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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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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ALLIANT ENERGY CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
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ALLIANT ENERGY CORPORATIONCONDENSED 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 IPL, WPL, 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, IPL’s and WPL’s latest combined Annual Report on Form 10-K.
Alliant Energy’s comprehensive income, and the components of other comprehensive income (loss), net of taxes, for the three and nine months ended Sep. 30 were as follows (in thousands):
Certain financial information relating to Alliant Energy’s business segments is as follows. Gas revenues included $4.2 million and $16.8 million for the three months ended Sep. 30, 2004 and 2003, and $20.1 million and $39.9 million for the nine months ended Sep. 30, 2004 and 2003, respectively, for sales to the electric segment. All other intersegment revenues were not material to Alliant Energy’s operations.
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* Int’l = International ** ISCO = Integrated Services
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, IPL’s and WPL’s combined Annual Report on Form 10-K for the year ended Dec. 31, 2003. The following information supplements, and should be read in conjunction with, Note 10(a) in Alliant Energy’s “Notes to Consolidated Financial Statements” in the Form 10-K for the year ended Dec. 31, 2003.
A reconciliation of the weighted average common shares outstanding used in the basic and diluted EPS calculation for the three and nine months ended Sep. 30 was as follows:
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In July 2004, Alliant Energy announced its intent to divest the following businesses within its Integrated Services business platform:
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In the second quarter of 2004, Alliant Energy recorded a SFAS 142, “Goodwill and Other Intangible Assets,” pre-tax non-cash goodwill impairment charge of $41 million related to its energy services business, primarily due to less favorable market conditions. The fair value of the goodwill was estimated using a combination of the expected discounted future cash flows and market value indicators.
Loss (gain) on sale of affordable housing and SmartEnergy, Inc. businesses includes pre-tax valuation adjustments and selling costs incurred. The valuation adjustments reflect updated estimates of the market value, less selling costs, of assets classified as held for sale for each reporting period and other adjustments and changes in estimates after the sale date.
The provision for income taxes from discontinued operations for the nine months ended Sep. 30, 2004 was significantly different from the federal statutory rate of 35% due to the goodwill impairment charge recorded in the second quarter of 2004. Alliant Energy anticipates a significant portion of the temporary difference resulting from the goodwill impairment charge will more likely than not reverse in the form of a capital loss for tax purposes. Given Alliant Energy’s current capital loss carryforward position and the likelihood regarding its ability to utilize the capital loss related to this goodwill impairment charge before it expires, Alliant Energy recorded a valuation allowance against deferred tax assets of approximately $14 million in the second quarter of 2004 related to this issue.
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In 2004, Alliant Energy adopted revised FIN 46 guidance (FIN 46R). The entities that Alliant Energy consolidated as a result of this guidance did not have a material impact on its financial condition or results of operations. After making an ongoing exhaustive effort, Alliant Energy concluded that it was unable to obtain the information necessary from the counterparties for the Riverside and RockGen power plants, tolling and purchased-power agreements, respectively, to determine whether the counterparties are variable interest entities and if Alliant Energy is the primary beneficiary. These agreements are currently accounted for as operating leases. Costs are included in “Electric production fuel and purchased power” in Alliant Energy’s Condensed Consolidated Statements of Income based on monthly payments for these agreements. Monthly capacity payments related to the Riverside agreement began in June 2004 when the plant was placed in service and are higher during the peak demand period from May 1 through Sep. 30 and lower in all other periods during each calendar year. These seasonal differences in capacity charges are consistent with market pricing and the expected usage of energy from the plant. The counterparties sell some or all of their generating capacity to WPL, and can sell their energy output to both WPL and IPL. WPL and IPL incurred costs (excluding fuel costs) related to the Riverside contract of $24.3 million and $0.4 million for the three months ended Sep. 30, 2004, and $31.5 million and $0.5 million for the nine months ended Sep. 30, 2004, respectively. WPL incurred costs related to the RockGen contract of approximately $4.7 million and $28.0 million for the three and nine months ended Sep. 30, 2004, and $10.1 million and $26.8 million for the three and nine months ended Sep. 30, 2003, respectively. Alliant Energy’s maximum exposure to loss from these contracts is undeterminable due to the inability to obtain the necessary information to complete such evaluation.
Pursuant to SFAS 143, “Accounting for Asset Retirement Obligations” (SFAS 143), a reconciliation of the changes in asset retirement obligations associated with long-lived assets is as follows (in millions):
The components of Alliant Energy’s qualified and non-qualified pension benefits and other postretirement benefits costs for the three and nine months ended Sep. 30 were as follows (in thousands):
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In March 2004, WPL discontinued its participation in Alliant Energy’s combined utility customer accounts receivable sale program. WPL had no receivables sold and no short-term debt outstanding at the time it discontinued its participation in the program. In May 2004, Alliant Energy reduced the maximum amount of receivables that can be sold in the program from $250 million to $175 million, all of which may be sold by IPL. At Sep. 30, 2004 and Dec. 31, 2003, Alliant Energy had sold $51 million (all at IPL) and $176 million ($126 million at IPL and $50 million at WPL) of domestic utility customer accounts receivable, respectively.
WPL has signed a definitive agreement to sell its 41% ownership interest in Kewaunee to a subsidiary of Dominion Resources, Inc. (Dominion). Approval has already been obtained from the Federal Trade Commission, Nuclear Regulatory Commission, IUB, Illinois Commerce Commission and MPUC, and certain approvals have been obtained from the Federal Energy Regulatory Commission (FERC). Alliant Energy expects to receive the PSCW order on this matter in the fourth quarter of 2004.
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Kewaunee is currently down for a scheduled maintenance and refueling outage. The outage is currently anticipated to be two to three weeks longer than the original schedule and is anticipated to be complete in late November. The delays have occurred primarily due to problems with lifting equipment related to the reactor vessel inspection required during this outage and procedures to perform the lift. WPL’s share of the estimated increase in replacement power and operation and maintenance expenses resulting from the delay is approximately $6 million. WPL plans to seek deferral of these additional costs from the PSCW and FERC.
The other (income) and deductions included in “Interest income and other” in Alliant Energy’s Condensed Consolidated Statements of Income for the three and nine months ended Sep. 30 were as follows (in millions):
In May 2004, Emery was placed in service and resulted in an increase in “Domestic utility — Electric plant in service” and a corresponding decrease in “Construction work in progress — Emery generating facility” on Alliant Energy’s Condensed Consolidated Balance Sheet as of Sep. 30, 2004.
Alliant Energy, through its subsidiaries Corporate Services, IPL and WPL, has entered into purchased-power, coal, and natural gas supply, transportation and storage contracts for its domestic utility business. As of Sep. 30, 2004, minimum commitments related to its domestic utility business for 2005 and beyond for purchased-power (excluding operating leases), coal and natural gas were $59.2 million, $315.9 million and $365.5 million, respectively.
