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 March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Name of Registrant, State of Commission Incorporation, Address of Principal IRS Employer File Number Executive Offices and Telephone Number Identification 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 April 30, 1999: Interstate Energy Corporation Common stock, $.01 par value, 78,116,598 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 Months Ended March 31, 1999 and 1998 4 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 7 Notes to Consolidated Financial Statements 8 IES Utilities Inc.: Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 10 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 11 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 13 Notes to Consolidated Financial Statements 14 Wisconsin Power and Light Company: Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 15 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 16 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 18 Notes to Consolidated Financial Statements 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Part II. Other Information 33 Item 1. Legal Proceedings 33 Item 6. Exhibits and Reports on Form 8-K 33 Signatures 35 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 - ----------------------- ---------- Cargill Cargill Incorporated CEMS Continuous Emission Monitoring System Corporate Services Alliant Energy Corporate Services, Inc. Dth Dekatherm EAC Energy Adjustment Clause EPA United States Environmental Protection Agency IEC Interstate Energy Corporation IESU IES Utilities Inc. IPC Interstate Power Company IUB Iowa Utilities Board Kewaunee Kewaunee Nuclear Power Plant MAEC MidAmerican Energy Company McLeod McLeodUSA Inc. MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MW Megawatt MWH Megawatt-Hour NOx Nitrogen Oxides OCA Office of Consumer Advocate PGA Purchased Gas Adjustment Polsky Polsky Energy Corporation PSCW Public Service Commission of Wisconsin PUHCA Public Utility Holding Company Act of 1935 Resources Alliant Energy Resources, Inc. SEC Securities and Exchange Commission SIP State Implementation Plan Whiting Whiting Petroleum Corporation WP&L Wisconsin Power and Light Company WPSC Wisconsin Public Service Corporation 3
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS INTERSTATE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31 1999 1998 - -------------------------------------------------------------------------------- (in thousands, except per share amounts Operating revenues: Electric utility $ 351,338 $ 357,751 Gas utility 133,684 130,046 Nonregulated and other 61,833 68,486 --------- --------- 546,855 556,283 --------- --------- - -------------------------------------------------------------------------------- Operating expenses: Electric and steam production fuels 65,404 69,556 Purchased power 52,065 56,147 Cost of utility gas sold 81,343 77,280 Other operation 130,365 157,352 Maintenance 23,812 25,259 Depreciation and amortization 73,640 69,832 Taxes other than income taxes 27,239 26,977 --------- --------- 453,868 482,403 --------- --------- - -------------------------------------------------------------------------------- Operating income 92,987 73,880 --------- --------- - -------------------------------------------------------------------------------- Interest expense and other: Interest expense 33,400 30,924 Allowance for funds used during construction (1,934) (1,503) Preferred dividend requirements of subsidiaries 1,676 1,674 Miscellaneous, net (6,771) (3,877) --------- --------- 26,371 27,218 --------- --------- - -------------------------------------------------------------------------------- Income before income taxes 66,616 46,662 --------- --------- - -------------------------------------------------------------------------------- Income taxes 24,872 17,787 --------- --------- - -------------------------------------------------------------------------------- Net income $ 41,744 $ 28,875 ========= ========= - -------------------------------------------------------------------------------- Average number of common shares outstanding 77,780 76,579 ========= ========= - -------------------------------------------------------------------------------- Earnings per average common share (basic and diluted) $ 0.54 $ 0.38 ========= ========= - -------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4
INTERSTATE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS March 31, 1999 December 31, ASSETS (Unaudited) 1998 - -------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 4,884,916 $ 4,866,152 Gas 517,775 515,074 Other 409,844 409,711 ------------ ----------------- 5,812,535 5,790,937 Less - Accumulated depreciation 2,917,085 2,852,605 ------------ ----------------- 2,895,450 2,938,332 Construction work in progress 133,054 119,032 Nuclear fuel, net of amortization 40,709 44,316 ------------ ----------------- 3,069,213 3,101,680 Other property, plant and equipment, net of accumulated depreciation and amortization of $189,289 and $178,248, respectively 354,075 355,100 ------------ ----------------- 3,423,288 3,456,780 ------------ ----------------- - ------------------------------------------------------------------------------ Current assets: Cash and temporary cash investments 54,183 31,827 Accounts receivable: Customer, less allowance for doubtfu accounts of $2,594 and $2,518, respectively 96,973 102,966 Other, less allowance for doubtful accounts of $499 and $490, respectively 22,273 26,054 Notes receivable, less allowance for doubtful accounts of $117 and $120, respectively 9,433 13,392 Production fuel, at average cost 44,397 54,140 Materials and supplies, at average cost 55,025 53,490 Gas stored underground, at average cost 12,489 26,013 Regulatory assets 26,628 30,796 Prepaid gross receipts tax 16,882 22,222 Other 24,316 30,767 ------------ ----------------- 362,599 391,667 ------------ ----------------- - ------------------------------------------------------------------------------ Investments: Investment in McLeodUSA Inc. 431,255 320,280 Nuclear decommissioning trust funds 245,024 225,803 Investment in foreign entities 119,124 68,882 Other 52,619 54,776 ------------ ----------------- 848,022 669,741 ------------ ----------------- - ------------------------------------------------------------------------------ Other assets: Regulatory assets 278,147 284,467 Deferred charges and other 159,066 156,682 ------------ ----------------- 437,213 441,149 ------------ ----------------- - ------------------------------------------------------------------------------ Total assets $ 5,071,122 $ 4,959,337 ============ ================= - ------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5
INTERSTATE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) <TABLE> <CAPTION> March 31, 1999 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1998 - ------------------------------------------------------------------------------------------------------------------------ (in thousands, except share amounts) <S> <C> <C> Capitalization: Common stock - $.01 par value - authorized 200,000,000 shares; outstanding 77,935,693 and 77,630,043 shares, respectively $ 779 $ 776 Additional paid-in capital 913,728 905,130 Retained earnings 540,282 537,372 Accumulated other comprehensive income 237,434 163,017 ----------------- ----------------- Total common equity 1,692,223 1,606,295 ----------------- ----------------- Cumulative preferred stock of subsidiaries: Par/Stated Authorized Shares Mandatory Value Shares Outstanding Series Redemption ----- ------ ----------- ------ ---------- $ 100 * 449,765 4.40% - 6.20% No 44,977 44,977 $ 25 * 599,460 6.50% No 14,986 14,986 $ 50 466,406 366,406 4.30% - 6.10% No 18,320 18,320 $ 50 ** 216,381 4.36% - 7.76% No 10,819 10,819 $ 50 ** 545,000 6.40% Yes *** 27,250 27,250 ----------------- ----------------- 116,352 116,352 Less: unamortized expenses (2,819) (2,854) ----------------- ----------------- Total cumulative preferred stock of subsidiaries 113,533 113,498 ----------------- ----------------- Long-term debt (excluding current portion) 1,545,251 1,543,131 ----------------- ----------------- 3,351,007 3,262,924 ----------------- ----------------- * 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 - ------------------------------------------------------------------------------------------------------------------------ Current liabilities: Current maturities and sinking funds 54,084 63,414 Variable rate demand bonds 56,975 56,975 Commercial paper 64,000 64,500 Notes payable 50,027 51,784 Capital lease obligations 12,146 11,978 Accounts payable 163,589 204,297 Accrued taxes 106,845 84,921 Other 113,414 111,685 ----------------- ----------------- 621,080 649,554 ----------------- ----------------- - ------------------------------------------------------------------------------------------------------------------------ Other long-term liabilities and deferred credits: Accumulated deferred income taxes 738,168 691,624 Accumulated deferred investment tax credits 75,949 77,313 Environmental liabilities 68,192 68,399 Customer advances 35,964 37,171 Capital lease obligations 11,499 13,755 Other 169,263 158,597 ----------------- ----------------- 1,099,035 1,046,859 ----------------- ----------------- - ------------------------------------------------------------------------------------------------------------------------ Total capitalization and liabilities $ 5,071,122 $ 4,959,337 ================= ================= - ------------------------------------------------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> 6
