-----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, IcR/JjrjYIkLxxvM/PSMeJBEInt3yIdZWjeQuAhRycNhBElemyGXdHju8/cQy0mC xqkr2hVnQ/TwNTI2/QbupQ== 0000897069-98-000568.txt : 19981118 0000897069-98-000568.hdr.sgml : 19981118 ACCESSION NUMBER: 0000897069-98-000568 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERSTATE ENERGY CORP CENTRAL INDEX KEY: 0000352541 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 391380265 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09894 FILM NUMBER: 98752049 BUSINESS ADDRESS: STREET 1: 244 W WASHINGTON AVE CITY: MADISON STATE: WI ZIP: 53703 BUSINESS PHONE: 6082523110 MAIL ADDRESS: STREET 1: P O BOX 2568 CITY: MADISON STATE: WI ZIP: 53701-2568 FORMER COMPANY: FORMER CONFORMED NAME: WPL HOLDINGS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IES UTILITIES INC CENTRAL INDEX KEY: 0000052485 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 420331370 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04117 FILM NUMBER: 98752050 BUSINESS ADDRESS: STREET 1: 200 FIRST ST SE STREET 2: IES TOWER CITY: CEDAR RAPIDS STATE: IA ZIP: 52401 BUSINESS PHONE: 3193984411 FORMER COMPANY: FORMER CONFORMED NAME: IOWA ELECTRIC LIGHT & POWER CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IOWA RAILWAY & LIGHT CORP DATE OF NAME CHANGE: 19670629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WISCONSIN POWER & LIGHT CO CENTRAL INDEX KEY: 0000107832 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 390714890 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-00337 FILM NUMBER: 98752051 BUSINESS ADDRESS: STREET 1: 222 W WASHINGTON AVE CITY: MADISON STATE: WI ZIP: 53703 BUSINESS PHONE: 6082523311 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission Name of Registrant, State of Incorporation, IRS Employer File Number Address of Principal Executive Offices and Identification Telephone Number Number 1-9894 INTERSTATE ENERGY CORPORATION 39-1380265 (a Wisconsin corporation) 222 West Washington Avenue Madison, Wisconsin 53703 Telephone (608)252-3311 0-4117-1 IES UTILITIES INC. 42-0331370 (an Iowa corporation) Alliant Tower Cedar Rapids, Iowa 52401 Telephone (319)398-4411 0-337 WISCONSIN POWER AND LIGHT COMPANY 39-0714890 (a Wisconsin corporation) 222 West Washington Avenue Madison, Wisconsin 53703 Telephone (608)252-3311 Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past (90) days. Yes X No _____ This combined Form 10-Q is separately filed by Interstate Energy Corporation, IES Utilities Inc. and Wisconsin Power and Light Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. Number of shares outstanding of each class of common stock as of October 31, 1998: Interstate Energy Corporation Common stock, $.01 par value, 77,152,806 shares outstanding IES Utilities Inc. Common stock, $2.50 par value, 13,370,788 shares outstanding (all of which are owned beneficially and of record by Interstate Energy Corporation) Wisconsin Power and Light Company Common stock, $5 par value, 13,236,601 shares outstanding (all of which are owned beneficially and of record by Interstate Energy Corporation) CONTENTS Page Part I. Financial Information Item 1. Consolidated Financial Statements Interstate Energy Corporation: Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1998 and 1997 6 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 7 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 9 Notes to Consolidated Financial Statements 10 IES Utilities Inc.: Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1998 and 1997 14 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 15 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 17 Notes to Consolidated Financial Statements 18 Wisconsin Power and Light Company: Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1998 and 1997 20 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 21 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 23 Notes to Consolidated Financial Statements 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 57 Part II. Other Information 57 Item 1. Legal Proceedings 57 Item 5. Other Information 58 Item 6. Exhibits and Reports on Form 8-K 59 Signatures 60 2 DEFINITIONS Certain abbreviations or acronyms used in the text and notes of this combined Form 10-Q are defined below: Abbreviation or Acronym Definition AICPA American Institute of Certified Public Accountants Alliant Industries Alliant Industries, Inc. Alliant Services Alliant Services Company DAEC Duane Arnold Energy Center Diversified IES Diversified Inc. DOE U.S. Department of Energy Dth Dekatherm EAC Energy Adjustment Clause EPA United States Environmental Protection Agency EWG Exempt Wholesale Generator FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission FUCO Foreign Utility Company HDC Heartland Development Corporation ICC Illinois Commerce Commission IDNR Iowa Department of Natural Resources IEC Interstate Energy Corporation IEPC Iowa Environmental Protection Commission IES IES Industries Inc. IESU IES Utilities Inc. IPC Interstate Power Company ISO Independent System Operator IUB Iowa Utilities Board Kewaunee Kewaunee Nuclear Power Plant 3 Abbreviation or Acronym Definition LIBOR London Interbank Offer Rate McLeod McLeodUSA Inc. MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MG&E Madison Gas and Electric Company MGP Manufactured Gas Plants Midwest ISO Midwest Independent System Operator MPUC Minnesota Public Utilities Commission MW Megawatt MWH Megawatt-Hour NOx Nitrogen Oxides OCA Office of Consumer Advocate PCB Polychlorinated Biphenyl PGA Purchased Gas Adjustment PSCW Public Service Commission of Wisconsin PSD Prevention of Significant Deterioration PUHCA Public Utility Holding Company Act of 1935 SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards SIP State Implementation Plan SO2 Sulfur Dioxide SOP Statement of Position Whiting Whiting Petroleum Corporation WP&L Wisconsin Power and Light Company WPLH WPL Holdings, Inc. WPSC Wisconsin Public Service Corporation 4 INTERSTATE ENERGY CORPORATION PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 5 INTERSTATE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Operating revenues: Electric utility $ 460,974 $ 433,983 $ 1,199,139 $ 1,145,377 Gas utility 29,082 33,893 204,395 269,709 Nonregulated and other 65,257 88,982 199,074 299,264 ---------------- --------------- --------------- ---------------- 555,313 556,858 1,602,608 1,714,350 ---------------- --------------- --------------- ---------------- - -------------------------------------------------------------------------------------------------------------------------------- Operating expenses: Electric and steam production fuels 85,854 75,185 224,948 215,522 Purchased power 69,366 65,783 198,930 193,616 Cost of utility gas sold 12,215 18,833 113,401 175,544 Other operation 140,082 157,953 456,113 500,349 Maintenance 29,274 28,833 87,921 89,613 Depreciation and amortization 70,097 64,532 212,787 192,035 Taxes other than income taxes 26,229 25,442 79,804 78,106 ---------------- --------------- --------------- ---------------- 433,117 436,561 1,373,904 1,444,785 ---------------- --------------- --------------- ---------------- - -------------------------------------------------------------------------------------------------------------------------------- Operating income 122,196 120,297 228,704 269,565 ---------------- --------------- --------------- ---------------- - -------------------------------------------------------------------------------------------------------------------------------- Interest expense and other: Interest expense 31,890 31,584 95,045 88,519 Allowance for funds used during construction (1,884) (1,468) (5,024) (3,832) Preferred dividend requirements of subsidiaries 1,675 1,674 5,024 5,020 Miscellaneous, net 1,131 (2,449) 8,289 (7,701) ---------------- --------------- --------------- ---------------- 32,812 29,341 103,334 82,006 ---------------- --------------- --------------- ---------------- - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 89,384 90,956 125,370 187,559 ---------------- --------------- --------------- ---------------- - -------------------------------------------------------------------------------------------------------------------------------- Income taxes 37,680 35,987 53,889 72,103 ---------------- --------------- --------------- ---------------- - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 51,704 $ 54,969 $ 71,481 $ 115,456 ================ =============== =============== ================ - -------------------------------------------------------------------------------------------------------------------------------- Average number of common shares outstanding 77,008 76,327 76,796 76,130 ================ =============== =============== ================ - -------------------------------------------------------------------------------------------------------------------------------- Earnings per average common share (basic and diluted) $ 0.67 $ 0.72 $ 0.93 $ 1.52 ================ =============== =============== ================ - -------------------------------------------------------------------------------------------------------------------------------- Dividends declared per common share $ 0.50 $ 0.50 $ 1.50 $ 1.50 ================ =============== =============== ================ - --------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 6 INTERSTATE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1998 1997 ASSETS (Restated) - --------------------------------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 4,820,913 $ 4,733,222 Gas 506,895 495,155 Other 386,132 366,395 ----------------- ----------------- 5,713,940 5,594,772 Less - Accumulated depreciation 2,812,179 2,631,582 ----------------- ----------------- 2,901,761 2,963,190 Construction work in progress 118,988 86,511 Nuclear fuel, net of amortization 48,204 55,777 ----------------- ----------------- 3,068,953 3,105,478 Other property, plant and equipment, net of accumulated depreciation and amortization of $173,049 and $139,920, respectively 343,104 329,264 ----------------- ----------------- 3,412,057 3,434,742 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Current assets: Cash and temporary cash investments 9,467 27,329 Accounts receivable: Customer, less allowance for doubtful accounts of $2,303 and $2,400, respectively 93,554 123,545 Other, less allowance for doubtful accounts of $401 and $224, respectively 19,013 20,824 Notes receivable 13,465 23,410 Production fuel, at average cost 43,141 40,656 Materials and supplies, at average cost 52,600 49,845 Gas stored underground, at average cost 22,627 32,364 Regulatory assets 35,488 36,330 Prepaid gross receipts tax 18,372 22,153 Other 22,978 35,786 ----------------- ----------------- 330,705 412,242 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Investments: Investment in McLeodUSA Inc. 223,499 328,022 Nuclear decommissioning trust funds 212,745 190,238 Investment in foreign entities 57,519 57,072 Other 50,759 49,319 ----------------- ----------------- 544,522 624,651 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Other assets: Regulatory assets 321,181 352,365 Deferred charges and other 101,663 99,550 ----------------- ----------------- 422,844 451,915 ----------------- ----------------- $ 4,710,128 $ 4,923,550 ================= ================= - ---------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 7 INTERSTATE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED)
September 30, December 31, 1998 1997 CAPITALIZATION AND LIABILITIES (Restated) - ----------------------------------------------------------------------------------------------------------------------- (in thousands, except share amounts) Capitalization: Common stock - $.01 par value - authorized 200,000,000 shares; outstanding 77,133,936 and 76,481,102 shares, respectively $ 771 $ 765 Additional paid-in capital 889,469 868,903 Retained earnings 550,754 581,376 Accumulated other comprehensive income 103,982 173,512 ----------------- ----------------- Total common equity 1,544,976 1,624,556 ----------------- ----------------- Cumulative preferred stock of subsidiaries: Par/Stated Authorized Shares Mandatory Value Shares Outstanding Redemption $ 100 * 449,765 No 44,977 44,977 $ 25 * 599,460 No 14,986 14,986 $ 50 466,406 366,406 No 18,320 18,320 $ 50 ** 216,381 No 10,819 10,819 $ 50 ** 545,000 Yes *** 27,250 27,250 ----------------- ----------------- 116,352 116,352 Less: unamortized expenses (2,887) (2,983) ----------------- ----------------- Total cumulative preferred stock of subsidiaries 113,465 113,369 ----------------- ----------------- Long-term debt (excluding current portion) 1,485,607 1,467,903 ----------------- ----------------- 3,144,048 3,205,828 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------------------------- Current liabilities: Current maturities and sinking funds 68,764 18,329 Variable rate demand bonds 56,975 56,975 Commercial paper 54,000 114,500 Notes payable 74 42,000 Capital lease obligations 13,211 13,197 Accounts payable 164,380 192,634 Accrued taxes 101,465 78,923 Other 119,488 133,233 ----------------- ----------------- 578,357 649,791 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------------------------- Other long-term liabilities and deferred credits: Accumulated deferred income taxes 641,284 719,899 Accumulated deferred investment tax credits 78,743 82,862 Environmental liabilities 55,643 66,455 Customer advances 36,002 36,619 Capital lease obligations 15,745 23,634 Other 160,306 138,462 ----------------- ----------------- 987,723 1,067,931 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------------------------- $ 4,710,128 $ 4,923,550 ================= ================= - -----------------------------------------------------------------------------------------------------------------------
* 3,750,000 authorized shares in total between the two classes ** 2,000,000 authorized shares in total between the two classes *** $53.20 mandatory redemption price The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 8 INTERSTATE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 1998 1997 (Restated) (Restated) - ----------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 71,481 $ 115,456 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 212,787 192,035 Amortization of nuclear fuel 13,718 12,560 Amortization of deferred energy efficiency expenditures 20,849 8,637 Deferred taxes and investment tax credits (22,731) (6,286) Refueling outage provision (6,707) 6,654 Other 10,788 7,121 Other changes in assets and liabilities: Accounts receivable 31,802 44,329 Notes receivable 9,945 (13,052) Production fuel (2,485) (5,385) Materials and supplies (2,755) (1,595) Gas stored underground 9,737 (1,175) Accounts payable (28,254) (64,252) Accrued taxes 22,542 21,563 Benefit obligations and other 36,103 18,528 -------------- --------------- Net cash flows from operating activities 376,820 335,138 -------------- --------------- - ----------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends (117,556) (109,108) Proceeds from issuance of common stock 18,317 12,201 Net change in Alliant Industries, Inc. credit facility 77,037 19,160 Proceeds from issuance of other long-term debt 2,594 295,000 Reductions in other long-term debt (10,879) (146,338) Net change in short-term borrowings (102,426) (132,066) Principal payments under capital lease obligations (9,655) (9,405) Other (91) (661) -------------- --------------- Net cash flows used for financing activities (142,659) (71,217) -------------- --------------- - ----------------------------------------------------------------------------------------------- Cash flows used for investing activities: Construction and acquisition expenditures: Utility (167,109) (182,905) Other (74,437) (43,471) Deferred energy efficiency expenditures - (13,254) Nuclear decommissioning trust funds (18,084) (15,214) Other 7,607 2,239 -------------- --------------- Net cash flows used for investing activities (252,023) (252,605) -------------- --------------- - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and temporary cash investments (17,862) 11,316 -------------- --------------- - ----------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 27,329 22,817 -------------- --------------- - ----------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of period $ 9,467 $ 34,133 ============== =============== - ----------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid during the period for: Interest $ 92,707 $ 83,489 ============== =============== Income taxes $ 57,428 $ 61,133 ============== =============== Noncash investing and financing activities: Capital lease obligations incurred $ 1,276 $ 13,912 ============== =============== - -----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 9 INTERSTATE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The interim consolidated financial statements included herein have been prepared by IEC, without audit, pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements include IEC and its consolidated subsidiaries (WP&L, IESU, IPC, Alliant Industries and Alliant Services). These statements are prepared on the basis of accounting for the merger of WPLH, IES and IPC, which was effective on April 21, 1998, as a pooling of interests. Certain adjustments have been made to the prior period amounts as part of the restatement to reflect the pooling of interests transaction. In addition, the prior period amounts have been restated for a change in accounting method implemented in the third quarter of 1998 (see Note 7 for further discussion). These financial statements should be read in conjunction with the financial statements and the notes thereto included in WPLH's and WP&L's latest Annual Report on Form 10-K, as amended, and IES's, IESU's and IPC's latest Annual Report on Form 10-K. In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of (a) the consolidated results of operations for the three and nine months ended September 30, 1998 and 1997, (b) the consolidated financial position at September 30, 1998 and December 31, 1997, and (c) the consolidated statement of cash flows for the nine months ended September 30, 1998 and 1997, have been made. Because of the seasonal nature of IESU's, WP&L's and IPC's operations, results for the three and nine months ended September 30, 1998 are not necessarily indicative of results that may be expected for the year ending December 31, 1998. Certain prior period amounts have been reclassified on a basis consistent with the 1998 presentation. 2. On January 1, 1998, IEC adopted SFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards for reporting of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 requires reporting a total for comprehensive income which includes: (a) unrealized holding gains/losses on securities classified as available-for-sale under SFAS 115, (b) foreign currency translation adjustments accounted for under SFAS 52, and (c) minimum pension liability adjustments made pursuant to SFAS 87. Prior years have been restated to conform to the SFAS 130 requirements. IESU and WP&L had no comprehensive income in the periods presented. IEC's comprehensive income (loss), and the components of other comprehensive income (loss), net of taxes, were as follows (in thousands):
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 (Restated) (Restated) (Restated) -------------------------------- -------------------------------- Net income $ 51,704 $ 54,969 $ 71,481 $ 115,456 Other comprehensive income (loss), net of tax: Unrealized gain (loss) on securities (1) (102,546) 218,567 (61,075) 218,567 Foreign currency translation adjustments (8,511) (19) (8,455) (19) -------------- --------------- -------------- --------------- Other comprehensive income (loss), net of tax (111,057) 218,548 (69,530) 218,548 -------------- --------------- -------------- --------------- Comprehensive income (loss) $ (59,353) $ 273,517 $ 1,951 $ 334,004 ============== =============== ============== ===============
10 (1): Adjustment to the estimated fair value each quarter of IEC's investment in McLeod. 3. In accordance with an order from the PSCW, effective January 1, 1998, off-system gas sales for WP&L are included in the Consolidated Statements of Income as a reduction of the cost of gas sold rather than as gas revenue. In 1997, off-system gas sales were included in the Consolidated Statements of Income as gas revenue. 4. WPLH, as the surviving corporation in the merger involving WPLH, IES and IPC, changed its name to IEC. In connection with the merger, the number of authorized shares of IEC common stock was increased to 200,000,000. See Item 2, "MD&A Merger" for additional information. 5. The provisions for income taxes are based on the estimated annual effective tax rate, which differs from the federal statutory rate of 35% principally due to: state income taxes, tax credits, effects of utility rate making and certain nondeductible expenses. 6. On September 14, 1998, WP&L entered into an interest rate forward contract related to the anticipated issuance of $60 million of debentures. The securities were issued on October 30, 1998 and the forward contract was settled, which resulted in a cash payment of $1.5 million by WP&L. This payment will be recognized as an adjustment to interest expense over the life of the new debt securities to approximate the interest rate implicit in the forward contract. 7. During the third quarter of 1998, IEC's oil and gas subsidiary, Whiting, changed its accounting method for oil and gas properties from the full cost method to the successful efforts method. While both methods are acceptable under generally accepted accounting principles, successful efforts is the preferred method. Management believes that the successful efforts method more accurately presents the results of Whiting's exploration, development and production activities and minimizes asset impairments caused by temporary declines in oil and gas prices, which may not be representative of overall or long-term markets or management's estimate of fair market value. As a result, impairments will only be recognized under the successful efforts method when there has been a permanent decline in the fair value of the oil and gas properties. Had Whiting not converted to the successful efforts method, management estimates in the results of operations for the three months ended September 30, 1998, IEC would have experienced a full cost ceiling write-down comparable to the cumulative impact on net income realized upon the conversion to the successful efforts method. As required by generally accepted accounting principles, all prior period financial statements of IEC presented herein have been restated to reflect the change in accounting method. Under the successful efforts method of accounting, Whiting capitalizes all costs related to property acquisitions and successful exploratory wells, all development costs and the costs of support equipment and facilities. Unproved leasehold costs are capitalized and are reviewed periodically for impairment. All costs related to unsuccessful exploratory wells are expensed when such wells are determined to be non-productive and other exploration costs, including geological and geophysical costs, are expensed as incurred. Depreciation, depletion and amortization of proved oil and gas properties is determined on a field-by-field basis using the unit-of-production method over the life of the remaining proved reserves. Estimated costs (net of salvage value) of site remediation, including offshore platform dismantlement, are included in the depreciation and depletion calculation. Proven oil and gas properties are reviewed on a field-by-field basis whenever events or circumstances indicate that the carrying value of such properties may be impaired. 11 The cumulative effect of the restatement at January 1, 1997, was an after-tax reduction in retained earnings of $11.8 million. The restated net income amounts for the quarters ended March 31, 1997 through June 30, 1998 are as follows (in thousands):