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, 2004 and 2003
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Alliant Energy Corporation Condensed Consolidating Statements of Income for the Nine Months Ended September 30, 2004 and 2003
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Alliant Energy Corporation Condensed Consolidating Balance Sheet as of September 30, 2004
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Alliant Energy Corporation Condensed Consolidating Balance Sheet as of December 31, 2003
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Alliant Energy Corporation Condensed Consolidating Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
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INTERSTATE POWER AND LIGHT COMPANYCONDENSED 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 COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
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INTERSTATE POWER AND LIGHT COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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The interim condensed consolidated financial statements included herein have been prepared by IPL, 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 IPL and its consolidated subsidiaries. IPL 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 IPL’s latest Annual Report on Form 10-K.
For the three and nine months ended Sep. 30, 2004 and 2003, IPL had no other comprehensive income, thus IPL’s comprehensive income was equal to its earnings available for common stock for all periods.
Certain financial information relating to IPL’s significant business segments is as follows. Intersegment revenues were not material to IPL’s operations.
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The components of IPL’s qualified pension benefits and other postretirement benefits costs for the three and nine months ended Sep. 30 were as follows (in thousands):
As of Sep. 30, 2004, IPL’s minimum commitments for 2005 and beyond for purchased-power, coal and natural gas were $5.7 million, $95.1 million and $168.4 million, respectively. In addition, for 2005 and beyond, system-wide purchased-power contracts of $49.3 million and coal contracts of $154.1 million have not yet been directly assigned to IPL and WPL since the specific needs of each utility are not yet known.
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WISCONSIN POWER AND LIGHT COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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WISCONSIN POWER AND LIGHT COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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WISCONSIN POWER AND LIGHT COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
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WISCONSIN POWER AND LIGHT COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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The interim condensed consolidated financial statements included herein have been prepared by WPL, 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 WPL and its consolidated subsidiaries. WPL 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 WPL’s latest Annual Report on Form 10-K.
WPL’s comprehensive income, and the components of other comprehensive loss, net of taxes, for the three and nine months ended Sep. 30 were as follows (in thousands):
Certain financial information relating to WPL’s significant business segments is as follows. Gas revenues included $3.6 million and $15.2 million for the three months ended Sep. 30, 2004 and 2003, and $18.5 million and $36.8 million for the nine months ended Sep. 30, 2004 and 2003, respectively, for sales to the electric segment. All other intersegment revenues were not material to WPL’s operations.
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The components of WPL’s qualified pension benefits and other postretirement benefits costs for the three and nine months ended Sep. 30 were as follows (in thousands):
As of Sep. 30, 2004, WPL’s minimum commitments for 2005 and beyond for purchased-power (excluding operating leases), coal and natural gas were $4.2 million, $66.7 million and $197.1 million, respectively. In addition, for 2005 and beyond, system-wide purchased-power contracts of $49.3 million and coal contracts of $154.1 million have not yet been directly assigned to IPL and WPL since the specific needs of each utility are not yet known.
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Alliant Energy operates as a registered public utility holding company subject to the limitations imposed by PUHCA. The primary first tier subsidiaries of Alliant Energy include IPL, WPL, Resources and Corporate Services. IPL is a public utility engaged principally in the generation, transmission, distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in selective markets in Iowa, Minnesota and Illinois. WPL is a public utility engaged principally in the generation, distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in selective markets in Wisconsin and Illinois. Resources manages a portfolio of wholly-owned subsidiaries and additional investments through distinct platforms: Non-regulated Generation (domestic generation projects), International (foreign energy generation and delivery systems), Integrated Services (energy and environmental services) and Other Investments. Corporate Services provides administrative services to Alliant Energy and its subsidiaries as required under PUHCA. This MD&A includes information relating to Alliant Energy, IPL and WPL (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, IPL’s and WPL’s latest combined 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 potential energy-related legislation in Congress as well as the recently enacted federal tax legislation, including any potential tax charges incurred related to foreign repatriation of earnings, the ability to obtain adequate and timely rate relief to allow for, among other things, the recovery of operating costs, the earning of reasonable rates of return in current and future rate proceedings and the payment of expected levels of dividends; unanticipated construction and acquisition expenditures; unanticipated issues in connection with Alliant Energy’s construction of new generating facilities; issues related to the supply of purchased electricity and price thereof, including the ability to recover purchased-power and fuel costs in a timely manner through domestic and international rates; issues related to electric transmission, including recovery of costs incurred, and federal legislation and regulation affecting such transmission; risks related to the operations of Alliant Energy’s nuclear facilities and unanticipated issues relating to the pending 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; the amount of premiums incurred in connection with Alliant Energy’s planned debt reductions; the results from Alliant Energy’s Brazil investments; improved results from Alliant Energy’s non-regulated businesses as a whole; stable foreign exchange rates; no material permanent declines in the fair 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; Alliant Energy’s ability to complete the divestiture of the remaining businesses within its Integrated Services business unit in a timely fashion; Alliant Energy’s ability to achieve its EPS growth goal; access to technological developments; employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages; continued access to the capital markets; the ability to successfully complete ongoing tax audits and appeals with no material impact on Alliant Energy’s earnings or cash flows; 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’s domestic utility business is its core business and the sole growth platform within its strategic plan. The strategic plan is concentrated on building and maintaining the generation and infrastructure necessary to provide Alliant Energy’s domestic utility customers with safe, reliable and environmentally sound energy service. Alliant Energy’s strategic plan also includes focusing on the profitability and cash flows of its remaining non-regulated businesses which will serve as ongoing business platforms. The following is an update related to Alliant Energy’s domestic utility generation plan:
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Alliant Energy also continues to evaluate the performance of all its businesses, both utility and non-regulated, and is focused on taking actions to increase the returns earned on invested capital in all of its businesses. Alliant Energy is committed to streamlining its portfolio of businesses to only those that can provide meaningful earnings and cash flows for shareowners and those it is prepared to invest the capital needed to reach the scale necessary to generate such earnings and cash flows. Consistent with this strategic focus, Alliant Energy is pursuing the divestiture of several utility and non-regulated businesses.
In August 2004, Alliant Energy announced its intention to sell its two Illinois utility properties (net book value of approximately $50 million to $60 million). The administrative costs of serving relatively few customers in a jurisdiction that requires the same regulatory and administrative support as a state with a larger number of customers make it difficult for Alliant Energy to offer its services cost-effectively. Alliant Energy currently intends to enter into a sales agreement for the Illinois properties by the end of the first quarter of 2005 and any such sales agreement would be subject to regulatory approvals. In September 2004, a tentative verbal agreement between WPL and the city of Ripon was reached on the purchase price of WPL’s Ripon water utility and WPL also continues to make progress on the sale of its South Beloit water utility. Additionally, the sale of Kewaunee to Dominion continues to move through the regulatory process. None of these utility assets qualified as assets held for sale as of Sep. 30, 2004.