INTERSTATE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> For the Three Months Ended March 31, 1999 1998 - ----------------------------------------------------------------------------------------------------- (in thousands) <S> <C> <C> Cash flows from operating activities: Net income $ 41,744 $ 28,875 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 73,640 69,832 Amortization of nuclear fuel 5,024 5,437 Amortization of deferred energy efficiency expenditures 7,930 8,240 Deferred taxes and investment tax credits (1,799) (13,424) Refueling outage provision 2,415 1,299 Impairment of oil and gas properties - 6,746 Other (2,070) 1,197 Other changes in assets and liabilities: Accounts receivable 9,774 20,221 Notes receivable 3,959 2,091 Production fuel 9,743 7,289 Materials and supplies (1,535) (1,543) Gas stored underground 13,524 21,544 Prepaid gross receipts tax 5,340 4,912 Accounts payable (40,708) (23,964) Accrued taxes 21,924 29,699 Adjustment clause balances 9,168 14,220 Benefit obligations and other 12,079 (398) ----------------- ----------------- Net cash flows from operating activities 170,152 182,273 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends declared (38,834) (36,580) Proceeds from issuance of common stock 8,538 2,828 Net change in Alliant Energy Resources, Inc. credit facility 42,995 29,562 Proceeds from issuance of other long-term debt 11,994 41 Reductions in other long-term debt (62,310) (1,013) Net change in short-term borrowings (2,257) (67,676) Principal payments under capital lease obligations (3,369) (4,106) Other 113 (423) ----------------- ----------------- Net cash flows used for financing activities (43,130) (77,367) ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Cashflows used for investing activities: Construction and acquisition expenditures: Utility (41,638) (39,160) Nonregulated businesses (49,198) (22,554) Nuclear decommissioning trust funds (15,437) (13,642) Shared savings expenditures (4,247) (1,808) Other 5,854 7,032 ----------------- ----------------- Net cash flows used for investing activities (104,666) (70,132) ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Net increase in cash and temporary cash investments 22,356 34,774 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 31,827 27,329 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- ----------------- ----------------- Cash and temporary cash investments at end of period $ 54,183 $ 62,103 ================= ================= - ----------------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid during the period for: Interest $ 31,952 $ 32,237 ================= ================= Income taxes $ 4,600 $ 11,892 ================= ================= Noncash investing and financing activities: Capital lease obligations incurred $ 1,414 $ 1,039 ================= ================= - ----------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> 7
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, Resources and Corporate Services). These financial statements should be read in conjunction with the financial statements and the notes thereto included in IEC's, IESU's and WP&L'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 months ended March 31, 1999 and 1998, (b) the consolidated financial position at March 31, 1999 and December 31, 1998, and (c) the consolidated statement of cash flows for the three months ended March 31, 1999 and 1998, have been made. Because of the seasonal nature of IESU's, WP&L's and IPC's operations, results for the three months ended March 31, 1999 are not necessarily indicative of results that may be expected for the year ending December 31, 1999. Certain prior period amounts have been reclassified on a basis consistent with the 1999 presentation. 2. IEC's comprehensive income, and the components of other comprehensive income (loss), net of taxes, were as follows (in thousands): <TABLE> <CAPTION> For the Three Months Ended March 31, 1999 1998 -------------- --------------- <S> <C> <C> Net income $ 41,744 $ 28,875 Other comprehensive income (loss): Unrealized gain on securities, net of tax (1) 75,031 61,829 Foreign currency translation adjustments (614) 55 -------------- --------------- Other comprehensive income 74,417 61,884 -------------- --------------- Comprehensive income $ 116,161 $ 90,759 ============== =============== (1) Primarily due to the adjustment to the estimated fair value each quarter of IEC's investment in McLeod. </TABLE> IESU and WP&L had no comprehensive income in the periods presented. 8
3. Certain financial information relating to IEC's significant business segments is presented below: <TABLE> <CAPTION> Regulated Domestic Utilities Nonregulated IEC ------------------------------------------- Electric Gas Other Total Businesses Other Consolidated ------------------------------------------------------------------------------------ (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Three Months Ended March 31, 1999 -------------- Operating revenues $351,338 $133,684 $9,204 $494,226 $53,199 ($570) $546,855 Operating income (loss) 68,615 23,939 2,354 94,908 (1,836) (85) 92,987 Net income (loss) 44,767 (1,906) (1,117) 41,744 Three Months Ended March 31, 1998 -------------- Operating revenues $357,751 $130,046 $8,409 $496,206 $60,322 ($245) $556,283 Operating income (loss) 55,837 22,376 1,831 80,044 (5,499) (665) 73,880 Net income (loss) 33,177 (3,999) (303) 28,875 </TABLE> Resources' (i.e. the nonregulated businesses) assets increased $150 million during the first quarter of 1999, primarily due to the increase in market value of its investment in McLeod and additional investments in foreign entities. Intersegment revenues were not material to IEC's operations and there was no single customer whose revenues exceeded 10% or more of IEC's consolidated revenues. 4. 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. 5. At March 31, 1999, IEC had $119.1 million of investments in foreign entities on its Consolidated Balance Sheets that included: (a) investments in several New Zealand utility entities; (b) investments in several generation facilities in China; and (c) an investment in an international venture capital fund. IEC accounts for the China investments under the equity method and the other investments under the cost method. The geographic concentration of IEC's investments in foreign entities at March 31, 1999, included investments of approximately $85.7 million in New Zealand, $32.9 million in China and $0.5 million in other countries. 6. In October 1998, the Board of Directors of IEC adopted a new Shareowner Rights Plan (new plan) to replace IEC's former plan that expired on February 22, 1999. The new plan was approved on January 15, 1999 by the SEC. On January 20, 1999, the Board of Directors declared a dividend of one common share purchase right (right) on each outstanding share of IEC's common stock which was issued on February 22, 1999 to coincide with the expiration of the former plan. Rights under the new plan will be exercisable only if a person or group acquires, or announces a tender offer to acquire, 15% or more of IEC's 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 multiples of two at an initial price of $95.00 per full share, subject to adjustment. If any shareowner acquires 15% or more of the outstanding common stock of IEC, each right (subject to limitations) will entitle its holder to purchase, at the right's then current exercise price, a number of common shares of IEC or of the acquirer having a market value at the time of twice the right's per full share exercise price. The Board of Directors is also authorized to reduce the 15% thresholds to not less than 10%. 9
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------- (in thousands) Operating revenues: Electric utility $ 140,017 $ 140,649 Gas utility 61,296 60,395 Steam and other 7,952 7,234 --------- --------- 209,265 208,278 --------- --------- - ----------------------------------------------------------------------------- Operating expenses: Electric and steam production fuels 26,589 30,649 Purchased power 13,150 11,049 Cost of gas sold 37,912 37,657 Other operation 47,439 47,002 Maintenance 9,904 10,991 Depreciation and amortization 25,482 24,335 Taxes other than income taxes 12,616 12,306 --------- --------- 173,092 173,989 --------- --------- - ----------------------------------------------------------------------------- Operating income 36,173 34,289 --------- --------- - ----------------------------------------------------------------------------- Interest expense and other: Interest expense 13,204 13,075 Allowance for funds used during construction (849) (765) Miscellaneous, net (857) 279 --------- --------- 11,498 12,589 --------- --------- - ----------------------------------------------------------------------------- Income before income taxes 24,675 21,700 --------- --------- - ----------------------------------------------------------------------------- Income taxes 10,216 10,040 --------- --------- - ----------------------------------------------------------------------------- Net income 14,459 11,660 --------- --------- - ----------------------------------------------------------------------------- Preferred dividend requirements 229 229 --------- --------- - ----------------------------------------------------------------------------- Earnings available for common stock $ 14,230 $ 11,431 ========= ========= - ----------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 10