For the Quarters Ended 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 ---------- ---------- ----------- ----------- ----------- ----------- Previously reported net income $ (9,567) $32,628 $34,544 $56,030 $20,859 $42,857 Adjustment for change in accounting method for oil and gas properties from the full cost method to the successful efforts method 469 (3,753) (5,422) (1,061) (1,060) (2,169) ---------- ---------- ----------- ----------- ----------- ----------- Restated net income $ (9,098) $28,875 $29,122 $54,969 $19,799 $40,688 ========== ========== =========== =========== =========== =========== The restated earnings per average common share (basic and diluted) for the quarters ended March 31, 1997 through June 30, 1998 are as follows: For the Quarters Ended 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 ---------- ---------- ----------- ----------- ----------- ----------- Previously reported earnings per average common share (basic and diluted) $ (0.12) $ 0.43 $ 0.45 $ 0.73 $ 0.27 $ 0.57 Adjustment for change in accounting method for oil and gas properties from the full cost method to the successful efforts method ---- (0.05) (0.07) (0.01) (0.01) (0.03) ---------- ---------- ----------- ----------- ----------- ----------- Restated earnings per average common share (basic and diluted) $ (0.12) $ 0.38 $ 0.38 $ 0.72 $ 0.26 $ 0.54 ========== ========== =========== =========== =========== ===========
12 IES UTILITIES INC. PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 13 IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating revenues: Electric utility $ 201,336 $ 184,676 $ 489,625 $ 459,653 Gas utility 14,984 15,507 96,299 122,711 Steam and other 5,870 5,528 19,277 19,369 ----------------- ----------------- ------------------ ----------------- 222,190 205,711 605,201 601,733 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Operating expenses: Electric and steam production fuels 35,478 27,613 87,411 84,026 Purchased power 18,315 18,749 55,132 52,472 Cost of gas sold 7,524 7,835 55,963 84,413 Other operation 42,020 42,507 133,891 116,763 Maintenance 13,042 12,224 37,993 37,675 Depreciation and amortization 23,885 21,840 72,127 68,605 Taxes other than income taxes 11,986 10,956 36,699 34,563 ----------------- ----------------- ------------------ ----------------- 152,250 141,724 479,216 478,517 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Operating income 69,940 63,987 125,985 123,216 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Interest expense and other: Interest expense 13,124 13,371 39,154 38,446 Allowance for funds used during construction (976) (784) (2,543) (1,551) Miscellaneous, net 809 864 5,256 2,394 ----------------- ----------------- ------------------ ----------------- 12,957 13,451 41,867 39,289 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 56,983 50,536 84,118 83,927 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Income taxes 26,346 21,900 38,861 36,550 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Net income 30,637 28,636 45,257 47,377 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Preferred dividend requirements 229 229 686 686 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Earnings available for common stock $ 30,408 $ 28,407 $ 44,571 $ 46,691 ================= ================= ================== ================= - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 14 IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS
September 30, 1998 December 31, ASSETS (Unaudited) 1997 - ---------------------------------------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 2,108,039 $ 2,072,866 Gas 193,687 187,098 Steam 55,391 55,374 Common 96,172 90,342 ----------------- ----------------- 2,453,289 2,405,680 Less - Accumulated depreciation 1,188,390 1,115,261 ----------------- ----------------- 1,264,899 1,290,419 Construction work in progress 61,791 38,923 Leased nuclear fuel, net of amortization 28,865 36,731 ----------------- ----------------- 1,355,555 1,366,073 Other property, plant and equipment, net of accumulated depreciation and amortization of $1,904 and $1,709, respectively 5,567 5,762 ----------------- ----------------- 1,361,122 1,371,835 ----------------- ----------------- - ---------------------------------------------------------------------------------------------------------------- Current assets: Cash and temporary cash investments 1,142 230 Temporary cash investments with associated companies 68,053 - Accounts receivable: Customer, less allowance for doubtful accounts of $984 and $630, respectively 5,692 29,259 Associated companies 1,805 907 Other, less allowance for doubtful accounts of $315 and $224, respectively 7,685 9,235 Production fuel, at average cost 9,050 10,579 Materials and supplies, at average cost 23,823 22,976 Gas stored underground, at average cost 7,864 17,192 Regulatory assets 32,208 36,330 Prepayments and other 5,976 11,680 ----------------- ----------------- 163,298 138,388 ----------------- ----------------- - ---------------------------------------------------------------------------------------------------------------- Investments: Nuclear decommissioning trust funds 82,979 77,882 Other 5,767 5,167 ----------------- ----------------- 88,746 83,049 ----------------- ----------------- - ---------------------------------------------------------------------------------------------------------------- Other assets: Regulatory assets 138,058 163,264 Deferred charges and other 13,754 12,393 ----------------- ----------------- 151,812 175,657 ----------------- ----------------- - ---------------------------------------------------------------------------------------------------------------- $ 1,764,978 $ 1,768,929 ================= ================= - ----------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 15 IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30, 1998 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1997 - -------------------------------------------------------------------------------------------------------------------- (in thousands, except share amounts) Capitalization: Common stock - par value $2.50 per share - authorized 24,000,000 shares; 13,370,788 shares outstanding $ 33,427 $ 33,427 Additional paid-in capital 279,042 279,042 Retained earnings 258,947 233,216 ------------------ ----------------- Total common equity 571,416 545,685 Cumulative preferred stock, not mandatorily redeemable - par value $50 per share - authorized 466,406 shares; 366,406 shares outstanding 18,320 18,320 Long-term debt (excluding current portion) 601,909 651,848 ------------------ ----------------- 1,191,645 1,215,853 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Current liabilities: Current maturities and sinking funds 50,140 140 Capital lease obligations 13,197 13,183 Accounts payable 27,394 60,546 Accounts payable to associated companies 12,696 2,736 Accrued payroll and vacations 7,430 7,615 Accrued interest 10,035 12,230 Accrued taxes 70,161 58,996 Accumulated refueling outage provision 3,899 10,606 Environmental liabilities 5,409 4,054 Other 17,726 11,533 ------------------ ----------------- 218,087 181,639 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Other long-term liabilities and deferred credits: Accumulated deferred income taxes 225,637 238,829 Accumulated deferred investment tax credits 29,892 31,838 Environmental liabilities 32,016 38,256 Pension and other benefit obligations 27,370 17,334 Capital lease obligations 15,668 23,548 Other 24,663 21,632 ------------------ ----------------- 355,246 371,437 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- $ 1,764,978 $ 1,768,929 ================== ================= - --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 16 IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 1998 1997 - --------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 45,257 $ 47,377 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 72,127 68,605 Amortization of leased nuclear fuel 9,143 10,668 Amortization of deferred energy efficiency expenditures 14,339 6,003 Deferred taxes and investment tax credits (9,948) (8,970) Refueling outage provision (6,707) 6,654 Other 621 3,188 Other changes in assets and liabilities: Accounts receivable 24,219 10,680 Production fuel 1,529 2,522 Materials and supplies (847) (1,043) Gas stored underground 9,328 2,806 Accounts payable (23,192) (38,974) Accrued taxes 11,165 25,335 Adjustment clause balances 6,307 11,534 Benefit obligations and other 15,534 6,255 ------------- ------------- Net cash flows from operating activities 168,875 152,640 ------------- ------------- - --------------------------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends (14,000) (42,000) Preferred stock dividends (686) (686) Proceeds from issuance of long-term debt - 190,000 Reductions in long-term debt (140) (63,140) Net change in short-term borrowings - (135,000) Principal payments under capital lease obligations (9,655) (9,405) Other - (821) ------------- ------------- Net cash flows used for financing activities (24,481) (61,052) ------------- ------------- - --------------------------------------------------------------------------------------------------------------- Cash flows used for investing activities: Construction expenditures (71,390) (74,529) Deferred energy efficiency expenditures - (8,450) Nuclear decommissioning trust funds (4,506) (4,506) Other 467 240 ------------- ------------- Net cash flows used for investing activities (75,429) (87,245) ------------- ------------- - --------------------------------------------------------------------------------------------------------------- Net increase in cash and temporary cash investments 68,965 4,343 ------------- ------------- - --------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 230 11,608 ------------- ------------- - --------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of period $ 69,195 $ 15,951 ============= ============= - --------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid during the period for: Interest $ 39,420 $ 33,215 ============= ============= Income taxes $ 46,500 $ 31,875 ============= ============= Noncash investing and financing activities - Capital lease obligations incurred $ 1,276 $ 13,912 ============= ============= - ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 17 IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Except as modified below, the IEC Notes to Consolidated Financial Statements are incorporated by reference insofar as they relate to IESU. IEC Notes 3, 4, 6 and 7 do not relate to IESU and, therefore, are not incorporated by reference. 1. The interim consolidated financial statements included herein have been prepared by IESU, without audit, pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements include IESU and its consolidated wholly-owned subsidiary, IES Ventures Inc. IESU is a subsidiary of IEC. These statements are prepared on the basis of accounting for the merger of WPLH, IES and IPC, which was effective on April 21, 1998, as a pooling of interests. Certain adjustments have been made to the prior period amounts as part of the restatement to reflect the pooling of interests transaction. These financial statements should be read in conjunction with the financial statements and the notes thereto included in IESU's latest Annual Report on Form 10-K. In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of (a) the consolidated results of operations for the three and nine months ended September 30, 1998 and 1997, (b) the consolidated financial position at September 30, 1998 and December 31, 1997, and (c) the consolidated statement of cash flows for the nine months ended September 30, 1998 and 1997, have been made. Because of the seasonal nature of IESU's operations, results for the three and nine months ended September 30, 1998 are not necessarily indicative of results that may be expected for the year ending December 31, 1998. Certain prior period amounts have been reclassified on a basis consistent with the 1998 presentation. 18 WISCONSIN POWER AND LIGHT COMPANY PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 19 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating revenues: Electric utility $ 165,345 $ 165,465 $ 470,969 $ 475,198 Gas utility 9,450 13,371 76,712 108,583 Water 1,335 1,356 3,763 3,481 ----------------- ----------------- ------------------ ----------------- 176,130 180,192 551,444 587,262 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Operating expenses: Electric production fuels 33,520 31,253 91,889 89,655 Purchased power 30,539 31,514 89,378 98,610 Cost of gas sold 2,711 7,135 41,940 68,401 Other operation 31,140 29,951 105,036 95,203 Maintenance 10,793 11,598 35,240 36,759 Depreciation and amortization 30,237 26,801 91,075 77,177 Taxes other than income taxes 7,494 7,782 22,710 23,199 ----------------- ----------------- ------------------ ----------------- 146,434 146,034 477,268 489,004 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Operating income 29,696 34,158 74,176 98,258 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Interest expense and other: Interest expense 9,224 9,176 26,591 23,058 Allowance for funds used during construction (778) (634) (2,175) (2,155) Miscellaneous, net 573 799 1,849 (4,019) ----------------- ----------------- ------------------ ----------------- 9,019 9,341 26,265 16,884 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 20,677 24,817 47,911 81,374 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Income taxes 8,000 9,581 18,869 31,743 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Net income 12,677 15,236 29,042 49,631 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Preferred dividend requirements 827 827 2,483 2,483 ----------------- ----------------- ------------------ ----------------- - ---------------------------------------------------------------------------------------------------------------------------------- Earnings available for common stock $ 11,850 $ 14,409 $ 26,559 $ 47,148 ================= ================= ================== ================= - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 20 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED BALANCE SHEETS
September 30, 1998 December 31, ASSETS (Unaudited) 1997 - ------------------------------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 1,828,813 $ 1,790,641 Gas 242,267 237,856 Water 25,961 24,864 Common 208,556 195,815 ----------------- ---------------- 2,305,597 2,249,176 Less - Accumulated depreciation 1,149,329 1,065,726 ----------------- ---------------- 1,156,268 1,183,450 Construction work in progress 45,681 42,312 Nuclear fuel, net of amortization 19,339 19,046 ----------------- ---------------- 1,221,288 1,244,808 Other property, plant and equipment, net of accumulated depreciation and amortization of $40 and $44, respectively 798 684 ----------------- ---------------- 1,222,086 1,245,492 ----------------- ---------------- - ------------------------------------------------------------------------------------------------------- Current assets: Cash and temporary cash investments 1,123 2,492 Accounts receivable: Customer 2,449 20,928 Associated companies 1,927 5,017 Other 8,721 11,589 Production fuel, at average cost 16,557 18,857 Materials and supplies, at average cost 20,923 19,274 Gas stored underground, at average cost 11,236 12,504 Prepaid gross receipts tax 18,372 22,153 Other 1,074 4,824 ----------------- ---------------- 82,382 117,638 ----------------- ---------------- - ------------------------------------------------------------------------------------------------------- Investments: Nuclear decommissioning trust funds 129,766 112,356 Other 14,573 14,877 ----------------- ---------------- 144,339 127,233 ----------------- ---------------- - ------------------------------------------------------------------------------------------------------- Other assets: Regulatory assets 122,706 120,826 Deferred charges and other 52,230 53,415 ----------------- ---------------- 174,936 174,241 ----------------- ---------------- - ------------------------------------------------------------------------------------------------------- $ 1,623,743 $ 1,664,604 ================= ================ - -------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 21 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30, 1998 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1997 - ------------------------------------------------------------------------------------------------------- (in thousands, except share amounts) Capitalization: Common stock - par value $5 per share - authorized 18,000,000 shares; 13,236,601 shares outstanding $ 66,183 $ 66,183 Additional paid-in capital 199,338 199,170 Retained earnings 303,189 320,386 ----------------- ----------------- Total common equity 568,710 585,739 ----------------- ----------------- Cumulative preferred stock, not mandatorily redeemable without par value - authorized 3,750,000 shares, maximum aggregate stated value $150,000,000: $100 stated value - 449,765 shares outstanding 44,977 44,977 $ 25 stated value - 599,460 shares outstanding 14,986 14,986 ----------------- ----------------- Total cumulative preferred stock 59,963 59,963 ----------------- ----------------- Long-term debt (excluding current portion) 354,608 354,540 ----------------- ----------------- 983,281 1,000,242 ----------------- ----------------- - ------------------------------------------------------------------------------------------------------- Current liabilities: Current maturities and sinking funds - 8,899 Variable rate demand bonds 56,975 56,975 Commercial paper - 81,000 Notes payable to associated companies 73,347 - Accounts payable 71,837 85,617 Accounts payable to associated companies 11,646 - Accrued payroll and vacations 12,950 12,221 Accrued interest 6,449 6,317 Other 22,339 25,162 ----------------- ----------------- 255,543 276,191 ----------------- ----------------- - ------------------------------------------------------------------------------------------------------- Other long-term liabilities and deferred credits: Accumulated deferred income taxes 247,281 251,709 Accumulated deferred investment tax credits 33,637 35,039 Customer advances 33,484 34,240 Environmental liabilities 8,926 9,238 Other 61,591 57,945 ----------------- ----------------- 384,919 388,171 ----------------- ----------------- - ------------------------------------------------------------------------------------------------------- $ 1,623,743 $ 1,664,604 ================= ================= - -------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 22 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------ (in thousands) Cash flows from operating activities: Net income $ 29,042 $ 49,631 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 91,075 77,177 Amortization of nuclear fuel 4,575 1,892 Deferred taxes and investment tax credits (4,349) (710) Other (1,508) (1,591) Other changes in assets and liabilities: Accounts receivable 24,437 21,945 Production fuel 2,300 (4,598) Materials and supplies (1,649) 194 Gas stored underground 1,268 (3,223) Prepaid gross receipts tax 3,781 (3,400) Accounts payable (2,134) (5,001) Benefit obligations and other 12,768 (1,091) ---------------- ---------------- Net cash flows from operating activities 159,606 131,225 ---------------- ---------------- - ------------------------------------------------------------------------------------------------------------ Cash flows used for financing activities: Common stock dividends (43,756) (56,377) Preferred stock dividends (2,483) (2,483) Proceeds from issuance of long-term debt - 105,000 Reductions in long-term debt (8,899) (55,000) Net change in short-term borrowings (7,653) (15,500) Other - (2,669) ---------------- ---------------- Net cash flows used for financing activities (62,791) (27,029) ---------------- ---------------- - ------------------------------------------------------------------------------------------------------------ Cash flows used for investing activities: Construction expenditures (73,587) (89,317) Nuclear decommissioning trust funds (13,578) (10,708) Other (11,019) (5,217) ---------------- ---------------- Net cash flows used for investing activities (98,184) (105,242) ---------------- ---------------- - ------------------------------------------------------------------------------------------------------------ Net decrease in cash and temporary cash investments (1,369) (1,046) ---------------- ---------------- - ------------------------------------------------------------------------------------------------------------ Cash and temporary cash investments at beginning of period 2,492 4,167 ---------------- ---------------- - ------------------------------------------------------------------------------------------------------------ Cash and temporary cash investments at end of period $ 1,123 $ 3,121 ================ ================ - ------------------------------------------------------------------------------------------------------------ Supplemental cash flow information: Cash paid during the period for: Interest $ 21,332 $ 24,395 ================ ================ Income taxes $ 22,524 $ 25,944 ================ ================ - ------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 23 WISCONSIN POWER AND LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Except as modified below, the IEC Notes to Consolidated Financial Statements are incorporated by reference insofar as they relate to WP&L. IEC Notes 4 and 7 do not relate to WP&L and, therefore, are not incorporated by reference. 1. The interim consolidated financial statements included herein have been prepared by WP&L, without audit, pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements include WP&L and its consolidated subsidiary. WP&L is a subsidiary of IEC. These financial statements should be read in conjunction with the financial statements and the notes thereto included in WP&L's latest Annual Report on Form 10-K, as amended. In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of (a) the consolidated results of operations for the three and nine months ended September 30, 1998 and 1997, (b) the consolidated financial position at September 30, 1998 and December 31, 1997, and (c) the consolidated statement of cash flows for the nine months ended September 30, 1998 and 1997, have been made. Because of the seasonal nature of WP&L's operations, results for the three and nine months ended September 30, 1998 are not necessarily indicative of results that may be expected for the year ending December 31, 1998. Certain prior period amounts have been reclassified on a basis consistent with the 1998 presentation. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MERGER In April 1998, IES, WPLH and IPC completed a three-way merger (Merger) forming IEC. IEC is currently doing business as Alliant Energy Corporation. As a result of the Merger, the first tier subsidiaries of IEC include: WP&L, IESU, IPC, Alliant Industries and Alliant Services (the subsidiary formed to provide administrative services as required under the Public Utility Holding Company Act of 1935). Among various other regulatory constraints, IEC is operating as a registered public utility holding company subject to the limitations imposed by the Public Utility Holding Company Act of 1935. As part of the approval process for the Merger, IEC agreed to various rate freezes and rate caps implemented in certain jurisdictions for periods not to exceed four years commencing on the effective date of the Merger (see "Liquidity and Capital Resources - Rates and Regulatory Matters" for a further discussion). Assuming capture of the anticipated merger-related synergies and no significant legislative or regulatory changes affecting IEC, IEC does not expect the merger-related electric and natural gas price freezes to have a material adverse effect on its financial position or results of operations. This MD&A includes information relating to IEC, IESU and WP&L (as well as IPC and Alliant Industries). Where appropriate, information relating to a specific entity has been segregated and labeled as such. FORWARD-LOOKING STATEMENTS Statements contained in this Quarterly Report on Form 10-Q (including MD&A) that are not of historical fact are forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. From time to time, IEC, IESU or WP&L may make other forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of such companies. