INTERSTATE POWER & LIGHT CO - 10-K - 20050304 - PART_II
PART II
ITEM 5.
MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Alliant Energy’s common stock trades on the New York Stock Exchange under the symbol “LNT.” Quarterly sales price ranges and dividends with respect to Alliant Energy’s common stock were as follows:
2004
2003
Quarter
High
Low
Dividend
High
Low
Dividend
First
$26.50
$24.54
$0.25
$18.30
$14.98
$0.25
Second
26.55
23.50
0.25
20.60
16.03
0.25
Third
27.40
24.34
0.25
22.70
18.69
0.25
Fourth
28.80
24.90
0.2625
25.09
21.94
0.25
Year
28.80
23.50
1.0125
25.09
14.98
1.00
Stock closing price at Dec. 31, 2004: $28.60
Although Alliant Energy’s practice has been to pay cash dividends on its common stock quarterly, the timing of payment and amount of future dividends are necessarily dependent upon future earnings, capital requirements, general financial condition, general business conditions, the ability of Alliant Energy’s subsidiaries to pay dividends and other factors. 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.
At Dec. 31, 2004, there were approximately 50,026 holders of record of Alliant Energy’s stock, including holders through Alliant Energy’s Shareowner Direct Plan.
Alliant Energy is the sole common shareowner of all 13,370,788 shares of IPL common stock currently outstanding. During 2004 and 2003, IPL paid dividends on its common stock of $102 million and $89 million, respectively, to Alliant Energy. In accordance with the IUB order authorizing the IPL merger, IPL must inform the IUB if its common equity ratio falls below 42% of total capitalization. Alliant Energy is the sole common shareowner of all 13,236,601 shares of WPL common stock currently outstanding. During 2004 and 2003, WPL paid dividends on its common stock of $89 million and $71 million, respectively, to Alliant Energy. In its December 2003 rate order, the PSCW stated WPL may not pay annual common stock dividends, including pass-through of subsidiary dividends, in excess of $89 million to Alliant Energy if WPL’s actual average common equity ratio, on a regulatory financial basis, is or will fall
below the authorized level of 54.01%. WPL’s dividends are also restricted to the extent that such dividend would reduce the common stock equity ratio to less than 25%. IPL and WPL each have common stock dividend payment restrictions based on their respective bond indentures and the terms of their outstanding preferred stock. At Dec. 31, 2004, IPL and WPL were in compliance with all such dividend restrictions.
A summary of Alliant Energy common stock repurchases for the quarter ended Dec. 31, 2004 was as follows:
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan (1)
Oct. 1 to Oct. 31
206
$25.97
--
N/A
Nov. 1 to Nov. 30
2,177
27.17
--
N/A
Dec. 1 to Dec. 31
255
27.80
--
N/A
Total
2,638
$27.14
--
N/A
(1)
Represents shares of Alliant Energy common stock purchased on the open market and held in a grantor trust under the Alliant Energy Key Employee Deferred Compensation Plan (KEDCP). There is no limit on the number of shares of Alliant Energy common stock that may be held under the KEDCP, which currently does not have an expiration date.
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ITEM 6. SELECTED FINANCIAL DATA
Alliant Energy
Financial Information
2004 (1)
2003 (1)
2002 (1)
2001
2000 (2)
(dollars in millions, except per share data)
Income Statement Data:
Operating revenues
$2,958
.7
$2,866
.8
$2,457
.1
$2,591
.0
$2,268
.4
Income from continuing operations
210
.8
156
.0
94
.1
132
.7
330
.9
Income (loss) from discontinued operations, net of tax
(65
.3)
33
.5
12
.8
52
.6
51
.1
Income before cumulative effect of changes in
accounting principles
145
.5
189
.5
106
.9
185
.3
382
.0
Cumulative effect of changes in accounting
principles, net of tax
--
(6
.0)
--
(12
.9)
16
.7
Net income
145
.5
183
.5
106
.9
172
.4
398
.7
Common Stock Data:
Earnings per average common share (basic):
Income from continuing operations
$1
.86
$1
.54
$1
.04
$1
.65
$4
.19
Income (loss) from discontinued operations
($0
.58)
$0
.33
$0
.14
$0
.65
$0
.65
Cumulative effect of changes in accounting principles
$--
($0
.06)
$--
($0
.16)
$0
.21
Net income
$1
.28
$1
.81
$1
.18
$2
.14
$5
.05
Earnings per average common share (diluted):
Income from continuing operations
$1
.85
$1
.54
$1
.04
$1
.65
$4
.18
Income (loss) from discontinued operations
($0
.57)
$0
.33
$0
.14
$0
.65
$0
.64
Cumulative effect of changes in accounting principles
$--
($0
.06)
$--
($0
.16)
$0
.21
Net income
$1
.28
$1
.81
$1
.18
$2
.14
$5
.03
Common shares outstanding at year-end (000s)
115,
742
110,
963
92,
304
89,
682
79,
010
Dividends declared per common share
$1.0
125
$1
.00
$2
.00
$2
.00
$2
.00
Market value per share at year-end
$28
.60
$24
.90
$16
.55
$30
.36
$31
.88
Book value per share at year-end (3)
$22
.13
$21
.37
$19
.89
$21
.39
$25
.79
Other Selected Financial Data:
Cash flows from operating activities (continuing operations)
$501
.6
$460
.7
$541
.3
$457
.1
$393
.6
Construction and acquisition expenditures
$649
.2
$837
.2
$648
.4
$692
.5
$831
.7
Total assets at year-end (3)
$8,275
.2
$7,797
.5
$7,848
.2
$7,007
.5
$7,436
.7
Long-term obligations, net
$2,518
.0
$2,321
.6
$2,784
.2
$2,586
.0
$2,128
.5
Times interest earned before income taxes (4)
2.75
X
2.17
X
1.80
X
2.06
X
4.35
X
Capitalization ratios:
Common equity (3)
48
%
47
%
36
%
41
%
44
%
Preferred stock
4
%
5
%
4
%
2
%
2
%
Long- and short-term debt
48
%
48
%
60
%
57
%
54
%
Total
100
%
100
%
100
%
100
%
100
%
(1)
Refer to "Alliant Energy Results of Operations" in MDA for a discussion of the 2004, 2003 and 2002 results of operations.
(2)
Includes $204.0 million ($2.58 per diluted share) of non-cash net income related to Alliant Energy's adoption of Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities," and $15.6 million
($0.20 per diluted share) of net income from gains on sales of McLeodUSA Incorporated (McLeod) stock.
(3)
Alliant Energy adjusts the carrying value of its investments in McLeod to its estimated fair value, pursuant to the applicable
accounting rules. At Dec. 31, 2000, the carrying amount reflected an unrealized gain of approximately $543 million with a net
of tax increase to common equity of $317 million. The unrealized gain (loss) was not significant during all other periods
reported.
(4)
Represents income from continuing operations before income taxes plus preferred dividend requirements of subsidiaries plus
interest expense divided by interest expense.
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IPL
2004 (1)
2003 (1)
2002 (1)
2001
2000
(in millions)
Operating revenues
$1,459.6
$1,371.2
$1,242.4
$1,352.6
$1,234.0
Earnings available for common stock
110.3
87.1
88.0
94.7
99.7
Cash dividends declared on common stock
102.0
89.1
81.8
80.3
80.3
Cash flows from operating activities
345.7
321.9
250.4
305.9
267.6
Total assets
3,869.1
3,621.0
3,192.8
2,854.2
2,924.2
Long-term obligations, net
1,038.9
910.5
902.2
922.9
792.3
(1) Refer to “IPL Results of Operations” in MDA for a discussion of the 2004, 2003 and 2002 results of operations.
Alliant Energy is the sole common shareowner of all 13,370,788 shares of IPL’s common stock outstanding. As such, earnings per share data is not disclosed herein.
WPL
2004 (1)
2003 (1)
2002 (1)
2001
2000
(in millions)
Operating revenues
$1,209.8
$1,217.0
$989.5
$993.7
$862.4
Earnings available for common stock
110.4
111.6
77.6
70.2
68.1
Cash dividends declared on common stock
89.0
70.6
59.6
60.4
--
Cash flows from operating activities
199.3
138.5
223.8
135.9
174.1
Total assets
2,656.1
2,469.3
2,335.1
2,217.5
2,160.6
Long-term obligations, net
491.3
453.5
523.3
523.2
569.3
(1) Refer to “WPL Results of Operations” in MDA for a discussion of the 2004, 2003 and 2002 results of operations.
Alliant Energy is the sole common shareowner of all 13,236,601 shares of WPL’s common stock outstanding. As such, earnings per share data is not disclosed herein.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MDA)
FORWARD-LOOKING STATEMENTS
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 Corporation’s (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 and recently enacted federal tax legislation, 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 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 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 anticipated sale of Alliant Energy’s interests in the Kewaunee Nuclear Power Plant (Kewaunee) and Duane Arnold Energy Center (DAEC); 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 International investments; stable foreign exchange rates; 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 its comprehensive cost-cutting and operational efficiency efforts; Alliant Energy’s ability to identify and successfully complete potential acquisitions and development projects; Alliant Energy’s ability to complete its proposed divestitures of various businesses and investments in a timely fashion and for anticipated proceeds; Alliant Energy’s ability to achieve its earnings per average common share (EPS) growth, dividend payout ratio and total shareowner return goals; 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 and 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.