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS March 31, 1999 December 31, ASSETS (Unaudited) 1998 - -------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 2,148,059 $ 2,140,322 Gas 199,209 198,488 Steam 55,794 55,797 Common 106,732 106,940 ------------- --------------- 2,509,794 2,501,547 Less - Accumulated depreciation 1,237,623 1,209,204 ------------- --------------- 1,272,171 1,292,343 Construction work in progress 57,141 48,991 Leased nuclear fuel, net of amortization 23,559 25,644 ------------- --------------- 1,352,871 1,366,978 Other property, plant and equipment, net of accumulated depreciation and amortization of $1,984 and $1,948, respectively 5,586 5,623 ------------- --------------- 1,358,457 1,372,601 ------------- --------------- - ------------------------------------------------------------------------------ Current assets: Cash and temporary cash investments 585 4,175 Temporary cash investments with associated companies - 53,729 Accounts receivable: Customer, less allowance for doubtful accounts of $1,056 and $1,058, respectively 17,543 16,703 Associated companies 2,466 2,662 Other, less allowance for doubtful accounts of $363 and $357, respectively 10,158 10,346 Production fuel, at average cost 13,306 11,863 Materials and supplies, at average cost 25,972 25,591 Gas stored underground, at average cost 5,887 12,284 Regulatory assets 19,324 23,487 Prepayments and other 3,879 4,185 ------------- --------------- 99,120 165,025 ------------- --------------- - ------------------------------------------------------------------------------ Investments: Nuclear decommissioning trust funds 95,398 91,691 Other 6,236 6,019 ------------- --------------- 101,634 97,710 ------------- --------------- - ------------------------------------------------------------------------------ Other assets: Regulatory assets 133,491 137,908 Deferred charges and other 15,201 15,734 ------------- --------------- 148,692 153,642 ------------- --------------- - ------------------------------------------------------------------------------ Total assets $ 1,707,903 $ 1,788,978 ============= =============== - ------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 11
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) <TABLE> <CAPTION> March 31, 1999 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1998 - -------------------------------------------------------------------------------------------------------------------- (in thousands, except share amounts) <S> <C> <C> Capitalization: Common stock - $2.50 par value - authorized 24,000,000 shares; 13,370,788 shares outstanding $ 33,427 $ 33,427 Additional paid-in capital 279,042 279,042 Retained earnings 245,626 275,372 ------------------ ----------------- Total common equity 558,095 587,841 Cumulative preferred stock, not mandatorily redeemable - $50 par value - authorized 466,406 shares; 366,406 shares outstanding 18,320 18,320 Long-term debt (excluding current portion) 551,086 602,020 ------------------ ----------------- 1,127,501 1,208,181 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Current liabilities: Current maturities and sinking funds 51,140 50,140 Capital lease obligations 12,132 11,965 Notes payable to associated companies 9,694 - Accounts payable 30,117 43,953 Accounts payable to associated companies 13,930 22,487 Accrued payroll and vacations 9,311 6,365 Accrued interest 10,082 12,045 Accrued taxes 64,480 55,295 Accumulated refueling outage provision 9,020 6,605 Environmental liabilities 5,660 5,660 Other 16,928 17,617 ------------------ ----------------- 232,494 232,132 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Other long-term liabilities and deferred credits: Accumulated deferred income taxes 224,893 224,510 Accumulated deferred investment tax credits 28,603 29,243 Environmental liabilities 29,027 29,195 Pension and other benefit obligations 27,283 25,655 Capital lease obligations 11,427 13,679 Other 26,675 26,383 ------------------ ----------------- 347,908 348,665 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Total capitalization and liabilities $ 1,707,903 $ 1,788,978 ================== ================= - -------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> 12
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) <S> <C> <C> Cash flows from operating activities: Net income $ 14,459 $ 11,660 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 25,482 24,335 Amortization of leased nuclear fuel 3,499 4,010 Amortization of deferred energy efficiency expenditures 6,064 6,070 Deferred taxes and investment tax credits (473) (8,822) Refueling outage provision 2,415 1,299 Other 146 319 Other changes in assets and liabilities: Accounts receivable (456) 2,796 Production fuel (1,443) 197 Materials and supplies (381) (1,249) Gas stored underground 6,397 10,509 Accounts payable (22,393) (12,292) Accrued taxes 9,185 13,262 Adjustment clause balances 4,809 9,466 Benefit obligations and other 5,776 5,449 ------------------ ----------------- Net cash flows from operating activities 53,086 67,009 ------------------ ----------------- - ------------------------------------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends declared (43,976) (14,000) Dividends payable (4,840) 14,000 Preferred stock dividends (229) (229) Reductions in long-term debt (50,000) - Net change in short-term borrowings 9,694 - Principal payments under capital lease obligations (3,369) (4,106) Other (3) - ------------------ ------------------ Net cash flows used for financing activities (92,723) (4,335) ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Cash flows used for investing activities: Construction expenditures - utility (16,621) (19,198) Nuclear decommissioning trust funds (1,502) (1,502) Other 441 72 ------------------ ------------------ Net cash flows used for investing activities (17,682) (20,628) ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and temporary cash investments (57,319) 42,046 ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 57,904 230 ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of period $ 585 $ 42,276 ================== ================== - ------------------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid during the period for: Interest $ 13,989 $ 12,378 ================== ================== Income taxes $ 7,334 $ 11,804 ================== ================== Noncash investing and financing activities - Capital lease obligations incurred $ 1,414 $ 1,039 ================== ================== - ------------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> 13
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 5 and 6 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 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 months ended March 31, 1999 and 1998, (b) the consolidated financial position at March 31, 1999 and December 31, 1998, and (c) the consolidated statement of cash flows for the three months ended March 31, 1999 and 1998, have been made. Because of the seasonal nature of IESU's operations, results for the three months ended March 31, 1999 are not necessarily indicative of results that may be expected for the year ending December 31, 1999. Certain prior period amounts have been reclassified on a basis consistent with the 1999 presentation. 14
WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------ (in thousands) Operating revenues: Electric utility $ 149,944 $ 151,310 Gas utility 51,794 50,318 Water 1,252 1,175 ---------- ----------- 202,990 202,803 ---------- ----------- - ------------------------------------------------------------------------------ Operating expenses: Electric production fuels 27,366 28,897 Purchased power 24,000 28,602 Cost of gas sold 31,181 30,714 Other operation 26,108 34,003 Maintenance 9,103 9,967 Depreciation and amortization 31,139 29,258 Taxes other than income taxes 7,702 7,711 ---------- ----------- 156,599 169,152 ---------- ----------- - ------------------------------------------------------------------------------ Operating income 46,391 33,651 ---------- ----------- - ------------------------------------------------------------------------------ Interest expense and other: Interest expense 9,865 8,383 Allowance for funds used during construction (923) (656) Miscellaneous, net (4,344) (1,867) ---------- ----------- 4,598 5,860 ---------- ----------- - ------------------------------------------------------------------------------ Income before income taxes 41,793 27,791 ---------- ----------- - ------------------------------------------------------------------------------ Income taxes 15,505 10,193 ---------- ----------- - ------------------------------------------------------------------------------ Net income 26,288 17,598 ---------- ----------- - ------------------------------------------------------------------------------ Preferred dividend requirements 828 828 ---------- ----------- - ------------------------------------------------------------------------------ Earnings available for common stock $ 25,460 $ 16,770 ========== =========== - ------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 15
WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED BALANCE SHEETS March 31, 1999 December 31, ASSETS (Unaudited) 1998 - -------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 1,847,950 $ 1,839,545 Gas 246,188 244,518 Water 26,584 26,567 Common 219,715 219,268 -------------- ----------------- 2,340,437 2,329,898 Less - Accumulated depreciation 1,199,761 1,168,830 -------------- ----------------- 1,140,676 1,161,068 Construction work in progress 63,950 56,994 Nuclear fuel, net of amortization 17,151 18,671 -------------- ----------------- 1,221,777 1,236,733 Other property, plant and equipment, net of accumulated depreciation and amortization of $44 for both years 630 630 -------------- ----------------- 1,222,407 1,237,363 -------------- ----------------- - -------------------------------------------------------------------------------- Current assets: Cash and temporary cash investments 9,496 1,811 Accounts receivable: Customer 9,932 13,372 Associated companies 1,921 3,019 Other 7,307 8,298 Production fuel, at average cost 14,851 20,105 Materials and supplies, at average cost 21,117 20,025 Gas stored underground, at average cost 5,924 10,738 Regulatory assets 3,707 3,707 Prepaid gross receipts tax 16,882 22,222 Other 1,413 6,987 -------------- ----------------- 92,550 110,284 -------------- ----------------- - -------------------------------------------------------------------------------- Investments: Nuclear decommissioning trust funds 149,627 134,112 Other 15,476 15,960 -------------- ----------------- 165,103 150,072 -------------- ----------------- - -------------------------------------------------------------------------------- Other assets: Regulatory assets 74,788 76,284 Deferred charges and other 113,058 111,147 -------------- ----------------- 187,846 187,431 -------------- ----------------- - -------------------------------------------------------------------------------- Total assets $ 1,667,906 $ 1,685,150 ============== ================= - -------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 16
WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED) <TABLE> <CAPTION> March 31, 1999 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1998 - --------------------------------------------------------------------------------------------------------- (in thousands, except share amounts) <S> <C> <C> Capitalization: Common stock - $5 par value - authorized 18,000,000 shares; 13,236,601 shares outstanding $ 66,183 $ 66,183 Additional paid-in capital 199,438 199,438 Retained earnings 305,181 294,309 ----------------- ----------------- Total common equity 570,802 559,930 ----------------- ----------------- 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) 414,603 414,579 ----------------- ----------------- 1,045,368 1,034,472 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Current liabilities: Variable rate demand bonds 56,975 56,975 Notes payable 50,000 50,000 Notes payable to associated companies 1,102 26,799 Accounts payable 70,884 84,754 Accounts payable to associated companies 16,468 20,315 Accrued payroll and vacations 5,052 5,276 Accrued interest 8,093 6,863 Accrued taxes 16,502 740 Other 10,197 13,860 ----------------- ----------------- 235,273 265,582 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Other long-term liabilities and deferred credits: Accumulated deferred income taxes 243,750 245,489 Accumulated deferred investment tax credits 32,705 33,170 Customer advances 33,253 34,367 Environmental liabilities 11,644 11,683 Other 65,913 60,387 ----------------- ----------------- 387,265 385,096 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Total capitalization and liabilities $ 1,667,906 $ 1,685,150 ================= ================= - --------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> 17
WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- (in thousands) <S> <C> <C> Cash flows from operating activities: Net income $ 26,288 $ 17,598 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 31,139 29,258 Amortization of nuclear fuel 1,525 1,427 Deferred taxes and investment tax credits (1,578) (1,607) Other (1,617) (457) Other changes in assets and liabilities: Accounts receivable 5,529 15,460 Production fuel 5,254 4,889 Materials and supplies (1,092) (32) Gas stored underground 4,814 8,768 Prepaid gross receipts tax 5,340 4,912 Accounts payable (17,717) (3,302) Accrued taxes 15,762 10,396 Adjustment clause balances 7,157 3,691 Benefit obligations and other 2,814 (361) --------------------- --------------------- Net cash flows from operating activities 83,618 90,640 --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends (14,588) (14,586) Preferred stock dividends (828) (828) Net change in short-term borrowings (25,697) (42,500) --------------------- --------------------- Net cash flows used for financing activities (41,113) (57,914) --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash flows used for investing activities: Construction expenditures - utility (18,967) (15,584) Nuclear decommissioning trust funds (13,935) (12,140) Shared savings expenditures (2,519) (1,808) Other 601 477 --------------------- --------------------- Net cash flows used for investing activities (34,820) (29,055) --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Net increase in cash and temporary cash investments 7,685 3,671 --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 1,811 2,492 --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of period $ 9,496 $ 6,163 ===================== ===================== - --------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid (refunded) during the period for: Interest $ 8,468 $ 8,150 ===================== ===================== Income taxes $ (357) $ 1,668 ===================== ===================== - --------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> 18
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 5 and 6 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. 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 months ended March 31, 1999 and 1998, (b) the consolidated financial position at March 31, 1999 and December 31, 1998, and (c) the consolidated statement of cash flows for the three months ended March 31, 1999 and 1998, have been made. Because of the seasonal nature of WP&L's operations, results for the three months ended March 31, 1999 are not necessarily indicative of results that may be expected for the year ending December 31, 1999. Certain prior period amounts have been reclassified on a basis consistent with the 1999 presentation. 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IEC is currently doing business as Alliant Energy Corporation and is the result of a three-way merger involving WP&L Holdings, Inc., IES Industries Inc. and Interstate Power Company that was completed in April 1998. The first tier subsidiaries of IEC include: WP&L, IESU, IPC, Resources and Corporate Services. Among various other regulatory constraints, IEC is operating as a registered public utility holding company subject to the limitations imposed by PUHCA. This MD&A includes information relating to IEC, IESU and WP&L (as well as IPC, Resources and Corporate Services). Where appropriate, information relating to a specific entity has been segregated and labeled as such. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report as well as the financial statements, notes and MD&A included in IEC's, IESU's and WP&L's latest Annual Report on Form 10-K. FORWARD-LOOKING STATEMENTS Statements contained in this report (including MD&A) that are not of historical fact are forward-looking statements intended to qualify for the safe harbors 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 its operations 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, employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages, political, legal and economic conditions in foreign countries IEC has investments in and changes in the rate of inflation. UTILITY INDUSTRY OUTLOOK A summary of the current regulatory environment is included in the Form 10-K filed by IEC, IESU and WP&L for the year ended December 31, 1998. Set forth below are several developments relating to such regulatory environment. The IUB has been reviewing all forms of competition in the electric utility industry for several years. A group comprised of the IUB, IEC, MAEC, the rural electric cooperatives, the municipal utilities and Iowans for Choice in Electricity (a diverse group of industrial customers, marketers, such as Enron, and a low income customer representative, among others) endorsed a bill to allow for such competition that was introduced in the Iowa Legislature in March 1999. The bill was opposed by the OCA, which is charged by Iowa law with representation of all consumers generally. While the bill did not pass, it will by operation of Iowa General Assembly rules remain alive in the General Assembly upon adjournment of its 1999 regular session. By operation of House rules, it will be 20
rereferred to the House Commerce Committee and will again be inserted into the legislative process in the Second Regular Session of the 78th General Assembly (2000). In November 1998, IEC and Northern States Power Co. (NSP) announced plans to develop an independent transmission company to provide electric transmission services to the Upper Midwest. The companies are evaluating modifications to the original structure as a result of the recent merger announcement between NSP and New Century Energies Inc. Each of the utilities complies with the provisions of Statement of Financial Accounting Standards (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 rate making 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 RESULTS OF OPERATIONS Overview IEC reported net income of $41.7 million, or $0.54 per share (basic and diluted), for the first quarter of 1999 compared with net income of $28.9 million, or $0.38 per share (basic and diluted), for the first quarter of 1998. The 44% increase in earnings resulted from higher electric margins, lower utility operation and maintenance expenses, improved results from IEC's nonregulated operations and income from a weather hedge. In addition, the 1998 results included approximately $10 million of non-recurring merger-related expenses ($0.07 per share). Higher depreciation and interest expenses partially offset the 1999 increase in earnings. The 1999 first quarter utility earnings were approximately $44.8 million compared with $33.2 million ($39.0 million excluding merger-related expenses) for the same period in 1998. The increase in utility earnings resulted primarily from a $5.3 million increase in electric margins (excluding energy efficiency revenues), a $2.6 million decrease in operation and maintenance expenses (excluding merger-related and energy efficiency expenses) and $2.5 million of pre-tax income realized from a weather hedge. Increases of $3.7 million and $1.6 million in depreciation and interest expense, respectively, partially offset these items. The higher electric margins stemmed from separate $15 million annual rate increases implemented at WP&L in July 1998 and early March 1999 to recover higher purchased power and transmission costs and a 4% increase in sales to retail customers. The sales increase resulted from a combination of more normal weather conditions in 1999 as well as continued economic growth within IEC's utility service territory. While the weather conditions in the first quarter of 1999 were milder than normal, they were more favorable to earnings than the same period of 1998. Through the first quarter, the estimated benefit to earnings in 1999 was $0.03 per share compared to 1998. Decreased sales to off-system customers at WP&L partially offset these items. The lower operation and maintenance expenses resulted from decreases in administrative and general expenses (including lower costs in 1999 due to merger-related operating efficiencies). This was partially offset by increased expenses for Year 2000 readiness efforts. 21