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance and that such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include weather effects on sales and revenues, competitive factors, general economic conditions in the relevant service territory, federal and state regulatory or government actions, unanticipated construction and acquisition expenditures, issues related to stranded costs and the recovery thereof, the operations of IEC's nuclear facilities, unanticipated issues or costs associated with achieving Year 2000 compliance, the ability of IEC to successfully integrate the operations of the parties to the Merger and unanticipated costs associated therewith, unanticipated difficulties in achieving expected synergies from the Merger, unanticipated costs associated with certain environmental remediation efforts being undertaken by IEC, technological developments and changes in the rate of inflation. UTILITY INDUSTRY OUTLOOK IEC competes in an ever-changing utility industry. Set forth below is an overview of this evolving marketplace. Electric energy generation, transmission and distribution are in a period of fundamental change in the manner in which customers obtain, and energy suppliers provide, energy services. As legislative, regulatory, economic and technological changes occur, electric utilities are faced with increasing pressure to become more competitive. Such 25 competitive pressures could result in loss of customers and an incurrence of stranded costs (i.e., assets and other costs rendered unrecoverable as the result of competitive pricing). To the extent stranded costs cannot be recovered from customers, they would be borne by security holders. Legislative action which would allow customers to choose their electric energy supplier is not expected in Wisconsin, Iowa or Minnesota this year. Nationwide, however, 18 states (including Illinois and Michigan) have adopted legislative or regulatory plans to implement electric utility competition. In July 1998, the Clinton Administration's plan for electric utility competition, proposing that states implement customer choice by January 1, 2003, was introduced as a bill in the U.S. Senate. The bill joined five other U.S. Senate bills and four U. S. House of Representative bills to implement competition in the electric utility industry. IEC realized 56%, 39%, 3% and 2% of its electric utility revenues in the nine months ended September 30, 1998, in Iowa, Wisconsin, Minnesota and Illinois, respectively. Approximately 87% of the electric revenues were regulated by the respective state commissions while the other 13% were regulated by the FERC. IEC realized 58%, 36%, 3% and 3% of its gas utility revenues in Iowa, Wisconsin, Minnesota and Illinois, respectively, during the same period. IESU realized 100% of its electric and gas utility revenues in the nine months ended September 30, 1998, in Iowa. Approximately 93% of the electric revenues in the first nine months of 1998 were regulated by the IUB while the other 7% were regulated by the FERC. WP&L realized 98% of its electric utility revenues in the nine months ended September 30, 1998 in Wisconsin and 2% in Illinois. Approximately 78% of the electric revenues in the first nine months of 1998 were regulated by the PSCW and the ICC while the other 22% were regulated by the FERC. WP&L realized 96% of its gas utility revenues in the first nine months of 1998 in Wisconsin and 4% in Illinois. Federal Regulation WP&L, IESU and IPC are subject to regulation by the FERC. The National Energy Policy Act of 1992 addresses several matters designed to promote competition in the electric wholesale power generation market. In 1996, FERC issued final rules (FERC Orders 888 and 889) requiring electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. In March 1997, FERC issued orders on rehearing for Orders 888 and 889 (Orders 888-A and 889-A). In response to FERC Orders 888 and 888-A, Alliant Services, on behalf of WP&L, IESU and IPC, filed an Open Access Transmission Tariff (Tariff) that complies with the orders. The Tariff supersedes the transmission tariffs previously filed by the three utilities. Upon receiving the final merger-related regulatory order, a compliance tariff was filed by Alliant Services with the FERC. This filing was made to comply with the FERC's merger order. In response to FERC Orders 889 and 889-A, WP&L, IESU and IPC are participating in a regional Open Access Same-Time Information System. FERC Order 888 permits utilities to seek recovery of legitimate, prudent and verifiable stranded costs associated with providing open access transmission services. FERC does not have jurisdiction over retail distribution and, consequently, the final FERC rules do not provide for the recovery of stranded costs resulting from retail competition. The various states retain jurisdiction over the question of whether to permit retail competition, the terms of such retail competition, and the recovery of any portion of stranded costs that are ultimately determined to have resulted from retail competition. The utility subsidiaries cannot predict the long-term consequences of these rules on their results of operations or financial condition. On September 16, 1998, the FERC conditionally approved the filing made by IEC and twelve other transmission-owning utilities to form the Midwest ISO. The FERC's approval is conditioned upon the results of hearings to be held on rate issues and upon the acceptance by the member utilities of minor changes to the filing required by the FERC. The Midwest ISO will establish independent operation and control of the electric transmission system across 26 a thirteen state region spanning from West Virginia to Missouri. All buyers and sellers in this region will have open access to the transmission system while being assessed a single transmission rate. In November 1998, IEC and Northern States Power Co. (NSP) announced plans to develop an independent transmission company (ITC) to provide electric transmission services to the Upper Midwest. The two companies are developing a relationship by which NSP will create an independent transmission entity that, in turn, will lease the transmission assets of IEC. The independent entity will be publicly traded, have its own board of directors, management and employees. As such, it will not be affiliated with NSP or IEC. In 1999, the companies plan to seek the necessary approvals from state and federal regulators. The federal filing will include an innovative new tariff designed to allow for open and economical delivery of electric power throughout the region. The tariff will be available to non-ITC participants as well as ITC members. IEC and NSP believe they can have an ITC established which is capable of serving the Upper Midwest region by the year 2000. As a result of this announcement, IEC is reevaluating its membership in the Midwest ISO. State Regulation Iowa IESU and IPC are subject to regulation by the IUB. The IUB initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging Competition in the Electric Utility Industry" to address all forms of competition in the electric utility industry and to gather information and perspectives on electric competition from all persons or entities with an interest or stake in the issues. The IUB staff's report in this docket was accepted by the IUB, finding, in part, that there is no compelling reason to move quickly into restructuring the electric utility industry in Iowa, based upon the existing level of relative prices. However, the IUB is continuing the analysis and debate on restructuring and retail competition in Iowa. On September 10, 1997, the IUB issued an order adopting an "Action Plan to Develop a Competitive Model for the Electric Industry in Iowa." The IUB states in this action plan that while "the IUB has not determined retail competition in the electric industry is in the best interests of Iowa's consumers...", the State of Iowa is likely to be affected by federal or neighboring states' actions so there is a need for the IUB to design a model that suits Iowa's needs. The priority concerns in the plan are public interest issues (an Iowa-specific pilot project, customer information and assessment, environmental impacts, public benefits and transition costs/benefits) and transmission-related issues (transmission and distribution system reliability and transmission system operations). There is no timetable in the action plan. On October 2, 1997, the IUB staff sent to the advisory group (of which IESU and IPC are members) for written comment a set of proposed guidelines for an Iowa-specific electric pilot project that would allow retail access to a "subset of all customer classes." The IUB has also issued an order covering unbundling of natural gas rates for all Iowa customers to be effective in 1999. On September 15, 1998, the IUB staff issued draft reports on (1) Reliability and (2) Recovery of Transition Costs/Benefits in a Restructured Electric Utility Industry for review and comment by the IUB Advisory Group on electric restructuring. The Recovery of Transition Costs/Benefits in a Restructured Electric Utility Industry report is expected to be finalized in the fourth quarter of 1998. This draft report concludes that MidAmerican Energy Company, IESU and IPC could realize substantial transition benefits resulting from their low-cost generating units. The report states, however, that no one can predict with any accuracy what transition costs or benefits will actually be thus, to accommodate this uncertainty, the costs should be determined as they occur. The report continues that a cap on electric rates should be established during the transition period which would allow customers to share, for a limited time, in any transition benefits. Similarly, the report acknowledges that a stranded cost recovery mechanism should be established, which would allow utilities to recover from exiting customers a declining percentage of lost revenues, should transition costs materialize. While the final report will be important in Iowa's restructuring debate, ultimately the approach to stranded costs and benefits can reasonably be expected to be decided in the legislative process. 27 On October 8, 1998, the IUB staff issued draft reports on (1) Market Structure and Power and (2) Universal Service for review and comment by the IUB Advisory Group on electric restructuring. The Market Structure and Power draft report concludes that the IUB staff is concerned about market power, but it states that mandatory divestiture of generating assets is not a necessary remedy. It suggests that market power issues can be remedied as confronted, rather than creating restrictive rules up-front. The Universal Service draft report covers: (1) customer access; (2) default provider and provider of last resort; (3) customer protections; and (4) low-income assistance. It concludes that significant revisions to existing rules are required to introduce these concepts into a competitive environment. The Iowa legislature has been conducting interim legislative meetings regarding restructuring and expects these meetings to be completed by the end of 1998. Wisconsin WP&L is subject to regulation by the PSCW. The PSCW's inquiries into the future structure of the natural gas and electric utility industries are ongoing. The stated goal of the PSCW in the natural gas docket is "to accommodate competition but not create it." The PSCW has followed a measured approach to restructuring the natural gas industry in Wisconsin. The PSCW has determined that customer classes will be deregulated (i.e., the gas utility would no longer have an obligation to procure gas commodity for customers, but would still have a delivery obligation) in a step-wise manner, after each class has been demonstrated to have a sufficient number of gas suppliers available. A number of working groups have been established by the PSCW and these working groups are addressing numerous subjects which need to be resolved before deregulation may proceed. The short-term goals of the electric restructuring process are to ensure reliability of the state's electric system and development of a robust wholesale electric market. The longer-term goal is to establish prerequisite safeguards to protect customers prior to allowing retail customer choice. The PSCW is following a timetable to make this latter determination on allowing customer choice in 1999-2000. The PSCW has issued an order outlining its policies and principles for Public Benefits (low-income assistance, energy efficiency, renewable generation and environmental research and development) including funding levels, administration of the funds and how funds should be collected from customers. The PSCW has proposed increasing funding levels primarily through utility rates by $50 to $75 million statewide. It is anticipated that there will be legislative proposals introduced in the 1999-2000 legislative session on issues dealing with restructuring, including affiliated interest, public benefits, competition and others. It is impossible to predict at this time the scope or the possibility of enactment of such proposals. In May 1998, the PSCW reactivated Docket No. 05-BU-101, with the objective of examining the degree of separation which should be required as a matter of policy between utility and non-utility activities involving the various state utilities. Hearings are being held in the fourth quarter of 1998. A future phase of the docket will investigate the standards of conduct that should govern relationships and transactions between a utility and its affiliates. It is anticipated that IEC will be required to file with the PSCW for permission to turn operational control of its transmission system over to the Midwest ISO. The PSCW has established four guiding principles for participating in an ISO under Wisconsin Statutes. IEC would also be required to file with the PSCW for permission to lease its transmission assets to the ITC. Minnesota IPC is subject to regulation by the MPUC. The MPUC established an Electric Competition Working Group in April 1995. On October 28, 1997, the Working Group issued a report and recommendations on retail competition. The MPUC reviewed the report and directed its staff to develop an electric utility restructuring plan and timeline. The 28 Minnesota legislature had established a joint legislative task force on electric utility restructuring in 1995. It appears the earliest restructuring legislation could be introduced is in 1999. Illinois IPC and WP&L are subject to regulation by the ICC. In December 1997, the State of Illinois passed electric deregulation legislation requiring customer choice of electric suppliers for non-residential customers with loads of four megawatts or larger and for approximately one-third of all other non-residential customers starting October 1, 1999. All remaining non-residential customers will be eligible for customer choice beginning December 31, 2000 and all residential customers will be eligible for customer choice beginning May 1, 2002. Summary Each of the utilities complies with the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 provides that rate-regulated public utilities record certain costs and credits allowed in the ratemaking process in different periods than for nonregulated entities. These are deferred as regulatory assets or regulatory liabilities and are recognized in the consolidated statements of income at the time they are reflected in rates. If a portion of the utility subsidiaries' operations becomes no longer subject to the provisions of SFAS 71 as a result of competitive restructurings or otherwise, a write-down of related regulatory assets and possibly other charges would be required, unless some form of transition cost recovery is established by the appropriate regulatory body that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. In addition, each utility subsidiary would be required to determine any impairment of other assets and write-down any impaired assets to their fair value. The utility subsidiaries believe they currently meet the requirements of SFAS 71. IEC and its subsidiaries cannot currently predict the long-term consequences of the competitive and restructuring issues described above on their results of operations or financial condition. The major objective is to allow the utilities to better prepare for a competitive, deregulated utility industry. The strategy for dealing with these emerging issues includes seeking growth opportunities, continuing to offer quality customer service, ongoing cost reductions and productivity enhancements. IEC RESULTS OF OPERATIONS Overview IEC reported net income of $51.7 million, or $0.67 per share, for the third quarter of 1998 compared to net income of $55.0 million, or $0.72 per share, for the third quarter of 1997. Net income for the nine months ended September 30, 1998, was $71.5 million, or $0.93 per share, compared to net income of $115.5 million, or $1.52 per share, for the first nine months of 1997. Excluding one-time merger-related expenses, 1998 earnings were $0.72 per share for the quarter, equal to last year, and $1.32 year-to-date. All prior period financial results have been restated to reflect a change in accounting method implemented in the third quarter of 1998. The 1998 third quarter results include approximately $6 million ($51 million year-to-date as of September 30, 1998) of one-time, pre-tax merger-related expenses. The merger-related expenses were primarily for employee retirements and separations, the services of the company's advisors, costs related to IEC's name change and other miscellaneous costs. IEC's utility operations reported net income of $53.0 million in the third quarter of 1998 compared to net income of $53.1 million for the same period in 1997. Excluding one-time merger expenses, the 1998 third quarter earnings would have been approximately $56.4 million, up 6.2% from a year ago. 29 The increased utility earnings (excluding merger-related expenses) resulted primarily from an increase in electricity sales volumes to retail customers of 5.1% and reduced costs resulting from merger-related operating efficiencies. The increased sales volumes were due to warmer weather conditions in the third quarter of 1998, compared to the same period in 1997, as well as continued economic growth within IEC's service territory. Partially offsetting these items were higher depreciation expenses, higher purchased power costs at WP&L, lower income from off-system sales at WP&L, increased expenses for Year 2000 readiness efforts and a higher effective income tax rate. IEC's diversified (nonregulated) operations reported a net loss of $1.2 million in the third quarter of 1998 compared to net income of $2.4 million in the comparable 1997 period. Excluding one-time merger expenses, the third quarter 1998 net loss would have been approximately $0.3 million. The decrease in earnings was largely due to lower oil and gas prices at Whiting, IEC's Denver-based oil and gas subsidiary, a higher effective income tax rate, expenses for new business development in international and domestic markets and a gain realized in the third quarter of 1997 from an asset sale. Income from IEC's electricity trading joint venture partially offset these items. Electric Operations Electric margins and MWH sales for IEC for the three months ended September 30 were as follows:
Revenues and Costs MWHs Sold (in thousands) Change (in thousands) Change ---------------------------- --------- ---------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Residential $ 161,978 $ 149,653 8% 1,962 1,826 7% Commercial 94,590 89,689 5% 1,350 1,297 4% Industrial 136,922 130,621 5% 3,311 3,180 4% ------------- ------------- ------------- ------------- Total from ultimate customers 393,490 369,963 6% 6,623 6,303 5% Sales for resale 56,617 53,176 6% 1,851 1,810 2% Other 10,867 10,844 - 38 38 - ---------------------------- ------------ ------------- Total 460,974 433,983 6% 8,512 8,151 4% ============= ============= ========= Electric production fuels 82,725 72,031 15% Purchased power 69,366 65,783 5% ------------- ------------- Margin $ 308,883 $ 296,169 4% ============= ============= =========
30 Electric margins and MWH sales for IEC for the nine months ended September 30 were as follows:
Revenues and Costs MWHs Sold (in thousands) Change (in thousands) Change ---------------------------- --------- ---------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Residential $ 409,757 $ 396,122 3% 5,198 5,159 1% Commercial 241,384 232,576 4% 3,702 3,614 2% Industrial 361,776 344,846 5% 9,461 9,119 4% ------------- ------------- ------------- ------------- Total from ultimate customers 1,012,917 973,544 4% 18,361 17,892 3% Sales for resale 156,657 145,523 8% 5,557 5,022 11% Other 29,565 26,310 12% 118 122 (3%) ---------------------------- ============= ============= Total 1,199,139 1,145,377 5% 24,036 23,036 4% ============= ============= ========= Electric production fuels 214,815 204,004 5% Purchased power 198,930 193,616 3% ------------- ------------- Margin $ 785,394 $ 747,757 5% ============= ============= =========
Electric margin increased $12.7 million, or 4%, and $37.6 million, or 5%, for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997. The increase for both periods was primarily due to the recovery of concurrent and previously deferred expenditures for Iowa-mandated energy efficiency programs, higher sales volumes and reduced purchased power capacity costs at IESU. The recovery for energy efficiency programs is in accordance with IUB orders (a portion of these recoveries is also amortized to expense in other operation expenses). Electric revenues included increased recoveries for energy efficiency program costs in Iowa of $5.9 million and $26.0 million for the three and nine months ended September 30, 1998 compared with the same periods in 1997. The increased sales volumes were due to warmer weather conditions in the third quarter of 1998, compared with the same period in 1997, as well as continued growth in the IEC service territory. The increase in electric margin for the nine month period was also due to WP&L's reliance on more costly purchased power in the first six months of 1997 due to various power plant outages and the collection of a $3.2 million surcharge related to Kewaunee (a corresponding amount was included in depreciation and amortization expense). Partially offsetting the increase in margin for the three and nine month periods were higher than forecasted purchased power and transmission costs at WP&L and lower income from off-system sales at WP&L. Rate reductions implemented at WP&L and IPC in April 1997 and October 1997, respectively, also partially offset the nine month increase. IESU's and IPC's electric tariffs include EAC's that are designed to currently recover the costs of fuel and the energy portion of purchased power billings. 31 Gas Operations Gas margins and Dth sales for IEC for the three months ended September 30 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 15,504 $ 16,820 (8%) 1,918 2,074 (8%) Commercial 7,709 8,785 (12%) 1,533 1,661 (8%) Industrial 3,407 3,144 8% 998 815 22% Transportation and other 2,462 5,144 (52%) 11,589 13,115 (12%) --------------------------- ============ ============= Total 29,082 33,893 (14%) 16,038 17,665 (9%) ============ ============= ========= Cost of utility gas sold 12,215 18,833 (35%) ------------- ------------- Margin $ 16,867 $ 15,060 12% ============= ============= =========
Gas margins and Dth sales for IEC for the nine months ended September 30 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 121,797 $ 155,602 (22%) 19,475 23,524 (17%) Commercial 58,843 78,174 (25%) 11,998 14,267 (16%) Industrial 13,564 17,163 (21%) 3,658 3,915 (7%) Transportation and other 10,191 18,770 (46%) 38,333 42,321 (9%) --------------------------- ============ ============= Total 204,395 269,709 (24%) 73,464 84,027 (13%) ============ ============= ========= Cost of utility gas sold 113,401 175,544 (35%) ------------- ------------- Margin $ 90,994 $ 94,165 (3%) ============= ============= =========
