copies of this Plan.
The Plan Administrator shall maintain the Plan in its office, or
in such other place or places as it may designate. The Plan may
be examined during reasonable business hours. Upon the written
request of a Participant receiving benefits under the Plan, the
Plan Administrator shall furnish such Participant with a copy of
the Plan.
6.4 Expenses.
The Employer shall pay all expenses of administering the Plan.
ARTICLE VII - AMENDMENT AND TERMINATION
7.1 Right to Amend or Terminate Plan.
While the Employer intends to maintain this Plan indefinitely,
the Employer, through the action of the Board of Directors,
reserves the right to amend and/or terminate this Plan at any
time for whatever reason it may deem appropriate; provided,
however, that any such amendment and/or termination adopted by
the Board of Directors or otherwise after the occurrence of any
Change in Control shall not be effective against any Participant
participating in this Plan on the date of any such Change in
Control if such amendment and/or termination would have any
adverse effect on the benefit rights and/or entitlements,
accrued or potential, of such Participant, when compared to any
such benefit rights and/or entitlements as the same existed
immediately prior to the adoption of any such amendment and/or
termination of this Plan, without the prior express written
consent of any such adversely effected Participant.
7.2 Amendments.
No amendment to this Plan may be made except by action of a
simple majority of the Board of Directors.
ARTICLE VIII - MISCELLANEOUS PROVISIONS
8.1 No Employment Rights.
Nothing contained in this Plan shall be construed as a contract
of employment between the Employer and any Officer or as a right
of any Officer to be continued in employment or as a limitation
on the right of any Employer to discharge any of its Officers
with or without cause.
8.2 Non-alienability.
The rights of an Officer to the payment of benefits under this
Plan shall not be assigned, transferred, pledged or encumbered,
or be subject in any manner to alienation or anticipation.
8.3 Facility of Payment.
Any amounts payable under this Plan to any person under a legal
disability or who, in the judgment of the Employer, is unable to
properly manage his financial affairs may be paid to the legal
representative of such person or may be applied for the benefit
of such person in any manner which the Employer may select.
8.4 Severability.
Whenever possible, each provision of the Plan shall be
interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Plan shall be held
to be prohibited by or invalid under applicable law, then such
provision shall be deemed to be amended to accomplish the
objectives of the provision as originally written to the fullest
extent permitted by law and all other provisions of the Plan
shall remain in full force and effect. Such provision shall be
deemed to have been drafted in such manner on the Effective
Date.
8.5 Headings.
The headings are for convenience of reference only. In the
event of a conflict between a heading and the content of a
section, the content of the section shall control.
8.6 Number and Gender.
The masculine pronoun used herein shall include the feminine
pronoun and the singular number shall include the plural number
unless the context of this Plan requires otherwise.
8.7 Governing Law.
The provisions of this Plan shall be interpreted in accordance
with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Employer has caused its corporate seal to be
hereunto affixed and has caused its name to be signed hereto by the person
duly authorized below, pursuant to the authority of the Board of
Directors, to be effective as first above written, on this 9th day of
December, 1997.
INTERSTATE POWER COMPANY
By: / s / Michael R. Chase
( Michael R. Chase )
Title: President & CEO
(Corporate Seal)
Attest:
/ s / Joseph C. McGowan
( Joseph C. McGowan )
Secretary
Exhibit 99.6
Annual Report on Form 10-K
A. Item 10 Directors Biographical Information
Class I Directors - Present Terms Expire at 1998 Annual Meeting
ALFRED D. CORDES, 66, was elected to Interstate Power Company's Board
of Directors on January 1, 1992. He was elected Vice President
District Administration and Public Affairs on May 1, 1990 and retired
from that position on July 1, 1995. He has also served as District
Manager and Executive Assistant prior to being appointed Vice
President - District Administration on January 1, 1986. Mr. Cordes
is a member of the Executive Committee.