IEC's nonregulated operations reported a net loss of $1.9 million in the first quarter of 1999, compared with a net loss of $4.0 million for the same period in 1998. The change in earnings was largely due to improved operating results at Whiting, IEC's Denver-based oil and gas subsidiary. The 1998 results also included an asset impairment charge of $6.7 million at Whiting. However, Whiting's average oil and gas prices were 25% and 16% lower, respectively, in the first quarter of 1999 compared with the same period in 1998. As a result, Whiting experienced a slight loss in the first quarter of 1999. Electric Utility Operations Electric margins and MWH sales for IEC for the three months ended March 31 were as follows: <TABLE> <CAPTION> Revenues and Costs MWHs Sold (in thousands) (in thousands) ------------------------------ ---------------------------- 1999 1998 Change 1999 1998 Change -------------- ------------- --------- ------------- ------------- --------- <S> <C> <C> <C> <C> <C> <C> Residential $ 130,280 $ 127,069 3% 1,810 1,712 6% Commercial 72,023 72,035 - 1,244 1,185 5% Industrial 102,601 106,403 (4%) 3,076 2,999 3% -------------- ------------- ------------- ------------- Total from ultimate customers 304,904 305,507 - 6,130 5,896 4% Sales for resale 36,214 43,032 (16%) 1,345 1,670 (19%) Other 10,220 9,212 11% 41 43 (5%) -------------- ------------- ------------- ------------- Total 351,338 357,751 (2%) 7,516 7,609 (1%) ============= ============= ========= Electric production fuels 61,309 65,702 (7%) Purchased power 52,065 56,147 (7%) -------------- ------------- Margin $ 237,964 $ 235,902 1% ============== ============= ========= </TABLE> Electric margin increased $2.1 million, or 1%, in the first quarter of 1999, compared with the same period in 1998. The increase was primarily due to separate $15 million annual rate increases implemented at WP&L in July 1998 and early March 1999 to recover higher purchased power and transmission costs and a 4% increase in sales to retail customers. The sales increase resulted from a combination of more favorable weather conditions in 1999 as well as continued economic growth within IEC's retail utility service territory. Partially offsetting the increase in electric margin were decreased sales to off-system customers at WP&L and decreased recoveries of concurrent and previously deferred expenditures for Iowa-mandated energy efficiency program costs. Electric revenues included recoveries for energy efficiency program costs of $7.3 million and $12.0 million for the first quarter of 1999 and 1998, respectively, which is in accordance with IUB orders (a portion of these recoveries is also amortized to expense in other operation expenses). 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. 22
Gas Utility Operations Gas margins and Dth sales for IEC for the three months ended March 31 were as follows: <TABLE> <CAPTION> Revenues and Costs Dekatherms Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Residential $ 82,439 $ 80,293 3% 8% 14,836 13,779 Commercial 39,159 39,198 - 8,559 8,112 6% Industrial 6,767 7,129 (5%) 1,919 1,841 4% Transportation and other 5,319 3,426 55% 14,609 14,790 (1%) ------------- ------------- ----------- ------------ Total 133,684 130,046 3% 39,923 38,522 4% ============ ============= ========= Cost of gas sold 81,343 77,280 5% ------------- ------------- Margin $ 52,341 $ 52,766 (1%) ============= ============= ========= </TABLE> Gas margin decreased $0.4 million, or 1%, in the first quarter of 1999, compared with the same period in 1998, primarily due to reduced revenues from the recovery of concurrent and previously deferred 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) and gas cost adjustments at IPC. Partially offsetting the decrease was a 4% increase in Dth sales, largely due to colder weather. Gas revenues included recoveries for energy efficiency program costs in Iowa of $6.2 million and $7.1 million for the first quarter of 1999 and 1998, respectively. Refer to "Interest Expense and Other" for a discussion of income IEC realized from settlement of a weather hedge in the first quarter of 1999. IESU's and IPC's gas tariffs include PGA clauses that are designed to currently recover the cost of utility gas sold. Nonregulated and Other Revenues Nonregulated and other revenues for the three months ended March 31 were as follows (in thousands): 1999 1998 ------------- ------------- Environmental and engineering services $16,174 $16,637 Oil and gas production 12,833 17,147 Nonregulated energy 10,175 13,445 Transportation, rents and other 10,065 9,676 Steam 8,262 7,445 Affordable housing 3,072 2,961 Water 1,252 1,175 ------------- ------------- $61,833 $68,486 ============= ============= Oil and gas production revenues declined $4.3 million in the first quarter of 1999, compared with the same period in 1998, primarily due to lower oil and gas prices as well as reduced volumes sold at Whiting. Average oil and gas prices in the first quarter of 1999 declined by 25% and 16%, respectively. In addition, nonregulated energy revenues declined by $3.3 million primarily due to a shift to higher margin, lower volume gas customers. 23
Operating Expenses Other operation expenses for the three months ended March 31 were as follows (in thousands): 1999 1998 -------------- -------------- Utility-IESU / WP&L / IPC $ 87,829 $102,747 Nonregulated and other 42,536 54,605 -------------- -------------- $ 130,365 $157,352 ============== ============== Other operation expenses at the utility subsidiaries decreased $14.9 million in the first quarter of 1999, compared with the same period in 1998, primarily due to $9.7 million of merger-related expenses in the first quarter of 1998, lower administrative and general expenses (including lower costs in 1999 due to merger-related operating efficiencies) and lower energy efficiency expenses. This was partially offset by increased expenses for Year 2000 readiness efforts. Other operation expenses at the nonregulated businesses decreased $12.1 million in the first quarter of 1999, compared with the first quarter in 1998, primarily due to a $6.7 million asset impairment charge in the first quarter of 1998 at Whiting and lower operation expenses in the gas marketing business. Depreciation and amortization expense increased $3.8 million in the first quarter of 1999 compared with the same period last year, primarily as a result of utility property additions. Interest Expense and Other Interest expense increased $2.5 million in the first quarter of 1999, compared with the first quarter in 1998, due to higher utility and nonregulated borrowings outstanding during 1999. Miscellaneous, net income increased $2.9 million in the first quarter of 1999, compared with the same period last year, primarily due to $2.5 million of income realized from settlement of a weather hedge at WP&L for the November 1, 1998, to March 31, 1999, heating season. Income Taxes IEC's income tax expense increased $7.1 million in the first quarter of 1999, compared with the same period last year, primarily due to higher pre-tax income. The effective rate was 36.4% and 36.8% for the first quarter of 1999 and 1998, respectively. IESU RESULTS OF OPERATIONS Overview IESU's earnings available for common stock increased $2.8 million for the first quarter of 1999, compared with the same period in 1998. The increased earnings in 1999 were primarily due to the non-recurrence of $2 million of merger-related expenses in the first quarter of 1998, higher electric margins and a lower effective tax rate. Higher operation and maintenance expenses (excluding merger-related expenses) and increased depreciation and amortization expense partially offset these items. 24
Electric Utility Operations Electric margins and MWH sales for IESU for the three months ended March 31 were as follows: <TABLE> <CAPTION> Revenues and Costs MWHs Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Residential $ 54,353 $ 54,569 - 693 663 5% Commercial 38,548 37,611 2% 628 583 8% Industrial 37,882 40,239 (6%) 1,182 1,163 2% ------------- ------------- ------------ ------------- Total from ultimate customers 130,783 132,419 (1%) 2,503 2,409 4% Sales for resale 6,353 5,712 11% 341 189 80% Other 2,881 2,518 14% 10 10 - ------------- ------------- ------------ ------------- Total 140,017 140,649 - 2,854 2,608 9% ============ ============= ========= Electric production fuels 22,494 26,795 (16%) Purchased power 13,150 11,049 19% ------------- ------------- Margin $ 104,373 $ 102,805 2% ============= ============= ========= </TABLE> Electric margin increased $1.6 million, or 2%, for the first quarter of 1999, compared with the same period in 1998, primarily due to a 4% increase in sales volumes to retail customers due to economic growth in the service territory and colder weather. Increased purchased power capacity costs partially offset the increase. Sales for resale increased significantly in the first quarter of 1999 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 EAC and therefore have no impact on electric margin. 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 Utility Operations Gas margins and Dth sales for IESU for the three months ended March 31 were as follows: <TABLE> <CAPTION> Revenues and Costs Dekatherms Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Residential $ 39,161 $ 38,002 3% 6,855 6,624 3% Commercial 17,970 17,992 - 3,889 3,876 - Industrial 2,803 3,163 (11%) 873 914 (4%) Transportation and other 1,362 1,238 10% 3,195 3,237 (1%) ------------- ------------- ------------ ------------- Total 61,296 60,395 1% 14,812 14,651 1% ============ ============= ========= Cost of gas sold 37,912 37,657 1% ------------- ------------- Margin $ 23,384 $ 22,738 3% ============= ============= ========= </TABLE> Gas margin increased $0.6 million, or 3%, for the first quarter of 1999, compared with the same period in 1998, primarily due to increased residential sales resulting from colder weather. IESU's gas tariffs include PGA clauses that are designed to currently recover the cost of gas sold. 25
