UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
This combined Form 10-Q is separately filed by Alliant Energy Corporation, Interstate Power and Light Company and Wisconsin Power and Light Company. Information contained in the Form 10-Q relating to Interstate Power and Light Company and Wisconsin Power and Light Company is filed by such registrant on its own behalf. Each of Interstate Power and Light Company and Wisconsin Power and Light Company makes no representation as to information relating to registrants other than itself.
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 [ ]
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Certain abbreviations or acronyms used in the text and notes of this combined Form 10-Q are defined below:
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PART I. FINANCIAL INFORMATION
ALLIANT ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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ALLIANT ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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ALLIANT ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
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ALLIANT ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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The interim condensed consolidated financial statements included herein have been prepared by Alliant Energy, 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 GAAP have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements include Alliant Energy and its consolidated subsidiaries (including IP&L, WP&L, Resources and Corporate Services). These financial statements should be read in conjunction with the financial statements and the notes thereto included in Alliant Energy’s Current Report on Form 8-K, dated June 4, 2003, and IP&L’s and WP&L’s latest Annual Report on Form 10-K.
Alliant Energy’s comprehensive income (loss), and the components of other comprehensive income (loss), net of taxes, for the three and nine months ended Sept. 30 were as follows (in thousands):
Certain financial information relating to Alliant Energy’s significant business segments is presented below. Gas revenues included $17 million and $12 million for the three months ended Sept. 30, 2003 and 2002, and $40 million and $22 million for the nine months ended Sept. 30, 2003 and 2002, respectively, for sales to the electric segment. All other intersegment revenues were not material to Alliant Energy’s operations.
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The provisions for income taxes for earnings from continuing operations are based on the estimated annual effective tax rate, which differs from the federal statutory rate of 35% principally due to state income taxes, the impact of foreign income and associated taxes, tax credits, effects of utility rate making and certain non-deductible expenses.
Alliant Energy utilizes derivative instruments to manage its exposures to various market risks as described in Alliant Energy’s Current Report on Form 8-K, dated June 4, 2003, and IP&L’s and WP&L’s Annual Report on Form 10-K for the year ended Dec. 31, 2002. The following information supplements, and should be read in conjunction with, Note 10(a) in Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” in the Form 8-K, dated June 4, 2003.
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A reconciliation of the weighted average common shares outstanding used in the basic and diluted EPS calculation for the three and nine months ended Sept. 30 was as follows:
On Jan. 31, 2002, McLeod filed a pre-negotiated plan of reorganization in a Chapter 11 bankruptcy proceeding and the trading of McLeod’s common stock was suspended by Nasdaq. Consequently, Alliant Energy discontinued accounting for its investment in McLeod under the provisions of SFAS 115 and reduced the cost basis of its investments to the last quoted market price on Jan. 30, 2002. In June 2002, Alliant Energy received from McLeod under its plan of reorganization an initial distribution of approximately 3.3 million shares of new common stock and classified 0.9 million and 2.4 million shares as trading and available-for-sale securities, respectively. With the receipt of the new McLeod common shares and the resumption of trading on Nasdaq, Alliant Energy resumed accounting for its McLeod investments under SFAS 115 and adjusted its cost basis to the quoted market price on the date the shares were received. As a result of these events, Alliant Energy recognized pre-tax impairment charges in the first nine months of 2002 for available-for-sale securities totaling $27.2 million.
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Alliant Energy announced in November 2002 its commitment to pursue the sale of, or other exit strategies for, certain non-regulated businesses in 2003. Alliant Energy has applied the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to certain of its assets which were held for sale. SFAS 144 requires that a long-lived asset classified as held for sale be measured at the lower of its carrying amount or fair value, less costs to sell, and to cease depreciation, depletion and amortization. At Dec. 31, 2002, Alliant Energy’s oil and gas (Whiting), Australian (including Southern Hydro), affordable housing and SmartEnergy businesses were classified as held for sale. In April 2003, Alliant Energy completed the sale of its Australian assets (including Southern Hydro) to New Zealand-based Meridian. The sale enabled Alliant Energy to reduce its indebtedness by approximately $320 million in the second quarter of 2003. Alliant Energy also completed the sale of its affordable housing and SmartEnergy businesses in July 2003 and these sales enabled Alliant Energy to reduce its indebtedness by approximately $110 million. Alliant Energy currently intends to sell 80.1% or more of its interest in WPC in the fourth quarter of 2003 in a proposed IPO and currently plans to divest its remaining interest, subject to market conditions. The operating results for these businesses have been separately classified and reported as discontinued operations in Alliant Energy’s Condensed Consolidated Financial Statements. A summary of the components of discontinued operations in Alliant Energy’s Condensed Consolidated Statements of Income for the three and nine months ended Sept. 30 was as follows (in thousands):
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Alliant Energy continues to evaluate the potential impacts of FIN 46 with respect to its limited off-balance sheet entities that it utilizes for its synthetic lease financings, utility accounts receivable sales program, equity method investments or other entities. In October 2003, the FASB deferred the effective date for applying the provisions of FIN 46 to Dec. 31, 2003 for entities created before Feb. 1, 2003. Alliant Energy currently anticipates the implementation of FIN 46 will not have a material impact on its financial condition or results of operations.
In accordance with the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others,” as of Sept. 30, 2003 and Dec. 31, 2002, Alliant Energy had a guarantee outstanding to support a third-party financing arrangement of approximately $4 million that is not included on Alliant Energy’s Condensed Consolidated Balance Sheets. The guarantee expires in December 2007, the maturity date of the underlying debt. Alliant Energy has also guaranteed the residual value of its synthetic leases totaling $75 million in the aggregate that is not included on Alliant Energy’s Condensed Consolidated Balance Sheets. The guarantees extend through the maturity of each respective underlying lease, the latest of which is April 2015.
Alliant Energy adopted SFAS 143 on Jan. 1, 2003, which provides accounting and disclosure requirements for retirement obligations associated with long-lived assets (AROs). SFAS 143 requires that when an asset is placed in service the present value of retirement costs for which Alliant Energy has a legal obligation must be recorded as liabilities with an equivalent amount added to the asset cost. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity settles the obligation for its recorded amount or incurs a gain or loss.