JOYCE L. HANES, 65, is a Director and Chairman of the Board of
Midwest Wholesale Inc., Mason City, Iowa. Mrs. Hanes has been a
Director of Midwest Wholesale Inc. since 1970. She was re-elected
Chairman of the Board of that Company in December 1997 having served
as Chairman from 1986 to 1988. She is a member of the Board of
Directors of the Iowa Student Loan Liquidity Corporation. She was
elected a Director of Interstate Power Company on January 1, 1982.
Mrs. Hanes is Chairman of the Audit Committee, and a member of the
Compensation Committee and the Executive Committee.
Class II Directors - Present Terms Expire at 1999* Annual Meeting
JAMES E. BYRNS, 71, is Chairman and Chief Executive Officer of Custom
Pak, Inc. of Clinton, Iowa, a firm of which he was co-founder in
1974. Mr. Byrns was elected to this position on August 15, 1989. He
had been President of that Company since 1980 having served as
Executive Vice President from 1974. He was elected to Interstate
Power Company's Board of Directors on January 31, 1984. Mr. Byrns is
Chairman of the Nominating Committee and is a member of the Audit
Committee and the Compensation Committee.
*In October of 1996 Mr. Byrns reached age 70, the mandatory
retirement age for Directors, the Board of Directors adopted in July
of 1996 and May of 1997 resolutions authorizing the continued service
of Mr. Byrns as a Class II Director from October, 1996 until the 1998
Annual Meeting of Stockholders or the effective date of the merger
with WPL Holdings, Inc, IES Industries Inc. and IPC, whichever came
first.
GERALD L. KOPISCHKE, 66, was elected to Interstate Power Company's
Board of Directors effective July 10, 1992. Mr. Kopischke was
elected Vice President - Electric Operations on September 1, 1980 and
retired from that position on January 1, 1996. He had served as
Director of Electrical Engineering prior to being appointed as Vice
President. Mr. Kopischke is a member of the Nominating Committee.
Class III Directors - Present Terms Expire at 2000 Annual Meeting
ALAN B. ARENDS, 64, is Chairman of the Board of Alliance Benefit
Group Financial Services, Corp. (formerly Arends Associates, Inc.,)
of Albert Lea, Minnesota, an employee benefits company which he
founded in 1983. Mr. Arends has also taught at both the high school
and college levels. He was elected to the Board of Directors of the
Company on August 15, 1993. Mr. Arends is Chairman of the
Compensation Committee and a member of the Audit Committee.
MICHAEL R. CHASE, 59, was elected to Interstate Power Company's Board
of Directors in January of 1996. He was elected President effective
October 1, 1996. He was elected Chief Executive Officer on January 1,
1997. He had served as Vice President, Power Production beginning in
1991 and then Executive Vice President starting in July 1995. Mr.
Chase is a member of the Nominating Committee.
WAYNE H STOPPELMOOR, 64, is Chairman of the Board of Directors of
Interstate Power Company. He was elected to the IPC Board in July
1986. He was elected president and Chief Executive Officer effective
January 1, 1987 and was elected Chairman on May 1, 1990. He resigned
from the position of President effective October 1, 1996 but
continued as Chief Executive Officer until he retired as an officer
on January 1, 1997. Mr. Stoppelmoor has served as Vice president of
Administration beginning in 1978 and then Executive Vice President
starting in May 1985. Mr. Stoppelmoor is Chairman of the Executive
Committee.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company's directors, its executive officers, and certain other
officers are required to report their ownership of the Company's common
stock and Preferred Stock and any changes in that ownership to the
Securities and Exchange Commission and the New York Stock Exchange. All
required filings in 1997 were properly made in a timely fashion. In making
this statement, the Company has relied on the representations of the
persons involved and on copies of their reports filed with the Securities
and Exchange Commission.
B. Item 11
Compensation of Directors
During the period of January 1, 1997, to March 31, 1997 all directors
who were not employees of the Company were paid $11,000 per year plus $650
for each directors' meeting in which they participated. Also $650 was
paid each non-employee director for each committee meeting held on a day
separate from a scheduled Board meeting while $325 was paid for each
committee meeting which they attended that was held the same day but not
in conjunction with a Board meeting. Effective April 1, 1997, the annual
retainer for non-employee directors was increased to $12,000 per year.