Gas margin increased $1.8 million, or 12%, and decreased $3.2 million, or 3%, for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in the prior year. Dth sales declined by 9% and 13% for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997 due to milder weather. Partially offsetting the decline in margin for the nine months ended September 30, 1998 were higher revenues from the recovery of concurrent and previously deferred energy efficiency expenditures for Iowa-mandated energy efficiency program costs in accordance with IUB orders (a portion of these recoveries is also amortized to expense in other operation expenses). Gas revenues included increased recoveries for energy efficiency program costs in Iowa of $0.4 million and $7.5 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997. A rate reduction implemented in April 1997 at WP&L also contributed to the decrease in margin for the nine months ended September 30, 1998. The increase in gas margin for the three months ended September 30, 1998 was primarily due to gas cost adjustments at IPC and higher earnings from the gas incentive program at WP&L. IESU's and IPC's gas tariffs include PGA clauses that are designed to currently recover the cost of utility gas sold. 32 Nonregulated and Other Revenues Nonregulated and other revenues for the three and nine months ended September 30 were as follows (in thousands):
For the three months ended For the nine months ended September 30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Environmental and engineering services $17,348 $20,450 $50,672 $59,207 Oil and gas production 15,854 15,907 50,478 46,590 Transportation, rents and other 13,985 12,164 34,411 35,100 Nonregulated energy 7,668 29,703 30,796 123,353 Steam 6,059 6,317 19,885 22,227 Affordable housing 3,008 3,085 9,069 9,307 Water 1,335 1,356 3,763 3,480 ------------- ------------- ------------- ------------- $65,257 $88,982 $199,074 $299,264 ============= ============= ============= =============
The revenues for nonregulated energy declined significantly in the three and nine months ended September 30, 1998 compared with the same periods in 1997 primarily due to a shift to higher margin, lower volume gas customers and the transfer of the power marketing business to a joint venture in July 1997 with Cargill Incorporated to market electricity and risk management services to wholesale buyers. In addition, revenues declined in environmental and engineering services due to sales force reductions and the performance of less subcontracting work. For the nine months ended September 30, 1998, these decreases were partially offset by increased oil and gas production revenues resulting from increased acquisition and development activity. The revenue increase from the higher oil and gas volumes sold was largely offset by lower oil and gas prices, however. Operating Expenses Other operation expenses for the three and nine months ended September 30 were as follows (in thousands):
For the three months ended For the nine months ended September 30, September 30, 1998 1997 1998 1997 -------------- -------------- ---------------------------- Utility-WP&L/IESU/IPC $92,688 $87,775 $308,627 $255,406 Nonregulated and other 47,394 70,178 147,486 244,943 -------------- -------------- ----------------------------- $140,082 $157,953 $456,113 $500,349 ============== ============== ============================
IEC's other operation expenses decreased $17.9 million and $44.2 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997. The increase in other operation expense at the utility subsidiaries was primarily due to increased merger-related expenses of $1.9 million and $31.7 million for the three and nine months ended September 30, 1998, an increase in energy efficiency expenses in Iowa of $5.6 million and $26.8 million for the three and nine months ended September 30, 1998, higher administrative and general expenses at WP&L and increased expenses for Year 2000 readiness efforts. The merger-related expenses were primarily for employee retirements and separations. The increase was partially offset by reduced pension and benefit expenses, lower costs resulting from merger-related operating efficiencies and reduced nuclear operation expenses at IESU. Other operation expenses at the nonregulated businesses were lower for the three and nine months ended September 30, 1998 compared with the same periods in 1997 due to a decrease in the cost of nonregulated energy sold of $21.8 million and $92.9 million, respectively, sales force reductions and the performance of less subcontracting work in the environmental and engineering services business. These reductions in operation expense were partially offset by higher expenses in the oil and gas production business due to increased activity and expenses for new business 33 development in international and domestic markets. In addition, under the successful efforts method (see Note 7 of the "Notes to Consolidated Financial Statements" for a further discussion), Whiting recorded pre-tax impairment charges of $1.7 million and $8.4 million for the three and nine months ended September 30, 1998, respectively, and pre-tax charges of $0.3 million and $2.7 million for the three and nine months ended September 30, 1997, respectively. Depreciation and amortization expense increased $5.6 million and $20.8 million for the three and nine months ended September 30, 1998, respectively, as compared with the same period last year as a result of utility property additions. The increase for the nine month period was also due to the Kewaunee surcharge (which is recorded in depreciation and amortization expense with a corresponding increase in revenues resulting in no impact on earnings) and higher depletion expense at Whiting. Interest Expense and Other Interest expense increased $6.5 million for the nine months ended September 30, 1998 compared with the same period in 1997 due to higher borrowings during 1998 and unusually low interest expense in the second quarter of 1997, resulting from an adjustment to decrease interest expense relating to a tax audit settlement. Miscellaneous, net expense increased $3.6 million and $16.0 million for the three and nine months ended September 30, 1998, respectively, primarily due to merger-related expenses for the services of IEC's advisors and costs related to IEC's name change. Income Taxes IEC's income tax expense increased $1.7 million and decreased $18.2 million for the three and nine months ended September 30, 1998, respectively. The change for nine months ended September 30, 1998 was due to lower pre-tax income, which was partially offset by an increase in the overall effective tax rate. The effective tax rate increase is primarily due to the incurrence of various non-deductible merger-related expenses in 1998. IESU RESULTS OF OPERATIONS Overview IESU reported 1998 earnings available for common stock of $30.4 million and $44.6 million for the three and nine months ended September 30, 1998, respectively, as compared with $28.4 million and $46.7 million for the same periods in 1997. The increased earnings for the three months ended September 30, 1998 were primarily due to a higher electric margin which was partially offset by merger-related expenses, increased depreciation and amortization expenses and a higher effective tax rate. The decreased earnings for the nine months ended September 30, 1998 were primarily due to merger-related expenses, increased depreciation and amortization expenses, a higher effective tax rate and lower gas sales due to milder weather conditions. These items were partially offset by a higher electric margin and the nonrecurrence of a $2.5 million reserve for non-utility investments recorded in the second quarter of 1997. Prior to August 1997, energy efficiency expenditures for Iowa mandated energy efficiency programs had been recorded as a regulatory asset and recovered through rates over a four-year period. In August 1997, the IUB allowed IESU to begin concurrent recovery of its prospective expenditures (see "Rates and Regulatory Matters" for additional information). 34 Electric Operations Electric margins and MWH sales for IESU for the three months ended September 30 were as follows:
Revenues and Costs MWHs Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 74,079 $ 71,521 4% 761 737 3% Commercial 53,132 50,107 6% 676 640 6% Industrial 55,883 53,675 4% 1,229 1,175 5% ------------- ------------- ------------ ------------- Total from ultimate customers 183,094 175,303 4% 2,666 2,552 4% Sales for resale 15,190 6,373 138% 520 161 223% Other 3,052 3,000 2% 11 11 - --------------------------- ----------- ------------- Total 201,336 184,676 9% 3,197 2,724 17% ============ ============= ========= Electric production fuels 32,349 24,458 32% Purchased power 18,315 18,749 (2%) ------------- ------------- Margin $ 150,672 $ 141,469 7% ============= ============= =========
Electric margins and MWH sales for IESU for the nine months ended September 30 were as follows:
Revenues and Costs MWHs Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 178,917 $ 175,047 2% 1,995 2,033 (2%) Commercial 127,998 123,369 4% 1,823 1,777 3% Industrial 140,620 135,306 4% 3,630 3,505 4% ------------- ------------- ------------ ------------- Total from ultimate customers 447,535 433,722 3% 7,448 7,315 2% Sales for resale 34,153 17,866 91% 1,241 518 140% Other 7,937 8,065 (2%) 32 33 (3%) --------------------------- ----------- -------------- Total 489,625 459,653 7% 8,721 7,866 11% ============ ============= ========= Electric production fuels 77,278 72,507 7% Purchased power 55,132 52,472 5% ------------- ------------- Margin $ 357,215 $ 334,674 7% ============= ============= =========
Electric margin increased $9.2 million, or 7%, and $22.5 million, or 7%, for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997 primarily due to the recovery of concurrent and previously deferred expenditures for Iowa-mandated energy efficiency programs, reduced purchased power capacity costs and customer sales growth. The recovery for energy efficiency programs is in accordance with IUB orders (a portion of these recoveries is also amortized to expense in other operation expense). Electric revenues included increased recoveries for energy efficiency program costs of approximately $3 million and $15 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997. Sales for resale increased significantly for both periods as a result of the implementation of a merger-related joint sales agreement during the second quarter of 1998 (off-system sales revenues are passed through IESU's energy adjustment clause and therefore have no impact on electric margin). See "Rates and Regulatory Matters" for a further discussion. 35 Electric margin also increased for the three months ended September 30, 1998 as a result of a 3% increase in sales to higher margin residential customers as a result of warmer weather as compared with the same period last year. The increase in electric margin for the nine months ended September 30, 1998 was partially offset by a decrease of 2% in sales to higher margin residential customers due to milder winter weather conditions in 1998 compared with the same period in 1997. IESU's electric tariffs include EAC's that are designed to currently recover the costs of fuel and the energy portion of purchased power billings. Gas Operations Gas margins and Dth sales for IESU for the three months ended September 30 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 8,187 $ 8,802 (7%) 933 1,025 (9%) Commercial 3,852 4,259 (10%) 714 758 (6%) Industrial 2,110 1,656 27% 652 440 48% Transportation and other 835 790 6% 2,537 2,287 11% --------------------------- ------------ ------------- Total 14,984 15,507 (3%) 4,836 4,510 7% ============ ============= ========= Cost of gas sold (4%) 7,524 7,835 ------------- ------------- Margin $ 7,460 $ 7,672 (3%) ============= ============= =========
Gas margins and Dth sales for IESU for the nine months ended September 30 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 59,183 $ 75,037 (21%) 9,350 11,140 (16%) Commercial 27,357 37,078 (26%) 5,650 6,520 (13%) Industrial 6,801 7,926 (14%) 1,997 1,874 7% Transportation and other 2,958 2,670 11% 8,273 7,507 10% --------------------------- ------------ ------------- Total 96,299 122,711 (22%) 25,270 27,041 (7%) ============ ============= ========= Cost of gas sold 55,963 84,413 (34%) ------------- ------------- Margin $ 40,336 $ 38,298 5% ============= ============= =========
Gas margin increased $2.0 million, or 5%, for the nine months ended September 30, 1998 compared with the same period in 1997 primarily due to higher revenues from the recovery of concurrent and previously deferred energy efficiency expenditures for Iowa-mandated energy efficiency program costs in accordance with IUB orders (a portion of these recoveries is also amortized to expense in other operation expenses). For the nine months ended September 30, 1998 gas revenues included an increase of $5.0 million in recoveries for energy efficiency program costs as compared to the same period last year. Partially offsetting the increased recoveries for energy efficiency programs was a decrease in Dth sales of 7% resulting from milder winter weather. IESU's gas tariffs include PGA clauses that are designed to currently recover the cost of gas sold. 36 Operating Expenses IESU's other operation expenses decreased $0.5 million and increased $17.1 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997. The decrease for the three months was primarily due to reduced pension and benefit costs and lower injury and damage expenses which were largely offset by an increase of $2.7 million in energy efficiency expenses. The nine month increase resulted from $17.7 million of higher energy efficiency expenses, merger-related expenses and Year 2000 compliance costs which were partially offset by lower nuclear operation expenses, reduced pension and benefit costs and lower injury and damage expenses. The merger-related expenses were primarily for employee retirements and separations. Depreciation and amortization expense increased $2.0 million and $3.5 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997 primarily due to property additions. Interest Expense and Other Miscellaneous, net expense increased $2.9 million for the nine months ended September 30, 1998 compared with the same period in 1997 primarily due to merger-related expenses and lower returns on deferred energy efficiency expenditures (which are being recovered concurrently effective August 1997). The increase was partially offset by the nonrecurrence of a $2.5 million reserve for non-utility investments recorded in the second quarter of 1997. Income Taxes IESU's income tax expense increased $4.4 million and $2.3 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997 due to higher pre-tax income and an increase in the overall effective tax rate. The effective rate increased primarily as a result of the incurrence of certain merger-related expenses which are not deductible. WP&L RESULTS OF OPERATIONS Overview WP&L reported consolidated earnings available for common stock of $11.9 million and $26.6 million for the three and nine months ended September 30, 1998, respectively, as compared with $14.4 million and $47.1 million for the same periods in 1997. The decline in earnings for the three months ended September 30, 1998 was primarily due to higher depreciation and amortization expenses, lower electric margin and merger-related expenses. The decline in earnings for the nine months ended September 30, 1998 was primarily due to merger-related expenses, higher depreciation and amortization expenses, lower gas margin and higher interest expense which were partially offset by reduced maintenance expenses. 37 Electric Operations Electric margins and MWH sales for WP&L for the three months ended September 30 were as follows:
Revenues and Costs MWHs Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 55,156 $ 50,194 10% 833 763 9% Commercial 29,671 27,944 6% 522 499 5% Industrial 42,504 38,812 10% 1,182 1,100 7% ------------- ------------- ------------ ------------- Total from ultimate customers 127,331 116,950 9% 2,537 2,362 7% Sales for resale 33,800 44,464 (24%) 1,072 1,591 (33%) Other 4,214 4,051 4% 13 13 - --------------------------- ------------ ------------- Total 165,345 165,465 - 3,622 3,966 (9%) ============ ============= ========= Electric production fuels 33,520 31,253 7% Purchased power 30,539 31,514 (3%) ------------- ------------- Margin $ 101,286 $ 102,698 (1%) ============= ============= =========
Electric margins and MWH sales for WP&L for the nine months ended September 30 were as follows:
Revenues and Costs MWHs Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 152,861 $ 150,205 2% 2,289 2,227 3% Commercial 83,039 80,481 3% 1,453 1,403 4% Industrial 121,179 113,003 7% 3,335 3,145 6% ------------- ------------- ------------ ------------- Total from ultimate customers 357,079 343,689 4% 7,077 6,775 4% Sales for resale 103,373 123,015 (16%) 3,592 4,384 (18%) Other 10,517 8,494 24% 44 46 (4%) --------------------------- ------------ ------------- Total 470,969 475,198 (1%) 10,713 11,205 (4%) ============ ============= ========= Electric production fuels 91,889 89,655 2% Purchased power 89,378 98,610 (9%) ------------- ------------- Margin $ 289,702 $ 286,933 1% ============= ============= =========
Electric margin decreased $1.4 million, or 1%, and increased $2.8 million, or 1%, for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997. Sales to ultimate customers for both periods increased due to economic strength in the service territory and warmer weather. Sales for resale declined in both periods as a result of a less active bulk power market, increased transmission constraints, and implementation of the merger-related joint sales agreement. Under the agreement, the marginal revenues resulting from sales in the bulk power market are shared among the utility merger partners (WP&L, IESU and IPC). The increase in electric margin for the nine month period was also due to reliance on more costly purchased power in the first six months of 1997 due to various power plant outages and the collection of a $3.2 million surcharge related to Kewaunee (a corresponding amount was included in depreciation and amortization expense). Higher than forecasted purchased power and transmission costs and lower income from off-system sales negatively impacted the 38 1998 three and nine month margin as compared to the prior period. A rate reduction implemented in April 1997 also partially offset the nine month increase. Gas Operations Gas margins and Dth sales for WP&L for the three months ended September 30 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 5,112 $ 5,631 (9%) 737 778 (5%) Commercial 2,969 3,445 (14%) 663 715 (7%) Industrial 561 698 (20%) 152 176 (14%) Transportation and other 808 3,597 (78%) 2,715 3,436 (21%) --------------------------- ------------ ------------- Total 9,450 13,371 (29%) 4,267 5,105 (16%) ============ ============= ========= Cost of gas sold 2,711 7,135 (62%) ------------- ------------- Margin $ 6,739 $ 6,236 8% ============= ============= =========
Gas margins and Dth sales for WP&L for the nine months ended September 30 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) Change (in thousands) Change --------------------------- --------- --------------------------- --------- 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Residential $ 45,102 $ 59,037 (24%) 7,454 8,887 (16%) Commercial 22,712 30,061 (24%) 4,781 5,665 (16%) Industrial 4,019 5,656 (29%) 951 1,164 (18%) Transportation and other 4,879 13,829 (65%) 9,190 13,439 (32%) --------------------------- ------------ ------------- Total 76,712 108,583 (29%) 22,376 29,155 (23%) ============ ============= ========= Cost of gas sold 41,940 68,401 (39%) ------------- ------------- Margin $ 34,772 $ 40,182 (13%) ============= ============= =========
Gas margin declined $5.4 million or 13% for the nine months ended September 30, 1998 compared with the same period in 1997 due to a reduction in Dth sales resulting from milder weather and an average retail rate reduction of 2.2% effective April 29, 1997. The significant decline in transportation and other revenues and sales reflects an accounting change for off-system sales as required by the PSCW effective January 1, 1998. The accounting change requires that beginning in 1998 off-system gas sales are reported as a reduction of the cost of gas sold rather than as gas revenue. Off-system gas revenues were $1.8 million and $9.6 million for the three and nine months ended September 30, 1997. The PSCW has approved a gas cost adjustment mechanism based on a prescribed commodity price index which replaced the PGA clause formerly in place for WP&L. Under the current sharing mechanism, 40% of all gains and losses relative to current commodity prices as well as other benchmarks are recognized by WP&L rather than refunded to or recovered from customers. WP&L realized favorable contributions to gas margin of $0.7 million and $0.2 million for the three and nine months ended September 30, 1998. For the same periods in 1997, WP&L realized an unfavorable contribution of $0.2 million and a favorable contribution of $0.2 million. 39 Operating Expenses Other operation expense increased $1.2 million and $9.8 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997 primarily due to merger-related expenses for employee retirements and separations and higher administrative and general expenses. Such items were partially offset by the reflection in the third quarter of 1998 of updated actuarial estimates for annual benefit costs which were lower than earlier estimates. Maintenance expense declined for the nine months ended September 30, 1998 due to increased expenses in the same period in 1997 resulting from several generating plant outages and overhauls. Depreciation and amortization expense increased $3.4 million and $13.9 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997 due to property additions. The nine months ended September 30, 1998, expenses also increased due to higher Kewaunee depreciation (see "Capital Requirements - Nuclear Facilities" for additional information) and $3.2 million of amortization costs related to the recovery of deferred charges associated with the 1997 outages at the Kewaunee nuclear plant. Interest Expense and Other Interest expense increased $3.5 million for the nine months ended September 30, 1998 compared with the same period in 1997 primarily due to unusually low interest expense in the second quarter of 1997, resulting from an adjustment to decrease interest expense relating to a tax audit settlement. Interest expense was also impacted by increased borrowings during 1998. Miscellaneous, net expense increased $5.9 million for the nine months ended September 30, 1998 compared with the same period in 1997 largely due to merger-related expenses. Income Taxes Income taxes decreased $1.6 million and $12.9 million for the three and nine months ended September 30, 1998, respectively, as compared with the same periods in 1997 due to lower taxable income. LIQUIDITY AND CAPITAL RESOURCES Historical IEC Analysis Cash flows from operating activities at IEC increased to $377 million for the nine months ended September 30, 1998 compared with $335 million for the nine months ended September 30, 1997, primarily due to changes in working capital partially offset by lower net income. Cash flows used for financing activities were higher for the first nine months of 1998 compared with the first nine months of 1997 due to the net change in borrowings. Cash flows used for investing activities were constant in the first nine months of 1998 compared with the first nine months of 1997. Times interest earned before income taxes for IEC for the nine months ended September 30, 1998 was 2.37 compared with 3.18 for the same time period in 1997. Historical IESU Analysis Cash flows generated from operating activities increased to $169 million during the nine months ended September 30, 1998 compared with $153 million for the nine months ended September 30, 1997 primarily due to changes in working capital. Cash flows used for financing activities were lower in the first nine months of 1998 compared with the same period last year primarily due to reduced common stock dividends and changes in debt levels. Cash flows used for investing activities were lower during the first nine months of 1998 as compared with the first nine months of 1997 due to the concurrent recovery of energy efficiency expenditures in 1998 and lower construction expenditures. 