In July 2004, Alliant Energy announced its intention to divest its energy services (Cogenex Corporation and affiliates), gas marketing (NGE) and energy management services businesses within its Integrated Services non-regulated business platform. In September 2004, Alliant Energy successfully completed the sale of substantially all of the assets of NGE. Alliant Energy is currently in the process of executing its divestiture plan for the other two businesses. At Sep. 30, 2004, NGE and the energy services business qualified as assets held for sale and discontinued operations. Refer to Note 7 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for additional information regarding these two businesses. Alliant Energy currently intends to complete the divestiture of its energy management services business within the next twelve months and expects this business will qualify for reporting as assets held for sale and discontinued operations in the fourth quarter of 2004. The net losses from the energy management services business included in Alliant Energy’s consolidated income from continuing operations were $0.4 million for both the three months ended Sep. 30, 2004 and 2003, and $4.6 million and $1.1 million for the nine months ended Sep. 30, 2004 and 2003, respectively. The proceeds from the divestiture of these Integrated Services businesses would be available for debt reduction at Resources.
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A summary of the regulatory environment is included in the combined Form 10-K filed by Alliant Energy, IPL and WPL for the year ended Dec. 31, 2003. Set forth below are recent developments relating to the regulatory environment.
Details of Alliant Energy’s rate cases impacting its historical and future results of operations 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.
The 2005/2006 retail rate case is based on a test period from July 2005 to June 2006.
Since the final increase was lower than the interim relief granted, a refund to customers was made in 2003.
Since the final increase was lower than the interim relief granted, a refund to customers will be made in the fourth quarter of 2004. Such refunds were appropriately reserved for at Sep. 30, 2004.
IPL requested interim rate relief of approximately $106 million. In July 2004, a non-unanimous settlement agreement was filed with the IUB proposing resolution of all revenue requirement issues in the case. A majority of the parties to the case signed the settlement agreement including IPL, the Iowa Office of Consumer Advocate, and certain other customers and/or customer groups. The parties agreed to an increase in IPL’s annual Iowa electric rates of $107 million ($9 million more than the revenues granted in the IUB’s interim order) and a return on equity for capital unrelated to Emery of 10.7%. Capital related to Emery will continue to earn a return on equity of 12.23% consistent with the ratemaking principles granted by the IUB in 2002. The elements of the settlement agreement are subject to approval by the IUB. A decision by the IUB on the settlement is expected in the first quarter of 2005. The filing of the settlement agreement does not impact interim rates.
With the exception of recovering a return on IPL’s Emery plant, which is a large component of IPL’s retail Iowa electric rate case filed in March 2004, and on other additions to IPL’s and WPL’s infrastructure, a significant portion of the rate increases included in the previous table reflect the recovery of increased costs incurred by IPL and WPL or costs they expect to incur. In addition to the 2005/2006 retail base rate case, WPL currently plans to file an estimated $35 million fuel-related rate case in early 2005, with anticipated approval from the PSCW to implement interim rates for the fuel-related increase to be effective approximately three weeks after the filing is made. The major drivers in the base rate and fuel-related rate cases for 2005 are both fixed and variable fuel and purchased-power costs. Thus, the potential increase in revenues related to these rate increase requests are not expected to result in a corresponding increase in net income.
In March 2004, a new ratemaking law was passed in Iowa. The new law allows utilities to place in effect interim rates, subject to refund, without review by the IUB within ten days of filing a general rate increase request. The law also allows the IUB to consider known and measurable changes in costs and revenues occurring within nine months from the end of the historical test year in setting final rates in a rate case. Both of these changes are designed to mitigate regulatory lag in Iowa ratemaking, which uses a historical versus projected test year in setting rates. IPL does not expect this new law to have any impact on its pending retail electric rate case in Iowa as it is only expected to impact future Iowa rate cases.
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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 and EPS for the third quarter were as follows (dollars in millions; totals may not foot due to rounding):
Alliant Energy experienced extremely mild weather conditions in its domestic utility service territories in the third quarter of 2004 and estimates this had a negative impact of $0.12-0.14 per share on earnings in the third quarter of 2004. In spite of this, Alliant Energy’s earnings from its domestic utility business were higher in the third quarter of 2004 compared to the same period in 2003 due to the impact of rate increases, Alliant Energy’s comprehensive cost-control and operational efficiency efforts, weather-normalized sales growth and a lower effective income tax rate. The decline in Alliant Energy’s non-regulated results from continuing operations was primarily due to lower results from its International and Integrated Services business units.
Domestic Utility Electric Margins — Electric margins and MWh sales for Alliant Energy for the three months ended Sep. 30 were as follows (in thousands):
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Electric margins and MWh sales for Alliant Energy for the nine months ended Sep. 30 were as follows (in thousands):
Electric margins increased $3.6 million, or 1%, and $49.0 million, or 5%, for the three- and nine-month periods, respectively, primarily due to the impact of various rate increases implemented in 2003 and 2004, weather-normalized sales growth including increased industrial sales which reflect improving economic conditions in Alliant Energy’s domestic utility service territories, lower purchased-power capacity costs at IPL and lower fuel and purchased-power energy costs at WPL. These items were partially offset by the impact of extremely mild weather conditions in the third quarter of 2004 and reduced energy conservation revenues. Cooling degree days in Cedar Rapids and Madison were 69% and 44% below normal in the third quarter of 2004, respectively. Alliant Energy estimates that the extremely mild weather conditions during the third quarter of 2004 reduced electric margins by approximately $23 million to $27 million, or $0.12 to 0.14 per share. By comparison, the impact of weather on the third quarter of 2003 results was not significant. Weather also had a modest downward impact on electric margins for the first six months of the year in 2004 and 2003. The reduced energy conservation revenues were largely offset by lower energy conservation expenses.
The three-month increase was also partially offset by higher purchased-power capacity costs at WPL related to the Riverside tolling agreement and the timing of rate collection of these costs. Monthly capacity costs related to the Riverside agreement began in June 2004 when the plant was placed in service and are higher during the peak demand period from May 1 through Sep. 30 and lower in all other periods during each calendar year. Recovery of these costs through rates began in January 2004 with WPL’s 2004 retail rate increase and is collected on a more levelized basis throughout the year. Total annual electric margins for 2004 are not expected to be impacted significantly. However, electric margins for the three months ended Sep. 30, 2004 were approximately $14 million lower than the same period in 2003 due to the higher summer capacity costs and the timing of rate collection of these costs.
The nine-month increase was also partially offset by the impact of seasonal rates at WPL. In April 2003, WPL implemented seasonal electric rates that are designed to result in higher rates for the peak demand period from June 1 through Sep. 30 and lower rates in all other periods during each calendar year. As a result, total annual revenues are not expected to be impacted significantly. However, the margins for the nine months ended Sep. 30, 2004 were approximately $7 million lower than the same period in 2003, all other things being equal, given the seasonal rates were not yet effective in the first quarter of 2003.