Operating Expenses IESU's other operation expenses increased $0.4 million in the first quarter of 1999, compared with the same period in 1998, largely due to increased Year 2000 readiness efforts and higher employee pension and benefits costs. Merger-related expenses of $1.8 million in the first quarter of 1998 and lower costs associated with merger-related operating efficiencies realized in 1999 virtually offset these items. Interest Expense and Other Miscellaneous, net income increased $1.1 million for the first quarter of 1999, compared with the same period in 1998, primarily due to higher interest income, lower sale of accounts receivable expenses and merger-related expenses incurred in 1998. Income Taxes IESU's income tax expense increased $0.2 million for the first quarter of 1999, compared with the same period in 1998, due to higher taxable income which was largely offset by a decrease in the overall effective tax rate. The effective income tax rates were 41.4% and 46.3% for the first quarter of 1999 and 1998, respectively. The effective income tax rate was lower in 1999, primarily due to a reduction in flow-through depreciation expense and nondeductible merger expenses in 1998. WP&L RESULTS OF OPERATIONS Overview WP&L's earnings available for common stock increased $8.7 million for the first quarter of 1999, compared with the same period in 1998. In addition to a $3.2 million decrease in merger-related expenses, the improvement in earnings in the first quarter of 1999 primarily reflects higher electric margins, lower operation expenses and $2.5 million of pre-tax income realized from settlement of a weather hedge. Partially offsetting these items were $1.9 million and $1.5 million increases in depreciation and amortization expense and interest expense, respectively. Electric Utility Operations Electric margins and MWH sales for WP&L for the three months ended March 31 were as follows: <TABLE> <CAPTION> Revenues and Costs MWHs Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Residential $ 53,889 $ 49,755 8% 801 758 6% Commercial 27,016 25,604 6% 465 459 1% Industrial 39,599 37,069 7% 1,087 1,041 4% ------------- ------------- ------------ ------------- Total from ultimate customers 120,504 112,428 7% 2,353 2,258 4% Sales for resale 24,929 35,626 (30%) 813 1,415 (43%) Other 4,511 3,256 39% 15 17 (12%) ------------- ------------- ------------ ------------- Total 149,944 151,310 (1%) 3,181 3,690 (14%) ============ ============= ========= Electric production fuels 27,366 28,897 (5%) Purchased power 24,000 28,602 (16%) ------------- ------------- Margin $ 98,578 $ 93,811 5% ============= ============= ========= </TABLE> 26
Electric margin increased $4.8 million, or 5%, during the first quarter of 1999, compared with the same period in 1998, primarily due to separate $15 million annual rate increases implemented in July 1998 and early March 1999 to recover higher purchased power and transmission costs. Sales to retail customers increased 4% due to economic strength in the service territory and colder weather compared with the same period in 1998. Lower income from off-system sales, due to increased transmission constraints and implementation of the merger-related joint sales agreement, partially offset these items. Under the joint sales agreement, the margins resulting from IEC's off-system sales are allocated among IESU, IPC and WP&L. Gas Utility Operations Gas margins and Dth sales for WP&L for the three months ended March 31 were as follows: <TABLE> <CAPTION> Revenues and Costs Dekatherms Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Residential $ 31,260 $ 31,010 1% 5,857 5,227 12% Commercial 15,100 15,237 (1%) 3,493 3,121 12% Industrial 2,504 2,675 (6%) 659 602 9% Transportation and other 2,930 1,396 110% 4,043 3,829 6% ------------- ------------- ------------ ------------- Total 51,794 50,318 3% 14,052 12,779 10% ============ ============= ========= Cost of gas sold 31,181 30,714 2% ------------- ------------- Margin $ 20,613 $ 19,604 5% ============= ============= ========= </TABLE> Gas margin increased $1.0 million, or 5%, for the first quarter of 1999, compared with the same period in 1998, primarily due to an increase in Dth sales resulting from colder weather and customer growth. Refer to "Interest Expense and Other" for a discussion of income WP&L realized from a weather hedge in the first quarter of 1999. Operating Expenses Other operation expense decreased $7.9 million in the first quarter of 1999, compared to the same period in 1998, primarily due to $3.2 million of merger-related expenses in the first quarter of 1998 and reduced administrative and general expenses in 1999, including lower costs due to merger-related operating efficiencies. Depreciation and amortization expense increased $1.9 million in the first quarter of 1999, compared with the same period in 1998, primarily due to property additions. Interest Expense and Other Interest expense increased $1.5 million in the first quarter of 1999, compared with the same period in 1998, primarily due to higher borrowings outstanding in 1999. The increase in miscellaneous, net income in the first quarter of 1999, compared with the same period in 1998, was due to $2.5 million of pre-tax income realized from settlement of a weather hedge for the November 1, 1998, to March 31, 1999, heating season. Income Taxes Income taxes increased $5.3 million in the first quarter of 1999, compared with the same period in 1998, due to higher pre-tax income. The effective rate for the first quarter of 1999 was 37.1% compared with 36.7% for the same period in 1998. 27
LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities at IEC decreased $12 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in working capital, which were partially offset by changes in net income, and deferred taxes and investment tax credits. Cash flows used for financing activities decreased $34 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily as a result of the net changes in the amount of debt outstanding. Cash flows used for investing activities increased $35 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in the levels of construction and acquisition expenditures. Cash flows generated from operating activities at IESU decreased $14 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in working capital, which were partially offset by the change in deferred taxes and investment tax credits. Cash flows used for financing activities increased $88 million for the three months ended March 31, 1999, compared with the same period in 1998, due to a reduction in the amount of debt outstanding in 1999 and increased common stock dividends as no dividend payments were made in the last three quarters of 1998 due to merger-related tax considerations. As a result, the dividend payment in the first quarter of 1999 was larger than IESU's historical quarterly payment. Cash flows used for investing activities decreased $3 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in the levels of construction expenditures. Cash flows generated from operating activities at WP&L decreased $7 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in working capital, which were partially offset by higher net income. Cash flows used for financing activities decreased $17 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in the amount of short-term borrowings. Cash flows used for investing activities increased $6 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to increased construction expenditures. Future Considerations At March 31, 1999, IEC had an investment in the stock of McLeod, a telecommunications company, valued at $431.3 million (based on a March 31, 1999 closing price of $42.00 per share and compared to a cost basis of $29.1 million). Pursuant to the applicable accounting rules, the carrying value of this investment is 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 and are a component of other comprehensive income. In addition, any such gains or losses are reflected in current earnings only at the time they are realized through a sale. IEC entered into an agreement in November 1998 with McLeod whereby IEC's ability to sell the McLeod stock is subject to various restrictions. In April 1999, IEC announced that it expects to participate as a selling shareholder in a secondary offering of McLeod Class A Common Stock. IEC will sell approximately 640,000 shares of McLeod stock in the offering (at a gross sales price of $55.63 per share). The sale is scheduled to close in May 1999. IEC plans to use the proceeds from the sale to repay outstanding short-term debt at Resources. IEC presently beneficially owns 10.3 million shares of McLeod Class A Common Stock. Under PUHCA, IEC's investments in exempt wholesale generators and foreign utility companies is limited to 50% of IEC's consolidated retained earnings. In addition, there are limitations on the amount of non-utility investments IEC can make under the Wisconsin Utility Holding Company Act (WUHCA) as well. If IEC is unable to obtain relief from the WUHCA provisions, the company may be forced to divest certain assets to stay in compliance. Under terms of comprehensive restructuring legislation passed in New Zealand, IEC will be selling a portion of its current New Zealand utility investments. IEC anticipates that it may realize a gain on such sales. 28