The fees for any Regular or Special Meeting of the Board as well as
committee meeting held on non-board meeting days were increased to $700.
Fees for committee meetings held on a Board meeting day but not
consecutive of that meeting were increased to $350. The meeting and
committee fees were for non-employee directors only.
Director Emeritus Program-The Company has adopted a Director Emeritus
Program, for present non-employee directors, that will be available during
the transition to a new Interstate Energy Corporation board of directors.
A director emeritus is appointed by the Board of Directors of the Company
and is entitled to serve as such until age 70, but no longer than two
years. Directors emeriti are entitled to receive the annual retainer fee
paid to the Company's or successor Company's regular directors. Directors
emeriti will participate in various board activities but are not voting
members.
All directors who were not employees received reimbursement of out-
of-pocket expenses incurred in connection with directors' or committee
meetings. Each director was included in the Company's group life
insurance program.
Compensation Committee Interlocks and Insider Participation
The Board of Directors accepted the recommendations of the
Compensation Committee for the 1997 salaries at the December 19, 1996
Board Meeting. There were no interlocking and insider positions required
to be disclosed.
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth the total
compensation paid by the Company for all services rendered during 1997,
1996, and 1995 to the Chief Executive Officer and the four other most
highly compensated executive officers (the "named executive officers").
<TABLE>
SUMMARY COMPENSATION TABLE
(Dollars)
Annual Compensation
<CAPTION>
Other
Name and Annual All Other
Principal Position Year Salary($) Bonus($) Compensation ($) Compensation($) 1
<S> <C> <C> <C> <C> <C>
Michael R. Chase 1997 225,000 6,750 0 1,600
President and CEO 1996 171,250 0 0 250
1995 138,000 0 0 250
Dale R. Sharp 1997 137,000 4,110 0 1,406
Vice President, 1996 120,000 0 0 250
Engineering - IPC 1995 50,000 0 0
250
Donald E. Hamill 1997 136,000 4,080 0 1,399
Vice President, Budgets 1996 129,000 0 0 250
& Regulatory Affairs - IPC 1995 123,000 0 0 250
William C. Troy 1997 136,000 4,080 0 1,399
Controller - IPC 1996 129,000 0 0 250
1995 123,000 0 0 250
Joseph C. McGowan 1997 127,000 3,810 0 926
Secretary & Treasurer - 1996 120,000 0 0 250
IPC 1995 114,000 0 0 250
____________________
1 All other compensation consists of Company matching contribution to 401(k) plan.
</TABLE>
Other Compensation
No officer individually or officers as a group received "Other Annual
Compensation" of $50,000 or 10% of the salary and bonus reported in the
Summary Compensation Table.
Stock Option and Stock Appreciation Right Plans
No director or Officer of the Company held any options to purchase
securities from the Company or its subsidiary during the year 1997.
Agreements with Executives
The Company has entered into Severance Agreements with each of eight
senior executives of the Company (including Messrs. Chase, Hamill,
McGowan, Sharp and Troy) which generally provide for certain benefits in
the event the executive is terminated or resigns under certain
circumstances following a change in control of the Company. The Mergers
will constitute a change in control of the Company for purposes of these
agreements.
Retirement and Employee Benefit Plans
The Company's Pension Plan covers substantially all employees
including officers. Pension Plan benefits depend upon credited service,
age at retirement and compensation. At an assumed retirement age of 65,
the normal retirement benefit for Pension Plan Participants is based on a
formula that applies a factor of 1.17% to the participant's average annual
compensation for the three highest consecutive years plus a factor of .35%
to the participant's average compensation in excess of Social Security
Covered Compensation multiplied by the number of accredited service years
(maximum 35). Optional benefit forms are also available.
The following table displays the maximum annual retirement benefits
payable under the straight life annuity form of pension at the normal
retirement age of 65 for specified remunerations and years of service
under the Pension Plan provisions in effect January 1, 1998.