Domestic Utility Gas Margins — Gas margins and Dth sales for Alliant Energy for the three months ended Sep. 30 were as follows (in thousands):
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Gas margins and Dth sales for Alliant Energy for the nine months ended Sep. 30 were as follows (in thousands):
Gas margins increased $2.8 million, or 13%, and $1.4 million, or 1%, for the three- and nine-month periods, respectively, primarily due to rate refund reserves recorded by IPL in 2003 for the Iowa retail rate case. The nine-month increase was also due to improved results of $4 million from WPL’s performance-based commodity cost recovery program (benefits are shared by ratepayers and shareowners), partially offset by lower sales due to milder weather conditions in 2004 compared to 2003. Transportation/other sales decreased for the three- and nine-month periods due to reduced demand from natural gas-fired electric generating facilities during the third quarter of 2004, primarily due to lower electricity demand as a result of the extremely mild weather conditions. The impact of these sales decreases on gas margins was not significant.
Refer to “Rates and Regulatory Matters” for discussion of various electric and gas rate filings.
Domestic Utility Other Revenues — Other revenues for the domestic utilities decreased $5.5 million and $14.6 million for the three- and nine-month periods, respectively, due to lower construction management revenues from WindConnect™, resulting from uncertainty during the nine months ended Sep. 30, 2004 regarding the extension of the federal renewable energy production tax credit, and lower water revenues due to the 2003 sale of WPL’s water utility serving the Beloit area. These decreases were largely offset by lower operating expenses. The federal renewable energy production tax credit was extended in the fourth quarter of 2004 for generating facilities placed in service prior to Jan. 1, 2006.
Non-regulated Revenues— Details regarding Alliant Energy’s non-regulated revenues for the three and nine months ended Sep. 30 were as follows (in thousands):
The increased International revenues for the three- and nine-month periods were primarily due to increased production at Alliant Energy’s generating facilities in China resulting from increased electricity and steam demand. Also contributing to the nine-month International increase was the acquisition of an additional combined heat and power facility in China in the second quarter of 2003. The decreased Integrated Services revenues for the three- and nine-month periods were primarily due to lower revenues at Alliant Energy’s environmental and engineering services business.
Other Operating Expenses— Other operation and maintenance expense for the domestic utilities decreased $12.2 million and $20.9 million for the three- and nine-month periods, respectively, primarily due to the lower expenses for WindConnect™, lower energy conservation expenses and lower transmission and distribution costs, partially offset by increases in employee and retiree benefits (comprised of compensation, medical and pension costs). The nine-month decrease was also impacted by a planned refueling outage at Kewaunee in the second quarter of 2003 (there was no such outage in 2004). Also contributing to the three- and nine-month decreases was the impact of comprehensive cost-control and operational efficiency efforts.
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Non-regulated operation and maintenance expenses for the three and nine months ended Sep. 30 were as follows (in thousands):
The International increase for the three- and nine-month periods was largely due to higher coal and related transportation costs for its generating facilities in China and the increased generation discussed previously. Refer to “Other Matters — Other Future Considerations — China” for additional discussion of the coal and related transportation costs. The Integrated Services variances were due to the same factors impacting the revenues variances discussed previously, partially offset by bad debt and litigation-related expenses recorded in the third quarter of 2004. The Integrated Services decrease for the nine-month period was also partially offset by a pre-tax, non-cash goodwill impairment charge of $2 million in the second quarter of 2004 related to its energy management services business. Refer to “Strategic Overview” for discussion of the proposed divestiture of this business. The Non-regulated Generation decrease for the three- and nine-month periods was largely due to a charge recorded in the third quarter of 2003 related to a cancelled contract.
Depreciation and amortization expense increased $5.2 million and $17.5 million for the three- and nine-month periods, respectively, primarily due to utility property additions, including Emery, and the implementation of higher depreciation rates at IPL on Jan. 1, 2004 resulting from an updated depreciation study, partially offset by lower software amortizations at WPL. Taxes other than income taxes increased $2.9 million and $8.0 million for the three- and nine-month periods, respectively, primarily due to increased gross receipts and property taxes.
Interest Expense and Other— Interest expense decreased $3.9 million and $26.1 million for the three- and nine-month periods, respectively, primarily due to lower average borrowings as a result of debt retirements within Alliant Energy’s non-regulated businesses in 2003 and 2004. The impact of additional equity issued by Alliant Energy during the last 12 months and various debt refinancings also contributed to the decreases for both the three- and nine-month periods. The nine-month decrease was also due to credit facility fees incurred at Resources during the first half of 2003.
Loss on early extinguishment of debt includes debt repayment premiums and charges for the unamortized debt expenses related to long-term debt retirements of $20 million and $15 million of senior notes at Resources in the first and third quarters of 2004, respectively.
Equity (income) loss from Alliant Energy’s unconsolidated investments for the three and nine months ended Sep. 30 was as follows (in thousands):
The higher equity income from Alliant Energy’s Brazil investments for the three- and nine-month periods was primarily due to rate increases implemented at the Brazilian operating companies in 2003 and 2004, partially offset by higher operating (including bad debt), litigation-related and interest expenses at the Brazilian operating companies. The nine-month Brazil increase was also due to a gain of $5.1 million (representing Alliant Energy’s allocated portion of the total gain) realized in the first quarter of 2004 from the sale of two hydroelectric plants.
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Allowance for funds used during construction (AFUDC) decreased $2.7 million and increased $1.7 million for the three- and nine-month periods, respectively, primarily due to the timing of the construction of Emery.
Interest income and other decreased $3.3 million and $10.2 million for the three- and nine-month periods, respectively, largely due to lower interest income, partially due to the elimination of loans to discontinued operations due to asset sales during 2003. The nine-month decrease was also due to lower non-cash valuation adjustments related to Alliant Energy’s McLeod trading securities. Refer to Note 13 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for further details.
Income Taxes — The effective income tax rates were 27.2% and 27.6% for the three- and nine-month periods ended Sep. 30, 2004, respectively, compared with 31.9% and 31.0% for the same periods last year. The decreases for the three- and nine-month periods were primarily due to lower state tax expense at IPL resulting from a retroactive Iowa state law change enacted in the third quarter of 2004 and a decrease in property-related temporary differences for which deferred taxes were not provided pursuant to rate making principles.
Income (Loss) from Discontinued Operations — Refer to Note 7 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for 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 Emerging Issues Task Force Issue 02-3, “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities” within WPC and NGE, respectively.
Overview — Third Quarter Results — Earnings available for common stock increased $20.7 million, primarily due to higher electric margins and a lower effective tax rate.
Electric Margins —Electric margins and MWh sales for IPL for the three months ended Sep. 30 were as follows (in thousands):
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Electric margins and MWh sales for IPL for the nine months ended Sep. 30 were as follows (in thousands):
Electric margins increased $22.1 million, or 10%, and $36.7 million, or 7%, for the three- and nine-month periods, respectively, primarily due to the impact of various rate increases implemented in 2003 and 2004, lower purchased-power capacity costs, and weather-normalized sales growth including increased industrial sales which reflect improving economic conditions in IPL’s service territory. These items were partially offset by the impact of extremely mild weather conditions in the third quarter of 2004, and reduced energy conservation revenues of $3 million and $4 million for the three- and nine-month periods, respectively. Cooling degree days in Cedar Rapids were 69% below normal in the third quarter of 2004. Alliant Energy estimates that the extremely mild weather conditions during the third quarter of 2004 reduced electric margins by approximately $14 million to $17 million. By comparison, the impact of weather on the third quarter of 2003 results was not significant. Weather also had a modest downward impact on electric margins for the first six months of the year in 2004 and 2003. The reduced energy conservation revenues were largely offset by lower energy conservation expenses.