Financing and Capital Structure At March 31, 1999, Resources had $296 million of commercial paper outstanding and backed by its 3-Year Credit Agreement with interest rates ranging from 4.90%-5.25%. Resources intends to continue issuing commercial paper backed by this facility, and no conditions existed at March 31, 1999 that would prevent the issuance of commercial paper or direct borrowings on its bank lines. Accordingly, this debt is classified as long-term. On February 11, 1999, IPC issued $3.25 million of pollution control revenue bonds due February 1, 2010. The proceeds were used to retire $3.25 million of 6.375% pollution control revenue bonds that were due serially 1999-2007. The bonds have a fixed interest rate of 4.05% for the first five years. Thereafter, IPC will have the option to reset the interest rate at one of three variable short-term interest rates or at a new long-term interest rate, based on the then prevailing market conditions, provided the rate does not exceed 12% per annum. On March 23, 1999, IPC issued $7.7 million of pollution control revenue bonds due January 1, 2013. The proceeds were used to refinance $7.7 million of 6.375% pollution control revenue bonds that were due serially 1999-2007. The bonds have a fixed interest rate of 4.20% for the first five years. Thereafter, IPC will have the option to reset the interest rate at one of three variable short-term interest rates or at a new long-term interest rate, based on the then prevailing market conditions, provided the rate does not exceed 12% per annum. On March 1, 1999, IESU retired $50 million of Series Z, 7.6% First Mortgage Bonds due in March 1999. Internally generated funds were used to retire the bonds. Capital Requirements 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 originally planned for the spring of 2000 is now scheduled for the fall of 2001 and will take approximately 60 days. The delay is attributable to the inability of the steam generator manufacturer to meet the spring 2000 delivery schedule. Delays in meeting the delivery schedule did not allow for steam generator replacement to occur prior to the start of the summer weather in 2000. Therefore, the decision was made to store the steam generators after they are received and wait until the next scheduled refueling outage in the fall of 2001. It is anticipated that the delay will not adversely impact the reliability of Kewaunee in the interim. Plans to shutdown the plant for a spring 2000 refueling remain unchanged. Rates and Regulatory Matters In January 1999, WP&L made a filing with the PSCW proposing to begin deferring, on January 1, 1999, all costs associated with the EPA's required NOx emission reductions. In connection with a statewide docket to investigate compliance issues associated with the EPA's NOx emission reductions, on March 30, 1999, the PSCW authorized deferral of all non-labor related costs incurred after March 30, 1999. However, the utilities are not allowed to defer costs of replacement power associated with NOx compliance. WP&L has requested expedited approval to start construction of NOx reduction investments at several generating units operated by WP&L and has requested recovery of all the NOx reduction costs through a surcharge mechanism. WP&L anticipates receiving a final order in this proceeding in late 1999. No assurance can be given as to what relief, if any, will be granted by the PSCW. Refer to the "Other Matters - Environmental" section for a further discussion of the NOx issue. Pursuant to PSCW requirements, WP&L recognizes annual demand side management expense based on: 1) an annual fixed expenditure amount as approved by the PSCW in the ratemaking process, and 2) PSCW approved amortization of any difference in historical demand side management expenditures and associated rate recoveries of such costs. Effective with WP&L's rates implemented April 29, 1997, the annual rate recovery for demand side management expenses (and the associated demand side management expense) was reduced to $6.9 million reflecting annual demand side management expenditures of $14.4 million reduced by a two-year amortization of 29
prior period expenditures which were less than the associated rate recoveries ($7.5 million per year). At the completion of the two-year amortization period, the annual demand side management expense to be recognized by WP&L returned to the $14.4 million level. Given the price freeze WP&L has in effect in Wisconsin, the annual rate recovery of demand side management expense is still $6.9 million. The OCA has requested certain financial information related to the electric utility operations within the state of Iowa for IESU and IPC. IESU and IPC responded to the data requests in a timely manner. It is unknown if additional data requests will be received by either IESU or IPC. While IESU and IPC cannot predict the outcome of this process, such data requests could lead to an effort by the OCA to seek a rate reduction for one or both of IESU and IPC in Iowa. OTHER MATTERS Year 2000 A summary of IEC's Year 2000 program is included in the Form 10-K filed by IEC, IESU and WP&L for the year ended December 31, 1998. Set forth below are developments relating to the Year 2000 program. Remediation and Testing Year 2000 remediation and testing has been substantially completed for all operational areas of IEC which include generating stations, substations, transmission and distribution substations, natural gas distribution systems, system and distribution operating centers and all key building infrastructure. However, IEC is still dependent upon the timely provision of necessary upgrades and modifications by certain software vendors. As of March 31, 1999, IEC was expecting upgrades from approximately 10 embedded system vendors and 14 information technology vendors. IEC considers the potential impact on the Year 2000 program to be minimal as: 1) the upgrades are for non-mission critical systems or applications, or 2) operational contingency plans have already been developed and deployed. A. Embedded Systems - All testing for assessing Year 2000 compliance has been completed. Remaining work includes minor upgrades on less than 15 miscellaneous systems. B. Information Technology - As of March 31, 1999, approximately 90% of the systems and 80% of the infrastructure components have been remediated and tested. IEC's customer information systems and financial systems make up the majority of the remaining remediation and testing effort. The remediation and testing of the customer information systems was 95% complete at the end of March 1999. All remediation work was completed in early May 1999 and will be operational by May 31, 1999. The financial systems have been remediated with final roll-forward-testing scheduled to be completed by July 15, 1999. Therefore, it is anticipated that IEC will have its information technology remediation and testing efforts 99% complete by July 15, 1999. On July 15, 1999 there will be four remaining non-mission critical systems waiting for vendor supplied software, scheduled for completion by September 1, 1999. Contingency plans for these remaining systems are already in place as well as for all other critical systems. Costs to Address Year 2000 Compliance IEC's historical Year 2000 project expenditures as well as CURRENT 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 - 12/31/98 $ 8.7 $4.8 $3.2 $0.7 Costs incurred from 1/1/99 - 3/31/99 $ 5.2 $2.3 $1.9 $1.0 Current estimate of remaining modifications $18.5 $5.4 $8.6 $4.5 In addition, IEC estimates it incurred $3 million in costs for internal labor and associated overheads in 1998 and anticipates expenditures of $6 million in 1999 ($1.6 million was incurred in the first quarter of 1999). The total 30
estimated project cost has decreased from the figures reported in the Form 10-K due to lower than anticipated remediation costs and a reduction in the contingency estimate. In accordance with an order received from the PSCW, WP&L is deferring its Year 2000 project costs, other than internal labor and associated overheads (approximately $4.3 million of the expenditures incurred at WP&L from January 1, 1998 through March 31, 1999 have been deferred). Risks and Contingency Planning IEC continues to work on developing its Year 2000 contingency plan. The planning process includes three components: 1) base contingency planning, 2) emergency preparedness, and 3) electric and gas industry-wide coordination. The base contingency planning phase involves the development of operating procedures to handle the malfunction of a specific device. This work was completed in the first quarter of 1999. The emergency preparedness phase involves the development of operating procedures to handle the malfunction of major business processes. This work started in late 1998 and will continue through the end of 1999. The electric and gas industry-wide coordination is a major focus of IEC's efforts in preparation for industry-wide drills which are being coordinated by the North American Electric Reliability Council (NERC). As part of its contingency planning process, NERC scheduled two nation-wide electric utility industry drills in April 1999 and September 1999. These drills focus on safe and reliable electrical system operations with the partial loss of telecommunications. Results of the April 1999 NERC drill were very positive. All contingency plans worked as anticipated, however, some procedures and manual data forms will be refined to enhance efficiency. In addition to these NERC drills, IEC will be conducting five additional internal drills. These include an already completed March table-top drill, a June 1999 functional drill and an August 1999 full-scale development drill where key employees will test and critique IEC's contingency plans. Two additional internal drills will also be scheduled after the September NERC full-scale drill. IEC also retained an outside third party to assess and evaluate its Year 2000 program and such study did not find any material deficiencies in the program. 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 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. Market Risk Sensitive Instruments and Positions Whiting is exposed to market risk in the pricing of its oil and gas production. Historically, prices received for oil and gas production have been volatile because of seasonal weather patterns, supply and demand factors, transportation availability and price, and general economic conditions. Worldwide political developments have historically also had an impact on oil prices. In the past, IEC generally has not utilized derivative instruments designed to reduce its exposure to these price fluctuations. However, during the first quarter of 1999, IEC entered into a limited amount of commodity derivative transactions to fix the ultimate sales price for approximately two-thirds of Whiting's anticipated gas production for the remainder of 1999. At March 31, 1999, the estimated fair value of the outstanding agreements would have resulted in a settlement payment by IEC of approximately $1.8 million. WP&L settled the weather insurance agreement it entered into for the November 1, 1998, to March 31, 1999, heating season and recognized income of $2.5 million in the first quarter of 1999 relating to such settlement. At March 31, 1999, IEC had an investment in the stock of McLeod, a telecommunications company, valued at $431.3 million (based on a March 31, 1999 closing price of $42.00 per share and compared to a cost basis of $29.1 million). Pursuant to the applicable accounting rules, the carrying value of this investment is adjusted to the 31