Estimated Annual Benefits For Years of Service
Listed
Average Annual Compensation
For 3 Highest Paid 20 Years 25 Years 30 Years 35 Years
Consecutive Years
$100,000 $28,221 $35,276 $42,331 $49,387
125,000 $35,821 $44,776 $53,732 $62,686
150,000 $43,421 $54,276 $65,132 $75,987
*175,000 $46,461 $58,076 $69,692 $81,307
*200,000 or greater $46,461 $58,076 $69,692 $81,307
_____________________
*compensation used for benefits is limited to $160,000
For purposes of determining Pension Plan benefits, compensation for
each of the individuals listed in the Summary Compensation Table is the
same as the amounts set forth in that table. The estimated full years of
credited service for benefits at retirement under the Pension Plan for
those executive officers listed in the Summary Compensation Table are:
Michael R. Chase, 35 years; Dale R. Sharp, 35 years; Donald E. Hamill, 35
years; William C. Troy, 23 years; and Joseph C. McGowan, 35 years.
In addition to the Pension Plan, the Supplemental Retirement Plan
(SRP) amended in 1997 provides a supplemental retirement benefit for all
officers of the Company. Benefits begin at the normal retirement date (age
65) or a participant electing early retirement may begin receiving reduced
benefits as early as age 55. For those officers retiring on or after
January 1, 1994, the SRP (1) provides a retirement benefit per month equal
to seventy-five percent of the individual's highest average monthly salary
for any consecutive 12-month period of employment by Interstate prior to
retirement, less the individual's qualified defined benefit retirement
plan benefit and less the individual's social security benefit, and (2)
provides a survivor benefit. The SRP may be funded in part from the
general assets of the Company in addition to the purchase of cost recovery
life insurance policies by the Company.
The following table displays the maximum annual supplemental
retirement benefits payable under the straight life annuity form of
pension at the normal retirement age of 65 for specified remunerations for
the year of retirement under the SRP provisions in effect at January 1,
1998.
Estimated Annual SRP Benefits For Years of Service Listed
Final Annual Salary 20 Years 25 Years 30 Years 35 Years
$125,000 $41,825 $32,870 $23,914 $14,960
150,000 $52,975 $42,120 $31,264 $20,409
175,000 $68,685 $57,070 $45,454 $33,839
200,000 $87,435 $75,820 $64,204 $52,589
225,000 $106,185 $94,570 $82,954 $71,339
250,000 $124,935 $113,320 $101,704 $90,089
The Company has an Amended Deferred Compensation Plan available to
officers and nonemployee directors and provides for deferral of salaries
and fees with accrued interest.
In 1988, the Company adopted a 401(k) Plan in which all Employees of
the Company are eligible to participate, subject to meeting Plan
eligibility requirements. Under the provisions of this Plan, any eligible
employee may elect to direct up to 15% of his or her compensation, as
defined in the Plan, with a maximum contribution of $9,500 for the year
1997. Any amount so deferred by the employee is exempt from current
federal income tax. Directors who are not employees are not eligible to
participate in the Plan. To encourage participation in this Plan, the
Company contributes to the account of participating employees 25 cents for
each one dollar contributed by the employee, on contributions that do not
exceed 4% of compensation. Upon retirement from the Company, employees may
receive distributions from their account held by the Plan Trustee.
C. Item 12
PRINCIPAL HOLDERS OF VOTING SECURITIES
Security Ownership of Certain Beneficial Owners
The Company represents that as of December 31, 1997, to the best of its
knowledge only the following persons or groups owned of record or
beneficially more than 5% of the outstanding voting securities of the
Company:
Amount and Nature
of
Name of Beneficial % of
Beneficial Owner Title of Class Ownership (1) Ownership (1)
WPLH IPC Common Stock 1,903,293 16.6%
IES IPC Common Stock 1,903,293 16.6%
(1) By reason of the Stock Option Agreements, each of WPLH and IES may
be deemed to have sole voting and dispositive power with respect to the
shares listed above which are subjected to their respective Options from
IPC and, accordingly, each of WPLH and IES may be deemed to beneficially
own all of such shares (assuming exercise of its Option and the
nontriggering of the other party's right to exercise its Option for IPC
Common Stock). However, each of WPLH and IES expressly disclaim any
beneficial ownership of such shares because the Options are exercisable
only in certain circumstances.