40 Historical WP&L Analysis Cash flows generated from operations were $160 million for the nine months ended September 30, 1998 compared with $131 million for the nine months ended September 30, 1997. The increase was primarily due to higher depreciation expense and changes in working capital, partially offset by lower net income. Cash flows used for financing activities were higher in the first nine months of 1998 compared with the same period in 1997 primarily due to changes in debt levels partially offset by lower common stock dividends. Cash flows used for investing activities were lower in the third quarter of 1998 due to reduced construction expenditures which were partially offset by higher nuclear decommissioning funding levels. Future Considerations The capital requirements of IEC are primarily attributable to its utility subsidiaries' construction and acquisition programs, its debt maturities and business opportunities of Alliant Industries. It is anticipated that future capital requirements of IEC will be met by cash generated from operations and external financing. The level of cash generated from operations is partially dependent upon economic conditions, legislative activities, environmental matters and timely regulatory recovery of utility costs. IEC's liquidity and capital resources will be affected by costs associated with environmental and regulatory issues. Emerging competition in the utility industry could also impact IEC's liquidity and capital resources, as discussed previously in the "Utility Industry Outlook" section. IEC has interests in the international arena. At September 30, 1998, Alliant Industries had approximately $58 million of investments in foreign entities. At September 30, 1998, IESU, WP&L and IPC did not have any foreign investments. It is expected that IEC will continue to explore additional international investment opportunities. Such investments may carry a higher level of risk than IEC's traditional domestic utility investments or Alliant Industries' domestic investments. Such risks could include foreign government actions, foreign economic and currency risks and others. IEC is expected to pursue various potential business development opportunities, including international as well as domestic investments, and is devoting resources to such efforts. It is anticipated that IEC will strive to select investments where the international and other risks are both understood and manageable. Under PUHCA, IEC's investments in EWG's and FUCO's is limited to 50% of IEC's consolidated retained earnings. At September 30, 1998, Alliant Industries and IPC had investments in the stock of McLeod, a telecommunications company, valued at $222.5 million and $1.0 million (based on a September 30, 1998 closing price of $21.875 per share and compared to a cost basis of $29.0 million and $0.1 million), respectively. The McLeod stock price closed at $36.69 per share on November 10, 1998. Pursuant to the applicable accounting rules, the carrying value of the investments are adjusted to the estimated fair value each quarter based on the closing price at the end of the quarter. The adjustments do not impact net income as the unrealized gains or losses, net of taxes, are recorded directly to the common equity section of the balance sheet. In addition, any such gains or losses are reflected in current earnings only at the time they are realized through a sale. IEC had certain off-balance sheet financial guarantees and commitments outstanding at September 30, 1998. They generally consist of third-party borrowing arrangements and lending commitments as well as guarantees of financial performance of syndicated affordable housing properties. Such guarantees were generally issued to support third party borrowing arrangements and similar transactions. Management currently believes the possibility of IEC having to make any material cash payments under these agreements is remote. 41 Financing and Capital Structure Access to the long-term and short-term capital and credit markets, and costs of external financing, are dependent on creditworthiness. The debt ratings of IEC and certain subsidiaries are as follows:
Standard & Moody's Poor's ----------------- ----------------- IESU - Secured long-term debt A2 A+ - Unsecured long-term debt A3 A WP&L - Secured long-term debt Aa2 AA - Unsecured long-term debt Aa3 A+ IPC - Secured long-term debt A1 A+ - Unsecured long-term debt A2 A Alliant Industries - Commercial paper P2 A1 IEC - Commercial paper (a) P1 A1
(a) IESU, WP&L and IPC participate in a utility money pool which is funded, as needed, through the issuance of commercial paper by IEC. The PSCW has restricted WP&L from loaning money to non-Wisconsin utilities and therefore WP&L is restricted from loaning money to the utility money pool. Alliant Industries is a party to a 3-Year Credit Agreement with various banking institutions. The agreement extends through October 2000, with one-year extensions available upon agreement by the parties. Unused borrowing availability under this agreement is also used to support Alliant Industries' commercial paper program. A combined maximum of $450 million of borrowings under this agreement and the commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing. The rates are based upon quoted market prices and the maturities are less than one year. At September 30, 1998, Alliant Industries had $259 million of borrowings outstanding under this facility with interest rates ranging from 5.66%-5.75%. (Refer to the "Other Matters - Financial Instruments" section for a discussion of several interest rate swaps Alliant Industries has entered into relative to $200 million of borrowings under this Agreement). Alliant Industries intends to continue borrowing under the renewal options of this facility and no conditions existed at September 30, 1998 that would prevent the issuance of commercial paper or direct borrowings on its bank lines. Accordingly, this debt is classified as long-term. In addition, Alliant Industries also has in place a $150 million 364-Day Credit Agreement which is described below. Other than periodic sinking fund requirements, which will not require additional cash expenditures, the following long-term debt (in millions) will mature prior to December 31, 2002: IESU $185.0 IPC 8.1 WP&L 1.9 Alliant Industries 287.6 ----------------- IEC $482.6 ================= Depending upon market conditions, it is currently anticipated that a majority of the maturing debt will be refinanced with the issuance of long-term securities. 42 IESU, WP&L and IPC currently have no authority from their applicable federal/state regulatory commissions or the SEC to issue additional long-term debt. The companies continually evaluate their future financing needs and will make the necessary regulatory filings as needed. In October 1998, IESU and IPC filed applications with the SEC under PUHCA to issue up to $200 million and $80 million of debt securities, respectively. It is anticipated that these securities will be issued during the next two years. On October 30, 1998, WP&L issued $60 million of debentures at a coupon rate of 5.70% maturing on October 15, 2008. The net proceeds from the debt offering were used to pay down short-term debt, including short-term debt used to retire maturing long-term debt. The various charter provisions of the entities identified below authorize and limit the aggregate amount of additional shares of Cumulative Preferred Stock and Cumulative Preference Stock that may be issued. At September 30, 1998, the companies could have issued the following additional shares of Cumulative Preferred or Preference Stock: IESU WP&L IPC ---- ---- --- Cumulative Preferred - 2,700,775 1,238,619 Cumulative Preference 700,000 - 2,000,000 The capitalization ratios of IEC, IESU, WP&L and IPC were as follows:
IEC IESU WP&L IPC 9/30/98 12/31/97 9/30/98 12/31/97 9/30/98 12/31/97 9/30/98 12/31/97 ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- Common equity 49% 51% 48% 45% 58% 59% 53% 52% Preferred stock 4 3 2 1 6 6 8 8 Long-term debt 47 46 50 54 36 35 39% 40 ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- 100% 100% 100% 100% 100% 100% 100% 100%
For interim financing, IESU, WP&L and IPC were authorized by the applicable federal or state regulatory agency to issue short-term debt as follows (in millions) at September 30, 1998: IESU WP&L IPC ---- ---- --- Regulatory authorization $200 $138 $75 Short-term debt outstanding - $73 $7 In addition to the short-term debt at its utility subsidiaries, IEC had an additional $54 million of short-term debt outstanding at September 30, 1998. In addition to providing for ongoing working capital needs, this availability of short-term financing provides the companies flexibility in the issuance of long-term securities. The level of short-term borrowing fluctuates based on seasonal corporate needs, the timing of long-term financing, and capital market conditions. To maintain flexibility in its capital structure and to take advantage of favorable short-term rates, IESU and WP&L also use proceeds from the sale of accounts receivable and unbilled revenues to finance a portion of their long-term cash needs. IEC anticipates that short-term debt will continue to be available at reasonable costs due to current ratings by independent utility analysts and rating services. Alliant Industries is also a party to a 364-Day Credit Agreement with various banking institutions. The agreement extends through October 18, 1999, with 364 day extensions available upon agreement by the parties. The unborrowed portion of this agreement is also used to support Alliant Industries' commercial paper program. A combined maximum of $150 million of borrowings under this agreement and the commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing. The rates are based upon quoted market prices and the maturities are less than one year. There were no borrowings under this facility at September 30, 1998. 43 In addition to the aforementioned borrowing capability under Alliant Industries Credit Agreements, IEC has $150 million of bank lines of credit, of which none was utilized, at September 30, 1998 available for direct borrowing or to support commercial paper. Commitment fees are paid to maintain these lines and there are no conditions which restrict the unused lines of credit. From time to time, IEC may borrow from banks and other financial institutions on "as-offered" credit lines in lieu of commercial paper, and has agreements with several financial institutions for such borrowings. There are no commitment fees associated with these agreements and there were no borrowings outstanding under these agreements at September 30, 1998. Given the above financing flexibility, including IEC's access to both the debt and equity securities markets, management believes it has the necessary financing capabilities in place to adequately finance its capital requirements for the foreseeable future. Capital Requirements General Capital expenditure and investment and financing plans are subject to continual review and change. The capital expenditure and investment programs may be revised significantly as a result of many considerations, including changes in economic conditions, variations in actual sales and load growth compared to forecasts, requirements of environmental, nuclear and other regulatory authorities, acquisition and business combination opportunities, the availability of alternate energy and purchased power sources, the ability to obtain adequate and timely rate relief, escalations in construction costs and conservation and energy efficiency programs. Construction and acquisition expenditures for IEC for the nine months ended September 30, 1998 were $242 million, compared with $226 million for the nine months ended September 30, 1997. IEC's anticipated construction and acquisition expenditures for 1998 were forecasted to be approximately $630 million, consisting of approximately $277 million in its utility operations, $190 million for energy-related international investments and $163 million for new business development initiatives at Alliant Industries. The level of 1998 domestic and international investments could vary significantly from the estimates noted here depending on actual investment opportunities, timing of the opportunities and the receipt of regulatory approvals to exceed limitations in place under the Wisconsin Utility Holding Company Act (WUHCA) on the amount of IEC's non-utility investments. It is expected that IEC will spend approximately $1.2 billion on utility construction and acquisition expenditures during 1999-2002. It is expected that Alliant Industries will invest in energy products and services in domestic and international markets, industrial services initiatives and other strategic initiatives. IEC anticipates financing utility construction expenditures during 1998-2002 through internally generated funds supplemented, when required, by outside financing. Funding of a majority of the Alliant Industries construction and acquisition expenditures is expected to be completed with external financings. IESU's construction and acquisition expenditures for the nine months ended September 30, 1998 were $71 million compared with $75 million for the nine months ended September 30, 1997. IESU's construction and acquisition program anticipates expenditures of approximately $124 million for 1998, of which 46% represents expenditures for electric transmission and distribution facilities, 17% represents electric generation expenditures, 12% represents information technology expenditures and 7% represents gas utility expenditures. The remaining 18% represents miscellaneous electric, steam and general expenditures. IESU's levels of utility construction and acquisition expenditures are projected to be $129 million in 1999, $103 million in 2000, $98 million in 2001 and $99 million in 2002. IESU anticipates funding the large majority of its utility construction and acquisition expenditures during 1998-2002 through internally generated funds, supplemented by external financings as needed. WP&L's construction and acquisition expenditures for the nine months ended September 30, 1998 were $74 million compared with $89 million for the nine months ended September 30, 1997. The decrease was due to significant 44 expenditures in 1997 for computer system development projects. WP&L's levels of utility construction and acquisition expenditures are projected to be $133 million in 1998, $136 million in 1999, $138 million in 2000, $141 million in 2001 and $144 million in 2002. WP&L anticipates funding the large majority of its utility construction and acquisition expenditures during 1998-2002 through internally generated funds, supplemented by external financings as needed. Nuclear Facilities IEC owns interests in two nuclear facilities, Kewaunee and the DAEC. Set forth below is a discussion of certain matters impacting these facilities. Kewaunee, a 532-megawatt pressurized water reactor plant, is operated by WPSC and is jointly owned by WPSC (41.2%), WP&L (41.0%), and MG&E (17.8%). The Kewaunee operating license expires in 2013. On April 7, 1998, the PSCW approved WPSC's application for replacement of the two steam generators at Kewaunee. The total cost of replacing the steam generators would be approximately $90.7 million, with WP&L's share of the cost being approximately $37.2 million. The replacement work is tentatively planned for the spring of 2000 and will take approximately 60 days. On July 2, 1998, the PSCW approved an agreement between the owners of Kewaunee which provides for WPSC to assume the 17.8% Kewaunee ownership share currently held by MG&E prior to work beginning on the replacement of steam generators. On September 29, 1998, WPSC and MG&E finalized an arrangement in which WPSC will acquire MG&E's 17.8% share of Kewaunee. This agreement, the closing of which is contingent upon the steam generator replacement, will give WPSC 59.0% ownership in Kewaunee. WPSC and WP&L are discussing revisions to the joint power supply agreement which will govern operation of the plant after the ownership change takes place. On October 17, 1998, Kewaunee was shut down for a planned maintenance and refueling outage. Inspection of the plant's two steam generators shows that the repairs made in 1997 are holding up well and few additional repairs are needed. In addition to the inspection and repairs of the steam generator, a major overhaul is being performed on the main turbine generator. The plant should be back in operation late in the fourth quarter of 1998. On July 2, 1998, WPSC and WP&L received approval from the PSCW to defer the costs associated with the repair of Kewaunee steam generator tubes. If the costs are significant, recovery of the deferred costs will be requested in a future rate proceeding. Minimal costs have been deferred to date. Prior to the July 2, 1998 PSCW decision, the PSCW had directed the owners of Kewaunee to develop depreciation and decommissioning cost levels based on an expected plant end-of-life of 2002 versus a license end-of-life of 2013. This was prompted by the uncertainty regarding the expected useful life of the plant without steam generator replacement. The revised end-of life of 2002 resulted in higher depreciation and decommissioning expense at WP&L beginning in May 1997, in accordance with the PSCW rate order UR-110. This level of depreciation will remain in effect until the steam generator replacement is completed at which time the entire plant will be depreciated over 8.5 years. At September 30, 1998, the net carrying amount of WP&L's investment in Kewaunee was approximately $43.3 million. The current cost of WP&L's share of the estimated costs to decommission Kewaunee is $189.7 million and exceeds the trust assets at September 30, 1998 by $59.9 million. WP&L's contribution to the decommissioning trust fund is based on an annual inflation rate of 5.83%. WP&L's retail customers in Wisconsin are responsible for approximately 80% of WP&L's share of Kewaunee costs. WPSC is an intervenor defendant in Madison Gas and Electric Co. v. Public Service Commission of Wisconsin, Dane County Circuit Court. The case involves MG&E's appeal of the PSCW's order granting WPSC authority to replace the steam generators at Kewaunee. MG&E opposes the steam generator replacement project. WPSC and MG&E have entered into a letter of intent to consummate certain transactions which would result in the settlement of MG&E's opposition to the steam generator replacement project and the dismissal of MG&E's appeal. WPSC and MG&E anticipate executing a definitive settlement agreement by the end of 1998. 45 DAEC, a 535-megawatt boiling water reactor plant, is operated by IESU and IESU has a 70% ownership interest in the plant. The DAEC operating license expires in 2014. Pursuant to the most recent electric rate case order, the IUB allows IESU to recover $6.0 million annually for the cost to decommission the DAEC. The current recovery figures are based on an assumed cost to decommission the DAEC of $252.8 million, which is IESU's 70% portion in 1993 dollars, based on the Nuclear Regulatory Commission minimum formula (which exceeds the amount in the current site-specific study completed in 1994). At September 30, 1998, IESU had $83.0 million invested in external decommissioning trust funds and also had an internal decommissioning reserve of $21.7 million recorded as accumulated depreciation. Refer to the "Other Matters - Environmental" section for a discussion of various issues impacting IEC's future capital requirements. Rates and Regulatory Matters In November 1997, as part of its Merger approval, FERC accepted a proposal by IESU, WP&L, and IPC, which provides for a four-year freeze on wholesale electric prices beginning with the effective date of the Merger. In association with the Merger, IESU, WP&L and IPC entered into a System Coordination and Operating Agreement (Agreement) which became effective with the consummation of the Merger. The Agreement, which has been approved by the FERC, provides a contractual basis for coordinated planning, construction, operation and maintenance of the interconnected electric generation and transmission systems of the three utility companies. In addition, the Agreement allows the interconnected system to be operated as a single control area with off-system capacity sales and purchases made to market excess system capability or to meet system capability deficiencies. Such sales and purchases are allocated among the three utility companies based on procedures included in the Agreement, and approved by both the FERC and all state regulatory bodies having jurisdiction over these sales. IESU In September 1997, IESU agreed with the IUB to provide Iowa customers a four-year retail electric and gas price freeze commencing on the effective date of the Merger. The agreement excluded price changes due to government-mandated programs (such as energy efficiency cost recovery), the electric fuel adjustment clause and PGA clause and unforeseen dramatic changes in operations. In addition, the price freeze does not preclude a review by either the IUB or OCA into whether IESU is exceeding a reasonable return on common equity. Pursuant to the authority described in the prior paragraph, the OCA requested certain financial information related to both electric and gas utility operations within the state of Iowa for IESU. The OCA requested information on what pro forma adjustments IESU would make to its most recent historical test year (1997) to be in compliance with the State of Iowa Code, IUB rules and past rate case precedent. IESU completed the data request in a timely manner and based upon that information management believes no change that would reduce utility rates is warranted. While IESU cannot predict the outcome of this process, management currently believes that the final outcome will not have a material adverse impact on IESU's results of operations or financial position. Under provisions of the IUB rules, IESU is currently recovering the costs it has incurred for its energy efficiency programs. There have been several cost recovery filings made with and approved by the IUB over the course of the last few years. Generally, the costs incurred through July 1997 are being recovered over various four-year periods. The IUB commenced a rulemaking in January 1997 to implement statutory changes allowing concurrent recovery and a final order in this proceeding was issued in April 1997. The new rules allowed IESU to begin concurrent recovery of its prospective expenditures on August 1, 1997. The implementation of these changes will gradually eliminate the regulatory asset that was created under the prior rate making mechanism as these costs are recovered. 46 IESU has the following amounts of energy efficiency costs included in regulatory assets on its Consolidated Balance Sheets (in thousands): Four-Year Recovery Beginning September 30, 1998 December 31, 1997 ------------ ---------------------- ---------------------- Costs incurred through 1993 6/95 $4,240 $7,779 Costs incurred in 1994 -1995 8/97 24,551 30,924 Costs incurred from 1/96 - 7/97 8/97 15,420 19,847 (Over) under collection of concurrent recovery N/A 30 850 ---------------------- ---------------------- $44,241 $59,400 ====================== ======================