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Alliant Energy’s natural gas marketing business, NG Energy, is impacted by EITF Issue 02-3, which requires that all sales of energy and the related cost of energy purchased under contracts that meet the definition of energy trading contracts and that are derivatives under SFAS 133, must be reflected on a net basis in the income statement for all periods presented. Under the guidance of EITF Issue 98-10, Alliant Energy had reported its energy trading contracts and related gas in storage at fair market value, and reported related revenues and expenses on a gross basis in the income statement. EITF Issue 02-3 rescinded EITF Issue 98-10 on a prospective basis. Accordingly, any new contracts entered into after Oct. 25, 2002 have been reported on a historical cost basis rather than at fair market value unless the contract meets the definition of a derivative under SFAS 133. Alliant Energy adopted EITF Issue 02-3 on Jan. 1, 2003 for all contracts that were in place and storage gas acquired prior to Oct. 25, 2002, and reclassified prior period trading contracts on a net basis in the income statement. The impact of transitioning from reporting inventory and existing contracts that were not derivatives under SFAS 133 at fair value to historical cost resulted in a cumulative effect charge of $2.1 million (net of a deferred tax benefit of $1.4 million) in the first quarter of 2003. Commencing Jan. 1, 2003, NG Energy has very few contracts that are accounted for as derivatives under SFAS 133 and that are also classified as trading contracts, therefore almost all of its sales of energy and cost of sales in the first nine months of 2003 are reported on a gross basis. Because substantially all of its contracts prior to 2003 were classified as trading contracts under EITF Issue 98-10, primarily all of its sales of energy and cost of sales for the first nine months of 2002 are reported on a net basis. For the three and nine months ended Sept. 30, NG Energy recorded gas revenues and gas costs on the Condensed Consolidated Statements of Income as follows (in millions):
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WP&L has signed a definitive agreement to sell its 41% ownership interest in Kewaunee to Richmond, Va.-based Dominion Resources, Inc. (Dominion). Joint owner of Kewaunee, WPSC, also agreed to sell its 59% ownership interest in Kewaunee to Dominion. Pending various regulatory approvals, including the PSCW and Nuclear Regulatory Commission, the transaction is expected to be completed by Fall 2004. WP&L anticipates that, based on a Nov. 1, 2004 closing date, it will receive approximately $90 million in cash and retain ownership of the trust assets contained in one of the two decommissioning funds it has established to cover the eventual decommissioning of Kewaunee. The fund that will be retained had a pre-tax value of $74.5 million on Sept. 30, 2003. The gross cash proceeds from the sale are expected to slightly exceed WP&L’s carrying value of the assets being sold. WP&L will request deferral of any gain and related costs from the PSCW. Because any gain realized and the retained decommissioning fund will likely be returned to customers in future rate filings, WP&L does not expect this transaction will have a significant impact on its operating results. Dominion will assume responsibility for the eventual decommissioning of Kewaunee and will receive WP&L’s qualified decommissioning trust assets which had a pre-tax value of $165 million on Sept. 30, 2003. At the closing of the sale, WP&L will enter into a long-term purchased-power agreement with Dominion to purchase energy and capacity equivalent to the amounts received had current ownership continued. The purchased-power agreement, which also will require regulatory approval, will extend through 2013 when the plant’s current operating license will expire.
Alliant Energy has fully and unconditionally guaranteed the payment of principal and interest on various debt securities issued by Resources and, as a result, is required to present condensed consolidating financial statements. No Alliant Energy subsidiaries are guarantors of Resources’ debt securities. Alliant Energy’s condensed consolidating financial statements are as follows:
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Alliant Energy Corporation Condensed Consolidating Statements of Income for the Three Months Ended September 30, 2003 and 2002
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Alliant Energy Corporation Condensed Consolidating Statements of Income for the Nine Months Ended September 30, 2003 and 2002
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Alliant Energy Corporation Condensed Consolidating Balance Sheet as of September 30, 2003
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Alliant Energy Corporation Condensed Consolidating Balance Sheet as of December 31, 2002
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Alliant Energy Corporation Condensed Consolidating Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002
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INTERSTATE POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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INTERSTATE POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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INTERSTATE POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
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INTERSTATE POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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The interim condensed consolidated financial statements included herein have been prepared by IP&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 GAAP have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements include IP&L and its consolidated subsidiaries. IP&L is a direct subsidiary of Alliant Energy. These financial statements should be read in conjunction with the financial statements and the notes thereto included in IP&L’s latest Annual Report on Form 10-K.
For the three and nine months ended Sept. 30, 2003 and 2002, IP&L had no other comprehensive income, thus IP&L’s comprehensive income was equal to its earnings available for common stock for all periods.
Certain financial information relating to IP&L’s significant business segments is presented below. Intersegment revenues were not material to IP&L’s operations.
IP&L utilizes several synthetic leases to finance certain utility railcars that were not included on IP&L’s Condensed Consolidated Balance Sheets. IP&L has guaranteed the residual value of its synthetic leases totaling $6.8 million in the aggregate. The guarantees extend through the maturity of each respective underlying lease, the latest of which is January 2009.
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WISCONSIN POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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WISCONSIN POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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WISCONSIN POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
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WISCONSIN POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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The interim condensed 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 GAAP have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements include WP&L and its consolidated subsidiaries. WP&L is a direct subsidiary of Alliant Energy. 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.
WP&L’s comprehensive income, and the components of other comprehensive income (loss), net of taxes, for the three and nine months ended Sept. 30 were as follows (in thousands):
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Certain financial information relating to WP&L’s significant business segments is presented below. Gas revenues included $15 million and $10 million for the three months ended Sept. 30, 2003 and 2002, and $37 million and $18 million for the nine months ended Sept. 30, 2003 and 2002, respectively, for sales to the electric segment. All other intersegment revenues were not material to WP&L’s operations.
WP&L utilizes several synthetic leases to finance certain utility railcars and a utility radio dispatch system that were not included on WP&L’s Condensed Consolidated Balance Sheets. WP&L has guaranteed the residual value of its synthetic leases totaling $13.4 million in the aggregate. The guarantees extend through the maturity of each respective underlying lease, the latest of which is April 2015.
Earnings (losses) on WP&L’s nuclear decommissioning trust funds of $2.0 million and ($0.2) million for the three months ended Sept. 30, 2003 and 2002, respectively, and $5.5 million and $5.1 million for the nine months ended Sept. 30, 2003 and 2002, respectively, are included in “Interest income” in WP&L’s Condensed Consolidated Statements of Income. A corresponding offset is recorded in “Depreciation and amortization” expense.
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The primary first tier subsidiaries of Alliant Energy include: IP&L, WP&L, Resources and Corporate Services. Among various other regulatory constraints, Alliant Energy is operating as a registered public utility holding company subject to the limitations imposed by PUHCA. This MD&A includes information relating to Alliant Energy, IP&L and WP&L (as well as 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 Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements included in this report as well as the financial statements, notes and MD&A included in Alliant Energy’s Current Report on Form 8-K, dated June 4, 2003, and IP&L’s and WP&L’s latest Annual Report on Form 10-K.