Gas Margins — Gas margins and Dth sales for IPL for the three months ended Sep. 30 were as follows (in thousands):
Gas margins and Dth sales for IPL for the nine months ended Sep. 30 were as follows (in thousands):
Gas margin increased $2.5 million, or 23%, and decreased $0.7 million, or 1%, for the three- and nine-month periods, respectively. The three-month increase was primarily due to a rate refund reserve recorded in 2003 for the Iowa retail rate case. The nine-month decrease was primarily due to lower sales, which were partially due to milder weather conditions in 2004 compared to 2003, partially offset by the rate refund reserve recorded in 2003.
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Refer to “Rates and Regulatory Matters” for discussion of IPL’s electric and gas rate filings.
Steam and Other Revenues— Steam and other revenues increased $3.8 million for the three-month period, primarily due to higher construction management revenues from WindConnect™. The increase was largely offset by higher other operation and maintenance expenses related to IPL’s WindConnect™ program.
Other Operating Expenses— Other operation and maintenance expenses decreased $6.4 million and $1.5 million for the three- and nine-month periods, respectively, primarily due to lower transmission and distribution costs and energy conservation expenses. The three-month decrease was partially offset by higher expenses for WindConnect™. The nine-month decrease was partially offset by increases in employee and retiree benefits (comprised of compensation, medical and pension costs). Also contributing to the three- and nine-month decreases was the impact of comprehensive cost-control and operational efficiency efforts. Depreciation and amortization expense increased $6.3 million and $19.6 million for the three- and nine-month periods, respectively, primarily due to property additions, including Emery, and the implementation of higher depreciation rates on Jan. 1, 2004 resulting from an updated depreciation study. Taxes other than income taxes increased $1.9 million and $3.5 million for the three- and nine-month periods, respectively, due to increased property taxes.
Interest Expense and Other— Interest expense increased $2.1 million and $2.0 million for the three- and nine-month periods, respectively, due to higher average borrowings outstanding primarily due to financing a portion of the construction costs of Emery. AFUDC decreased $3.0 million and increased $1.7 million for the three- and nine-month periods, respectively, due to the timing of the construction of Emery.
Income Taxes — The effective income tax rates were 35.5% and 37.8% for the three- and nine-month periods ended Sep. 30, 2004, respectively, compared with 45.4% and 43.0% for the same periods last year. The decreases for the three- and nine-month periods were primarily due to lower state tax expense resulting from a retroactive Iowa state law change enacted in the third quarter of 2004 and a decrease in property-related temporary differences for which deferred tax expense is not recorded pursuant to rate making principles. The nine-month decrease was partially offset by a decrease in the Alliant Energy tax benefit allocated to IPL pursuant to the provisions of PUHCA.
Overview — Third Quarter Results — Earnings available for common stock decreased $13.8 million, primarily due to lower electric margins.
Electric Margins —Electric margins and MWh sales for WPL for the three months ended Sep. 30 were as follows (in thousands):
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Electric margins and MWh sales for WPL for the nine months ended Sep. 30 were as follows (in thousands):
Electric margins decreased $18.5 million, or 12%, and increased $12.2 million, or 3%, for the three- and nine-month periods, respectively. The three-month decrease was primarily due to higher purchased-power capacity costs and the timing of rate collection of these costs, the impact of extremely mild weather conditions in the third quarter of 2004 and lower energy conservation revenues. These items were partially offset by the impact of rate increases, lower fuel and purchased-power energy costs and weather-normalized sales growth including increased industrial sales which reflect improving economic conditions in WPL’s service territory. Cooling degree days in Madison were 44% below normal in the third quarter of 2004. Alliant Energy estimates that the extremely mild weather conditions during the third quarter of 2004 reduced electric margins by approximately $9 million to $10 million. By comparison, the impact of weather on the third quarter of 2003 results was not significant. The nine-month increase was primarily due to the implementation of rate increases in 2003 and 2004, the weather-normalized sales growth and lower fuel and purchased-power energy costs, partially offset by milder weather conditions in the third quarter of 2004, lower energy conservation revenues and the impact of implementing seasonal rates in 2003. Weather also had a modest downward impact on electric margins for the first six months of the year in 2004 and 2003. The reduced energy conservation revenues were largely offset by lower energy conservation expenses. Refer to “Alliant Energy Results of Operations” for further discussion of the higher purchased-power capacity costs for the third quarter of 2004 and seasonal electric rates.
Gas Margins — Gas margins and Dth sales for WPL for the three months ended Sep. 30 were as follows (in thousands):
Gas margins and Dth sales for WPL for the nine months ended Sep. 30 were as follows (in thousands):
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Gas margin increased $2.1 million, or 3%, for the nine-month period, primarily due to improved results of $4 million from WPL’s performance-based commodity cost recovery program (benefits are shared by ratepayers and shareowners), partially offset by lower sales due to milder weather conditions in 2004 compared to 2003. Transportation/other sales decreased for the three- and nine-month periods due to reduced demand from natural gas-fired electric generating facilities during the third quarter of 2004, primarily due to lower electricity demand as a result of the extremely mild weather conditions. The impact of these sales decreases on gas margins was not significant.
Refer to “Rates and Regulatory Matters” for discussion of WPL’s electric and gas rate filings.
Other Revenues —Other revenues decreased $9.4 million and $15.8 million for the three- and nine-month periods, respectively, primarily due to lower construction management revenues from WindConnect™, resulting from uncertainty during the nine months ended Sep. 30, 2004 regarding the extension of the federal renewable energy production tax credit, and lower water revenues due to the 2003 sale of the water utility serving the Beloit area. These decreases were largely offset by lower operating expenses. The federal renewable energy production tax credit was extended in the fourth quarter of 2004 for generating facilities placed in service prior to Jan. 1, 2006.
Other Operating Expenses— Other operation and maintenance expenses decreased $5.1 million and $16.9 million for the three- and nine-month periods, respectively, primarily due to lower expenses for WindConnect™ and decreases in energy conservation expenses, partially offset by increases in employee and retiree benefits (comprised of compensation, medical and pension costs). The nine-month decrease was also impacted by a planned refueling outage at Kewaunee in the second quarter of 2003 (there was no such outage in 2004). Also contributing to the three- and nine-month decreases was the impact of comprehensive cost-control and operational efficiency efforts. Depreciation and amortization decreased $0.8 million and $2.5 million for the three- and nine-month periods, respectively, primarily due to lower software amortizations, partially offset by property additions. Taxes other than income taxes increased $1.2 million and $4.4 million for the three- and nine-month periods, respectively, primarily due to increased gross receipts taxes.