WP&L In connection with its approval of the Merger, the PSCW accepted a WP&L proposal to freeze rates for four years following the date of the Merger. A re-opening of an investigation into WP&L's rates during the rate freeze period, for both cost increases and decreases, may occur only for single events that are not merger-related and have a revenue requirement impact of $4.5 million or more. In addition, the electric fuel adjustment clause and PGA clause are not affected by the rate freezes. In rate order UR-110, the PSCW approved new rates effective April 29, 1997. On average, WP&L's retail electric rates under the new rate order declined by 2.4% and retail gas rates declined by 2.2%. Other items included in the rate order were: authorization of a surcharge to collect replacement power costs while Kewaunee remained out of service for the period effective April 29, 1997 through July 1, 1997; authorization of an increase in the return on equity to 11.7% from 11.5%; reinstatement of the electric fuel adjustment clause; continuation of a modified gas performance based ratemaking incentive mechanism; and a modified SO2 incentive. In addition, the PSCW ordered that it must approve the payment of dividends by WP&L to IEC that are in excess of the level forecasted in the rate order ($58.3 million), if such dividends would reduce WP&L's average common equity ratio below 52.00% of total capitalization. Based on the PSCW method approved for calculating return on average common equity, the common equity ratio at September 30, 1998 was 53.85%. The retail electric rates are based in part on forecasted fuel and purchased power costs. Under PSCW rules, Wisconsin utilities can seek emergency rate increases if these costs are more than 3% higher than the estimated costs used to establish rates. In March 1998, WP&L requested an electric rate increase to cover purchased power and transmission costs that have increased due to transmission constraints and electric reliability concerns in the Midwest. On July 14, 1998, the PSCW granted an electric rate increase of $14.8 million annually that was effective on July 16, 1998. The gas performance incentive was modified to eliminate the maximum gain or loss to be recognized by WP&L. Previously, this incentive was limited to a maximum of $1.1 million to WP&L. The incentive includes a sharing mechanism, whereby 40% of all gains and losses relative to current commodity prices as well as other benchmarks are recognized by WP&L rather than refunded to or recovered from customers. In April 1998, WP&L filed a request with the PSCW requesting deferral treatment of all non-labor Year 2000 costs. In May 1998, the PSCW approved the deferral of certain costs associated with the Year 2000 issue and required WP&L to submit a request and support for the rate recovery of costs deferred as well as estimated future Year 2000 costs in November 1998. Refer to "Nuclear Facilities" for a discussion of recent PSCW rulings regarding Kewaunee. 47 IPC In September 1997, IPC agreed with the IUB to provide Iowa customers a four-year retail electric and gas price freeze commencing on the effective date of the Merger. The agreement excluded price changes due to government-mandated programs (such as energy efficiency cost recovery), the electric fuel adjustment clause and PGA clause and unforeseen dramatic changes in operations. In addition, the price freeze does not preclude a review by either the IUB or OCA into whether IPC is exceeding a reasonable return on common equity. IPC also agreed with the MPUC and ICC to four-year and three-year rate freezes, respectively, commencing on the effective date of the Merger. Pursuant to the authority described in the prior paragraph, OCA has requested certain financial information related to both electric and gas utility jurisdictions within the state of Iowa for IPC. The OCA requested information on what pro forma adjustments IPC would make to their most recent historical test year (1997) to be in compliance with the State of Iowa Code, IUB rules and past rate case precedent. IPC completed the data request in a timely manner and based upon that information management believes no change that would reduce utility rates is warranted. While IPC cannot predict the outcome of this process, management currently believes that the final outcome will not have a material adverse impact on IPC's results of operations or financial position. On September 30, 1997, the IUB approved a settlement between IPC and the OCA which provided for an electric rate reduction of approximately $3.2 million annually. The reduction applied to all bills rendered on and after October 7, 1997. IPC is also recovering its energy efficiency costs in Iowa in a similar manner as IESU and began its concurrent cost recovery in October 1997. IPC has the following amounts of energy efficiency costs to be recovered in Iowa included in regulatory assets on its Balance Sheets (in thousands): Four-Year Recovery Beginning September 30, 1998 December 31, 1997 ------------- ---------------------- ---------------------- Costs incurred through 1992 10/94 $- $912 Costs incurred in 1993 -1995 5/97 12,937 16,576 Costs incurred from 1/96 - 9/97 10/97 7,837 9,796 ---------------------- ---------------------- $20,774 $27,284 ====================== ======================
In addition, IPC had $3.3 million and $2.7 million at September 30, 1998 and December 31, 1997, respectively, included in regulatory assets for energy efficiency recoveries in Minnesota. Assuming capture of the merger-related synergies and no significant legislative or regulatory changes affecting its utility subsidiaries, IEC does not expect the merger-related electric and gas price freezes to have a material adverse effect on its financial position or results of operations. OTHER MATTERS Year 2000 Overview IEC utilizes software, embedded systems and related technologies throughout its business that will be affected by the date change in the Year 2000. The Year 2000 problem exists because many computerized operating systems, applications, databases and embedded systems use a standard two digit year field instead of four digits to reference a given year. For example, "00" in the date field would actually represent 1900. As a result, information technology and embedded systems may not properly recognize the Year 2000 or process data correctly, potentially causing data inaccuracies, operational malfunctions or operational failures. 48 Following up on earlier work, IEC formally established a company-wide project team in 1997 to assess, remediate and communicate its Year 2000 issues as well as develop the necessary contingency plans. A full-time project manager heads up a team of approximately 50 employees who are dedicated to the team full-time and another 110 employees working on the project on a part-time basis. In addition, there are approximately 60 individuals from external consulting firms who are also providing various Year 2000-related services for the project team. Status reports are provided to senior management monthly and at every meeting of IEC's Board of Directors. Auditing of the Year 2000 inventory, remediation efforts and contingency planning is being done by the Internal Audits Department. IEC is also seeking to retain an outside third party to assess and evaluate its Year 2000 project. The various phases of and other matters relating to the Year 2000 project are described below. Assessment A company-wide inventory has already been completed for information technology (hardware, software, databases, network infrastructure operating systems) and embedded systems (computers or microprocessors that run specialized software). Inventoried devices and systems have been assessed and prioritized into three categories based on the relative critical nature of their business function: safety-related; critical-business-continuity-related; and non-critical. Remediation and Testing IEC's approach to remediation is to repair, replace or retire the affected devices and systems. Remediation and testing of safety-related and critical-business-continuity-related devices and systems is underway in all business units. The project team is using testing standards and procedures based on those developed in the national electric utility industry effort led by the Electric Power Research Institute (EPRI). The team is also using information and testing guidance received from IEC's vendors. IEC is participating in EPRI's Year 2000 collaborative effort to share information about test procedures, results and vendor information. The project team is also working with equipment vendors to ascertain Year 2000 compliance with systems and devices. Testing methodology includes a power on/off test and testing for 13 critical dates including 12/31/99, 1/1/2000 and 2/29/2000. The goal is to complete remediation work for the embedded systems by March 1999; approximately 80% of this remediation work has been completed as of the end of October 1998. Excluding the financial and customer information systems, there are 434 applications in the information technology (I/T) inventory; 223 have been remediated, tested and are in production; 183 are currently being remediated or tested; the remaining 28 are being analyzed to determine final action plans. Many of these 28 items are expected to be non-critical and, therefore, probably will not need to be tested for compliance. The goal is to complete the I/T remediation work by March 1999; approximately 40% has been completed as of the end of October 1998. Remediation efforts are underway on the financial and customer information systems which are also approximately 40% complete as of the end of October 1998. IEC intends these efforts to be 90% complete by the end of the first quarter of 1999 with work completed by mid-year. In some cases IEC's ability to meet its target date for remediation is dependent upon the timely provision of necessary upgrades and modifications by its software vendors. Should these upgrades be delayed it would impact IEC's ability to meet its target date. 49 Costs to Address Year 2000 Compliance IEC's historical Year 2000 project expenditures as well as CURRENT BEST ESTIMATES for the remaining costs to be incurred on the project are as follows (incremental costs, in millions): Description Total IESU WP&L Other ----------- ----- ---- ---- ----- Costs incurred from 1/1/98 - 9/30/98 $4.3 $2.6 $1.2 $0.5 Remaining modifications for financial and customer information systems $5.3 $2.3 $2.1 $0.9 Remaining modifications for other I/T systems and embedded systems $32 $10 $14 $8
While work was done on the Year 2000 project prior to 1998, IEC did not begin tracking the costs separately until 1998. In accordance with an order received from the PSCW, WP&L began deferring its Year 2000 project costs, other than internal labor and associated overheads, in May 1998 (approximately $1.0 million of the $1.2 million expenditures incurred for the nine months ended September 30, 1998 have been deferred by WP&L). (Refer to "Rates and Regulatory Matters" for a further discussion). IEC expects to fund its Year 2000 expenditures through internal sources. Other than the costs being deferred by WP&L pursuant to the PSCW order, IEC is expensing all the Year 2000 costs noted above. Communications / Third Party Assessment IEC is heavily dependent on other utilities (including electric, gas, telecommunications and water utilities) and its suppliers. An effort is underway to communicate with such parties to increase their awareness of Year 2000 issues and monitor and assess, to the extent possible, their Year 2000 readiness. IEC has sought written assurance that third parties with significant relationships with IEC will be Year 2000 ready. As part of an extensive awareness effort, IEC is also communicating with its utility customers, regulatory agencies, elected and appointed government officials, and industry groups. IEC executives and account managers are also having discussions with IEC's largest customers to review their initiatives for Year 2000 readiness. IEC co-hosted a Year 2000 conference with the Iowa Municipal Utility Association. IEC is also working closely with the North American Reliability Council (NERC) and the Natural Gas Council to assist their efforts to make certain all system interconnections across regional areas are Year 2000 compliant. Risks and Contingency Planning The systems which pose the greatest Year 2000 risks for IEC if the Year 2000 project is not successful are the plant control and automated transmission and distribution systems and information technology systems. The potential problems related to these systems include service interruptions, service order and billing delays and the resulting customer relations issues. IEC is currently unable to quantify the financial impact of such contingencies if in fact they were to occur. Even though IEC intends to complete the bulk of its Year 2000 remediation and testing activities by the end of March 1999 and has initiated Year 2000 communications with significant customers, key vendors, suppliers, and other parties material to IEC's operation, failures or delay in achieving Year 2000 compliance could significantly disrupt IEC's business. Therefore, IEC has initiated contingency planning to address alternatives in the event of a Year 2000 failure that occurs within IEC or where IEC is impacted by an external Year 2000 failure. The plan will address mission-critical processes, devices and systems and will include training, testing and rehearsal of procedures, and the need for installation of backup equipment as necessary. The goal is to have the contingency plan completed by mid-year 1999. As a member of Mid-America Interconnected Network, Inc. (MAIN), IEC is also working with the Operating Committee Y2K Task Force which will expand existing emergency operating strategies for member company control centers to ensure rapid responses to any Y2K-related electric system disturbances and will coordinate those strategies with other reliability organizations. MAIN is one of the 10 regional coordinating councils that make up NERC. The Mid-Continent Area Power Pool (MAPP) is also one of the 10 NERC councils and IEC also belongs to MAPP and will be coordinating Year 2000 contingency planning with that organization as well. Summary Based on IEC's current schedule for completion of its Year 2000 tasks, IEC believes its plan is adequate to secure Year 2000 readiness of its critical systems. Nevertheless, achieving Year 2000 readiness is 50 subject to many risks and uncertainties, as described above. If IEC, or third parties, fail to achieve Year 2000 readiness with respect to critical systems and, as such, there are systematic problems, there could be a material adverse effect on IEC's results of operations and financial condition. The Year 2000 cost estimates and other Year 2000 readiness statements contained above constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Such estimates and other statements are based on numerous assumptions by management, including assumptions relating to the accuracy of representations made by third parties regarding Year 2000 compliance and the continued availability of resources to deal with Year 2000 issues. Investors and other users of the forward-looking statements are cautioned that such statements are subject to various risks and uncertainties (some of which are described above) that could cause actual results to differ materially from those expressed in, or implied by, such statements. Refer to the "Forward-Looking Statements" section of MD&A for a further discussion. Labor Issues The status of the collective bargaining agreements at each of the utilities is as follows at September 30, 1998: IESU WP&L IPC ---- ---- --- Number of collective bargaining agreements 6 1 3 Percentage of workforce covered by agreements 61 92 83 There are two agreements at IESU which expired on July 1, 1998. Two new agreements were reached effective July 1, 1998 and both will expire on June 30, 2000. The number of employees covered under these agreements is relatively small. There are eight agreements scheduled to expire in 1999. Financial Instruments IEC has historically had only limited involvement with derivative financial instruments and has not used them for speculative purposes. They have been used to manage well-defined interest rate and commodity price risks. WP&L historically has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate long-term debt, short-term debt and the sales of its accounts receivable. The total notional amount of interest rate swaps outstanding was $30 million at September 30, 1998. On September 14, 1998 WP&L entered into an interest rate forward contract related to the anticipated issuance of $60 million of long-term debt securities (see Note 6 of IEC's "Notes to Consolidated Financial Statements" for additional information). IEC has historically used swaps, futures and options to hedge the price risks associated with the purchase and sale of stored gas at WP&L and with the purchases and sales of gas and electric power at its energy marketing subsidiary. On April 23, 1998, Alliant Industries successfully competitively bid $200 million of interest rate swaps. These interest rate swap agreements were entered into to reduce the impact of changes in variable interest rates by converting variable rate borrowings into fixed rate borrowings. Two separate structures of $100 million each were put in place. The first structure, a straight 2-year swap, was priced at 5.841%. Under this structure, Alliant Industries pays a fixed rate of 5.841% and receives 3-month LIBOR. Payments are made and LIBOR is reset quarterly. The second structure, a 2-year swap with a 1-year extension option, was priced at 5.6891%. This structure is identical to the first structure except the bank has the option to extend the swap an additional year at the end of the second year. The LIBOR set for the current 3-month period is 5.2092%. IESU and IPC had no derivatives outstanding at September 30, 1998. Accounting Pronouncements In February 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides authoritative guidance for determining whether computer software 51 is in fact internal-use software, citing specific examples and situations that answer that preliminary question. Further, it provides guidelines on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. Additionally, SOP 98-1 addresses specifics of accounting by discussing expensing versus capitalization of costs, accounting for the costs incurred in the upgrading of the software and amortizing the capitalized cost of software. This statement is effective for fiscal years beginning after December 15, 1998. IEC will be adopting the requirements of this statement in 1999 and does not anticipate any material impact on its financial statements upon adoption. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities." This SOP provides guidance on the financial reporting of start-up costs and organization costs. Costs of start-up activities and organization costs are required to be expensed as incurred. The statement is effective for periods beginning after December 15, 1998. IEC will be adopting the requirements of this statement in 1999 and does not anticipate any material impact on its financial statements upon adoption. In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits. The Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate analysis, and eliminates certain disclosures that are no longer useful. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. IEC has not yet quantified the impacts of SFAS 133 on the financial statements and has not determined the timing of or method of adoption of SFAS 133. However, the Statement could increase volatility in earnings and other comprehensive income. Accounting for Obligations Associated with the Retirement of Long-Lived Assets The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, including IESU and WP&L, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the FASB is reviewing the accounting for closure and removal costs, including decommissioning of nuclear power plants. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Assuming no significant change in regulatory treatment, IESU and WP&L do not believe that such changes, if required, would have an adverse effect on their financial position or results of operations due to their ability to recover decommissioning costs through rates. 52 Inflation IEC, IESU and WP&L do not expect the effects of inflation at current levels to have a significant effect on their financial position or results of operations. Environmental The pollution abatement programs of IESU, WP&L, IPC and Alliant Industries are subject to continuing review and are revised from time to time due to changes in environmental regulations, changes in construction plans and escalation of construction costs. While management cannot precisely forecast the effect of future environmental regulations on IEC's operations, it has taken steps to anticipate the future while also meeting the requirements of current environmental regulations. IESU, WP&L and IPC all have current or previous ownership interests in properties previously associated with the production of gas at MGP sites for which they may be liable for investigation, remediation and monitoring costs relating to the sites. A summary of information relating to the sites is as follows: IESU WP&L IPC ---- ---- --- Number of known sites for which liability may exist 34 14 9 Liability recorded at September 30, 1998 (millions) $28.6 $8.9 $5.8 Regulatory asset recorded at September 30, 1998 (millions) $28.5 $15.3 $5.9