Statements contained in this report 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. 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; economic and political conditions in Alliant Energy’s domestic and international service territories; federal, state and international regulatory or governmental actions, including the impact of pending energy-related legislation in Congress and the ability to obtain adequate and timely rate relief to allow for, among other things, the recovery of operating costs and the earning of reasonable rates of return, as well as the payment of expected levels of dividends; Alliant Energy’s ability to complete its proposed divestiture of its oil and gas business at expected values and on expected timelines and its ability to retire debt from the proceeds therefrom on the anticipated timeframes and at the expected cost; unanticipated construction and acquisition expenditures; issues related to the supply of purchased electricity and price thereof, including the ability to recover purchased-power and fuel costs through rates; risks related to the operations of Alliant Energy’s nuclear facilities and unanticipated issues relating to the sale of Alliant Energy’s interest in Kewaunee; costs associated with Alliant Energy’s environmental remediation efforts and with environmental compliance generally; developments that adversely impact Alliant Energy’s ability to implement its strategic plan; improved results from Alliant Energy’s Brazil investments, the ability of Alliant Energy’s Brazil investments to refinance certain debt outstanding and no material adverse changes in the rates allowed by the Brazilian regulators; improved performance by Alliant Energy’s other non-regulated businesses as a whole; no material permanent declines in the fair market value of, or expected cash flows from, Alliant Energy’s investments; Alliant Energy’s ability to continue cost controls and operational efficiencies; Alliant Energy’s ability to identify and successfully complete proposed acquisitions and development projects; access to technological developments; employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages; continued access to the capital markets; inflation rates; and factors listed in “Other Matters — Other Future Considerations.” Alliant Energy assumes no obligation, and disclaims any duty, to update the forward-looking statements in this report.
Alliant Energy continues to make significant progress relating to implementing the plan it outlined in November 2002 to strengthen its financial profile. An update on such progress follows.
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As a result of the progress noted above and the fact that Alliant Energy’s cost control initiatives are expected to be an ongoing part of its business and, hence, will never be fully completed, Alliant Energy believes it has now successfully executed all of its strategic actions announced in November 2002 other than the divestiture of its Whiting business.
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A summary of the regulatory environment is included in Alliant Energy’s Current Report on Form 8-K dated June 4, 2003, and the Form 10-K filed by IP&L and WP&L for the year ended Dec. 31, 2002. Set forth below are several recent developments relating to the regulatory environment.
Alliant Energy’s merger-related price freezes expired in April 2002 in all of its primary domestic utility jurisdictions and it has been addressing the recovery of its utility cost increases through numerous rate filings. Details of these rate cases are as follows (dollars in millions):
Interim rate relief is implemented, subject to refund, pending determination of final rates. The final rate relief granted replaces the amount of interim rate relief granted.
A party to the case representing selected commercial and industrial electric customers has appealed to a court to have the decision in this case remanded back to the PSCW for further consideration on issues of revenue increase amount and rate design. WP&L believes it is unlikely that the final outcome of this appeal will result in any changes to revenues or net income.
WP&L had a rate change moratorium agreement with a wholesale customer group that expired in July 2003. The requested rates went into effect in July 2003, subject to refund. The parties have agreed to a settlement in principle and are currently finalizing the settlement.
Since the final increase is lower than the interim relief granted in October 2002, a refund to customers will be made and is scheduled to be completed in December 2003. IP&L has reserved all amounts related to the refund.
A significant portion of the rate increases included in the previous table reflect the recovery of increased costs incurred by IP&L and WP&L, or costs they expect to incur, thus the increase in revenues related to these rate increases have not or are not expected to result in a corresponding increase in income. IP&L expects to file for an electric rate increase in 2004 which will include costs associated with the $400 million 500-MW combined cycle natural gas plant currently under construction in Iowa.
WP&L’s retail electric rates are based on annual forecasted fuel and purchased-power costs. In July 2003, WP&L completed an $8 million refund to its retail electric customers due to the overcollection of past fuel and purchased-power costs. The impact of such refund had no material impact on WP&L’s results of operations given reserves for such refund that it had previously recorded.
In 2002, IP&L filed with the IRS for a change in method of accounting for tax purposes for 1987 through 2001 that would allow a current deduction related to mixed service costs. Such costs had previously been capitalized and depreciated for tax purposes over the appropriate tax lives. This change would create a significant current tax benefit that has not been reflected in IP&L’s results of operations pending a decision from the IUB on the required rate making treatment of the benefit. In its April 2003 order, the IUB approved IP&L’s proposed accounting treatment to defer the tax savings resulting from the change of accounting method until the IRS audit on this issue is complete. The rate making impact will be addressed once the issue is resolved with the IRS, which is expected to occur in 2004. There would be no material negative impact on IP&L’s results of operations or financial position should the IRS reject IP&L’s proposal.
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In 2002, IP&L filed for IUB and MPUC approval to transfer its transmission assets to TRANSLink, a proposed independent for-profit, transmission-only company. In June 2003, the IUB dismissed, without prejudice, IP&L’s plan to contribute and transfer transmission assets of 69 KV and greater to TRANSLink. However, the IUB encouraged the participating companies to revise and refile their reorganization applications. Subsequent to an IUB order, IP&L revised its MPUC filing to only seek authorization to transfer functional control of its transmission assets to TRANSLink. In a June 2003 hearing, the MPUC deferred its decision and indicated IP&L could submit a supplemental or revised application to explain recent changes to the proposal and to respond to a number of issues and questions posed by the MPUC advisory staff and other parties. On Nov. 3, 2003, IP&L submitted a status report to the MPUC indicating that IP&L and the other TRANSLink participants are currently evaluating their options with respect to TRANSLink and would provide further details within 30 days.
Energy-related legislation is currently pending in the U.S. Congress that, among other proposals, would repeal PUHCA. However, it is uncertain when or whether such legislation will be enacted or what impact it would have on Alliant Energy.
Unless otherwise noted, all “per share” references in the Results of Operations section refer to earnings perdiluted share.
Overview — Third Quarter Results — Alliant Energy’s net income (loss) and EPS for the third quarter were as follows (dollars in millions; totals may not foot due to rounding):
* The 2003 EPS amounts have been computed based on the average shares outstanding in 2002. Alliant Energy reports the dilutive impact of increased shares outstanding as a separate earnings variance item if it is material.