EXECUTIVE SUMMARY
Description of Business
-
Alliant Energy operates as a registered public utility holding company subject to the limitations imposed by the Public Utility Holding Company Act of 1935 (PUHCA). The first tier subsidiaries of Alliant Energy are Interstate Power and Light Company (IPL), Wisconsin Power and Light Company (WPL), Alliant Energy Resources, Inc. (Resources) and Alliant Energy Corporate Services, Inc. (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 is the parent company for Alliant Energy’s non-regulated businesses. Corporate Services provides administrative services to Alliant Energy and its subsidiaries as required under PUHCA.
Alliant Energy manages three primary businesses: 1) domestic utility business (IPL and WPL); 2) non-regulated businesses (Resources and subsidiaries); and 3) other as defined below.
Domestic Utility Business -
IPL and WPL own a portfolio of domestic electric generating facilities with a diversified fuel mix including coal, nuclear, natural gas and renewable resources. The output from these generating facilities, supplemented with purchased-power, is used to provide electric service to approximately 1 million electric customers in the upper Midwest. The domestic utility business also procures natural gas from various suppliers to provide service to approximately 400,000 gas customers in the upper Midwest. Alliant Energy’s domestic utility business is its core business and primary source of earnings and cash flows. The earnings and cash flows from the domestic utility business are sensitive to various external factors including, but not limited to, the impact of weather on electric and gas sales volumes, the amount and timing of rate relief approved by
regulatory authorities and other factors listed in “Forward-Looking Statements.”
24
Non-regulated Businesses -
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 in Brazil, China and New Zealand); and Other Non-regulated Investments (includes investments in environmental engineering and site remediation, transportation, a resort development in Mexico (Laguna del Mar), synthetic fuel and energy technologies investments, as well as the oil and gas pipeline gathering systems and biomass facility that Alliant Energy recently decided to divest).
Other -
includes the operations of Corporate Services as well as Alliant Energy (the parent company).
Summary of Historical Results of Operations
-
Alliant Energy’s diluted EPS was as follows:
2004
2003
2002
Income from continuing operations
$1.85
$1.54
$1.04
Income (loss) from discontinued operations
(0.57)
0.33
0.14
Cumulative effect of changes in accounting principles
--
(0.06)
--
Net income
$1.28
$1.81
$1.18
Additional details regarding Alliant Energy’s net income were as follows (in millions):
2004
2003
2002
Continuing operations:
Domestic utility
$221.4
$197.2
$165.8
Non-regulated (Resources)
(3.6)
(29.4)
(73.8)
Alliant Energy parent and other (primarily taxes, interest and
administrative and general)
(7.0)
(11.8)
2.1
Income from continuing operations
210.8
156.0
94.1
Income (loss) from discontinued operations
(65.3)
33.5
12.8
Cumulative effect of changes in accounting principles
--
(6.0)
--
Net income
$145.5
$183.5
$106.9
In spite of extremely mild weather conditions in 2004, Alliant Energy’s earnings from its domestic utility business were higher in 2004 compared to 2003 due to the impact of rate increases, a lower effective income tax rate and weather-normalized sales growth. These items were partially offset by higher other operating expenses, although Alliant Energy was able to mitigate the impact of this to a degree by its comprehensive cost-cutting and operational efficiency efforts. Alliant Energy estimates the extremely mild weather conditions in its domestic utility electric and gas service territories had a negative impact on its 2004 after-tax earnings of $22 to $25 million. The improved results from continuing operations of $26 million from Alliant Energy’s non-regulated businesses in 2004 were primarily due to a decrease in interest expense of $21 million in 2004 compared to 2003, a gain realized on
the sale of Alliant Energy’s remaining interest in Whiting Petroleum Corporation (WPC) in 2004 and lower charges related to early debt reductions.
The 2003 increase in domestic utility income from continuing operations was largely due to higher electric and gas margins, which were partially offset by higher operating expenses. The significant improvement in Alliant Energy’s non-regulated results from continuing operations in 2003 was primarily due to improved results from its International businesses and lower non-cash valuation charges, which were partially offset by charges in 2003 related to early debt reductions.
Refer to “Alliant Energy Results of Operations,” “IPL Results of Operations” and “WPL Results of Operations” for additional details regarding the various factors impacting the respective earnings during 2004, 2003 and 2002.
STRATEGIC OVERVIEW
Summary
-
Alliant Energy’s strategic plan is based on five primary principles: a regional focus on utility operations; investments in new domestic utility generation; a focused approach to diversified operations; maintaining sustained, long-term strong financial performance with a strong balance sheet and investment grade credit ratings; and maintaining a performance culture focused on accountability and adherence to its corporate values of ethics, safety, diversity, efficiency and attention to the environment. This strategic plan is also 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, increasing the returns on invested capital in all of Alliant Energy’s businesses and streamlining
Alliant Energy’s portfolio of businesses. Alliant Energy has also implemented a comprehensive Lean Six Sigma program to assist it in generating cost savings and operational efficiencies in 2005 and beyond. Alliant Energy’s domestic utility business is its
core business and the sole growth platform within its strategic plan and Alliant Energy expects it to provide the larger share of its long-term earnings growth. It will also be the business that Alliant Energy will invest the majority of its capital in during 2005 and 2006. Refer to “Liquidity and Capital Resources - Cash Flows from (used for) Investing Activities - Construction and Acquisition Expenditures” for additional information. Alliant Energy’s remaining non-regulated businesses will serve as ongoing business platforms. Alliant Energy expects these businesses to contribute to its earnings growth, but to a lesser degree than its growth platform (i.e., domestic utility business). Alliant Energy intends to concentrate its strategic focus on the profitability and cash flows of its remaining non-regulated platforms and will consider additional divestitures if provided the right
opportunity to maximize value and/or eliminate unwarranted risk.
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Alliant Energy’s strategy reflects the fact that it has investment opportunities in its domestic utility business that did not exist several years ago. Progressive legislation was passed in Iowa that provides companies with the necessary rate making principles - and resulting increased regulatory and investment certainty - prior to making certain generation investments in Iowa. Wisconsin also enacted legislation with the goal of assuring reliable electric energy for Wisconsin. The law allows the construction of merchant power plants in the state and streamlines the regulatory approval process for building new generation and transmission facilities. In addition, the Public Service Commission of Wisconsin (PSCW) approved a plan proposed by another Wisconsin utility, which provides a similar level of investment certainty by leasing generation from an affiliate. These changes have enabled Alliant Energy
to pursue additional generation investments in its domestic utility business to serve its customers and to provide shareowners with greater certainty regarding the returns on these investments.
Domestic Utility Generation Plan
-
In 2003, Alliant Energy announced a plan to add an additional 1,600 megawatts (MW) of domestic utility generating capacity to its diversified portfolio by 2010. Alliant Energy intends to add this new generation to meet increasing customer demand, reduce reliance on purchased-power agreements and mitigate the impacts of potential future plant retirements. Alliant Energy will continue to purchase energy and capacity in the market and intends to remain a net purchaser of both, but at a reduced level assuming the successful completion of these generation projects. The plan also reflects continued commitments to Alliant Energy’s energy efficiency and environmental protection programs. The following is a summary of the significant progress Alliant Energy has made to-date regarding the execution of this plan:
•
Alliant Energy continues to make progress on acquiring regulatory approvals for the 300 MW, simple-cycle, natural gas-fired generating facility under construction near Sheboygan Falls, Wisconsin. Resources’ Non-regulated Generation business began construction of the generating facility in 2004 and is expected to complete the facility in time to meet increased summer demand in 2005. Alliant Energy is proposing that Resources’ Non-regulated Generation business would own the facility and enter into a long-term agreement with WPL whereby WPL would operate and maintain the facility and have exclusive rights to the generation output. The facility is expected to cost approximately $150 million, of which approximately $120 million had already been expended as of Dec. 31, 2004. The proposed structure is subject to final PSCW approval.
•
In October 2004, the federal renewable energy production tax credit was extended for generating facilities that will be placed in service prior to Jan. 1, 2006. As a result, Alliant Energy has moved forward with its plans to add 230 MW of wind generation to its diversified generation portfolio, preferably as purchased-power agreements. IPL and WPL each currently plan to add up to 100 MW of additional wind generation to their renewable resource portfolios by the end of 2005.
•
In May 2004, Alliant Energy announced WPL would pursue plans to build a jointly-owned 500 MW base-load electric plant with Wisconsin Public Service Corporation (WPSC) (respective ownership levels have not yet been determined). The planning process will include feasibility and siting studies. Based on the current energy requirement studies of both companies, WPL expects significant increases in electric supply are likely to be needed to offset rising energy demand and expiring purchased-power agreements by 2010.
•
IPL’s 565 MW, combined-cycle, natural gas-fired Emery Generating Facility (Emery) near Mason City, Iowa was completed on time and on budget and placed in service in May 2004. The rate making principles included a 12.23% return on common equity.
Alliant Energy reviews and updates, as deemed necessary and in accordance with regulatory requirements, its domestic utility generation requirements on a
periodic basis.
Asset Divestitures
-
Alliant Energy is committed to streamlining its portfolio of businesses to those that can provide meaningful earnings and cash flows for shareowners with acceptable risk profiles, as well as 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 and following the divestitures of its Australian, affordable housing, SmartEnergy, Inc., the majority of its oil and gas (WPC) and several other modest businesses in 2003, Alliant Energy completed the divestitures of additional businesses in 2004. In addition, Alliant Energy is in the process of divesting additional non-regulated and domestic utility businesses. The proceeds realized from these asset sales are expected to be available for debt reduction and other general
corporate purposes. The following is a summary of Alliant Energy’s asset divestiture activities in 2004 and to date in 2005.