Interest Expense and Other— Interest expense decreased $0.8 million and $4.6 million for the three- and nine-month periods, respectively, primarily due to lower average borrowings.
Income Taxes — The effective income tax rates were 39.1% and 38.7% for the three- and nine-month periods ended Sep. 30, 2004, respectively, compared with 36.6% and 35.9%, respectively, for the same periods last year. The increase for the three-and nine-month periods was due to a reduction in research and development tax credits. The increase for the nine-month period was also due to a decrease in the Alliant Energy tax benefit allocated to WPL pursuant to the provisions of PUHCA.
Cash Flows for the Nine-Month Periods — Selected information from Alliant Energy’s, IPL’s and WPL’s respective Condensed Consolidated Statements of Cash Flows for the nine months ended Sep. 30 was as follows (in thousands):
Alliant Energy’s cash flows from operating activities increased $117 million, primarily due to the timing of collections of receivables, changes in the level of accounts receivable sold and higher net income at IPL and WPL, partially offset by higher pension plan contributions and the timing of tax payments; cash flows from financing activities decreased $95 million, primarily due to lower proceeds from common stock issuances, partially offset by changes in the amount of debt issued and retired; and cash flows used for investing activities increased $113 million, primarily due to proceeds received from the sale of Alliant Energy’s Australian business in April 2003, partially offset by the 2003 acquisition by Resources of a 309 MW, non-regulated, tolled, natural gas-fired power plant in Neenah, Wisconsin, and other decreases in non-regulated construction and acquisition expenditures. IPL’s cash flows from financing activities decreased $131 million, primarily due to changes in the amount of debt issued and retired and the issuance of preferred stock in September 2003; and cash flows used for investing activities decreased $125 million, primarily due to lower construction and acquisition expenditures associated with the construction of Emery. WPL’s cash flows from operating activities increased $145 million, primarily due to higher net income, changes in the level of accounts receivable sold and the timing of collections of receivables; cash flows used for financing activities increased $86 million due to a $200 million capital contribution from Alliant Energy in 2003 and higher common stock dividends, partially offset by net changes in the amount of debt issued and retired; and cash flows used for investing activities increased $53 million, primarily due to increased levels of construction and acquisition expenditures.
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Certain Regulatory Approvals/Requirements — PUHCA — In September 2004, Alliant Energy, Resources and IPL filed for SEC approval under an Omnibus Financing Order for their ongoing program of external financing, credit support arrangements and other related proposals for the period through Dec. 31, 2007. Alliant Energy expects a new order will be in place before the current order expires on Dec. 31, 2004.
Alliant Energy is 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 Sep. 30, 2004, as computed under this requirement, was 48%.
State Regulatory Agencies — In March 2004, IPL received the necessary regulatory authorization to increase short-term borrowings from $250 million to $300 million. In March 2004, WPL discontinued its utility customer accounts receivable sale program, increasing its short-term borrowing authority granted by the PSCW to $240 million, $185 million for general corporate purposes and an additional $55 million should WPL repurchase its variable rate demand bonds.
Shelf Registrations— In 2004, Alliant Energy, IPL and WPL each filed separate shelf registrations with the SEC. Alliant Energy’s shelf registration allows Alliant Energy flexibility to offer from time to time up to an aggregate of $300 million of common stock, stock purchase contracts and stock purchase units. IPL’s shelf registration allows IPL flexibility to offer from time to time up to an aggregate of $210 million of preferred stock, senior unsecured debt securities and collateral trust bonds. WPL’s shelf registration allows WPL flexibility to offer from time to time up to an aggregate of $150 million of its preferred stock, senior unsecured debt securities and first mortgage bonds. Alliant Energy, IPL and WPL had $208 million, $85 million and $50 million remaining available under their respective shelf registrations as of Sep. 30, 2004.
Cash and Temporary Cash Investments — As of Sep. 30, 2004, Alliant Energy and its subsidiaries had approximately $184 million of cash and temporary cash investments, of which approximately $73 million consisted of deposits in foreign bank accounts. Alliant Energy has elected permanent reinvestment of earnings for federal income tax purposes for certain foreign subsidiaries within its China business platform. Alliant Energy is currently reviewing its opportunities to repatriate cash from its International businesses given the new tax benefits under the American Jobs Creation Act passed in October 2004. Refer to “Other Matters — Other Future Considerations” for additional information.
Sale of Accounts Receivable— Refer to Note 11 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for information on WPL’s discontinuance of participation in the utility customer accounts receivable sale program and a reduction in the maximum amount of receivables that can be sold in the program.
Short-term Debt — Information regarding commercial paper at Sep. 30, 2004 was as follows (dollars in millions):
In July 2004, Alliant Energy completed the syndication of three revolving credit facilities totaling $650 million ($100 million for Alliant Energy at the parent company level, $300 million for IPL and $250 million for WPL), which support commercial paper and are available for direct borrowings. The combined total amount of the new facilities remains the same as the former facilities. However, $100 million of the borrowing capability has been shifted from the parent company to IPL and WPL to support the continued focus on the domestic utility business as the primary source of future capital needs. The facility at the parent company is used to fund Resources and Corporate Services as well as its own needs. These new facilities replaced the former facilities which were to expire in September 2004. These new facilities are designed to be five-year facilities with the length of the facilities subject to various state and federal regulatory approvals given the term is longer than a 364-day facility. The credit facility agreements contain various covenants, including the following:
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The cross default provisions, negative pledge provisions and material adverse change clauses of the new credit facilities are less restrictive than those of the former credit facilities. Alliant Energy’s, IPL’s and WPL’s new credit facilities contain provisions that require, during the term of the facilities, any proceeds from asset sales, with certain exclusions, in excess of 20% of their respective consolidated assets be used to reduce commitments under their respective facilities. Exclusions include, among others, certain sale and lease-back transactions and any potential sales of Alliant Energy’s nuclear, transmission or international assets.
Long-term Debt— In October 2004, Resources’ wholly-owned New Zealand subsidiary issued NZ$100 million of non-recourse redeemable preference shares due 2007, secured by its investment in TrustPower Ltd., to take advantage of the strength of the New Zealand currency. Holders of the redeemable preference shares will receive semi-annual cash dividends of approximately NZ$3.4 million. Given their characteristics, the redeemable preference shares will be shown as “Long-term debt, net (excluding current portion)” on Alliant Energy’s Consolidated Balance Sheet. The majority of the approximately US$68 million of proceeds from this transaction has been repatriated to Resources, with no income tax implications, and will be used for general corporate purposes or further debt reduction at Resources.
In August 2004, WPL issued $100 million of 6.25% senior debentures due 2034 and used the proceeds to repay short-term debt, including $62 million incurred in connection with the repayment at maturity of 7.25% first mortgage bonds in June 2004, and for general corporate purposes. IPL issued $25 million and $100 million of 6.30% senior debentures due 2034 in August 2004 and May 2004, respectively, and used the proceeds to repay short-term debt primarily incurred in the construction of Emery and for general corporate purposes. All of this long-term debt was issued under WPL’s and IPL’s respective shelf registrations discussed previously. In October 2004, Resources retired $7.0 million of its 7.375% senior notes; in August 2004, Resources retired $15.0 million of its 7% senior notes; and in February 2004, Resources retired $10.0 million of its 9.75% senior notes and $9.5 million of its 7% senior notes. Resources incurred a total of approximately $0.05 per share of debt repayment premiums and charges for the unamortized debt expenses related to these debt retirements.