The significant increase in utility earnings from continuing operations was largely due to higher electric and gas margins which were partially offset by higher utility operating expenses. Alliant Energy also realized a similar improvement in its non-regulated results from continuing operations which was primarily due to a $0.18 per share improvement from its International business unit and the absence of asset valuation charges in the third quarter of 2003 compared with $0.06 per share recorded in the same period in 2002.
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Domestic Electric Utility Margins — Electric margins and MWh sales for Alliant Energy for the three months ended Sept. 30 were as follows (in thousands):
Electric margins and MWh sales for Alliant Energy for the nine months ended Sept. 30 were as follows (in thousands):
Electric margin increased $51.2 million, or 15%, and $82.2 million, or 10%, for the three- and nine-month periods, respectively, primarily related to the impact of various rate increases implemented during the last 12 months, including increased revenues to recover a significant portion of higher utility operating expenses, the impact of WP&L implementing seasonal rates in 2003 for the first time and increased sales resulting from continued modest retail customer growth. Lower purchased-power and fuel costs impacting margin also contributed to the three-month increase. These items were partially offset by the impact of milder weather conditions in the second and third quarters of 2003 compared to the same periods in 2002.
In April 2003, WP&L implemented seasonal electric rates that resulted in higher rates for the period from June 1 through Sept. 30 and lower rates in all other periods. As a result, total annual revenues are not expected to be impacted significantly. However, WP&L expects that, going forward, each year’s second and third quarter revenues will be higher and first and fourth quarter revenues will be lower than those that would be realized without seasonal rates. Such seasonal rates will impact quarterly comparisons through the first quarter of 2004. The impact of seasonal rates increased electric margins by approximately $13 million for the three-month period in 2003 compared to 2002 when no seasonal rates were in effect. WP&L expects electric margins in the fourth quarter of 2003 will be approximately $7 million lower than it would have been without seasonal rates.
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Gas Utility Margins —Gas margins and Dth sales for Alliant Energy for the three months ended Sept. 30 were as follows (in thousands):
Gas margins and Dth sales for Alliant Energy for the nine months ended Sept. 30 were as follows (in thousands):
Gas revenues and cost of utility gas sold increased significantly for the three- and nine-month periods due to the large increase in natural gas prices from the same periods in 2002. Due to Alliant Energy’s rate recovery mechanisms for gas costs, these increases alone had little impact on gas margin. Gas margin increased $4.7 million, or 27%, and $29.8 million, or 34%, for the three- and nine-month periods, respectively, primarily due to the impact of several rate increases implemented during the last 12 months. Also contributing to the nine-month increase were increased sales, which were largely due to more favorable weather conditions in the first quarter of 2003 compared to the same period in 2002 and continued modest retail customer growth, and improved performance related to WP&L’s performance-based commodity cost recovery program (benefits are shared by ratepayers and shareowners).
Refer to “Rates and Regulatory Matters” for discussion of various electric and gas rate filings.
Non-regulated and Other Revenues — Details regarding Alliant Energy’s non-regulated and other revenues for the three and nine months ended Sept. 30 were as follows (in thousands):
The increased Integrated Services revenues for both periods were primarily due to increased gas revenues at Alliant Energy’s natural gas marketing business, NG Energy, largely due to higher natural gas prices and increased revenues at Alliant Energy’s environmental consulting business. Lower/higher natural gas volumes at NG Energy also impacted the three/nine month variances, respectively. Refer to Note 12 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for further discussion of NG Energy. The increased International revenues for both periods were primarily due to increased sales due to the acquisition of additional combined heat and power facilities in China in the fourth quarter of 2002 and the second quarter of 2003. The increased Other revenues for both periods was primarily due to generation from a 309-MW natural-gas fired power plant purchased by Resources in Wisconsin in February 2003.
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Other Operating Expenses— Other operation and maintenance expenses for the three and nine months ended Sept. 30 were as follows (in thousands):
The utility increase for both periods was primarily due to increases in the amortization of deferred costs that are now being recovered in rates and higher administrative and general expenses (including, among others, employee benefits, uncollectible customer accounts and insurance). The nine-month increase was also impacted by a planned refueling outage at Kewaunee in the second quarter of 2003, partially offset by lower electric transmission and distribution expenses. A significant portion of these cost increases are being recovered as a result of the rate increases implemented during the last 12 months. Refer to “Rates and Regulatory Matters” for additional information. The Integrated Services, International and Other increases were largely driven by the same factors impacting the revenue variances.
Depreciation and amortization expense increased $9.1 million and $20.6 million for the three- and nine-month periods, respectively, primarily due to utility property additions, acquisitions at the non-regulated businesses and higher contributions to IP&L’s nuclear decommissioning trust fund.
Taxes other than income taxes decreased $5.3 million and $11.4 million for the three- and nine-month periods, respectively, largely due to decreased property taxes. Refer to “IP&L Results of Operations — Other Operating Expenses” for further discussion.
Interest Expense and Other— Interest expense increased $4.3 million and $25.5 million for the three- and nine-month periods, respectively, primarily due to higher average borrowing rates at Resources due to an increase in the mix of long- versus short-term debt outstanding. Higher credit facility fees at Resources and higher interest expense at the parent company also contributed to the nine-month increase.
Equity loss (income) from Alliant Energy’s unconsolidated investments for the three and nine months ended Sept. 30 was as follows (in thousands):
Equity income from unconsolidated investments increased $18.1 million and $26.7 million for the three- and nine-month periods, respectively. The increased earnings for New Zealand for both periods was primarily due to higher energy prices. The improved results for Brazil for both periods was primarily due to: rate increases implemented at all five of the Brazilian operating companies throughout 2003; 3.2% and 8.6% increases in electricity sales volumes for the three- and nine-month periods; a charge in the third quarter of 2002 resulting from the receipt of a regulatory order; and foreign currency transaction losses of $4.9 million and $7.7 million for the three and nine months ended Sept. 30, 2002, respectively, related to approximately $40 million in debt at one of the Brazilian operating companies. The nine-month Brazil increase was also impacted by a second quarter 2002 charge of $3.1 million related to the recovery of the impacts of rationing and other prior costs. In the second quarter of 2002, Synfuel, a direct subsidiary of Resources, purchased an equity interest in an entity that owns a synthetic fuel processing facility which generates operating losses at its fuel processing facility. These losses are more than offset by tax credits and the tax benefit of the losses the project generates. All tax benefits are included in “Income taxes” in Alliant Energy’s Condensed Consolidated Statements of Income. Refer to “Other Matters — Other Future Considerations” for further discussion of the tax credits associated with the Synfuel investment.