26
Non-regulated Businesses -
In November 2004, Alliant Energy completed the sale of its remaining interest in WPC, generating pre-tax proceeds of approximately $30 million and a gain of $0.08 per share. In July 2004, Alliant Energy announced its intention to divest its energy services (Cogenex Corporation and affiliates), gas marketing (NG Energy Trading, LLC (NGE)) and energy management services businesses within its former Integrated Services platform. During the second half of 2004, Alliant Energy completed the sale of NGE and the energy management services business and plans to divest its energy services business (net book value of approximately $40 million at Dec. 31, 2004) during the first half of 2005. As of Dec. 31, 2004, these businesses have been reported as assets held for sale and discontinued operations. Refer to Note 16 of Alliant Energy’s “Notes to
Consolidated Financial Statements” for additional information regarding these businesses.
In January 2005, Alliant Energy also announced its intention to divest in 2005 its oil and gas gathering pipeline systems as well as its investment in a biomass facility, two additional businesses within its former Integrated Services platform. The net book value of these two businesses was approximately $25 million at Dec. 31, 2004. Alliant Energy expects these businesses will qualify for reporting as assets held for sale and discontinued operations in 2005. The 2004 earnings from continuing operations included a loss of $0.04 per share from these two businesses.
Alliant Energy is currently evaluating and considering the full range of options available to it as relates to the future of its non-regulated businesses, including International and Laguna del Mar, with a focus on the pursuit of the action that best protects its interests and maximizes the overall value of its investments for Alliant Energy’s shareowners.
Domestic Utility Business -
Alliant Energy is currently pursuing the sale of its two nuclear generating facilities, WPL’s 41% interest in Kewaunee and IPL’s 70% interest in DAEC. In pursuing the sale of both of these facilities, Alliant Energy expects to reduce the financial and operational uncertainty associated with nuclear generating facility ownership and operations, yet still retain the benefit of the output from such plants through purchased-power agreements. In November 2004, the PSCW issued a decision rejecting WPL’s and WPSC’s joint application to sell Kewaunee to Dominion Resources, Inc. (Dominion). WPL and WPSC joined Dominion and applied for a rehearing with the PSCW to continue the pursuit of the sale of the plant. In January 2005, the PSCW accepted the rehearing petition and expects to rule on the sale in the first half of 2005. Also, Alliant
Energy announced in December 2004 its intention to sell its ownership interest in DAEC. Alliant Energy currently intends to enter into a definitive sales agreement for DAEC during 2005 and will then seek all appropriate state and federal regulatory approvals. Refer to Notes 17 and 18 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information regarding the proposed sale of these nuclear generating facilities.
In August 2004, Alliant Energy announced its intention to sell its Illinois electric and gas utility properties (net book value of approximately $50 million to $60 million as of Dec. 31, 2004) owned by IPL and WPL. 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 in the first half of 2005 and any such sales agreement would be subject to regulatory approvals.
In January 2005, WPL and the city of Ripon, Wisconsin finalized a purchase and sale agreement for the sale of the water utility serving the Ripon area. Pending approval by the PSCW, the transfer of ownership of the water utility is expected to take place in the first half of 2005. WPL also continues to make progress on the sale of its water utility in South Beloit, Illinois.
Of all these domestic utility business divestitures, only WPL’s water utility in Ripon qualified as assets held for sale as of Dec. 31, 2004 and none of them have been reported as discontinued operations.
RATES AND REGULATORY MATTERS
Overview
-
Alliant Energy has two utility subsidiaries, IPL and WPL. WPL has one utility subsidiary, South Beloit Water, Gas and Electric Company (South Beloit).
Alliant Energy’s utility subsidiaries are currently subject to federal regulation by the Federal Energy Regulatory Commission (FERC), which has jurisdiction over wholesale rates and certain natural gas facilities, and state regulation in Iowa, Wisconsin, Minnesota and Illinois for retail utility rates and standards of service. Such regulatory oversight also covers IPL’s and WPL’s plans for construction and financing of new generation facilities and related activities.
27
As a public utility holding company with significant utility assets, Alliant Energy conducts its utility operations in an ever-changing business environment. Electric energy generation, transmission and distribution are facing a period of fundamental change resulting from potential legislative, regulatory, economic and technological changes. However, the pace of
restructuring in Alliant Energy’s primary retail electric service territories has been delayed (and may continue to be delayed for a long period of time) due to uncertainty and developments in the industry. Alliant Energy cannot predict the timing of a restructured electric industry or the impact on its financial condition or results of operations.
Certain Recent Developments
-
Details of Alliant Energy’s domestic utility rate cases impacting its historical and future results of operations are as follows (dollars in millions; Electric (E); Gas (G); Water (W); To Be Determined (TBD); Not Applicable (N/A); Fuel-related (F-R)):
Case
Utility Type
Filing
Date
Increase Requested
Interim Increase Granted (1)
Interim Effective Date
Final Increase Granted (1)
Final
Effective
Date
Expected
Final
Effective
Date
Return on Common Equity
Notes
WPL:
2002 retail
E/G/W
8/01
$104
$49
4/02
$82
9/02
N/A
12.3%
2003 retail
E/G/W
5/02
123
--
N/A
81
4/03
N/A
12%
2004 retail
E/G/W
3/03
87
--
N/A
14
1/04
N/A
12%
2005/2006 retail
E/G
9/04
63
N/A
N/A
TBD
TBD
7/05
TBD
(2)
2004 retail (F-R)
E
2/04
16
16
3/04
10
10/04
N/A
N/A
(3)
2004 retail (F-R)
E
12/04
9
--
N/A
--
N/A
N/A
N/A
(4)
South Beloit
retail - IL
G/W
10/03
1
N/A
N/A
1
10/04
N/A
G-9.87%/ W-9.64%
Wholesale
E
2/02
6
6
4/02
3
1/03
N/A
N/A
Wholesale
E
3/03
5
5
7/03
5
2/04
N/A
N/A
Wholesale
E
8/04
12
12
1/05
TBD
TBD
8/05
N/A
IPL:
IA retail
E
3/02
82
15
7/02
26
5/03
N/A
11.15%
IA retail
G
7/02
20
17
10/02
13
8/03
N/A
11.05%
IA retail
E
3/04
149
98
6/04
107
2/05
N/A
(a)
MN retail
E
5/03
5
2
7/03
1
9/04
N/A
11.25%
(3)
(a) Emery - 12.23% and Other - 10.7%
(1)
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.
(2)
The 2005/2006 retail rate case is based on a test period from July 2005 to June 2006.
(3)
Since the final increase was lower than the interim relief granted, a refund to customers was made in 2004.
(4)
The PSCW denied WPL’s request for a rate increase in this proceeding during an oral hearing held in February 2005. WPL expects to receive the final written order in March 2005 and will consider its alternatives upon a thorough review of such written order.
With the exception of recovering a return on Emery, which was a large component of IPL’s 2004 retail Iowa electric rate case, 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 $25 million to $35 million fuel-related rate case in the first quarter of 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 WPL’s 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 is not
expected to result in a meaningful increase in net income.
WPL’s retail electric rates are based on annual forecasted fuel and purchased power costs. Under PSCW rules, WPL can seek rate increases for increases in the cost of electric fuel and purchased power if it experiences an increase in costs that are more than 3% higher than the estimated costs used to establish rates. The PSCW attempts to authorize, after a required hearing, interim fuel-related rate increases within 21 days of notice to customers. Any such change in rates would be effective prospectively and would require a refund with interest at the overall authorized return on common equity if final rates are determined to be lower than interim rates approved. Rate decreases due to decreases in fuel-related costs can be implemented without hearing. The rules also include a process whereby Wisconsin utilities can seek deferral treatment of emergency changes in fuel-related costs between
fuel-related or base rate cases. Such deferrals would be subject to review, approval and recovery in future fuel-related or base rate cases.
28
In 2004, a new law impacting ratemaking was passed in Iowa. The new law allows utilities to place in effect interim rates, subject to refund, without review by the Iowa Utilities Board (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.
In 2002, IPL filed with the Internal Revenue Service (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 IPL’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 IPL’s proposed accounting treatment to defer the tax savings as a regulatory liability 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 2005 or 2006. There would be no material negative impact
on IPL’s results of operations or financial position should the IRS reject IPL’s proposal.
Energy-related legislation is currently pending in the United States (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.
ALLIANT ENERGY RESULTS OF OPERATIONS
Unless otherwise noted, all “per share” references in the Results of Operations section refer to
diluted
EPS.
Overview
-
Refer to “Executive Summary” for an overview of Alliant Energy’s 2004, 2003 and 2002 earnings and the various components of Alliant Energy’s business.