Common Equity— In connection with Alliant Energy’s 2004 shelf registration discussed previously, Alliant Energy entered into a sales agreement with Cantor Fitzgerald & Co., under which Alliant Energy may sell from time to time up to 7.5 million shares of its common stock. During 2004, Alliant Energy issued approximately 3.6 million shares of new common stock and received approximately $90 million in net proceeds under this shelf registration and sales agreement. Alliant Energy announced in October 2004 that it has completed its common stock issuances for 2004 under this program. Alliant Energy intends to continue to issue modest amounts of equity through both its Shareowner Direct Plan and 401(k) Savings Plan, which totaled approximately $18 million for the nine months ended Sep. 30, 2004.
In October 2004, Alliant Energy announced an increase in its quarterly common stock dividend from $0.25 per share to $0.2625 per share, which is equivalent to an annual rate of $1.05 per share, beginning with the Nov. 15, 2004 dividend payment.
Credit Ratings— In May 2004, Standard & Poor’s Rating Services lowered WPL’s secured long-term debt rating from A to A- to align it with WPL’s corporate/issuer credit rating.
Off-Balance Sheet Arrangements — A summary of Alliant Energy’s off-balance sheet arrangements is included in the combined Form 10-K filed by Alliant Energy, IPL and WPL for the year ended Dec. 31, 2003 and has not changed materially from the items reported in the 2003 Form 10-K. Refer to Note 8 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for the impact of FIN 46R guidance on Alliant Energy’s tolling and purchased-power agreements.
Contractual Obligations— A summary of Alliant Energy’s, IPL’s and WPL’s contractual obligations is included in the combined Form 10-K filed by Alliant Energy, IPL and WPL for the year ended Dec. 31, 2003 and has not changed materially from the items reported in the 2003 Form 10-K, except for the items described in Note 15 of the “Notes to Condensed Consolidated Financial Statements.”
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Environmental — A summary of Alliant Energy’s environmental matters is included in the combined Form 10-K filed by Alliant Energy, IPL and WPL for the year ended Dec. 31, 2003 and has not changed materially from the items reported in the 2003 Form 10-K, except as described below.
Air Quality — WPL previously responded confidentially to multiple data requests from the U.S. Environmental Protection Agency (EPA) related to the historical operation and associated air permitting for certain major Wisconsin coal-fired generating units. In September 2004, WPL was notified by the EPA that a third party had requested WPL’s response materials. After review of such records, WPL determined that the information would no longer be claimed as confidential. There have been instances where citizen groups have pursued claims against utilities for alleged air permitting violations. WPL has not received any such actions to date and is unable to predict the outcome.
The Wisconsin Department of Natural Resources independently developed mercury control rules, which became effective in October 2004 for Wisconsin generating facilities, that cap emissions beginning in 2008, followed by subsequent reductions of 40% by 2010 and 75% by 2015. The Wisconsin mercury rule requirements will be superseded by federal mercury emissions standards when published. WPL has begun fuel sampling and will conduct stack testing in 2005 to support the compliance requirements for Wisconsin mercury rules. Alliant Energy continues to closely monitor the developments at the federal level related to mercury emissions standards and believes that required capital investments and/or modifications resulting from these rules could be significant.
Water Quality — The EPA regulation under the Clean Water Act referred to as “316(b)” became effective in September 2004. This regulation requires existing large power plants with cooling water intake structures to apply technology to minimize adverse environmental impacts to fish and other aquatic life. Alliant Energy is currently studying such impacts and will have compliance plans in place by the required date of January 2008. Alliant Energy is currently investigating compliance options and is unable to predict the final outcome, but believes that required capital investments and/or modifications resulting from this regulation could be significant.
In October 2004, FERC issued an order lifting a delay of its previously issued order regarding one of WPL’s hydroelectric project licenses to require WPL to develop a detailed engineering and biological evaluation of potential fish passage alternatives within one year and to install within three years agency-approved fish-protective devices and fish passages. Accordingly, these provisions are now effective and WPL is in the process of working with the appropriate federal and state agencies to comply with these provisions. WPL and state agencies are currently researching solutions and at this time WPL is unable to predict the final outcome but believes that required capital investments and/or modifications resulting from this issue could be significant.
Alliant Energy would expect to receive the appropriate rate recovery of any prudently incurred expenditures it may incur on these and other environmental initiatives within its domestic utility business.
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, IPL’s and WPL’s combined Form 10-K for the year ended Dec. 31, 2003 and has not changed materially from those reported in the 2003 Form 10-K, except as described below.
Commodity Risk — Non-trading — Refer to “Other Future Considerations — China” for discussion of higher than anticipated coal and other related costs in China.
Accounting Pronouncements— As of March 31, 2004, Alliant Energy adopted FIN 46R guidance. Refer to Note 8 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for additional information.
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In December 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans, that provide a benefit that is at least actuarially equivalent to Medicare Part D. In the second quarter of 2004, the FASB issued, and Alliant Energy elected early adoption of, FSP 106-2, which supersedes FSP 106-1. Refer to Note 10 of Alliant Energy’s, IPL’s and WPL’s “Notes to Condensed Consolidated Financial Statements” for additional information.
Critical Accounting Policies — A summary of Alliant Energy’s critical accounting policies is included in Alliant Energy’s, IPL’s and WPL’s combined Form 10-K for the year ended Dec. 31, 2003 and has not changed materially from the items reported in the 2003 10-K. Refer to Note 7 of Alliant Energy’s “Notes to Condensed Consolidated Financial Statements” for information regarding a goodwill impairment charge recorded in the second quarter of 2004.
Other Future Considerations— A summary of Alliant Energy’s, IPL’s and WPL’s other future considerations is included in the combined Form 10-K filed by Alliant Energy, IPL and WPL for the year ended Dec. 31, 2003 and has not changed materially from the items reported in the 2003 Form 10-K, except as described below. In addition to items discussed earlier in MD&A, the following items could impact Alliant Energy’s future financial condition or results of operations:
Mexico — At Sep. 30, 2004, Resources held a secured loan receivable of approximately $82 million from an unrelated Mexican development company. The loan proceeds were used by the development company to construct substantially all the infrastructure for the initial phase of a master-planned resort community known as Laguna del Mar located near Puerto Penasco, State of Sonora, on the Sea of Cortez in Mexico. Alliant Energy has been concerned about the Mexican development company’s ability to timely complete all phases of the project, market and sell the real estate, and otherwise meet all of its obligations under the loan documents. As a result, Resources evaluated its alternatives and concluded that a negotiated transfer of ownership and control of the project to Resources was the best course of action for Resources to maximize the ultimate recovery of its loan and related interest income. In September 2004, Resources successfully completed negotiations and entered into a stock purchase agreement to acquire ownership of the project and all related assets, subject to the transferors’ compliance with certain conditions precedent. The proposed acquisition price for concluding the transfer is not significant. If these conditions are satisfied and the transfer of ownership and control of the project is consummated, which is expected to occur in the fourth quarter of 2004, Resources will continue to evaluate various alternatives related to the continued development of the resort community as well as its options related to the potential sale or sales of the project and its assets. Effective Jan. 1, 2004, Resources ceased accruing interest income related to this loan pending resolution of this matter. If the development of the project and related real estate sales are not ultimately successfully executed, it is possible that Alliant Energy could incur material asset valuation charges in the future. Alliant Energy is unable to predict the ultimate outcome of this matter.