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AFUDC increased $3.9 million and $9.0 million for the three- and nine-month periods, respectively, primarily due to increased construction expenditures at IP&L related to the $400 million generating facility it is constructing in Iowa under its Power Iowa program.
Preferred dividend requirements of subsidiaries increased $2.5 million and $7.2 million for the three- and nine-month periods, respectively, due to an increase in the aggregate amount of preferred stock outstanding at IP&L and a higher dividend rate.
Refer to Note 7 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for discussion of the asset valuation charge recorded by Alliant Energy in the first and second quarters of 2002 related to its McLeod available-for-sale securities.
Miscellaneous, net income increased $8.6 million and $30.5 million for the three- and nine-month periods, respectively, primarily due to the recording of pre-tax asset valuation charges in 2002 related to Alliant Energy’s investments in Energy Technologies (Q1 $5.0 million and Q3 $5.3 million); Enermetrix (Q1 $8.5 million); a loan receivable from a Mexican development company in connection with development of a resort community in Mexico (Q2 $6.9 million); and $2.6 million of charges recorded at Alliant Energy’s Integrated Services business unit in the third quarter of 2002. Also contributing to the nine-month increase were improvements in the pre-tax, non-cash SFAS 133 valuation adjustments related to the derivative component of Alliant Energy’s exchangeable senior notes and McLeod trading securities.
Income Taxes — The effective income tax rates were 32.0% and 31.3% for the three- and nine-month periods ended Sept. 30, 2003, respectively, compared with 36.5% and 47.4% for the same periods last year. The effective tax rates for both periods in 2003 were lower than the statutory federal income tax rate of 35% largely due to the impact of foreign operations and tax credits, which were partially offset by the effects of utility rate making and the impact of state taxes. The effective tax rates for both periods of 2003 were lower than the rates for the same periods in 2002 primarily due to the impact of income from foreign operations.
Income (Loss) from Discontinued Operations — Income from discontinued operations increased $19.9 million and $1.8 million for the three- and nine-month periods, respectively. The three-month increase was primarily due to the recording of a non-cash SFAS 133 loss in the third quarter of 2002 related to the valuation of electricity derivatives at Southern Hydro and the impact of discontinuing depreciation, depletion and amortization of Alliant Energy’s assets held for sale in 2003. The nine-month increase was primarily due to the after-tax gain on the sale of Alliant Energy’s Australian business of $41 million recorded in the second quarter of 2003, the impact of discontinuing depreciation, depletion and amortization of Alliant Energy’s assets held for sale in 2003 and higher oil and gas prices at Whiting. The nine-month increase was largely offset by the recording of after-tax losses of $46 million and $9 million on the sale of Alliant Energy’s affordable housing and SmartEnergy businesses, respectively. These losses include valuation adjustments and selling costs recorded in the first and second quarters of 2003. Refer to Note 8 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for further discussion of Alliant Energy’s discontinued operations.
Cumulative Effect of Changes in Accounting Principles — In the first quarter of 2003, Alliant Energy recorded after-tax charges of $4 million and $2 million for the cumulative effect of changes in accounting principles related to the adoption on Jan. 1, 2003 of SFAS 143 and EITF Issue 02-3 within its oil and gas and Integrated Services businesses, respectively. The oil and gas business has been classified as held for sale. Refer to Notes 11 and 12 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for further information.
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Overview — Third Quarter Results — Earnings available for common stock decreased $6.5 million, primarily due to increased operating expenses and preferred dividend requirements, partially offset by higher electric margins.
Electric Utility Margins— Electric margins and MWh sales for IP&L for the three months ended Sept. 30 were as follows (in thousands):
Electric margins and MWh sales for IP&L for the nine months ended Sept. 30 were as follows (in thousands):
Electric margin increased $5.4 million, or 2%, and $20.0 million, or 4%, for the three- and nine-month periods, respectively, primarily due to the impact of retail rate increases implemented during the last 12 months, including increased revenues to recover a significant portion of IP&L’s increased operating expenses, lower purchased-power capacity costs, increased energy conservation revenues of $4 million for both the three- and nine-month periods, and continued modest retail customer growth. These items were partially offset by the impact of milder weather conditions in the second and third quarters of 2003 compared to the same periods in 2002. The increased energy conservation revenues were offset by higher energy conservation expenses.
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Gas Utility Margins— Gas margins and Dth sales for IP&L for the three months ended Sept. 30 were as follows (in thousands):
Gas margins and Dth sales for IP&L for the nine months ended Sept. 30 were as follows (in thousands):
Gas revenues and cost of gas sold increased significantly for the three- and nine-month periods due to the large increase in natural gas prices from the same periods in 2002. Such increases alone had no impact on IP&L’s gas margin given its rate recovery mechanism for gas costs. Gas margin increased $0.8 million, or 9%, and $10.5 million, or 22%, for the three- and nine-month periods, respectively, primarily due to the impact of a retail rate increase implemented during the last 12 months. Also contributing to the nine-month increase were increased sales, primarily due to more favorable weather conditions in the first quarter of 2003 compared to the same period in 2002.
Refer to “Rates and Regulatory Matters” for discussion of IP&L’s electric and gas rate filings.
Other Operating Expenses— Other operation and maintenance expenses increased $16.0 million and $24.9 million for the three- and nine-month periods, respectively, primarily due to increased administrative and general expenses including, among others, employee benefits, energy conservation, uncollectible customer accounts and insurance expenses. These items were partially offset by decreased electric transmission and distribution expenses.
Depreciation and amortization expense increased $4.8 million and $13.7 million for the three- and nine-month periods, respectively, primarily due to increased amortization of software, increased contributions to the nuclear decommissioning trust fund and property additions.
Taxes other than income taxes decreased $4.5 million and $9.4 million for the three- and nine-month periods, respectively, largely due to decreased property taxes, primarily related to an April 2003 property tax settlement.
IP&L appealed to the Iowa State Board of Tax Review, an agency of the State of Iowa, regarding assessments of Iowa property tax made by the Director of the Iowa Department of Revenue and Finance. The appeals involved assessments for the years 1994 through 1998 and sought reduction of the assessments reflecting the true value of IP&L’s operating property. In April 2003, IP&L settled this matter with the Iowa Department of Revenue and Finance. IP&L expects to realize reductions in property tax expense of $7.7 million, $5.1 million, $3.6 million and $2.1 million in 2003, 2004, 2005, and 2006 and thereafter, respectively, in comparison to what property tax expense would have been without the settlement. The impact of the settlement on ratepayers will be addressed in future ratemaking proceedings.