Domestic Utility Electric Margins
-
Electric margins, megawatt-hour (MWh) sales and cooling degree day data for Alliant Energy were as follows:
Revenues and Costs (in millions)
MWhs Sold (in thousands)
2004
2003
*
2002
**
2004
2003
*
2002
**
Residential
$716.7
$684.6
5%
$626.9
9%
7,354
7,565
(3%)
7,616
(1%)
Commercial
437.8
409.7
7%
376.4
9%
5,702
5,663
1%
5,542
2%
Industrial
609.9
571.6
7%
526.8
9%
12,596
12,345
2%
12,297
--
Total from retail
customers
1,764.4
1,665.9
6%
1,530.1
9%
25,652
25,573
--
25,455
--
Sales for resale
185.8
195.8
(5%)
160.3
22%
5,102
5,495
(7%)
4,805
14%
Other
58.8
55.4
6%
62.1
(11%)
178
184
(3%)
197
(7%)
Total revenues/sales
2,009.0
1,917.1
5%
1,752.5
9%
30,932
31,252
(1%)
30,457
3%
Electric production
fuel and purchased-
power expense
747.4
730.6
2%
651.8
12%
Margins
$1,261.6
$1,186.5
6%
$1,100.7
8%
* Reflects the % change from 2003 to 2004. ** Reflects the % change from 2002 to 2003.
Actual
Cooling degree days*:
2004
2003
2002
Normal
Cedar Rapids (IPL)
139
276
397
379
Madison (WPL)
138
224
356
242
*
Cooling degree days are calculated using a 70 degree base. Normal degree days are calculated using a fixed 30-year average most recently updated in February 2002.
29
Electric margins increased $75 million, or 6%, in 2004, primarily due to the impact of various rate increases implemented in 2004 and 2003, which included increased revenues to recover a significant portion of higher utility operating expenses, an approximate 2% increase in weather-normalized sales and lower purchased-power capacity costs at IPL. This sales growth included an increase of 2% in industrial sales, reflecting improving economic conditions in Alliant Energy’s domestic utility service territories. These items were partially offset by the impact of extremely mild weather in 2004, $8 million of lower energy conservation revenues and the effect of WPL implementing seasonal rates for the first time in April 2003. Alliant
Energy estimates the mild weather conditions had a negative impact of approximately $33 million to $38 million on its electric utility margins in 2004 compared to normal weather. By comparison, Alliant Energy estimates the impact of weather had a negative impact of approximately $9 million to $10 million on its electric utility margins in 2003 compared to normal weather. The reduced energy conservation revenues were largely offset by lower energy conservation expenses.
Electric margins increased $86 million, or 8%, in 2003, primarily due to the impact of rate increases implemented in 2003 and 2002, including increased revenues to recover a significant portion of higher utility operating expenses, lower purchased-power and fuel costs impacting margins, the impact of WPL implementing seasonal rates in 2003 for the first time, weather-normalized retail sales growth and higher sales to non-retail customers. These items were partially offset by milder weather conditions in 2003 compared to 2002.
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 Sept. 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, given the seasonal rates were not yet effective in the first quarter of 2003, the impact of seasonal rates increased the 2003 electric margins by approximately $6 million compared to the 2004 and 2002 electric margins.
Domestic Utility Gas Margins
-
Gas margins, dekatherm (Dth) sales and heating degree day data for Alliant Energy were as follows:
Revenues and Costs (in millions)
Dths Sold (in thousands)
2004
2003
*
2002
**
2004
2003
*
2002
**
Residential
$315.6
$310.7
2%
$218.7
42%
29,338
31,871
(8%)
30,931
3%
Commercial
172.3
162.7
6%
111.3
46%
19,199
19,947
(4%)
19,348
3%
Industrial
38.4
34.2
12%
25.2
36%
5,127
5,093
1%
5,373
(5%)
Transportation/other
43.5
59.3
(27%)
38.8
53%
49,626
48,978
1%
47,386
3%
Total revenues/sales
569.8
566.9
1%
394.0
44%
103,290
105,889
(2%)
103,038
3%
Cost of gas sold
396.9
396.1
--
249.0
59%
Margins
$172.9
$170.8
1%
$145.0
18%
* Reflects the % change from 2003 to 2004. ** Reflects the % change from 2002 to 2003.
Actual
Heating degree days*:
2004
2003
2002
Normal
Cedar Rapids (IPL)
6,463
6,883
6,577
6,899
Madison (WPL)
6,831
7,337
6,929
7,485
*
Heating degree days are calculated using a 65 degree base. Normal degree days are calculated using a fixed 30-year average most recently updated in February 2002.
Gas margins increased $2.1 million, or 1%, in 2004, primarily due to improved results of $3.5 million from WPL’s performance-based gas 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. Gas revenues and cost of gas sold were higher in 2003 compared to 2002 primarily due to increased natural gas prices. Due to Alliant Energy’s rate recovery mechanisms for gas costs, these price differences alone had little impact on gas margins. Gas margins increased $26 million, or 18%, in 2003, primarily due to the impact of several rate increases implemented during 2003 and 2002, improved results of $2.7 million from WPL’s performance-based gas commodity cost recovery program, continued modest customer growth and slightly more favorable weather conditions during the heating season in
2003 compared to 2002.
Refer to “Rates and Regulatory Matters” for discussion of various electric and gas rate filings. Refer to Note 1(i)
of Alliant Energy’s “Notes to Consolidated Financial Statements” for information relating to utility fuel and natural gas cost recovery.
Domestic Utility Other Revenues
-
Other revenues for the domestic utilities decreased $14 million in 2004, primarily due to $13 million of lower construction management revenues from Alliant Energy’s WindConnect™ program, resulting from uncertainty in 2004 regarding the extension of the federal renewable energy production tax credit. This decrease was largely offset by lower operating expenses related to these activities. In the fourth quarter of 2004, the federal renewable energy production tax credit was extended for generating facilities placed in service prior to Jan. 1, 2006. Other revenues for the domestic utilities increased $19 million in 2003, largely due to increased revenues from WindConnect™, which were largely offset by higher operating expenses related to WindConnect™.
30
Non-regulated Revenues
-
Details regarding Alliant Energy’s non-regulated revenues were as follows (in millions):
2004
2003
2002
International
$136
$117
$100
Environmental engineering and site remediation
85
90
76
Non-regulated Generation
25
24
9
Transportation
23
20
20
Other (includes eliminations)
20
28
20
$289
$279
$225
The increased International revenues in 2004 were primarily due to increased production at Alliant Energy’s generating facilities in China resulting from increased electricity and steam demand, the acquisition of an additional generating facility in China in 2003 and tariff increases to recover a portion of higher coal and related transportation costs in China. The increased International revenues in 2003 were primarily due to acquisitions of additional generating facilities in China during 2002 and 2003. The 2003 Environmental revenues were higher than those in 2004 and 2002, primarily due to a large construction management project in 2003. The higher Non-regulated Generation revenues in 2003 were primarily due to the acquisition in the first quarter of 2003 of a 309 MW non-regulated, tolled (through May 2008), natural gas-fired power plant in Neenah, Wisconsin. The higher 2003 Other revenues were primarily due to
increased revenues from Alliant Energy’s oil and gas gathering pipeline systems (which Alliant Energy is in the process of divesting).
Other Operating Expenses
-
Other operation and maintenance expenses for the domestic utilities increased $5.4 million in 2004, primarily due to increases in employee and retiree benefits (comprised of compensation, medical and pension costs) and other administrative and general expenses. These items were largely offset by the impact of comprehensive cost-cutting and operational efficiency efforts, lower energy conservation expenses and $9.5 million of lower expenses for WindConnect™. Other operation and maintenance expenses for the domestic utilities increased $79 million in 2003, primarily due to increases in the amortization of deferred costs that are now being recovered in rates and increased employee and retiree benefits, WindConnect™ and nuclear expenses. The increased nuclear expenses in 2003 resulted primarily from a planned
refueling outage at Kewaunee in 2003. A similar planned outage occurred in 2004 but there was no refueling outage in 2002. These 2003 items were partially offset by lower fossil generation expenses due to the timing of boiler plant maintenance.
Non-regulated operation and maintenance expenses were as follows (in millions):
2004
2003
2002
International
$114
$90
$77
Environmental engineering and site remediation
78
79
68
Non-regulated Generation
12
14
16
Transportation
12
12
11
Other (includes eliminations)
39
47
28
$255
$242
$200
The variances in 2004 and 2003 were largely driven by the same factors impacting the revenue variances discussed previously. The International increase in 2004 was also due to higher coal and related transportation costs for its generating facilities in China and higher litigation-related expenses incurred defending Alliant Energy’s shareholder rights in Brazil. Refer to “Other Matters - Market Risk Sensitive Instruments and Positions - Commodity Price Risk” and “Other Matters - Other Future Considerations - Brazil” for additional discussion of these issues. Charges of $3.5 million and $4.8 million were included in Non-regulated Generation in 2003 and 2002, respectively, for cancelled contracts and generation projects. Asset valuation charges of $2.2 million and $6.4 million are included in Other in 2004 and 2003, respectively, related to a small biomass facility (which Alliant
Energy is in the process of divesting).
Depreciation and amortization expense increased $30 million and $24 million in 2004 and 2003, respectively. The 2004 increase was 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. The 2003 increase was primarily due to utility property additions, an increase of $11 million in non-regulated depreciation and amortization due largely to acquisitions at the non-regulated businesses and higher contributions of $4.4 million to IPL’s nuclear decommissioning trust fund.
31
Taxes other than income taxes increased $11 million and decreased $14 million in 2004 and 2003, respectively, primarily due to changes in property taxes at IPL related to a 2003 property tax settlement and expiration of provisions which required additional payments in the early years of the revised property tax regulations in Iowa. The 2004 increase also was due to increased gross receipts taxes at WPL.