Security Ownership of Management
The directors and officers of the Company owned of record and
beneficially on December 31, 1997, an aggregate of 36,115 shares of Common
Stock of the Company, representing less than 1% of the shares outstanding.
The Company represents that as of December 31, 1997, to the best of its
knowledge beneficial ownership of shares of each class of equity
securities of the Company by all directors and nominees individually, the
CEO and certain named executive officers individually, and the directors
and officers of the Company as a group is as follows:
Amount and Nature
of Beneficial % of
Name of Nominee Title of Class(1) Ownership(2)(3) Ownership
Alan B. Arends Common Stock 986 *
James E. Byrns Common Stock 2,949 *
Michael R. Chase Common Stock 5,894 *
Alfred D. Cordes Common Stock 1,508(4) *
Donald E. Hamill Common Stock 2,800(4) *
Joyce L. Hanes Common Stock 1,676 *
Gerald L. Kopischke Common Stock 4,676(4) *
Joseph C. McGowan Common Stock 2,640(4) *
Dale R. Sharp Common Stock 2,686(4) *
Wayne H. Stoppelmoor Common Stock 5,373(4) *
William C. Troy Common Stock 409(4) *
Officers and Directors as a
group - 14 in group Common Stock 36,115(4) *
* - less than 1%
1) In addition to Common Stock, the Company also has, as equity
securities, outstanding shares of Preferred Stock.
(2) Information with respect to beneficial ownership based upon
information furnished by each officer or director and contained in
filings made with the Securities and Exchange Commission.
(3) Includes shares in which said director or officer may have an
indirect beneficial ownership by reason of the ownership of such
shares by their spouses, dependent children or trusts.
(4) Includes 2,087 shares for Mr. Stoppelmoor, 1,693 shares for Mr.
Kopischke, 2,096 shares for Mr. Hamill, 197 shares for Mr. Cordes,
1,086 shares for Mr. Sharp, 304 shares for Mr. Troy, 2500 shares
for Mr. McGowan and an aggregate of 13,508 shares for officers and
directors. These shares are in the Company's 401(k) Plan as of
December 31, 1997.
EX-99.7
INTERSTATE POWER COMPANY IRREVOCABLE TRUST AGREEMENT - 1997
This Agreement made this 29th day of December, 1997, by and between
Interstate Power Company ("Company") and American Trust & Savings Bank, of
Dubuque, Iowa ("Trustee");
(a) WHEREAS, Company has adopted the non-qualified deferred
compensation Plan as listed in Appendix 1.
(b) WHEREAS, Company has incurred or expects to incur liability
under the terms of such Plan with respect to the individuals participating
in such Plan;
(c) WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of Company's creditors in the event of
Company's Insolvency, as herein defined, until paid to Plan participants
and their beneficiaries in such manner and at such times as specified in
the Plan;
(d) WHEREAS, it is the intention of the parties that this Trust
shall constitute an unfunded arrangement and shall not affect the status
of the Plan as an unfunded plan maintained for the purpose of providing
deferred compensation for a select group of management or highly
compensated employees for purposes of Title I of the Employee Retirement
Income Security Act of 1974;
(e) WHEREAS, it is the intention of Company to make contributions to
the Trust to provide itself with a source of funds to assist it in the
meeting of its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a) Company hereby deposits with Trustee in trust $4,400,000, which
shall become the principal of the Trust to be held, administered and
disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company
is the grantor, within the meaning of sub-part E, part I subchapter J,
chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended,
and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their beneficiaries
shall have no preferred claim on, or any beneficial ownership interest
in, any assets of the Trust. Any rights created under the Plan and this
Trust Agreement shall be mere unsecured contractual rights of Plan
participants and their beneficiaries against Company. Any assets held by
the Trust will be subject to the claims of Company's general creditors
under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) Within 60 days following the end of the Plan years, ending after
the Trust has become irrevocable pursuant to Section 1(b) hereof, Company
shall be required to irrevocably deposit additional cash or other property
to the Trust in an amount sufficient to pay each Plan participant or
beneficiary the benefits payable pursuant to the terms of the Plan as of
the close of the Plan year.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) Company shall deliver to Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or
other instructions acceptable to Trustee for determining the amounts so
payable, the form in which such amount is to be paid (as provided for or
available under the Plan, and the time of commencement for payment of
such amounts. Except as otherwise provided herein, Trustee shall make
payments to the Plan participants and their beneficiaries in accordance
with such Payment Schedule. The Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes that may
be required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plan and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by Company.