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Interest Expense and Other— AFUDC increased $3.7 million and $7.3 million for the three- and nine-month periods, respectively, due to increased construction expenditures related to the $400 million generating facility being constructed in Iowa under IP&L’s Power Iowa program.
Miscellaneous, net income decreased $4.9 million for the nine-month period, primarily due to lower income from sales of non-commodity products and services.
Income Taxes — The effective income tax rates were 45.4% and 43.0% for the three- and nine-month periods ended Sept. 30, 2003, respectively, compared with 46.3% and 43.0% for the same periods last year.
Preferred Dividend Requirements — Preferred dividend requirements increased $2.5 million and $7.2 million for the three- and nine-month periods, respectively, due to an increase in the aggregate amount of preferred stock outstanding and a higher dividend rate.
Overview — Third Quarter Results — Earnings available for common stock increased $28.3 million, primarily due to higher electric and gas margins, partially offset by increased operating expenses.
Electric Utility Margins— Electric margins and MWh sales for WP&L for the three months ended Sept. 30 were as follows (in thousands):
Electric margins and MWh sales for WP&L for the nine months ended Sept. 30 were as follows (in thousands):
Electric margin increased $45.8 million, or 40%, and $62.2 million, or 20%, for the three- and nine-month periods, respectively, primarily due to the implementation of rate increases during the last 12 months, including increased revenues to recover a significant portion of WP&L’s increased operating expenses, the impact of WP&L implementing seasonal rates in 2003 for the first time, higher sales for resale and increased sales resulting from continued modest retail customer growth. Also contributing to the three-month increase were lower purchased-power and fuel costs impacting margin. These items were partially offset by the impact of milder weather conditions in the second and third quarters of 2003 compared with the same periods in 2002.
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In April 2003, WP&L implemented seasonal electric rates that result in higher rates for the period from June 1 through Sept. 30 and lower rates in all other periods. As a result, total annual revenues are not expected to be impacted significantly. However, WP&L expects that, going forward, each year’s second and third quarter revenues will be higher and first and fourth quarter revenues will be lower than those that would be realized without seasonal rates. Such seasonal rates will impact quarterly comparisons through the first quarter of 2004. The impact of seasonal rates increased electric margins by approximately $13 million for the three-month period in 2003 compared to 2002 when no seasonal rates were in effect. WP&L expects electric margins in the fourth quarter of 2003 will be approximately $7 million lower than it would have been without seasonal rates.
Gas Utility Margins— Gas margins and Dth sales for WP&L for the three months ended Sept. 30 were as follows (in thousands):
Gas margins and Dth sales for WP&L for the nine months ended Sept. 30 were as follows (in thousands):
Gas revenues and cost of gas sold increased significantly for the three- and nine-month periods due to the large increase in natural gas prices from the same periods in 2002. Due to WP&L’s rate recovery mechanism for gas costs, these increases alone had little impact on gas margin. Gas margin increased $3.9 million, or 49%, and $19.3 million, or 48%, for the three- and nine-month periods, respectively, primarily due to the implementation of rate increases during the last 12 months. Also contributing to the nine-month increase were improved performance from WP&L’s performance-based commodity cost recovery program (benefits are shared by ratepayers and shareowners) and increased sales largely due to more favorable weather conditions in the first quarter of 2003 compared to the same period in 2002.
Refer to “Rates and Regulatory Matters” for discussion of WP&L’s electric and gas rate filings.
Other Operating Expenses— Other operation and maintenance expenses increased $8.8 million and $44.9 million for the three- and nine-month periods, respectively, primarily due to increases in the amortization of deferred costs that are now being recovered in rates and administrative and general expenses (including, among others, employee benefits, uncollectible customer accounts and insurance). Also contributing to the nine-month increase were the impact of a planned refueling outage at Kewaunee in the second quarter of 2003. A significant portion of these cost increases are being recovered as a result of the rate increases implemented during the last 12 months.
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Depreciation and amortization expense increased $2.1 million and $0.9 million for the three- and nine-month periods, respectively, primarily due to property additions and increased earnings on the nuclear decommissioning trust fund. These items were partially offset by lower software amortization. The accounting for earnings on the nuclear decommissioning trust fund results in no net income impact. Interest income increases for earnings on the trust fund and the corresponding offset is recorded through depreciation expense.
Income Taxes — The effective income tax rates were 36.6% and 35.9% for the three- and nine-month periods ended Sept. 30, 2003, respectively, compared with 36.9% and 36.6%, respectively, for the same periods last year.
Cash Flows for the Nine-Month Periods — Selected information from Alliant Energy’s, IP&L’s and WP&L’s Condensed Consolidated Statements of Cash Flows for the nine months ended Sept. 30 was as follows (in thousands):
Alliant Energy’s cash flows from operating activities decreased $192 million primarily due to changes in the levels of utility accounts receivable sold; cash flows from financing activities increased $151 million primarily due to proceeds from the July 2003 common equity offering and lower common stock dividends due to the dividend reduction implemented in the first quarter of 2003, partially offset by the changes in the amounts of debt issued and retired; cash flows used for investing activities decreased $84 million primarily due to proceeds received from the sale of Alliant Energy’s Australian business in April 2003, partially offset by construction and acquisition expenditures associated with the construction of the natural gas plant in Iowa as part of IP&L’s Power Iowa program and the 2003 acquisition by Resources of a natural gas-fired power plant in Wisconsin. IP&L’s cash flows from operating activities decreased $24 million primarily due to a planned refueling outage at DAEC in 2003; cash flows from financing activities increased $243 million primarily due to the issuance of senior debentures and preferred stock in 2003, a higher capital contribution from Alliant Energy in 2003 compared to 2002 and the redemption of preferred stock in 2002; and cash flows used for investing activities increased $225 million primarily due to increased construction and acquisition expenditures associated with the construction of the Power Iowa natural gas plant. WP&L’s cash flows from operating activities decreased $142 million primarily due to changes in the levels of utility accounts receivable sold; and cash flows from financing activities increased $104 million primarily due to a capital contribution of $200 million from Alliant Energy, partially offset by changes in the amount of debt issued and retired.
Common Equity— Refer to “Strategic Actions” for discussion of a common equity offering completed by Alliant Energy in July 2003.
Preferred Stock —In September 2003, IP&L issued 1.6 million shares of 7.10% cumulative preferred stock at a price to the public of $25.00 per share in a public offering and received proceeds of approximately $38.7 million.