Refer to “Rates and Regulatory Matters” for discussion of the interplay between utility operating expenses and utility margins given their impact on Alliant Energy’s utility rate activities.
Interest Expense and Other
-
Interest expense decreased $28 million and increased $25 million in 2004 and 2003, respectively. The 2004 decrease was primarily due to a $21 million
decrease in interest expense at Alliant Energy’s non-regulated businesses resulting from lower average borrowings as a result of debt retirements during
2003 and 2004 (largely from the use of asset sale proceeds), $5.6 million of credit facility fees incurred during the first half of 2003 and the
capitalization of $5.4 million of interest in 2004 related to the generating facility under construction near Sheboygan Falls, Wisconsin. The 2004 decrease was
also due to the impact of additional equity issued by Alliant Energy during 2003 and 2004 and various debt refinancings. The 2003 increase was 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. The 2003 increase was partially offset by the impact of lower average borrowings at Resources.
Loss on early extinguishment of debt includes debt repayment premiums and charges for the unamortized debt expenses related to long-term debt retirements. The $8.9 million in 2004 relates to $42 million of senior notes retired by Resources. The $16.9 million in 2003 relates to $72 million of senior notes retired by Resources and $24 million of senior notes retired by the parent company.
Equity (income) loss from Alliant Energy’s unconsolidated investments was as follows (in millions):
2004
2003
2002
American Transmission Company LLC (ATC)
($19)
($16)
($14)
Brazil
(17)
(9)
23
New Zealand
(11)
(8)
(4)
Wisconsin River Power Company (WRPC)
(6)
(5)
(3)
Alliant Energy Synfuel LLC ((Synfuel) - excludes tax benefits)
19
20
13
Other
(1)
(1)
(2)
($35)
($19)
$13
The higher equity income from ATC in 2004 and 2003 was due to rate increases at ATC. The higher equity income from Alliant Energy’s Brazil investments in 2004 was primarily due to the impact of rate increases implemented at the Brazilian operating companies in 2004 and 2003 and a gain of $5.1 million (representing Alliant Energy’s allocated portion of the total gain) realized in 2004 from the sale of two hydroelectric plants, partially offset by higher operating and interest expenses at the Brazilian operating companies. The improved results from New Zealand during 2004 were primarily due to higher margins as a result of increased energy prices. The Brazil and New Zealand results do not include Alliant Energy’s allocated debt capital and overhead charges.
The improved results for Brazil during 2003 were primarily due to: rate increases implemented at all five of the Brazil operating companies throughout 2003; an increase in electric sales volumes of approximately 7% in 2003 compared to 2002; foreign currency transaction gains of $2.4 million and losses of $6.5 million during 2003 and 2002, respectively, related to approximately $40 million in debt at one of the Brazilian operating companies; and charges of $7.7 million during 2002 resulting from the receipt of regulatory orders related to the recovery of various costs. The increased earnings from New Zealand during 2003 were primarily due to higher energy prices and gains on asset sales in 2003. In the second quarter of 2002, Synfuel purchased an equity interest in a synthetic fuel processing facility. The synthetic fuel project generates operating losses at its fuel processing facility, which 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 Consolidated Statements of Income.
Allowance for funds used during construction (AFUDC) was significantly higher in 2004 and 2003 compared to 2002, primarily due to the construction of Emery in 2004 and 2003. Preferred dividend requirements of subsidiaries increased $11 million in 2003 due to an increase in the aggregate amount of preferred stock outstanding at IPL and a higher dividend rate. Refer to Note 9 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of the asset valuation charge recorded by Resources in 2002 related to its McLeodUSA Incorporated (McLeod) available-for-sale securities.
32
Interest income and other increased $6.9 million and $11 million in 2004 and 2003, respectively. The 2004 increase was due to a pre-tax gain of $14.2 million upon the sale of Alliant Energy’s remaining interest in WPC, partially offset by $7.0 million of lower interest income due largely to the impact of ceasing accruing interest income on the loan receivable related to Laguna del Mar effective Jan. 1, 2004. Refer to “Other Matters - Critical Accounting Policies - Asset Valuations - Investments” for additional discussion. The 2003 increase was largely due to the recording of pre-tax asset valuation charges related to Alliant Energy’s investments in Energy Technologies ($2.8 million in 2003 and $10 million in 2002), improvements in the non-cash valuation adjustments related to Resources’
McLeod trading securities and gains from asset sales realized in 2003. The 2003 items were partially offset by lower interest income from loans to discontinued operations due to asset sales during 2003. Refer to Note 1(p) of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information.
Income Taxes
-
The effective income tax rates for Alliant Energy's continuing operations were 26.7%, 28.5% and 31.8% in 2004, 2003 and 2002, respectively. The lower
effective income tax rate for 2004 was primarily due to the impact of legislation passed in Iowa in late 2004 related to additional bonus depreciation tax
deductions IPL was allowed to take in 2003 and 2004 under the provisions of the new legislation and differences in property-related temporary differences
for which deferred tax expense is not recorded pursuant to Iowa rate making principles. Alliant Energy does not anticipate that the impact of Iowa bonus
depreciation tax deductions will have a material effect on 2005 and future years. The increase was partially offset by a $4.4 million tax charge recorded
in the fourth quarter of 2004 related to recording U.S. taxes on unremitted 2004 and prior year earnings from its China investments at a rate of 5.25% as a
result of Alliant Energy's intent to repatriate these earnings to the U.S. in 2005 under the provisions of the recently enacted American Jobs Creation Act
(AJCA) tax legislation. Refer to Note 5 of Alliant Energy's "Notes to Consolidated Financial Statements" for additional information regarding the effective
income tax rates.
Income (Loss) from Discontinued Operations
-
Refer to Note 16 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of Alliant Energy’s discontinued operations.
Cumulative Effect of Changes in Accounting Principles
-
In 2003, Alliant Energy recorded after-tax charges of $3.9 million and $2.1 million for the cumulative effect of changes in accounting principles related to the adoption on Jan. 1, 2003 of Statement of Financial Accounting Standards (SFAS) 143, “Accounting for Asset Retirement Obligations,” 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. Alliant Energy has subsequently divested both of these businesses.
IPL RESULTS OF OPERATIONS
Overview
-
IPL’s earnings available for common stock increased $23 million in 2004 and decreased $0.9 million in 2003. The 2004 increase was primarily due to higher electric margins and a lower effective income tax rate, partially offset by increased operating expenses.
The 2003 decrease was primarily due to increased operating and preferred dividend expenses, largely offset by higher electric and gas margins and AFUDC.
33
Electric Margins
-
Electric margins and MWh sales for IPL were as follows:
Revenues and Costs (in millions)
MWhs Sold (in thousands)
2004
2003
*
2002
**
2004
2003
*
2002
**
Residential
$388.9
$367.7
6%
$355.0
4%
3,979
4,155
(4%)
4,184
(1%)
Commercial
257.8
239.4
8%
229.7
4%
3,487
3,496
--
3,392
3%
Industrial
347.3
327.8
6%
315.5
4%
7,827
7,750
1%
7,843
(1%)
Total from retail
customers
994.0
934.9
6%
900.2
4%
15,293
15,401
(1%)
15,419
--
Sales for resale
41.7
40.2
4%
34.5
17%
1,305
1,299
--
1,151
13%
Other
33.5
31.9
5%
30.1
6%
98
102
(4%)
103
(1%)
Total revenues/sales
1,069.2
1,007.0
6%
964.8
4%
16,696
16,802
(1%)
16,673
1%
Electric production
fuel and purchased-
power expense
315.9
320.9
(2%)
299.3
7%
Margins
$753.3
$686.1
10%
$665.5
3%
* Reflects the % change from 2003 to 2004. ** Reflects the % change from 2002 to 2003.
Refer to “Alliant Energy Results of Operations - Domestic Utility Electric Margins” for IPL’s cooling degree day data.
Electric margins increased $67 million, or 10%, in 2004, primarily due to the impact of rate increases implemented in 2004 and 2003, which included increased revenues to recover a significant portion of higher operating expenses, weather-normalized sales growth including increased industrial sales which reflects improving economic conditions in IPL’s service territory and lower purchased-power capacity costs. These items were partially offset by the impact of extremely mild weather conditions as cooling degree days in Cedar Rapids were 63% below normal in 2004. Alliant Energy estimates the impact of weather reduced electric margins by approximately $21 million to $24 million in 2004 compared to normal weather. By comparison, Alliant Energy estimates that mild weather conditions reduced electric margins by approximately $6 million to $7 million in 2003 compared to normal weather.
Electric margins increased $21 million, or 3%, in 2003, primarily due to the impact of retail rate increases implemented during 2003 and 2002, including increased revenues to recover a significant portion of higher operating expenses, lower purchased-power capacity costs of $6.4 million, weather-normalized retail sales growth and higher sales to non-retail customers, partially offset by the impact of milder weather conditions in 2003 compared to 2002 and a sluggish economy.