The companies are working pursuant to the requirements of various federal and state agencies to investigate, mitigate, prevent and remediate, where necessary, the environmental impacts to property, including natural resources, at and around the sites in order to protect public health and the environment. The companies each believe that they have completed the remediation at various sites, although they are still in the process of obtaining final approval from the applicable environmental agencies for some of these sites. Each company has recorded environmental liabilities related to the MGP sites; such amounts are based on the best current estimate of the remaining amount to be incurred for investigation, remediation and monitoring costs for those sites where the investigation process has been or is substantially completed, and the minimum of the estimated cost range for those sites where the investigation is in its earlier stages. Management currently estimates the range of remaining costs to be incurred for the investigation, remediation and monitoring of all IEC sites to be approximately $34 million to $81 million. IESU and WP&L currently estimate their share of the remaining costs to be incurred to be approximately $21 million to $49 million and $7 million to $12 million, respectively. An extensive study is currently underway to review all of IEC's MGP sites and the liability for each site will be updated based on the results of such study. The company expects the study will be completed in the fourth quarter of 1998. It is possible that future cost estimates will be greater than the current estimates as the investigation process proceeds and as additional facts become known. Under the current rate making treatment approved by the PSCW, the MGP expenditures of WP&L, net of any insurance proceeds, are deferred and collected from gas customers over a five-year period after new rates are implemented. The MPUC also allows the deferral of MGP-related costs applicable to the Minnesota sites and IPC has been successful in obtaining approval to recover such costs in rates in Minnesota. While the IUB does not allow for the deferral of MGP-related costs, it has permitted utilities to recover prudently incurred costs. As a result, regulatory assets have been recorded by each company which reflect the probable future rate recovery, where applicable. Considering the current rate treatment, and assuming no material change therein, each of IESU, WP&L and IPC believes that the clean-up costs incurred for these MGP sites will not have a material adverse effect on their respective financial positions or results of operations. In April 1996, IESU filed a lawsuit against certain of its insurance carriers seeking reimbursement for its MGP-related costs. Settlement has been reached with all twenty-one carriers. As a result, IESU will dismiss its lawsuit, as all issues will have been resolved. In 1994, IPC filed a lawsuit against certain of its insurance carriers to recover 53 its MGP-related costs. Settlements have been reached with eight carriers. IPC is continuing its pursuit of additional recoveries. Amounts received from insurance carriers are being deferred by IESU and IPC pending a determination of the regulatory treatment of such recoveries. WP&L has settled with twelve carriers and is also continuing to pursue additional recoveries from other carriers. IPC and WP&L are unable to predict the amount of any additional insurance recoveries they may realize. The Clean Air Act Amendments of 1990 (Act) require emission reductions of SO2, NOx and other air pollutants to achieve reductions of atmospheric chemicals believed to cause acid rain. IESU, WP&L and IPC have met the provisions of Phase I of the Act and are in the process of meeting the requirements of Phase II of the Act (effective in the year 2000). The Act also governs SO2 allowances, which are defined as an authorization for an owner to emit one ton of SO2 into the atmosphere. The companies are reviewing their options to ensure they will have sufficient allowances to offset their emissions in the future. The companies believe that the potential costs of complying with these provisions of Title IV of the Act will not have a material adverse impact on their financial position or results of operations. The Act and other federal laws also require the EPA to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to ozone transport, mercury and particulate control as well as modifications to the PCB rules. In July 1997, the EPA issued final rules that would tighten the National Ambient Air Quality Standards for ozone and particulate matter emissions. The company cannot predict the long-term consequences of these rules on its results of operations or financial condition as the potential impact is too speculative at this point in time. In October 1998, the EPA issued a final rule requiring 22 states, including Wisconsin, to modify their SIPs to address the ozone transport issue. The implementation of the rule will likely require WP&L to reduce its NOx emissions at all of its plants to .15 lbs/mmbtu by 2003. WP&L is currently evaluating various options to meet the emission levels. These options include fuel switching, operational modifications and capital investments. Based on existing technology, the preliminary estimates indicate that capital investments could be as high as $150 million. Such costs are not included in the anticipated construction and acquisition expenditures for WP&L in the "Capital Requirements" section of MD&A. Revisions to the Wisconsin Administrative Code have been proposed that could have a significant impact on WP&L's operation of the Rock River Generating Station in Beloit, Wisconsin. The proposed revisions will affect the amount of heat that the Generating Station can discharge into the Rock River. WP&L cannot presently predict the final outcome of the rule, but believes that, as the rule is currently proposed, the capital investments and/or modifications required to meet the proposed discharge limits could be significant. In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-case modeling method, suggested that the Cedar Rapids area could be classified as "nonattainment" for the National Ambient Air Quality Standards established for SO2. The worst-case modeling suggested that two of IESU's generating facilities contributed to the modeled exceedences. As a result of exceedences at a monitor near one of IESU's generating facilities, the EPA issued a letter to the Iowa Governor's office directing the state to develop a plan of action. In this regard, IESU entered into a consent order with the IDNR in the third quarter of 1997 on this issue. IESU agreed to limit the SO2 emissions from the two noted generating facilities and to install a new stack (the stack will be completed in 1999 at a capital cost of up to $2.5 million) at one of the facilities. The consent order is one piece of a revision to the SIP being proposed by the IDNR. The public comment period on the SIP revision was May 28 through June 26, 1998. IEPC approved the SIP revision on July 20, 1998. The SIP revision transmittal letter from Iowa to the EPA was signed by the Governor of Iowa and sent to the EPA Region VII for review and approval. Pursuant to a routine internal review of documents, IESU determined that certain changes undertaken during previous years at one of its generating facilities may have required a federal PSD permit. IESU initiated discussions with its regulators on the matter, resulting in the submittal of a PSD permit application in February 1997. IESU received the permit in the second quarter of 1998. IESU may be subject to a penalty for not having obtained the 54 permit previously; however, IESU believes that any likely actions resulting from this matter will not have a material adverse effect on its financial position or results of operation. Pursuant to a separate routine internal review of plant operations, IESU determined that certain permit limits were exceeded in 1997 at one of its generating facilities in Cedar Rapids, Iowa. IESU has initiated discussions with its regulators on the matter and has proposed a compliance plan which includes equipment modifications and contemplates operational changes. In addition, IESU may be required to obtain a PSD permit. On May 13, 1998, IESU received a citation from the Linn County Health Department alleging violations at the facility. IESU has negotiated a settlement agreement with the Linn County Health Department, resolving the matter for $30,000. The settlement was reviewed and approved by a local court with appropriate jurisdiction during the third quarter of 1998. Depending on the outcome of communications with the IDNR, IESU may be subject to a penalty for not having a PSD permit for this facility; however, management believes that any likely actions resulting from this matter will not have a material adverse effect on IESU's financial position or results of operations. In March 1998, IPC received a Notice of Intent to Sue from an environmental group alleging certain violations of effluent limits, established pursuant to the Clean Water Act, at IPC's generating facility in Clinton, Iowa. On May 14, 1998, IPC received from the IDNR an inspection report and notice of violation addressing the same and other concerns as were raised by the environmental group. IPC responded to the environmental group on May 19, 1998, providing an evaluation of the alleged violations. IPC responded to the IDNR on June 26, 1998 with a plan of action addressing the IDNR's concerns. While IPC believes that it has satisfied IDNR's concerns, IPC notes that it may be subject to a penalty for exceeding permit limits established for this facility, however, management believes that any likely actions resulting from this matter will not have a material adverse effect on IPC's financial position or results of operations. Pursuant to an internal review of operations, IPC discovered that Unit No. 6 at its generating facility in Dubuque, Iowa, may require a Clean Air Act Acid Rain permit and continuous emissions monitoring system (CEMS). IPC has initiated discussions with its regulators, has discontinued operation of the unit, pending resolution of the issues, and will be installing a CEMS on the unit and will be applying for an Acid Rain permit. Pursuant to its internal review, IPC also identified and disclosed to its regulators a potentially similar situation at its Lansing, Iowa generating facility, and will be installing CEMS and applying for Acid Rain permits for these units as well. IPC may be subject to a penalty for not having installed the CEMS and for not having obtained the permit previously. However, IPC believes that any likely actions resulting from this matter will not have a material adverse effect on its financial position or results of operations. A global treaty has been negotiated that could require reductions of greenhouse gas emissions from utility plants. Negotiators left significant implementation and compliance questions open to resolution at meetings to be held starting in November 1998. At this time, management is unable to predict whether the United States Congress will ratify the treaty. Given the uncertainty of the treaty ratification and the ultimate terms of the final regulations, management cannot currently estimate the impact the implementation of the treaty would have on IEC's operations. The Nuclear Waste Policy Act of 1982 assigned responsibility to the DOE to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. IESU and WP&L entered into such contracts and have made the agreed payments to the Nuclear Waste Fund held by the U.S. Treasury. The companies were subsequently notified by the DOE that it was not able to begin acceptance of spent nuclear fuel by the January 31, 1998 deadline. Furthermore, DOE has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Several other electric utilities with nuclear operations have filed lawsuits in the U.S. Court of Federal Claims alleging that the DOE was financially responsible for its failure to take the utilities' high level waste and spent nuclear fuel. The court has issued rulings of summary judgment in favor of three utilities to-date. IESU and WP&L are evaluating and pursuing multiple options, including litigation and legislation to protect the contractual and statutory rights of the companies and their customers. 55 The Nuclear Waste Policy Act of 1982 assigns responsibility for interim storage of spent nuclear fuel to generators of such spent nuclear fuel, such as IESU and WP&L. In accordance with this responsibility, IESU and WP&L have been storing spent nuclear fuel on site at DAEC and Kewaunee, respectively, since plant operations began. IESU will have to increase its spent fuel storage capacity at DAEC to store all of the spent fuel that will be produced before the current license expires in 2014. There are several options available that will satisfy DAEC's storage needs. IESU is currently reviewing its options to expand on-site storage capability. To provide assurance that both the operating and post-shutdown storage needs are satisfied, a combination of expanding the capacity of the existing fuel pool and construction of a dry cask modular facility are being contemplated. With minor modifications, Kewaunee would have sufficient fuel storage capacity to store all of the fuel they will generate through the end of the license life in 2013. Legislation is being considered on the federal level to provide for the establishment of an interim storage facility as early as 2002. The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates that each state must take responsibility for the storage of low-level radioactive waste produced within its borders. The States of Iowa and Wisconsin are members of the six-state Midwest Interstate Low-Level Radioactive Waste Compact (Compact) which is responsible for development of any new disposal capability within the Compact member states. In June 1997, the Compact commissioners voted to discontinue work on a proposed waste disposal facility in the State of Ohio because the expected cost of such a facility was comparably higher than other options currently available. Dwindling waste volumes and continued access to existing disposal facilities were also reasons cited for the decision. A disposal facility located near Barnwell, South Carolina continues to accept the low-level waste and IESU and WP&L currently ship the waste each produces to such site, thereby minimizing the amount of low-level waste stored on-site. In addition, given technological advances, waste compaction and the reduction in the amount of waste generated, DAEC and Kewaunee each have on-site storage capability sufficient to store low-level waste expected to be generated over at least the next ten years, with continuing access to the Barnwell disposal facility extending that on-site storage capability indefinitely. The National Energy Policy Act of 1992 requires owners of nuclear power plants to pay a special assessment into a "Uranium Enrichment Decontamination and Decommissioning Fund." The assessment is based upon prior nuclear fuel purchases. IESU is recovering the costs associated with this assessment through its electric fuel adjustment clauses over the period the costs are assessed. IESU's 70% share of the future assessment at September 30, 1998 was $8.9 million and has been recorded as a liability with a related regulatory asset for the unrecovered amount. WP&L is also recovering these costs from its customers and at September 30, 1998 had a regulatory asset and a liability of $5.8 million and $5.1 million recorded, respectively. Whiting, a wholly-owned subsidiary of Alliant Industries, is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas platforms (and related on-shore plants and equipment), the most significant of which is located off the coast of California. Whiting estimates the total costs for these properties to be approximately $13 million and the expenditures are not expected to be incurred for approximately five years. In accordance with applicable accounting requirements, Whiting has accrued these costs resulting in a recorded liability of $13 million at September 30, 1998. The estimates of environmental remediation costs and statements of other than historical fact relating to environmental matters are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Refer to the "Forward-Looking Statements" section of MD&A for a further discussion. Power Supply The power supply concerns of 1997 have raised awareness of the electric system reliability challenges facing Wisconsin and the Midwest region. WP&L was among an 11-member group of Wisconsin energy suppliers that, on October 1, 1997, recommended to the Governor of Wisconsin a series of steps to improve electric reliability in the state. Wisconsin enacted electric reliability legislation in April 1998 (Wisconsin Reliability Act). The legislation has the goal of assuring reliable electric energy for Wisconsin. The new law, effective May 12, 1998, requires Wisconsin utilities to join a regional independent system operator for transmission by the year 2000, allows the 56 construction of merchant power plants in the state and streamlines the regulatory approval process for building new generation and transmission facilities. As a requirement of the legislation, the PSCW completed a regional transmission constraint study. The PSCW is authorized to order construction of new transmission facilities, based on the findings of its constraint study, through December 31, 2004. On September 24, 1997, the PSCW ordered WP&L and two other Wisconsin utilities to arrange for additional electric capacity to help maintain reliable service for their customers. In response to this order, WP&L issued a Request for Proposal for contracts to provide WP&L with an additional 150 MW of electric capacity beginning as early as June 1, 1999. WP&L evaluated applications on the basis of per-megawatt cost, transmission capacity, environmental factors, experience in building and operating similar generating facilities and the ability to meet a June 2000 in-service date. In July 1998, IEC and Polsky Energy Corp. (Polsky) announced an agreement whereby Polsky would build, own and operate a power plant in southeastern Wisconsin capable of producing up to 525 MW of electricity. Under the agreement, IEC will purchase the capacity to meet the electric needs of its utility customers, as outlined by the Wisconsin Reliability Act. It is expected that this new generation will be operational in June of 2000. This is the first plant to be announced by the three Wisconsin utilities under the Wisconsin Reliability Act. In September 1998, the PSCW declared the Polsky application complete. Public hearings are scheduled to be held in November 1998. The PSCW has until December 21, 1998 to act on the application, or it is automatically approved. Polsky will also be seeking the necessary approvals from the Wisconsin Department of Natural Resources. Utility officials noted that it will take time for new transmission and power plant projects to be approved and built. While utility officials fully expect to meet customer demands in 1998 and 1999, problems still could arise if there are unexpected power plant outages, transmission system outages or extended periods of extremely hot weather. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS IEC On April 29, 1998, a lawsuit, Aliant Communications Inc. v. Interstate Energy Corporation, was filed in federal district court against IEC by Aliant Communications Inc. alleging trademark infringement, dilution and unfair competition in connection with the use by IEC of the name "Alliant." A mutual settlement agreement between the parties was reached effective October 1, 1998. The agreement calls for IEC to begin operating as Alliant Energy Corporation within the next six months. Aliant Communications Inc. will continue to operate as Aliant Communications. As part of the agreement, IEC also agreed to modify the names of several of its subsidiaries and business units. IEC shareowners will be asked to change the legal name of the company to Alliant Energy Corporation at the annual meeting scheduled to be held on May 19, 1999. IEC recognized the costs associated with the settlement in the third quarter of 1998 as part of its merger-related expenses as discussed earlier in MD&A. On April 17, 1998, MG&E and Citizens Utility Board appealed the decision of the SEC approving the Merger, Madison Gas and Electric Company and Citizens Utility Board v. Securities and Exchange Commission. On May 15, 1998, IEC moved to intervene in this appeal and the United States Court of Appeals for the District of Columbia District granted the motion. Briefs have been filed with the court and oral arguments are scheduled for January 13, 1999. IESU On April 30, 1996, IESU filed suit, IES Utilities Inc. v. Home Ins. Co., et al., No. 4-96-CV-10343 (S.D. Iowa filed Apr. 30, 1996), against various insurers who had sold comprehensive general liability policies to Iowa Southern Utilities 57 Company (ISU) and Iowa Electric Light and Power Company (IE) (IESU was formed as the result of a merger of ISU and IE). The suit seeks judicial determination of the respective rights of the parties, a judgment that each defendant is obligated under its respective insurance policies to pay in full all sums that IESU has become or may become obligated to pay in connection with its defense against allegations of liability for property damage at and around MGP sites, and indemnification for all sums that it has or may become obligated to pay for the investigation, mitigation, prevention, remediation and monitoring of environmental impacts to property, including natural resources like groundwater, at and around the MGP sites. Settlement has been reached with all twenty-one carriers. As a result, IESU will dismiss its lawsuit, as all issues will have been resolved. Any amounts received from insurance carriers are being deferred pending a determination of the regulatory treatment of such recoveries. IESU is in discussions with the regulators regarding certain environmental permit issues. For a discussion of these matters, see MD&A above, which information is incorporated herein by reference. IPC - --- IPC is in discussions with its regulators regarding various issues at generating facilities in Clinton, Iowa, Dubuque, Iowa and Lansing, Iowa. For a discussion of these matters, see "Other Matters - Environmental", which information is incorporated herein by reference. ITEM 5. OTHER INFORMATION On October 21, 1998, the Board of Directors of IEC adopted a new shareowner rights plan to replace IEC's existing shareowner rights plan, which expires on February 22, 1999. The issuance of new rights pursuant to the new shareowner rights plan is subject to approval by the SEC under the Public Utility Holding Company Act of 1935. A draft copy of the new shareowner rights plan has been submitted to the SEC in connection with an application filed by IEC under the Public Utility Holding Company Act. The new shareowner rights plan is designed to provide additional protection against abusive takeover tactics such as partial tender offers, selective open-market purchases and offers for all the shares of IEC at less than full value or at an inappropriate time. The new shareowner rights plan is intended to assure that IEC's Board of Directors has the ability to protect shareowners and IEC if efforts are made to gain control of IEC in a manner that is not in the best interests of IEC and all of its shareowners. The new shareowner rights plan was not adopted in response to any specific effort to acquire control of IEC, and IEC is not aware of any such effort. Assuming approval by the SEC, it is expected that the new rights will be issued on February 22, 1999 to coincide with the expiration of the existing shareowner rights plan. The new rights will be exercisable only if a person or group acquires 15% or more of IEC's common stock or announces a tender offer, consummation of which would result in ownership by a person or group of 15% or more of the common stock. Each right will initially entitle shareowners to buy one-half of one share of IEC's common stock. The rights will only be exercisable in integral multiples of two at an initial exercise price of $95 per full share, subject to adjustment. If any person becomes a 15% or more shareowner of IEC, the rights (subject to certain limitations) will entitle holders thereof to purchase, at the then-current exercise price per full share, a number of common shares of IEC or of the acquiror having a market value at the time of twice the rights' per full share exercise price. The IEC Board of Directors is also authorized under the new shareowner rights plan to reduce the 15% thresholds referred to above to not less than 10%. 58 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits are filed herewith. 4.1 Officers' Certificate, dated as of October 27, 1998, creating the 5.70% debentures due October 15, 2008 of WP&L (incorporated by reference to Exhibit 4 to WP&L's Current Report on Form 8-K, dated October 27, 1998) 10.1 Early Retirement Agreement, dated as of October 7, 1998, by and between Interstate Energy Corporation et al. and Michael R. Chase 27.1 Financial Data Schedule for Interstate Energy Corporation at and for the period ended September 30, 1998 27.2 Restated Financial Data Schedule for Interstate Energy Corporation at and for the period ended September 30, 1997 27.3 Restated Financial Data Schedule for Interstate Energy Corporation at and for the period ended December 31, 1997 27.4 Financial Data Schedule for IES Utilities Inc. at and for the period ended September 30, 1998 27.5 Restated Financial Data Schedule for IES Utilities Inc. at and for the period ended September 30, 1997 27.6 Financial Data Schedule for Wisconsin Power and Light Company at and for the period ended September 30, 1998 (b) Reports on Form 8-K: Wisconsin Power and Light Company filed a Current Report on Form 8-K, dated October 27, 1998, reporting (under Item 5) that on October 27, 1998, Wisconsin Power and Light Company agreed to sell $60,000,000 principal amount of its 5.70% Debentures due October 15, 2008 in a public offering through Merrill Lynch, Pierce, Fenner & Smith Incorporated, Robert W. Baird & Co. Incorporated and Legg Mason Wood Walker, Incorporated. 