Debt — Alliant Energy and its subsidiaries are party to various credit facilities and other borrowing arrangements. In September 2003, Alliant Energy completed the syndication of three 364-day revolving credit facilities totaling $650 million ($200 million for Alliant Energy at the parent company level, $250 million for IP&L and $200 million for WP&L), available for direct borrowing or to support commercial paper. These new facilities replaced the former facilities totaling $782 million ($432 million for Alliant Energy at the parent company level, $200 million for IP&L and $150 million for WP&L), which were to expire in October 2003. At Sept. 30, 2003, the unused capacity under these facilities was $505 million. Alliant Energy’s, IP&L’s and WP&L’s credit facility agreements contain various covenants, including the following:
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Alliant Energy is also subject to a PUHCA requirement whereby Alliant Energy’s common equity balance must be at least 30% of its total consolidated capitalization, including short-term debt. Alliant Energy’s common equity ratio as of Sept. 30, 2003, as computed under such requirement, was 43.4%.
Information regarding commercial paper at Sept. 30, 2003 was as follows (dollars in millions):
Alliant Energy had no borrowings outstanding under its bank facilities at Sept. 30, 2003.
In September 2003, IP&L issued $100 million of 5.875% unsecured senior debentures due 2018. IP&L ultimately used the majority of the net proceeds in October 2003 to redeem $27.5 million of its 7.25% first mortgage bonds, $20 million of its 8.625% first mortgage bonds and $50 million of its 7.875% subordinated deferrable interest debentures. In October 2003, IP&L completed a $100 million issuance of 6.45% unsecured senior debentures due 2033. The majority of the net proceeds will be used later in 2003 to redeem $94.0 million of its 7.625% first mortgage bonds.
Refer to “Strategic Actions” for information on debt reduction during 2003 related to steps Alliant Energy has taken to implement the plan it outlined in November 2002 to strengthen its financial profile.
Off-Balance Sheet Arrangements — A summary of Alliant Energy’s off-balance sheet arrangements is included in Alliant Energy’s Current Report on Form 8-K, dated June 4, 2003, and the Form 10-K filed by IP&L and WP&L for the year ended Dec. 31, 2002 and have not changed materially from those reported in such filings.
Environmental — A summary of Alliant Energy’s environmental matters is included in Alliant Energy’s Current Report on Form 8-K, dated June 4, 2003, and the Form 10-K filed by IP&L and WP&L for the year ended Dec. 31, 2002 and have not changed materially from those reported in such filings.
Construction and Acquisition Expenditures — In February 2003, Resources announced the purchase of a 309-MW, non-regulated, natural gas-fired power plant in Wisconsin for $109 million, which Resources financed with a $73 million 8-year secured credit facility ($57 million of borrowings were outstanding at Sept. 30, 2003), which is non-recourse to Alliant Energy. The entire power output of the facility is sold under contract to Milwaukee-based We Energies through June 2008.
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Market Risk Sensitive Instruments and Positions — Alliant Energy’s primary market risk exposures are associated with interest rates, commodity prices, equity prices and currency exchange rates. Alliant Energy has risk management policies to monitor and assist in controlling these market risks and uses derivative instruments to manage some of the exposures. A summary of Alliant Energy’s market risks is included in Alliant Energy’s Current Report on Form 8-K, dated June 4, 2003, and IP&L’s and WP&L’s Form 10-K for the year ended Dec. 31, 2002 and have not changed materially from those reported in such filings, except as described below.
Currency Risk — Alliant Energy has investments in various countries where the net investments are not hedged, including Brazil, China, New Zealand and Canada. As a result, these investments are subject to currency exchange risk with fluctuations in currency exchange rates. At Sept. 30, 2003, Alliant Energy had a cumulative foreign currency translation loss, net of any tax benefits realized, of $99 million, which related to decreases in value of the Brazil real of $100 million and increases in value of the New Zealand dollar of $1 million, all in relation to the U.S. dollar. This loss is recorded in “Accumulated other comprehensive loss” on Alliant Energy’s Condensed Consolidated Balance Sheets. Based on Alliant Energy’s investments at Sept. 30, 2003, a 10% sustained increase/decrease over the next 12 months in the foreign exchange rates of Brazil, China, New Zealand and Canada would result in a corresponding increase/decrease in the cumulative foreign currency translation loss of $54 million. Alliant Energy’s equity income (loss) from its foreign investments is also impacted by fluctuations in currency exchange rates.
Alliant Energy also has currency exchange risk associated with approximately $39 million at Sept. 30, 2003 of debt outstanding at one of the Brazilian operating companies. For the three and nine months ended Sept. 30, 2003, Alliant Energy recorded equity losses of $0.6 million and equity income of $2.4 million, respectively, and for the same periods in 2002, Alliant Energy recorded equity losses of $4.9 million and $7.7 million, respectively, related to its share of the foreign currency transaction gains/losses on such debt. Based on the loan balance and currency rates at Sept. 30, 2003, a 10% change in the currency rates would result in a $2.9 million pre-tax increase/decrease in net income.
In addition, Alliant Energy has currency exchange risk associated with approximately $23 million of payables at one of its Canadian operating companies. For the three and nine months ended Sept. 30, 2003, Alliant Energy recorded pre-tax income of $0.1 million and $2.2 million, respectively, related to the foreign currency transaction gains/losses on such payable. Based on the payables balance and currency rates at Sept. 30, 2003, a 10% change in the currency rates would result in a $2.3 million pre-tax increase/decrease in net income.
Accounting Pronouncements— In April 2003, the FASB issued SFAS 149, “Amendment of SFAS 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133 and when a derivative contains a financing component that warrants special reporting in the statement of cash flows, as well as amending certain other existing pronouncements. Also, energy contracts that are subject to unplanned netting will generally be accounted for as a derivative. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except for certain implementation issues and certain provisions of forward purchase and sale contracts and for hedging relationships designated after June 30, 2003. As a result of the implementation of SFAS 149, Alliant Energy determined that certain energy contracts entered into during the quarter met the definition of a derivative. Derivatives were reported at fair market value at Sept. 30, 2003, with no material impact on Alliant Energy’s financial condition or results of operations. Although SFAS 149 is expected to result in more energy contracts in Alliant Energy’s regulated operations qualifying as derivatives, changes in the fair value of these derivatives are generally reported as changes in regulatory assets and liabilities rather than being reported currently in earnings, based on the regulatory treatment. SFAS 149 will result in more earnings volatility at NG Energy given the majority of its derivatives will not qualify for hedge accounting.
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In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which requires an issuer to classify outstanding free-standing financial instruments within its scope as a liability on its balance sheets even though the instruments have characteristics of equity. Alliant Energy adopted SFAS 150 on July 1, 2003 with no material impact on Alliant Energy’s financial condition or results of operations. Alliant Energy continues to evaluate the implications of FASB Staff Position No. FAS 150-3, issued in November 2003, which defers the effective date for applying the provisions of SFAS 150 for certain mandatorily redeemable non-controlling interests.