Gas Margins
-
Gas margins and Dth sales for IPL were as follows:
Revenues and Costs (in millions)
Dths Sold (in thousands)
2004
2003
*
2002
**
2004
2003
*
2002
**
Residential
$179.2
$173.6
3%
$124.2
40%
16,882
19,074
(11%)
18,068
6%
Commercial
95.5
88.1
8%
61.2
44%
10,614
11,408
(7%)
10,774
6%
Industrial
30.3
24.6
23%
18.2
35%
4,029
3,911
3%
4,070
(4%)
Transportation/other
11.0
8.2
34%
11.3
(27%)
28,942
29,182
(1%)
28,814
1%
Total revenues/sales
316.0
294.5
7%
214.9
37%
60,467
63,575
(5%)
61,726
3%
Cost of gas sold
231.1
209.8
10%
138.9
51%
Margins
$84.9
$84.7
--
$76.0
11%
* Reflects the % change from 2003 to 2004. ** Reflects the % change from 2002 to 2003.
Refer to “Alliant Energy Results of Operations - Domestic Utility Gas Margins” for IPL’s heating degree day data.
Gas revenues and cost of gas sold were higher in 2003 compared to 2002 due to increased natural gas prices. These increases alone had no impact on IPL’s gas margins given its rate recovery mechanism for gas costs. Gas margins increased $8.7 million, or 11%, in 2003, primarily due to the impact of a retail rate increase implemented during 2002 and increased sales, which were largely due to slightly more favorable weather conditions during the heating season in 2003 compared to 2002.
Refer to “Rates and Regulatory Matters” for discussion of various electric and gas rate filings. Refer to Note 1(i)
of Alliant Energy’s “Notes to Consolidated Financial Statements” for information relating to utility fuel and natural gas cost recovery.
Steam and Other Revenues
-
Steam and other revenues increased $7.0 million in 2003, primarily due to higher construction management revenues from WindConnect™. These increases were largely offset by higher operating expenses related to WindConnect™.
34
Other Operating Expenses
-
Other operation and maintenance expenses increased $20 million in 2004 primarily due to increases in employee and retiree benefits (comprised of compensation, medical and pension costs) and other administrative and general expenses, partially offset by the impact of comprehensive cost-cutting and operational efficiency efforts. Depreciation and amortization expense increased $25 million in 2004, 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 $6.7 million in 2004 due to increased property taxes.
Other operation and maintenance expenses increased $23 million in 2003, largely due to higher employee and retiree benefits, WindConnect™ and steam production fuel costs. These items were partially offset by decreased transmission and distribution and generation expenses. Depreciation and amortization expense increased $17 million in 2003, largely due to higher amortization of software of $6.8 million, property additions and increased contributions of $4.4 million to the nuclear decommissioning trust fund. Taxes other than income taxes decreased $14 million in 2003, largely due to decreased property taxes, related to a 2003 property tax settlement and expiration of provisions which required additional payments in the early years of the revised property tax regulations in Iowa.
Refer to “Rates and Regulatory Matters” for discussion of the interplay between utility operating expenses and utility margins given their impact on IPL’s utility rate activities.
Interest Expense and Other
-
Interest expense increased $2.5 million in 2004, due to higher average borrowings outstanding primarily due to financing a portion of the construction costs of Emery. AFUDC was significantly higher in 2004 and 2003 compared to 2002 primarily due to the construction of Emery in 2004 and 2003.
Income Taxes
-
The effective income tax rates were 32.9%, 41.5% and 40.7% in 2004, 2003 and 2002, respectively. The lower effective income tax rate for 2004 was primarily due to the impact of legislation passed in Iowa in late 2004 related to additional bonus depreciation tax deductions IPL was allowed to take in 2003 and 2004 under the provisions of the new legislation and differences in property-related temporary differences for which deferred tax expense is not recorded pursuant to Iowa rate making principles. Refer to Note 5 of IPL’s “Notes to Consolidated Financial Statements” for additional information regarding the effective income tax rates.
Preferred Dividend Requirements
-
Preferred dividend requirements increased $11 million in 2003 due to an increase in the aggregate amount of preferred stock outstanding and a higher dividend rate.
WPL RESULTS OF OPERATIONS
Overview
-
WPL’s earnings available for common stock decreased $1.2 million in 2004 and increased $34 million in 2003. The 2004 decrease was primarily due to increased operating expenses, largely offset by higher electric margins. The 2003 increase was primarily due to higher electric and gas margins, partially offset by increased operating expenses.
Electric Margins
-
Electric margins and MWh sales for WPL were as follows:
Revenues and Costs (in millions)
MWhs Sold (in thousands)
2004
2003
*
2002
**
2004
2003
*
2002
**
Residential
$327.8
$316.9
3%
$271.9
17%
3,375
3,410
(1%)
3,432
(1%)
Commercial
180.0
170.3
6%
146.7
16%
2,215
2,167
2%
2,150
1%
Industrial
262.6
243.8
8%
211.3
15%
4,769
4,595
4%
4,454
3%
Total from retail
customers
770.4
731.0
5%
629.9
16%
10,359
10,172
2%
10,036
1%
Sales for resale
144.1
155.6
(7%)
125.8
24%
3,797
4,196
(10%)
3,654
15%
Other
25.3
23.5
8%
32.0
(27%)
80
82
(2%)
94
(13%)
Total revenues/sales
939.8
910.1
3%
787.7
16%
14,236
14,450
(1%)
13,784
5%
Electric production
fuel and purchased-
power expense
431.5
409.7
5%
352.5
16%
Margins
$508.3
$500.4
2%
$435.2
15%
* Reflects the % change from 2003 to 2004. ** Reflects the % change from 2002 to 2003.
Refer to “Alliant Energy Results of Operations - Domestic Utility Electric Margins” for WPL’s cooling degree day data.
35
Electric margins increased $7.9 million, or 2%, in 2004, primarily due to the impact of various rate increases in 2004 and 2003, which included increased revenues to recover a significant portion of higher operating expenses, and weather-normalized sales growth of 3%, including increased industrial sales of 4% which reflects improving economic conditions in WPL’s service territory. These items were partially offset by the impact of extremely mild weather conditions in 2004, $8.9 million of lower energy conservation revenues and the effect of implementing seasonal rates in 2003. Cooling degree days in Madison were 43% below normal in 2004. Alliant Energy estimates the impact of weather reduced electric margins by approximately $12 million to $14 million in 2004 compared to normal weather. By comparison, Alliant Energy estimates that mild weather conditions reduced electric margins by approximately $3
million in 2003 compared to normal weather. The reduced energy conservation revenues were largely offset by lower energy conservation expenses.
Electric margins increased $65 million, or 15%, in 2003, primarily due to the implementation of rate increases during 2003 and 2002, including increased revenues to recover a significant portion of WPL’s increased operating expenses, weather-normalized retail sales growth, the impact of WPL implementing seasonal rates in 2003 for the first time, lower purchased-power and fuel costs impacting margins and higher sales to non-retail customers. These items were partially offset by lower energy conservation revenues and the impact of milder weather conditions in 2003 compared to 2002. Refer to “Alliant Energy Results of Operations - Domestic Utility Electric Margins” for further discussion of seasonal rates.
Gas Margins
-
Gas margins and Dth sales for WPL were as follows:
Revenues and Costs (in millions)
Dths Sold (in thousands)
2004
2003
*
2002
**
2004
2003
*
2002
**
Residential
$136.4
$137.1
(1%)
$94.5
45%
12,456
12,797
(3%)
12,863
(1%)
Commercial
76.8
74.6
3%
50.1
49%
8,585
8,539
1%
8,574
--
Industrial
8.1
9.6
(16%)
7.0
37%
1,098
1,182
(7%)
1,303
(9%)
Transportation/other
32.5
51.1
(36%)
27.5
86%
20,684
19,796
4%
18,572
7%
Total revenues/sales
253.8
272.4
(7%)
179.1
52%
42,823
42,314
1%
41,312
2%
Cost of gas sold
165.8
186.3
(11%)
110.1
69%
Margins
$88.0
$86.1
2%
$69.0
25%
* Reflects the % change from 2003 to 2004. ** Reflects the % change from 2002 to 2003.
Refer to “Alliant Energy Results of Operations - Domestic Utility Gas Margins” for WPL’s heating degree day data.
Gas margins increased $1.9 million, or 2%, in 2004, primarily due to improved results of $3.5 million from WPL’s performance-based gas commodity cost recovery program (benefits are shared by ratepayers and shareowners), partially offset by lower sales to retail customers due to milder weather conditions in 2004 compared to 2003. Gas revenues and cost of gas sold were higher in 2003 compared to 2002 due to increased natural gas prices. These increases alone had little impact on WPL’s gas margins given its rate recovery mechanism for gas costs. Gas margins increased $17 million, or 25%, in 2003, primarily due to the impact of rate increases implemented during 2003 and 2002, improved performance of $2.7 million from WPL’s performance-based gas commodity cost recovery program and continued modest customer growth.
Refer to “Rates and Regulatory Matters” for discussion of various electric and gas rate filings. Refer to Note 1(i)
of Alliant Energy’s “Notes to Consolidated Financial Statements” for information relating to utility fuel and natural gas cost recovery.
Other Revenues
-
Other revenues decreased $18 million in 2004 primarily due to lower construction management revenues from WindConnect™, resulting from uncertainty in 2004 regarding the extension of the federal renewable energy production tax credit. This decrease was largely offset by lower operating expenses related to this activity. In the fourth quarter of 2004, the federal renewable energy production tax credit was extended for generating facilities that will be placed in service prior to Jan. 1, 2006. Other revenues increased $12 million in 2003, primarily due to increased revenues from WindConnect™, which were largely offset by higher operating expenses.