(b) The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plan shall be determined by Company
or such party as it shall designate under the Plan, and any claim for
such benefits shall be considered and reviewed under the procedures set
out in the Plan.
(c) Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of
the Plan. Company shall notify Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants
or their beneficiaries. In addition, if the principal of the Trust, and
any earnings thereon, are not sufficient to make payments of benefits in
accordance with the terms of the Plan, Company shall make the balance of
each such payment as it falls due. Trustee shall notify Company where
principal and earnings are not sufficient.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary When Company is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants
and their beneficiaries if the Company is Insolvent. Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i)
Company is unable to pay its debts as they become due, or (ii) Company is
subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided
in Section 1(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of Company under federal and state
law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges in
writing to Trustee that Company has become Insolvent, Trustee shall
determine whether Company is Insolvent and, pending such determination,
Trustee shall discontinue payment of benefits to Plan participants or
their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or
has received notice from Company or a person claiming to be a creditor
alleging that Company is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events rely on such
evidence concerning Company's solvency as may be furnished to Trustee and
that provides Trustee with a reasonable basis for making a determination
concerning company's solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Plan participants or
their beneficiaries and shall hold the assets of the Trust for the
benefit of Company's general creditors. Nothing in this Trust Agreement
shall in any way diminish any rights of Plan participants or their
beneficiaries to pursue their rights as general creditors of Company with
respect to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this
Trust Agreement only after Trustee has determined that Company is not
Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to Section
3(b) hereof and subsequently resumes such payments, the first payment
following such discontinuance shall include the aggregate amount of all
payments due to Plan participants or their beneficiaries under the terms
of the Plan for the period of such discontinuance, less the aggregate
amount of any payments made to Plan participants or their beneficiaries by
Company in lieu of the payments provided for hereunder during any such
period of discontinuance.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, Company shall have no right
or power to direct Trustee to return to Company or to divert to others any
of the Trust assets before all payments of benefits have been made to Plan
participants and their beneficiaries pursuant to the terms of the Plan.
Notwithstanding the above, if the merger between the Company, W.P.L.
Holdings, Inc. and IES Industries, Inc. is not finalized on or before May
10, 1998, the Company shall have the right and power to direct the Trustee
to return to the Company all of the Trust assets.
Section 5. Investment Authority.
(a) In no event may Trustee invest in securities (including stock or
rights to acquire stock) or obligations issued by Company, other than a
de minimis amount held in common investment vehicles in which Trustee
invests. All rights associated with assets of the Trust shall be
exercised by Trustee or the person designated by Trustee, and shall in no
event be exercisable by or rest with Plan participants.
Company shall have the right, at anytime, and from time to time in
its sole discretion, to substitute assets of equal fair market value for
any asset held by the Trust.
Section 6. Disposition of Income.
(a) During the term of this Trust, all income received by the Trust,
net of expenses shall be accumulated and reinvested.
Section 7. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing
between Company and Trustee. Within sixty
(60) days following the close of each calendar year and within fifteen
(15) days after the removal or resignation of Trustee, Trustee shall
deliver to Company a written account of its administration of the Trust
during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth
all investments, receipts, disbursements and other transactions effected
by it, including a description of all securities and investments purchased
and sold with the cost or net proceeds of such purchases or sales (accrued
interest paid or receivable being shown separately), and showing all cash,
securities and other property held in the Trust at the end of such year or
as of the date of such removal or resignation, as the case may be.