estimated fair value each quarter based on the closing price at the end of the quarter. IEC entered into an agreement in November 1998 with McLeod whereby IEC's ability to sell the McLeod stock is subject to various restrictions. IEC has a 50% interest in an electricity trading joint venture with Cargill. Guarantees of approximately $61 million have been issued of which approximately $12 million were outstanding at March 31, 1999. Under the terms of the joint venture agreement, any payments required under the guarantees would be shared by IEC and Cargill on a 50/50 basis to the extent the joint venture is not able to reimburse the guarantor for payments made under the guarantee. Environmental A summary of IEC's environmental issues is included in the Form 10-K filed by IEC, IESU and WP&L for the year ended December 31, 1998. Set forth below are several developments relating to IEC's environmental issues. In October 1998, the EPA issued a final rule requiring 22 states, including Wisconsin, to modify their SIP's 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 a fleet average of .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 will be in the range of $150 to $215 million. Refer to the "Rates and Regulatory Matters" section for a discussion of a filing WP&L made with the PSCW regarding seeking rate recovery of these costs. On February 28, 1998, the EPA issued the final report to Congress on the Study of Hazardous Air Pollutant Emissions from Electric Utility Steam Generating Units regarding hazardous air pollutant emissions from electric utilities (the HAPs report). The HAPs report concluded that mercury emissions from coal fired utilities were a concern. However, the EPA does not believe they have sufficient information regarding mercury emissions from coal fired units. To remedy this lack of information, the EPA required IESU, WP&L, IPC and all other coal fired electric utilities to start collecting information regarding the types and amount of mercury emitted as of January 1, 1999. Although the control of mercury emissions from coal fired plants is uncertain at this time, IEC believes that the capital investments and/or modifications required to control mercury emissions could be significant. Pursuant to an internal review of operations, IPC discovered that Unit No. 6 at its generating facility in Dubuque, Iowa might require a Clean Air Act Acid Rain permit and CEMS. IPC initiated discussions with the regulators and discontinued operation of the unit during resolution of the issues. IPC has resolved the issue by installing a CEMS on the unit and obtaining an Acid Rain permit. Pursuant to its internal review, IPC also identified and disclosed to regulators a potentially similar situation at its Lansing, Iowa generating facility, and will potentially be installing CEMS and applying for Acid Rain permits for these units as well, pending the outcome of regulatory review. 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. Power Supply In July 1998, IEC and Polsky announced an agreement whereby Polsky would build, own and operate a power plant in southeastern Wisconsin capable of producing up to 450 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. During the first quarter of 1999, Polsky changed its name to SkyGen Energy LLC (SkyGen). Recent developments for the 450 MW SkyGen project include an appeal to the EPA Appeals Board on the NOx mitigation. The appeal, if successful, would require selective catalytic reduction to be used for NOx mitigation instead of dry low NOx burners. Accelerated treatment (60 day process) of the appeal is being requested and, if approved, would still allow the facility to meet its in-service date of June 2000. Management currently believes that the EPA will rule in favor of SkyGen. 32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Quantitative and Qualitative Disclosures About Market Risk are reported under Item 2. MD&A "Other Matters - Market Risk Sensitive Instruments and Positions." PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 were filed with the court and oral arguments were held on January 13, 1999. The court issued its decision on March 16, 1999 upholding the SEC's decision in approving the merger and denying the petition for review. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following Exhibits are filed herewith or incorporated herein by reference. Documents indicated by an asterisk (*) are incorporated herein by reference. 3.1* Bylaws of Interstate Energy Corporation, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.2 to IEC's Form 10-K for the year ended December 31, 1998) 3.2* Bylaws of Wisconsin Power and Light Company, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.4 to WP&L's Form 10-K for the year ended December 31, 1998) 3.3* Bylaws of IES Utilities Inc., effective as of January 20, 1999 (incorporated by reference to Exhibit 3.6 to IESU's Form 10-K for the year ended December 31, 1998) 4.1* Rights Agreement, dated January 20, 1999, between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A. (incorporated by reference to Exhibit 4.1 to IEC's Registration Statement on Form 8-A, dated January 20, 1999) 10.1 Restricted Stock Agreement pursuant to the Interstate Energy Corporation Long-Term Equity Incentive Plan 10.2 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and Erroll B. Davis, Jr. 10.3 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of J.E. Hoffman, W.D. Harvey, E.G. Protsch, P.J. Wegner, T.M. Walker and B.J. Swan 10.4 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of T.L. Aller, D.A. Doyle, E.M. Gleason, D.K. Langer, D.L. Mineck, D.R. Sharp and K.K. Zuhlke 10.5 Employment Agreement by and between Interstate Energy Corporation and Erroll B. Davis, Jr., amended and restated as of March 29, 1999 33
27.1 Financial Data Schedule for Interstate Energy Corporation at and for the period ended March 31, 1999 27.2 Financial Data Schedule for IES Utilities Inc. at and for the period ended March 31, 1999 27.3 Financial Data Schedule for Wisconsin Power and Light Company at and for the period ended March 31, 1999 (b) Reports on Form 8-K: Interstate Energy Corporation filed a Current Report on Form 8-K, dated January 20, 1999, reporting (under Item 5) that on January 20, 1999 the Board of Directors of Interstate Energy Corporation adopted a series of amendments to the Bylaws of Interstate Energy Corporation. Interstate Energy Corporation filed a Current Report on Form 8-K, dated January 20, 1999, reporting (under Item 5) that on January 20, 1999, the Board of Directors of Interstate Energy Corporation declared a dividend of one common share purchase right for each outstanding share of common stock, $.01 par value, of Interstate Energy Corporation. The description and terms of the common share purchase rights are set forth in a Rights Agreement dated January 20, 1999 between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A., as Rights Agent. 34
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 17th day of May 1999. INTERSTATE ENERGY CORPORATION Registrant By: /s/ Thomas M. Walker Executive Vice President and Chief Thomas M. Walker Financial 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 Thomas M. Walker Financial 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 Thomas M. Walker Financial Officer (Principal Financial Officer) By: /s/ John E. Ebright Vice President-Controller John E. Ebright (Principal Accounting Officer) 35
EXHIBIT INDEX (a) Exhibits: The following Exhibits are filed herewith or incorporated herein by reference. Documents indicated by an asterisk (*) are incorporated herein by reference. 3.1* Bylaws of Interstate Energy Corporation, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.2 to IEC's Form 10-K for the year ended December 31, 1998) 3.2* Bylaws of Wisconsin Power and Light Company, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.4 to WP&L's Form 10-K for the year ended December 31, 1998) 3.3* Bylaws of IES Utilities Inc., effective as of January 20, 1999 (incorporated by reference to Exhibit 3.6 to IESU's Form 10-K for the year ended December 31, 1998) 4.1* Rights Agreement, dated January 20, 1999, between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A. (incorporated by reference to Exhibit 4.1 to IEC's Registration Statement on Form 8-A, dated January 20, 1999) 10.1 Restricted Stock Agreement pursuant to the Interstate Energy Corporation Long-Term Equity Incentive Plan 10.2 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and Erroll B. Davis, Jr. 10.3 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of J.E. Hoffman, W.D. Harvey, E.G. Protsch, P.J. Wegner, T.M. Walker and B.J. Swan 10.4 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of T.L. Aller, D.A. Doyle, E.M. Gleason, D.K. Langer, D.L. Mineck, D.R. Sharp and K.K. Zuhlke 10.5 Employment Agreement by and between Interstate Energy Corporation and Erroll B. Davis, Jr., amended and restated as of March 29, 1999 27.1 Financial Data Schedule for Interstate Energy Corporation at and for the period ended March 31, 1999 27.2 Financial Data Schedule for IES Utilities Inc. at and for the period ended March 31, 1999 27.3 Financial Data Schedule for Wisconsin Power and Light Company at and for the period ended March 31, 1999