59 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Interstate Energy Corporation, IES Utilities Inc. and Wisconsin Power and Light Company have each duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 13th day of November 1998. INTERSTATE ENERGY CORPORATION Registrant By: /s/ Thomas M. Walker Executive Vice President and Chief Financial Thomas M. Walker Officer (Principal Financial Officer) By: /s/ John E. Ebright Vice President-Controller John E. Ebright (Principal Accounting Officer) IES UTILITIES INC. Registrant By: /s/ Thomas M. Walker Executive Vice President and Chief Financial Thomas M. Walker Officer (Principal Financial Officer) By: /s/ John E. Ebright Vice President-Controller John E. Ebright (Principal Accounting Officer) WISCONSIN POWER AND LIGHT COMPANY Registrant By: /s/ Thomas M. Walker Executive Vice President and Chief Financial Thomas M. Walker Officer (Principal Financial Officer) By: /s/ John E. Ebright Vice President-Controller John E. Ebright (Principal Accounting Officer) 60 EX-10 2 EARLY RETIREMENT AGREEMENT As Executed Exhibit 10.1 EARLY RETIREMENT AGREEMENT BETWEEN INTERSTATE ENERGY CORPORATION ET AL. AND MICHAEL R. CHASE This Agreement is entered into between Interstate Energy Corporation, on behalf of itself, its subsidiary Interstate Power Company, and any of their affiliates (collectively referred to herein as the "Company") and Michael R. Chase ("Employee"), this 7th day of October, 1998 (the "Agreement Date"). In consideration of this mutual Agreement, Employee and the Company hereby agree as follows: 1. Retirement. Employee hereby retires and resigns, as an employee and officer, from the service of the Company effective January 1, 1999 (the "Retirement Date"). Employee acknowledges and agrees that he will, between the Agreement Date and his Retirement Date, actively assist in the transition of his duties to his successor, assist the Company to the fullest extent with the governmental investigation of the Dubuque plant, perform any appropriate public functions with the Iowa Utilities Association, and perform, as time permits, additional transitional assistance and special projects as requested by the Chief Executive Officer of the Company. Employee agrees to provide written resignations from any ancillary positions as the Company deems necessary. 2. Financial and Benefit Matters. a. Employee shall continue to be paid his base pay in the amount of Twenty Thousand Dollars ($20,000) per month for the remainder of 1998, will continue to be provided senior executive welfare benefits and continue to participate in all retirement plans and supplemental retirement plans on the same basis as other senior executives during this period, and will be paid his target Management Incentive Compensation Program bonus for his final year of service to the Company. These payments and benefits are the continuing employment obligations of the Company. This Agreement does not affect in any way the entitlement of Employee to pension and welfare benefits while an employee, post-retirement welfare benefits, Supplemental Executive Retirement Plan ("SERP") benefits, or qualified retirement plan benefits that are provided to Employee on account of his prior service with the Company and which are not financial accommodations pertaining to his retirement. As of Employee's Retirement Date, Employee shall be eligible to receive benefits under all of the Company's retiree welfare benefit plans available to retired senior executives of the Company as in effect on September 4, 1998. Any changes in welfare benefit plans available for retired senior executives of the Company retiring on or before January 1, 1999, that are adopted after September 4, 1998, and are generally applicable to senior executives retiring on or before January 1, 1999, shall apply to the Employee. It is understood that the Employee has selected the Interstate Power Company's Supplemental Executive Retirement Program as his SERP program and that, effective commencing on the Retirement Date, the Employee shall be entitled to the full benefits available to him under this SERP, including the right to select the date he begins to receive any benefits. The term "Compensation" for purposes of calculating the benefits under this SERP shall mean Two Hundred Forty Thousand Dollars ($240,000). All calculations under this SERP shall be made in accordance with its terms as it was interpreted in 1998 prior to September 4, 1998. b. In consideration for the release provided in Section 6 below and for the agreements in Section 4 below, the Company shall make the payment to Employee described in this subparagraph as a replacement for and to approximate the biweekly payments that the Company would make under the Employment Agreement. Provided the Employee is living on January 1, 1999, the Company shall make a lump sum payment of Two Hundred Fifty-five Thousand Dollars ($255,000), less applicable federal and state income tax withholding and payroll tax amounts, to Employee within fifteen (15) business days after January 1, 1999. Provided the Employee is living on January 1, 2000, the Company shall make a lump sum payment of Two Hundred Ten Thousand Seven Hundred Fifty Dollars ($210,750), less applicable federal and state income tax withholding and payroll tax amounts, to Employee within fifteen (15) business days after January 1, 2000. c. It is mutually agreed that the common stock options to purchase shares of Interstate Energy Corporation issued to Employee on July 1, 1998, under the Company's Long Term Equity Incentive Plan should be canceled effective on the Retirement Date and that no additional common stock options shall be issued by the Company to the Employee after the Agreement Date. Employee acknowledges that the considerations contained in this Agreement fully incorporate all considerations and accruals of such Long Term Equity Incentive Plan. d. Employee recognizes that consideration provided under this Agreement may result in taxable income to the Employee and that the Company will report such taxable income to the appropriate taxing authorities. 3. Tax Adjustment. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue service that any portion of the payments hereunder is subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any successor provision), the Company shall pay to the Employee an additional amount (the "Gross-up Payment") such that the net amount retained by the Employee after deduction of any Excise Tax and any interest charges or penalties in respect of the imposition of such Excise Tax (but not any federal, state or local income tax) on the payments hereunder, and any federal, state, and local income tax and Excise Tax upon the payment provided for by this Section 3, shall be equal to the payments hereunder. For purposes of determining the amount of the Gross-up Payment, the Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rates of taxation in the state and locality of the Executive's domicile for income tax purposes on the date the Gross-up Payment is made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. 4. Certain Agreements. It is mutually agreed that the Employment Agreement entered into between the Employee and Interstate Power Company, dated April 21, 1998, is canceled and replaced by this Agreement; the Severance Agreement referenced in Section 12(f) of such Employment Agreement (i.e., an agreement dated November 8, 1995, between Employee and Interstate Power Company) is null and void and of no further effect; and the letter agreement dated March 3, 1998, between Employee and Interstate Energy Corporation is null and void and of no further effect. The following agreements, however, apply to this Agreement: a. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Employee may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Employee may have under any contract or agreement with the Company or any of its affiliates relating to such subject matter other than that specifically addressed herein. Vested benefits and other amounts that the Employee is otherwise entitled to receive under any plan, policy, practice, or program of, or any contract or agreement with, the Company or any of its affiliates on or after the Retirement Date shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as specifically modified by this Agreement. b. Full Settlement. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Employee or others. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. The amounts payable by the Company under this Agreement shall not be offset or reduced by any amounts otherwise receivable or received by the Employee form any source. c. Confidential Information and Noncompetition. The Noncompetition and Nondisclosure Agreement between employee and the Company dated November 26, 1997, is incorporated herein by this reference and remains fully effective according to its terms. Furthermore, the Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Employee obtains during the Employee's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Employee's violation of this subsection ("Confidential Information"). The Employee shall not communicate, divulge or disseminate Confidential Information at any time during or for not less than five (5) years after the Employee's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. In no event shall any asserted violation of the provisions of this subsection constitute a basis for deferring or withholding any amounts otherwise payable to the Employee under this Agreement. Any provision of any other agreement between the Employee and Interstate Energy Corporation or Interstate Power Company relating to noncompetition and nondisclosure of information is null and void and of no further effect. 5. Attorney's Fees. The Company agrees to pay, as incurred, to the fullest extent permitted by law, all legal fees and expenses that the Employee may reasonably incur as a result of any contest (regardless of the outcome) by the Company, the Employee, or others of the validity or enforceability of or liability under, or otherwise involving, any provision of this Agreement arising after the Agreement Date, together with interest on any delayed payment at the applicable federal rate provided for in Code Section 7972(f)(2)(A) of the Code. In addition, the Company shall reimburse Employee up to Fifteen Thousand Dollars ($15,000) for the Employee's cost of legal services incurred by Employee for the negotiation and review of this Agreement prior to the Agreement Date. The Employee shall submit a request for such reimbursement in accordance with established Company procedures for the reimbursement of business expenses. 6. Release and Covenants. a. Employee, on behalf of himself, his spouse, heirs, executors, administrators, agents, successors, assigns and representatives of any kind (hereinafter collectively referred to as the "Releasors") confirm that Releasors have released the Interstate Energy Corporation and each of its subsidiaries and affiliates, the employees, successors, assigns, executors, trustees, directors, advisors, agents and representatives of Interstate Energy Corporation and each subsidiary or affiliate, and all their respective predecessors and successors (hereinafter collectively referred to as the "Releasees"), from any and all actions, causes of action, charges, debts, liabilities, accounts, demands, damages and claims of any kind whatsoever including, but not limited to, those arising out of the changes in the terms and conditions of Employee's relationship with the Company described in this Agreement and those arising under any labor, employment discrimination (including, without limitation, the Age Discrimination in Employment Act of 1967, as amended, Title VII of the Civil Rights of Act of 1964, as amended, applicable State fair employment legislation), contract or tort laws, equity or public policy, or negligence standard, whether known or unknown, certain or speculative, which against any of the Releasees, any of the Releasors ever had, now has, or hereafter shall have or can have. Employee further covenants that he will not initiate any action, claim or proceeding against any of the Releasees for any of the foregoing, will not participate, assist, or cooperate in any such action, claim, or proceeding unless required to do so by law, and will not apply for employment with the Company at any time. Employee acknowledges that the considerations contained in this Agreement fully compensate him for the release provided in this Section. b. Notwithstanding the foregoing, this Agreement does not waive rights, if any, Employee or his successors and assigns may have under or pursuant to, or release any member of Releasees from obligations, if any, it may have to Employee or to Employee's successors and assigns on claims arising out of, related to or asserted under or pursuant to, this Agreement or any indemnity agreement or obligation contained in or adopted or acquired pursuant to any provision of the charter or by-laws of Interstate Energy Corporation, a Wisconsin corporation, or Interstate Power Company, a Delaware corporation, or in any applicable insurance policy carried by the Company or its affiliates for any matter which has arisen, including the environmental investigation that the Company launched in April 1998 and related proceedings, or which arises or which may arise in the future in connection with Employee's employment with the Company. c. In accordance with the requirements of Title II of the Older Workers Benefit Protection Act (P. L. 101-433, 10/16/90), Employee hereby acknowledges that he has at least twenty-one (21) days to review this Agreement from the date he first received it and he has been advised to review it with an attorney of his choice. Employee further understands that the twenty-one (21) day review period ends when Employee signs this Agreement. Employee also has seven (7) days after signing this Agreement to revoke by so notifying the Company in writing. Any revocation by Employee under this Section 6(c), however, does not revoke the resignations provided under Section 1 and Employee's resignation from employment with the Company shall remain in effect as set forth therein. Employee further acknowledges that he has carefully read this Agreement, knows and understands the contents thereof and its binding legal effect. Employee signs the same of his own free will and act, and it is his intention that he be legally bound thereby. d. Employee agrees to keep this Agreement confidential and not to reveal its contents to anyone other than his attorney, financial consultant, immediate family members, and representatives of any governmental tax agency. The provisions of this Section 6(d) shall not apply to any truthful statement required to be made by Employee in any legal proceeding or government or regulatory investigation; provided, however, that prior to making such statement (other than to tax authorities), Employee will give the Company reasonable notice and, to the extent he is legally entitled to do so, afford the Company the ability to seek a confidentiality order. 7. Severability. In the event any one or more of the terms of this Agreement shall for any reason be held to be invalid, illegal or unenforceable, the remaining terms of this Agreement shall be unimpaired, and the invalid, illegal or unenforceable term shall be replaced by a term, which, being valid, legal and enforceable, comes closest to the intention of the parties underlying the invalid, illegal or unenforceable terms. However, in the event that any such term of this Agreement is adjudged by a court of competent jurisdiction to be invalid, illegal or unenforceable, but that the other terms are adjudged to be valid, legal and enforceable if such invalid, illegal or unenforceable term were deleted or modified, then this Agreement shall apply with only such deletions or modifications, or both, as the case may be, as are necessary to permit the remaining separate terms to be valid, legal and enforceable. 8. Company Property. Employee shall, not later than the Agreement Date, deliver to the Company the original and all copies of all documents, records, electronic files, and property of any nature whatsoever which are in Employee's possession or control and which are the property of the Company or which relate to the business activities, facilities, or customers of the Company, its subsidiaries, or its affiliates, including any records, documents or property created by Employee and, where such records may be maintained on hard disk files on computers owned by Employee, such files shall be purged and eliminated; provided, however, Employee shall be provided access to information and material appropriate to fulfillment of his duties as described in Section 1, above. To the extent Company property is in possession or control of the Employee on his Retirement Date it shall then be similarly returned or purged, as described above. Notwithstanding the foregoing, the Employee may temporarily retain copies of documents pertaining to any Company-initiated investigations of business matters pertaining to the Employee while such investigations continue or remain subject to review; provided, however, the Employee must, upon request by the Company, disclose the contents of all such documents and must, upon final conclusion of the investigations or reviews, return all such copies to the Company. 9. Other Agreements. This Agreement does not limit or restrict in any way Employee's rights under the Company's employee benefit plans. All the terms of agreement relating to Employee's early retirement from employment with the Company are embodied in this Agreement. This Agreement fully supersedes any and all prior agreements or understandings between Employee and the Company regarding the Employee's termination of employment with the Company. 10. Governing Law and Dispute Resolution. Except with regard to subsection (b) of Section 6, this Agreement shall be governed by the substantive laws of the State of Iowa without regard to its conflict of laws provisions. The parties agree that any proceeding to resolve any dispute arising hereunder will be brought only in the courts of the State of Iowa or in the courts of the United States of America for the District of Iowa, and that each party irrevocably submits to such jurisdiction, and hereby waives any and all objections as to venue, inconvenient forum and the like. It is the intention of the parties hereto, however, that to the extent practicable, the parties will endeavor to settle any dispute arising hereunder first through the process of non-binding mediation to be conducted in Madison, Wisconsin. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. Section 6(b) shall be governed by the laws of the State of Delaware, as to Interstate Power Company, and the State of Wisconsin, as to Interstate Energy Corporation. 11. Successors. This Agreement is personal to the Employee and shall not be assignable by the Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. Dated this 7th day of October, 1998. INTERSTATE ENERGY CORPORATION /s/ Erroll B. Davis, Jr. --------------------------------------- Erroll B. Davis, Jr., President and CEO /s/ Michael R. Chase --------------------------------------- Michael R. Chase, Employee EX-27.1 3 FDS 27.1
UT This schedule contains summary financial information extracted from the September 30, 1998 Financial Statements included in Interstate Energy Corporation's Form 10-Q and is qualified in its entirety by reference to such Financial Statements. 0000352541 INTERSTATE ENERGY CORPORATION 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 3,068,953 887,626 330,705 101,663 321,181 4,710,128 771 889,469 654,736 1,544,976 24,363 89,102 1,485,607 74 56,975 54,000 68,764 0 15,745 13,211 1,357,311 4,710,128 1,602,608 53,889 1,373,904 1,373,904 228,704 (3,265) 225,439 95,045 76,505 5,024 71,481 117,556 91,926 376,820 0.93 0.93 Includes $103,982 of Accumulated Other Comprehensive Income. Income tax expense is not included in Operating Expense in the Consolidated Statements of Income.
EX-27.2 4 FDS 27.2
UT This schedule contains summary financial information extracted from the September 30, 1997 Financial Statement of Interstate Energy Corporation and is qualified in its entirety by reference to such Financial Statements. Certain adjustments have been made to the prior period amounts as part of the restatement to reflect the pooling of interests transaction, and a change in accounting method for oil and gas properties from the full cost method to the successful efforts method. 0000352541 INTERSTATE ENERGY CORPORATION 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 3,095,745 1,007,574 401,926 160,913 307,062 4,973,220 763 864,385 806,516 1,671,644 24,236 89,102 1,484,790 46,113 56,975 88,300 11,148 0 24,674 13,308 1,462,910 4,973,220 1,714,350 72,103 1,444,785 1,444,785 269,565 11,533 281,098 88,519 120,476 5,020 115,456 109,108 92,586 335,138 1.52 1.52 Includes $217,739 of Accumulated Other Comprehensive Income. Income tax expense is not included in Operating Expense in the Consolidated Statements of Income.
EX-27.3 5 FDS 27.3
UT This schedule contains summary financial information extracted from the December 31, 1997 Financial Statements of Interstate Energy Corporation and is qualified in its entirety by reference to such Financial Statements. Certain adjustments have been made to the prior period amounts as part of the restatement to reflect the pooling of interests transaction, and a change in accounting method for oil and gas properties from the full cost method to the successful efforts method 0000352541 INTERSTATE ENERGY CORPORATION 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 3,105,478 953,915 412,242 99,550 352,365 4,923,550 765 868,903 754,888 1,624,556 24,267 89,102 1,467,903 42,000 56,975 114,500 18,329 0 23,634 13,197 1,449,087 4,923,550 2,300,627 81,732 1,964,245 1,964,245 336,381 19,186 355,567 122,563 151,272 6,694 144,578 145,631 92,128 463,691 1.90 1.90 Includes $173,512 of Accumulated Other Comprehensive Income. Income tax expense is not included in Operating Expense in the Consolidated Statements of Income.
EX-27.4 6 FDS 27.4
UT This schedule contains summary financial information extracted from the September 30, 1998 Financial Statements included in IES Utilities Inc.'s Form 10-Q and is qualified in its entirety by reference to such Financial Statements. 0000052485 IES UTILITIES INC. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 1,355,555 94,313 163,298 13,754 138,058 1,764,978 33,427 279,042 258,947 571,416 0 18,320 601,909 0 0 0 50,140 0 15,668 13,197 494,328 1,764,978 605,201 38,861 479,216 479,216 125,985 (2,713) 123,272 39,154 45,257 686 44,571 14,000 46,658 168,875 0 0 Income tax expense is not included in Operating Expense in the Statement of Income. Earnings per share of common stock is not reflected because all common shares are held by Interstate Energy Corporation.
EX-27.5 7 FDS 27.5
UT This schedule contains summary financial information extracted from the September 30, 1997 Financial Statements of IES Utilities Inc. and is qualified in its entirerty by reference to such Financial Statements. Certain adjustments have been made to the prior amounts as part of the restatement to reflect the pooling of interests transaction. 0000052485 IES UTILITES INC. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 1,353,941 85,040 126,900 11,168 174,661 1,751,710 33,427 279,042 236,028 548,497 0 18,320 651,781 0 0 0 140 0 24,674 13,294 495,004 1,751,710 601,733 36,550 478,517 478,517 123,216 (843) 122,373 38,446 47,377 686 46,691 42,000 46,711 152,640 0 0 Income tax expense is not included in Operating Expense in the Consolidated Statements of Income. Earnings per share of common stock is not reflected because all common shares are held by Interstate Energy Corporation.
EX-27.6 8 FDS 27.6
UT This scheudule contains summary financial information extracted from the September 30, 1998 Financial Statements included in Wisconsin Power and Light Company's Form 10-Q and is qualified in its entirety by reference to such Financial Statements. 0000107832 WISCONSIN POWER AND LIGHT 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 1,221,288 145,137 82,382 52,230 122,706 1,623,743 66,183 199,338 303,189 568,710 0 59,963 354,608 73,347 56,975 0 0 0 0 0 510,140 1,623,743 551,444 18,869 477,268 477,268 74,176 326 74,502 26,591 29,042 2,483 26,559 43,756 30,117 159,606 0 0 Income tax expense is not included in Operating Expense in the Consolidated Statements of Income. Earnings per share of common stock is not reflected because all common shares are held by Interstate Energy Corporation.
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