Critical Accounting Policies — A summary of Alliant Energy’s critical accounting policies is included in Alliant Energy’s Current Report on Form 8-K, dated June 4, 2003, and IP&L’s and WP&L’s Form 10-K for the year ended Dec. 31, 2002 and have not changed materially from those reported in such filings.
Other Future Considerations— In addition to items discussed earlier in MD&A, the following items could impact Alliant Energy’s future financial condition or results of operations:
Alliant Energy holds unconsolidated investments in certain Brazilian electric utility companies. The Brazilian utilities are negotiating with creditors to restructure and convert approximately $245 million, as converted from local currency to U.S. dollars, of short-and long-term debt currently outstanding into new long-term debentures and other longer- term debt. In June 2003, Standard and Poor’s issued a formal rating on the debentures of ‘brBBB+’ with a negative outlook. Approximately half of the amount being refinanced has closed and the other half has been approved by the lending bank, is now in the documentation phase and is expected to be completed in the fourth quarter of 2003. In addition, other negotiations to restructure a loan of approximately $39 million are currently in progress and are expected to be completed in the first quarter of 2004. If the refinancings are not completed as anticipated and the Brazilian utilities are unable to extend or repay certain obligations outstanding, then the liquidity position of the Brazilian utilities may be significantly adversely affected. In such an event, Alliant Energy is not required to invest any additional capital in Brazil but it could lead to material asset valuation charges as relates to Alliant Energy’s investments in its Brazilian utilities.
In June 2003, the IRS announced it was reviewing the scientific validity of test procedures and results used by companies claiming tax credits for producing synthetic fuels from coal and may withdraw such credits for operations that fail to meet federal standards which require, among other things, a significant chemical change to occur in the process. In October 2003, the IRS stated this review was complete and that the test procedures and results used by taxpayers for chemical change are scientifically valid if the procedures are applied in a consistent and unbiased manner. Since the second quarter of 2002, Alliant Energy has been an investor in a synthetic fuel facility and continued to record these tax credits as of Sept. 30, 2003. Currently, the IRS is auditing this facility to determine if its procedures are applied in a consistent and unbiased manner. Alliant Energy expects the audit to be completed by Dec. 31, 2003 and cannot predict its outcome. The synthetic fuel facility Alliant Energy partially owns previously received a private letter ruling from the IRS, which states that based on the facts submitted, a significant chemical change was achieved in its process. Alliant Energy currently estimates its tax credits for producing synthetic fuels to be approximately $23 million and $15 million for 2003 and 2002, respectively.
Alliant Energy’s qualified pension and other postretirement expenses for 2004 are currently expected to be comparable to the level of expenses in 2003. Alliant Energy currently estimates, based on the accumulated benefit obligation, that as of Sept. 30, 2003, its qualified pension plans were underfunded by approximately $94 million (85% funded). Alliant Energy does not anticipate making any additional contributions to its qualified pension plans in the fourth quarter of 2003 and currently anticipates making contributions of approximately $60 million in 2004.
Refer to Note 13 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for information on WP&L’s definitive agreement to sell its 41% ownership interest in Kewaunee to Dominion.
Quantitative and Qualitative Disclosures About Market Risk are reported under Item 2 MD&A “Other Matters — Market Risk Sensitive Instruments and Positions.”
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Alliant Energy’s, IP&L’s and WP&L’s management evaluated, with the participation of each of Alliant Energy’s, IP&L’s and WP&L’s Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Disclosure Committee, the effectiveness of the design and operation of Alliant Energy’s, IP&L’s and WP&L’s disclosure controls and procedures as of the end of the quarter ended Sept. 30, 2003 pursuant to the requirements of the Securities Exchange Act of 1934, as amended. Based on those evaluations, the CEO and the CFO concluded that Alliant Energy’s, IP&L’s and WP&L’s disclosure controls and procedures were effective as of the end of the quarter ended Sept. 30, 2003.
There was no change in Alliant Energy’s, IP&L’s and WP&L’s internal control over financial reporting that occurred during the quarter ended Sept. 30, 2003 that has materially affected, or is reasonably likely to materially affect, Alliant Energy’s, IP&L’s or WP&L’s internal control over financial reporting.
Alliant Energy On April 17, 2003, a purported class action shareowner lawsuit was filed against Alliant Energy, Erroll B. Davis, Jr., Thomas M. Walker and John E. Kratchmer in the U.S. District Court for the Western District of Wisconsin as Case No. 03-C-0191. Several substantially similar cases were subsequently filed in the same court and were consolidated into one action. The actions were allegedly brought on behalf of purchasers of Alliant Energy securities from Jan. 29, 2002 through July 18, 2002. The amended consolidated complaint alleged that the defendants made false and misleading statements in relation to Alliant Energy’s expected performance of its various non-regulated businesses. On Aug. 13, 2003, the court, acting upon a motion filed by the defendants, dismissed the action without prejudice. On Sept. 22, 2003, upon stipulation of the parties, the court entered a new order changing the dismissal of the case from without prejudice to with prejudice. Accordingly, this lawsuit has been concluded.
In October 2000, Alliant Energy and WP&L filed a federal lawsuit seeking declaratory relief regarding whether certain provisions of WUHCA are unconstitutional as a violation of the interstate commerce and equal protection provisions of the U.S. Constitution. Alliant Energy and WP&L are challenging the provisions of WUHCA which restrict ownership in utility holding companies, limit the investments those companies can make and place significant restrictions on companies that invest in Wisconsin utility holding companies. Alliant Energy and WP&L also requested that the court consider the constitutionality of issues related to the asset cap on non-utility investments imposed by WUHCA. The district court ultimately dismissed the case on summary judgment grounds in May 2002. Alliant Energy and WP&L appealed the district court’s decision to the 7th Circuit Court of Appeals in June 2002. In May 2003, the 7th Circuit ruled that it is unconstitutional to require public utility holding companies with Wisconsin utility subsidiaries to be incorporated in the state of Wisconsin. The remaining WUHCA provisions that Alliant Energy challenged were upheld as constitutional. Alliant Energy filed a petition for rehearing with the 7th Circuit regarding those provisions that were upheld, which was denied in July 2003. Alliant Energy has filed a petition with the U.S. Supreme Court asking it to review the case.
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Pursuant to the requirements of the Securities Exchange Act of 1934, Alliant Energy Corporation, Interstate Power and Light Company and Wisconsin Power and Light Company have each duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 13th day of November 2003.
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