Other Operating Expenses
-
Other operation and maintenance expenses decreased $11 million in 2004, primarily due to $11 million of lower expenses for WindConnect™, lower energy conservation expenses and the impact of comprehensive cost-cutting and operational efficiency efforts. These items were partially offset by increases in employee and retiree benefits (comprised of compensation, medical and pension costs). Depreciation and amortization increased $6.1 million in 2004, primarily due to property additions. Taxes other than income taxes increased $4.7 million in 2004, primarily due to increased gross receipts taxes.
Other operation and maintenance expenses increased $53 million in 2003, largely due to increases in the amortization of deferred costs that are now being recovered in rates, employee and retiree benefits, WindConnect™ and nuclear expenses. The increased nuclear expenses resulted primarily from a planned refueling outage at Kewaunee in 2003. A similar planned outage occurred in 2004 but there was no refueling outage in 2002. These items were partially offset by lower fossil generation expenses. Depreciation and amortization expense decreased $3.8 million in 2003, primarily due to lower software amortizations, partially offset by property additions.
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Refer to “Rates and Regulatory Matters” for discussion of the interplay between utility operating expenses and utility margins given their impact on WPL’s utility rate activities.
Interest Expense and Other
-
Interest expense decreased $4.4 million and $2.3 million for 2004 and 2003, respectively, primarily due to lower average borrowings outstanding. Equity income from unconsolidated investments increased $4.3 million and $3.7 million for 2004 and 2003, respectively, primarily due to higher earnings at ATC resulting from rate increases.
Income Taxes
-
The effective income tax rates were 36.8%, 36.4%, and 35.6% in 2004, 2003 and 2002, respectively. Refer to Note 5 of WPL’s “Notes to Consolidated Financial Statements” for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Overview
-
Alliant Energy believes it has a strong liquidity position and expects to maintain this position over its planning period of 2005 to 2009 as a result of its available capacity under its revolving credit facilities and sale of accounts receivable program, stable operating cash flows from its core domestic utility business and its remaining balance of available cash and temporary cash investments. Based on expected operating cash flows and plans to maintain a consolidated debt-to-total capitalization ratio of approximately 50%, Alliant Energy believes it will be able to secure the additional capital required to implement its strategic plan through the 2005 to 2009 planning period. Alliant Energy believes its ability to secure additional capital has been significantly enhanced by its actions during the last several years to strengthen its
balance sheet as is evidenced by, among other items, its current debt-to-total capitalization ratio of 48% compared to 61% in early 2003.
Primary Sources and Uses of Cash
-
Alliant Energy’s most significant source of cash is electric and gas sales to its domestic utility customers. Cash from these sales reimburse Alliant Energy for prudently incurred expenses to provide service to its domestic utility customers and provides Alliant Energy a return on the assets that are utilized to provide such services. Utility operating cash flows are expected to substantially cover Alliant Energy’s domestic utility maintenance capital expenditures and dividends paid to Alliant Energy’s shareowners. The capital requirements needed to retire maturing debt and pay capital expenditures associated with building additional generation at its domestic utilities and capital expenditures at its non-regulated businesses are expected to be financed largely through external financings and proceeds from asset
divestitures, supplemented by internally generated funds. In order to maintain its planned consolidated capitalization ratios, Alliant Energy may periodically issue additional equity as well as debt to fund such capital requirements.
Cash and Temporary Cash Investments
-
As of December 31, 2004, Alliant Energy and its subsidiaries had approximately $263 million of cash and temporary cash investments, of which approximately $74 million consisted of deposits in foreign bank accounts. Alliant Energy plans to repatriate the majority of the cash from its International businesses in 2005 under the provisions of the AJCA passed in 2004.
Cash Flows
-
Selected information from Alliant Energy’s, IPL’s and WPL’s Consolidated Statements of Cash Flows was as follows (in millions):
Alliant Energy
IPL
WPL
Cash flows from (used for):
2004
2003
2002
2004
2003
2002
2004
2003
2002
Operating activities
$501.6
$460.7
$541.3
$345.7
$321.9
$250.4
$199.3
$138.5
$223.8
Investing activities
(639.5)
(275.7)
(625.6)
(367.8)
(532.1)
(250.7)
(214.3)
(108.4)
(187.8)
Financing activities
159.7
(1.9)
77.2
20.1
206.2
6.3
(12.0)
(11.6)
(27.7)
Cash Flows from (used for) Operating Activities
-
Historical Changes in Cash Flows from Operating Activities -
In 2004, Alliant Energy’s cash flows from operating activities increased $41 million primarily due to changes in working capital caused largely by the timing of vendor payments and receivable collections as well as the impact of implementing rate increases at IPL and WPL, partially offset by changes in the levels of accounts receivable sold and higher pension plan contributions; IPL’s cash flows from operating activities increased $24 million primarily due to changes in working capital caused largely by the timing of tax refunds and payments and the impact of rate increases, partially offset by changes in the levels of accounts receivable sold and higher pension plan contributions; WPL’s cash flows from operating activities increased $61 million primarily due to changes in working capital caused largely by
the timing of tax payments and refunds. In 2003, Alliant Energy’s cash flows from operating activities decreased $81 million primarily due to changes in working capital caused largely by the timing of receivable collections as well as changes in the levels of accounts receivable sold, partially offset by the impact of implementing rate increases at IPL and WPL and lower pension plan contributions; IPL’s cash flows from operating activities increased $72 million primarily due to changes in working capital caused largely by the timing of receivable collections and changes in the levels of accounts receivable sold, partially offset by the timing of tax payments and refunds; WPL’s cash flows from operating activities decreased $85 million primarily due to changes in the levels of accounts receivable sold and the timing of tax payments and refunds, partially offset by lower pension plan contributions and the impact of rate increases.
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Sale of Accounts Receivable -
Refer to Note 4 of Alliant Energy’s “Notes to Consolidated Financial Statements” for information on IPL’s sale of accounts receivable program. WPL discontinued its sale of accounts receivable program in 2004.
Cash Flows from (used for) Investing Activities
-
Historical Changes in Cash Flows used for Investing Activities -
In 2004, Alliant Energy’s cash flows used for investing activities increased $364 million primarily due to proceeds received from asset sales (primarily WPC and its Australian business) in 2003, partially offset by the 2003 acquisition by Resources of a 309 MW
power plant in Neenah, Wisconsin, and lower expenditures associated with the construction of Emery; IPL’s cash flows used for investing activities decreased $164 million primarily due to lower expenditures associated with the construction of Emery; WPL’s cash flows used for investing activities increased $106 million primarily due to increased levels of construction and acquisition expenditures and the 2003 proceeds from the sale of WPL’s water utility serving the Beloit area. In 2003, Alliant Energy’s cash flows used for investing activities decreased $350 million primarily due to proceeds from asset sales, partially offset by construction expenditures for the Emery plant; IPL’s cash flows used for investing activities increased $281 million primarily due to construction expenditures for the Emery plant; WPL’s cash flows used for investing activities decreased $79 million
primarily due to proceeds from the sale of WPL’s water utility serving the Beloit area and lower nuclear decommissioning trust fund contributions.
Construction and Acquisition Expenditures -
Capital expenditures, investments and financing plans are continually reviewed, approved and updated as part of Alliant Energy’s ongoing strategic planning and budgeting processes. In addition, material capital expenditures and investments are subject to a rigorous cross-functional review prior to approval. Changes in Alliant Energy’s anticipated construction and acquisition expenditures may result from a number of reasons including, but not limited to, economic conditions, regulatory requirements, ability to obtain adequate and timely rate relief, the level of Alliant Energy’s profitability, Alliant Energy’s desire to maintain investment-grade credit ratings and reasonable capitalization ratios, variations in sales, changing market conditions and new opportunities.
Alliant Energy currently anticipates construction and acquisition expenditures during 2005 and 2006 as follows (in millions):
Alliant Energy
IPL
WPL
2005
2006
2005
2006
2005
2006
Domestic utility business-related:
Transmission and distribution (electric and gas)
$275
$265
$155
$140
$120
$125
Generation:
Existing plants
85
90
55
60
30
30
Sheboygan Falls facility (1)
30
--
N/A
N/A
N/A
N/A
Environmental
30
35
--
5
30
30
Other miscellaneous utility property
90
90
45
50
45
40
Non-regulated (primarily China and synthetic fuel)
115-145
125-145
N/A
N/A
N/A
N/A
$625-655
$605-625
$255
$255
$225
$225
(1) Non-regulated Generation in support of domestic utility generation plan
Alliant Energy has not yet entered into contractual commitments relating to the majority of its anticipated capital expenditures. As a result, Alliant Energy does have discretion with regard to the level of capital expenditures eventually incurred and it closely monitors and updates such estimates on an ongoing basis based on numerous economic and other factors. Refer to “Strategic Overview” for a further discussion of Alliant Energy’s domestic utility generation plan as well as an update on Alliant Energy’s asset divestitures.
