-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PjB9DqX7iZm/+wuf+brm89xwicwIXf6SwNWZJ6Dr/M8q9RBtlLZoNA5puDjPdCDd p0da4j9A/hvsFf+ZyKYHPg== 0000897069-98-000207.txt : 19980408 0000897069-98-000207.hdr.sgml : 19980408 ACCESSION NUMBER: 0000897069-98-000207 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980407 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERSTATE POWER CO CENTRAL INDEX KEY: 0000051720 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 420329500 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03632 FILM NUMBER: 98588888 BUSINESS ADDRESS: STREET 1: 1000 MAIN ST STREET 2: PO BOX 769 CITY: DUBUQUE STATE: IA ZIP: 52004-0769 BUSINESS PHONE: 3195825421 MAIL ADDRESS: STREET 1: 1000 MAIN ST STREET 2: PO BOX 769 CITY: DUBUQUE STATE: IA ZIP: 52001 10-K405 1 INTERSTATE POWER COMPANY 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. 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 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: INTERSTATE POWER COMPANY GENERATING STATIONS
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: 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.
(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 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. 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 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 SCHEDULE II INTERSTATE POWER COMPANY VALUATION AND QUALIFYING ACCOUNTS AND PROVISIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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 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.
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 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 2 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 3 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. 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. 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. 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. 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. 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. 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 ======= ======= ======= 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.
WPLH IES IPC PRO FORMA (in millions except per (as (as (as Pro Forma COMBINED share data) reported) reported) reported) Adjustments (Unaudited) 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
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.
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 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 ===== ===== ===== ===== ===== =====
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:
Power Gas Coal Dollars MWs Dollars Therms Dollars Tons 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 - -
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. 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 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
Selected Financial Data 1997 1996 1995 1994 1993 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 ========= ========= ========= ========= =========
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 4 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 EX-27 5
UT 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 494,597 6,186 65,996 71,970 0 638,749 34,163 108,292 73,166 215,621 24,267 10,819 165,280 0 0 33,500 6,300 0 85 14 182,863 638,749 331,847 14,715 276,347 291,062 40,785 3,819 44,604 15,436 29,168 2,469 26,699 20,225 13,590 66,745 2.74 2.74
EX-99.1 6 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.
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 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.
INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 (In thousands, except per share amounts)
Pro Forma WPLH Adjustments Pro Forma (As Reported) IES IPC (See Note 1) Combined 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.
INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (In thousands, except per share amounts)
Pro Forma WPLH Adjustments Pro Forma (As Reported) IES IPC (See Note 1) Combined 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.
INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands, except per share amounts)
Pro Forma WPLH Adjustments Pro Forma (As Reported) IES IPC (See Note 1) Combined 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
INTERSTATE ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
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 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) ======= ======= ======= ======== ======= =======
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 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
1996 INCOME STATEMENT Merged Company Common Stock IEA Total Adjustment Gas Activity Pro Forma (Note 1(c)) (Note 1(f)) Adjustments 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 1995 INCOME STATEMENT Merged Company Common Stock IEA Total Adjustment Gas Activity Pro Forma (Note 1(c)) (Note 1(f)) Adjustments 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
(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.
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 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
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 7 EX-99.5 INTERSTATE POWER COMPANY SUPPLEMENTAL RETIREMENT PLAN AS AMENDED AND RESTATED DECEMBER 9, 1997 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 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 EX-99.6 8 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 $350. The meeting and committee fees were for non-employee directors only. Director Emeritus Program-The Company has adopted a Director Emeritus Program, for present non-employee directors, that will be available during the transition to a new Interstate Energy Corporation board of directors. A director emeritus is appointed by the Board of Directors of the Company and is entitled to serve as such until age 70, but no longer than two years. Directors emeriti are entitled to receive the annual retainer fee paid to the Company's or successor Company's regular directors. Directors emeriti will participate in various board activities but are not voting members. All directors who were not employees received reimbursement of out- of-pocket expenses incurred in connection with directors' or committee meetings. Each director was included in the Company's group life insurance program. Compensation Committee Interlocks and Insider Participation The Board of Directors accepted the recommendations of the Compensation Committee for the 1997 salaries at the December 19, 1996 Board Meeting. There were no interlocking and insider positions required to be disclosed. COMPENSATION OF EXECUTIVE OFFICERS The following Summary Compensation Table sets forth the total compensation paid by the Company for all services rendered during 1997, 1996, and 1995 to the Chief Executive Officer and the four other most highly compensated executive officers (the "named executive officers"). SUMMARY COMPENSATION TABLE (Dollars) Annual Compensation
Other Name and Annual All Other Principal Position Year Salary($) Bonus($) Compensation ($) Compensation($) 1 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.
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 9 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 -----END PRIVACY-ENHANCED MESSAGE-----