Section 8. Responsibility of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in
like capacity and familiar with such matters would use in the conduct of
an enterprise of a like character and with like aims, provided, however,
that Trustee shall incur no liability to any person for any action taken
pursuant to a direction, request or approval given by Company which is
contemplated by, and in conformity with, the terms of the Plan or this
Trust and is given in writing by Company. In the event of a dispute
between Company and a party, Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in
connection with this Trust, Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable
for such payments. If Company does not pay such costs, expenses and
liabilities in a reasonably timely manner, Trustee may obtain payment
from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel
for Company generally) with respect to any of its duties or obligations
hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the
Trust, Trustee shall have no power to name a beneficiary of the policy
other than the Trust, to assign the policy (as distinct from conversion
of the policy to a different form) other than to a successor Trustee, or
to loan to any person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or to applicable law, Trustee shall not have any power
that could give this Trust the objective of carrying on a business and
dividing the gains therefrom, within the meaning of Section 301.7701-2 of
the Procedure and Administrative Regulations promulgated pursuant to the
Internal Revenue Code.
Section 9. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and
expenses. If not so paid, the fees and expenses shall be paid from the
Trust.
Section 10. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company,
which shall be effective ninety (90) days after receipt of such notice
unless Company and Trustee agree otherwise.
(b) Provided the majority of the participants or beneficiaries
entitled to payment of benefits pursuant to the terms of the Plan approve,
the trustee may be removed by Company on thirty (30) days notice or upon
shorter notice accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within thirty (30)
days after receipt of notice of resignation, removal or transfer, unless
Company extends the time limit.
(d) If Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraphs (a) or (b) of this section. If no
such appointment has been made, Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All
expenses of Trustee in connection with the proceeding shall be allowed as
administrative expenses of the Trust.
Section 11. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 10
(a) or (b) hereof, Company must appoint a bank trust department or other
party that may be granted corporate trustee powers under state law, as a
successor to replace Trustee upon resignation or removal. The
appointment shall be effective when accepted in writing by the new
Trustee, who shall have all of the rights and powers of the former
Trustee, including ownership rights in the Trust assets. The former
Trustee shall execute any instrument necessary or reasonably requested by
Company or the successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust assets,
subject to Sections 7 and 8 hereof. The successor Trustee shall not be
responsible for and Company shall indemnify and defend the successor
Trustee from any claim or liability resulting from any action or inaction
of any prior Trustee or from any other past event, or any condition
existing at the time it becomes successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the
Trust revocable after it has become irrevocable in accordance with Section
l(b) hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits
pursuant to the terms of the Plan. Upon termination of the Trust any
assets remaining in the Trust shall be returned to Company.
(c) Upon written approval of participants or beneficiaries entitled
to payment of benefits pursuant to the terms of the Plan, Company may
terminate this Trust prior to the time all benefit payments under the Plan
have been made. All assets in the Trust at termination shall be returned
to Company.
(d) Notwithstanding anything herein to the contrary, any provision
of this Trust which is subject to the approval of the participants or
beneficiaries entitled to payment of benefits pursuant to the terms of the
Plan, may not be amended without the unanimous approval of the
participants or beneficiaries.
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall
be ineffective to the extent of any such prohibition, without invalidating
the remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law
or in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of Iowa.
This Trust Agreement shall be binding upon the successors in interest
of the parties hereto.
Section 14. Effective Date.
The effective date of this Trust Agreement shall be December 29,
1997.
INTERSTATE POWER COMPANY
By: /s/ Michael R. Chase
Michael R. Chase, President and Chief
Executive Officer
AMERICAN TRUST & SAVINGS BANK, TRUSTEE
By: /s/ Robert J. Donovan
Robert J. Donovan,
Senior Vice President and
Trust Officer