Brazil — To complete earlier plans, the Juiz de Fora facility, a joint venture gas-fired generating facility in which Alliant Energy holds a 50% direct ownership interest, is scheduled for a 20 MW expansion from a single-cycle to a combined-cycle facility in early 2006 at an estimated cost of $26 million. However, initiation of the expansion construction is experiencing delays due to disputes with Alliant Energy’s Brazilian partner regarding the financing and construction of the Juiz de Fora facility and other matters (as mentioned below). Alliant Energy is currently discussing with its partner resolution of these matters including, but not limited to, arbitration, settlement or the possible sale of the facility. If the Juiz de Fora combined-cycle construction is not completed as anticipated, the future performance obligations of this generation asset might be significantly adversely affected. In such an event, Alliant Energy is not required to invest any additional capital in Juiz de Fora; however, it could lead to material asset valuation or other charges with respect to Alliant Energy’s investment in the Juiz de Fora facility. Alliant Energy’s direct investment in the Juiz de Fora facility at Sep. 30, 2004 was approximately $17 million.
Alliant Energy continues to closely monitor the financial performance of its Brazilian investments. While such performance improved significantly in 2003, it has been relatively flat in 2004 compared to 2003. Alliant Energy believes such performance can be improved, particularly in regard to controlling costs and reduction of debt, and this and Alliant Energy’s rights as a minority shareowner have been a source of ongoing dispute with its Brazilian partners. In particular, Alliant Energy’s Brazilian partners used company funds to pay dividends in order to ensure their control over the operations. Alliant Energy is not interested in and has not sought control of the operations. However, Alliant Energy has urged that, to the extent funds are available, they would be better used to pay down debt.
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Alliant Energy has been and continues to explore with various parties, including its existing Brazilian partners, all of the options available to it concerning its investments in Brazil. Among others, these options include the potential to repair Alliant Energy’s relationship with its partners, restructure the relationship or exit this market. Alliant Energy will consider the full range of options potentially available, although experience demonstrates that accomplishment of any of the considered options will take time. Consequently, Alliant Energy is unable to provide any assurances that one or more of the options under review will occur, or that implementation of any one or more of the options will not result in Alliant Energy incurring a material charge relating to its investments in Brazil as it cannot currently predict the ultimate outcome of these reviews and discussions.
China —The generating plants included in Alliant Energy’s China portfolio are currently experiencing higher than anticipated coal and related transportation costs due primarily to government reforms and coal allocations, rapid economic expansion in China and infrastructure bottlenecks. Alliant Energy has achieved some success in mitigating, and continues to work to mitigate, the impact of these cost increases through working with local and provincial Chinese authorities to increase the supply of lower-cost coal, gain access to long-term contracts and to enable the recovery of higher costs through tariffs. In addition, Alliant Energy is examining other ways to offset these cost increases within its operations. However, most of these efforts in China require government interaction, which is less formal and predictable than general fuel-related cost recovery processes experienced within the U.S. domestic utility industry. If the price of coal and related transportation costs were to increase (decrease) 10% compared to the average prices experienced during the 12 months ended Sep. 30, 2004, Alliant Energy’s pre-tax income for the 12 months ended Sep. 30, 2005 would (decrease) increase by approximately $6 million.
In addition to applying pressure on the margins currently being realized from Alliant Energy’s China operations, these cost pressures could impact the estimated fair value of Alliant Energy’s China investments. Alliant Energy has $10 million of goodwill related to its China investments on its balance sheet and if the fair value of these investments does not exceed their carrying value (including goodwill) in the future, Alliant Energy may be required to record an impairment charge related to this goodwill balance. Alliant Energy is currently unable to predict the future of these costs in China or provide assurances that its efforts to mitigate the impact of any cost increases will be successful.
Synfuel — Alliant Energy is an investor in a synthetic fuel facility. The Internal Revenue Service audited this facility to determine, among other issues, if the tax credits claimed have met the tests outlined in the Internal Revenue Code. The audit was substantially completed in the third quarter of 2004 with no significant impact to Alliant Energy’s financial condition or results of operations.
American Jobs Creation Act —In October 2004, the American Jobs Creation Act (the Act) was passed which includes changes to several provisions of the Internal Revenue Code. The key changes that may impact Alliant Energy include, but are not limited to, a temporary dividends received deduction for foreign earnings repatriated during 2004 and 2005, future tax relief for domestic manufacturers (including electric production activities) and an extension of certain renewable energy production tax credits for generating facilities placed in service prior to Jan. 1, 2006. Alliant Energy is currently analyzing the impacts of the Act, including reviewing opportunities to repatriate cash from certain of its International businesses during 2004 and 2005 to gain the benefits of the temporary dividends received deduction. If Alliant Energy elects to repatriate certain foreign earnings that were previously expected to be reinvested indefinitely, it will incur tax expense at the time such election is made given Alliant Energy has not previously recorded U.S. tax provisions related to these earnings. Alliant Energy does not currently anticipate that this tax expense would have a material adverse effect on its financial condition or results of operations. Any potential utility business tax benefits realized as a result of this legislation would be subject to all appropriate regulatory reviews.
Quantitative and Qualitative Disclosures About Market Risk are reported under Item 2 MD&A “Other Matters — Market Risk Sensitive Instruments and Positions.”
Alliant Energy’s, IPL’s and WPL’s management evaluated, with the participation of each of Alliant Energy’s, IPL’s and WPL’s Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Disclosure Committee, the effectiveness of the design and operation of Alliant Energy’s, IPL’s and WPL’s disclosure controls and procedures as of the end of the quarter ended Sep. 30, 2004 pursuant to the requirements of the Securities Exchange Act of 1934, as amended. Based on their evaluation, the CEO and the CFO concluded that Alliant Energy’s, IPL’s and WPL’s disclosure controls and procedures were effective as of the end of the quarter ended Sep. 30, 2004.
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There was no change in Alliant Energy’s, IPL’s and WPL’s internal control over financial reporting that occurred during the quarter ended Sep. 30, 2004 that has materially affected, or is reasonably likely to materially affect, Alliant Energy’s, IPL’s or WPL’s internal control over financial reporting.
The following Exhibits are filed herewith.
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 5th day of November 2004.
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