Cash Flows from (used for) Financing Activities
-
Historical Changes in Cash Flows from (used for) Financing Activities -
In 2004, Alliant Energy’s cash flows from financing activities increased $162 million primarily due to changes in the amount of debt issued and retired, partially offset by lower proceeds from common and preferred stock issuances compared to 2003; IPL’s cash flows from financing activities decreased $186 million primarily due to a lower capital contribution from Alliant Energy in 2004 as compared to 2003, changes in the amount of debt issued and retired and the issuance of preferred stock in 2003; WPL’s cash flows used for financing activities increased slightly in 2004 primarily due to a capital contribution from Alliant Energy in 2003 and higher common stock dividends, largely offset by changes in the amount of debt issued and retired. In 2003, Alliant Energy’s cash flows from financing
activities decreased $79 million primarily due to changes in the amounts of debt and preferred stock issued and retired, partially offset by proceeds from a 2003 common equity offering and lower common stock dividends due to the dividend reduction implemented in 2003; IPL’s cash flows from financing activities increased $200 million primarily due to a higher capital contribution from Alliant Energy in 2003 compared to 2002 and changes in the amount of debt and preferred stock issued and retired; WPL’s cash flows used for financing activities decreased $16 million primarily due to a higher capital contribution from Alliant Energy in 2003 compared to 2002, partially offset by changes in the amount of debt issued and retired.
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PUHCA Financing Authorizations -
In 2004, Alliant Energy, Resources and IPL received Securities and Exchange Commission (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. Among other things, the approval authorized Alliant Energy, directly or through financing subsidiaries, to issue common and preferred stock, long-term debt
securities and short-term debt securities up to a combined amount of $500 million; to provide guarantees and credit support for obligations of its subsidiaries up to an amount of $3.0 billion; to enter into hedging transactions to manage interest rate costs and risk exposure; and to increase its aggregate investment limit in exempt wholesale generators and foreign utility companies to 100% of consolidated retained earnings. The approval, among other things, also authorized Resources to provide guarantees and credit support for obligations of non-utility subsidiaries up to an amount of $600 million outstanding at any one time and IPL to issue preferred stock, long-term debt securities and short-term debt securities up to a combined amount of $700 million. Issuance of debt securities by WPL is exempt from regulation under provisions of PUHCA.
State Regulatory Agency Financing Authorizations -
IPL has authorization for short-term borrowings of $300 million. WPL has authorization for short-term borrowings of $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 Dec. 31, 2004.
Common Stock Dividends -
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. Alliant Energy’s general long-term goal is to maintain a dividend payout ratio similar to standard industry averages, which are currently in a range of approximately 60% to 70% of Alliant Energy’s utility earnings.
Common Stock Issuances -
In 2004, 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 sales agreement. Subject to market conditions and other factors, Alliant Energy is contemplating issuing up to $90 million of total common equity during 2005, including issuances under its Shareowner Direct Plan and 401(k) Savings Plan (Alliant Energy issued approximately $23 million of equity under these two plans in 2004).
Long-term Debt -
In February 2005, Resources retired an additional $100 million of its 7.375% senior notes due 2009, incurring a total of approximately $16 million of pre-tax debt repayment premiums and charges for the unamortized debt expenses related to these debt retirements. During 2004, Resources also retired $7 million of its 7.375% senior notes due 2009, $25 million of its 7% senior notes due 2011 and $10 million of its 9.75% senior notes due 2013. 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.
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 are reported 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 has been used for general corporate purposes and to fund 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 7.75% 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.
39
Refer to “Certain Financial Commitments - Contractual Obligations” for the timing of Alliant Energy’s, IPL’s and WPL’s long-term debt maturities. Refer to Note 8 of the “Notes to Consolidated Financial Statements” for additional information on short- and long-term debt.
Short-term Debt -
Alliant Energy and its subsidiaries are party to various credit facilities and other borrowing arrangements. In July 2004, Alliant Energy completed the syndication of three revolving credit facilities (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 facility at the parent company is used to fund Resources and Corporate Services as well as its own needs. These facilities are designed to be five-year facilities with the length of the facilities subject to various regulatory approvals given the term is longer than a 364-day facility. Alliant Energy expects to receive the remaining regulatory approvals in 2005. In addition to funding working capital needs, the availability of short-term financing
provides the companies flexibility in the issuance of long-term securities. The level of short-term borrowing fluctuates based on seasonal corporate needs, the timing of long-term financings and capital market conditions.
Information regarding commercial paper at Dec. 31, 2004 was as follows (dollars in millions):
Alliant
Parent
Energy
Company
IPL
WPL
Commercial paper:
Amount outstanding
$83
$--
$36
$47
Weighted average maturity
3 days
N/A
3 days
3 days
Discount rates
2.25-2.27%
N/A
2.27%
2.25%
Available capacity
$557
$100
$264
$193*
* WPL’s capacity is limited to $240 million due to a PSCW regulatory restriction.
Creditworthiness
-
Credit Facilities
-
Alliant Energy’s, IPL’s and WPL’s credit facility agreements contain various covenants, including the following:
Covenant Description
Covenant
Requirement
Status at
Dec. 31, 2004
Alliant Energy:
Consolidated debt-to-capital ratio
Less than 65%
48%
Interest coverage ratio
At least 2.5x
4.2x
IPL debt-to-capital ratio
Less than 58%
46%
WPL debt-to-capital ratio
Less than 58%
34%
The debt component of the capital ratios includes long- and short-term debt (excluding non-recourse debt and trade payables), capital lease obligations, letters of credit and guarantees of the foregoing and unfunded vested benefits under qualified pension plans. The equity component excludes accumulated other comprehensive income (loss). The interest coverage ratio is calculated by adding depreciation and amortization expense to operating income and dividing by interest expense.
Alliant Energy’s credit facility contains a cross default provision providing it is a default under the credit facility if the majority-owned subsidiaries of Alliant Energy default on debt totaling $50 million or more. A default by a minority-owned affiliate would not create a cross default. A default by Alliant Energy or Resources would not be a cross default for WPL or IPL, nor would a default by either of the utilities create a cross default for the other utility.
Alliant Energy’s, IPL’s and WPL’s credit facilities contain negative pledge provisions, which generally prohibit placing liens on any of the property of Alliant Energy or its subsidiaries with certain exceptions, including among others, for the issuance of secured debt under first mortgage bond indentures by IPL and WPL, non-recourse project financing, purchase money liens, and liens on the ownership interests in or assets of foreign subsidiaries to secure not more than $300 million aggregate principal amount of foreign debt.
40
Alliant Energy’s, IPL’s and WPL’s credit facilities contain material adverse change (MAC) clauses. Before each extension of credit (each borrowing under the facilities), unless the borrowing will be used exclusively to repurchase commercial paper issued by or on behalf of the borrower, each borrower must represent and warrant that no MAC has occurred since December 31, 2003. A MAC is defined as a change that would create: (1) a MAC in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the borrower or the borrower and its subsidiaries taken as a whole; (2) a material impairment of the ability of the borrower to perform its obligations under a credit facility agreement to which it is a party; or (3) a MAC upon the legality, validity, binding effect or enforceability against the borrower
of the credit agreement to which it is a party.
Alliant Energy’s, IPL’s and WPL’s 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.
Credit Ratings and Balance Sheet -
Access to the capital and credit markets, and costs of obtaining external financing, are dependent on creditworthiness. Alliant Energy is committed to taking the necessary steps required to maintain investment-grade credit ratings and a strong balance sheet. Although Alliant Energy believes the actions taken in 2003 and 2004 to strengthen its balance sheet will enable it to maintain investment-grade credit ratings, no assurance can be given that it will be able to maintain its existing credit ratings. If Alliant Energy’s credit ratings are downgraded in the future, then Alliant Energy’s borrowing costs may increase and its access to capital markets may be limited. If access to capital markets becomes significantly constrained, then Alliant Energy’s results of operations and financial condition could be materially
adversely affected. Alliant Energy’s current credit ratings and outlook are as follows (long-term debt ratings only apply to senior debt):
Standard & Poor’s
Moody’s Investors
Rating Services
Service (Moody’s)
IPL
Secured long-term debt
A-
A3
Unsecured long-term debt
BBB
Baa1
Commercial paper
A-2
P-2
Corporate/issuer
BBB+
Baa1
WPL
Secured long-term debt
A-
A1
Unsecured long-term debt
BBB+
A2
Commercial paper
A-2
P-1
Corporate/issuer
A-
A2
Resources (a)
Unsecured long-term debt
BBB
Baa2 (b)
Corporate/issuer
BBB+
Not rated
Alliant Energy
Unsecured long-term debt
BBB
Not rated
Commercial paper
A-2
P-2 (b)
Corporate/issuer
BBB+
Not rated
All Entities
Outlook
Negative
Stable
(a)
Resources’ debt is fully and unconditionally guaranteed by Alliant Energy.
(b)
Moody’s upgraded Resources’ unsecured long-term debt and Alliant Energy’s commercial paper ratings in February 2005 to Baa2 from Baa3 and to P-2 from P-3,
respectively.
Ratings Triggers -
The long-term debt of Alliant Energy and its subsidiaries is not subject to any repayment requirements as a result of explicit credit rating downgrades or so-called “ratings triggers.” However, Alliant Energy and its subsidiaries are parties to various agreements, including purchased-power agreements, fuel contracts, accounts receivable sale contracts and corporate guarantees that are dependent on maintaining investment-grade credit ratings. In the event of a downgrade below investment-grade, Alliant Energy or its subsidiaries may need to provide credit support, such as letters of credit or cash collateral equal to the amount of the exposure, or may need to unwind the contract or pay the underlying obligation. IPL is a party to an accounts receivable sale agreement that provides that a downgrade below investment-grade associated with its
secured debt makes it ineligible to sell receivables under the program. In the event of a downgrade below investment-grade, management believes the credit facilities at Alliant Energy, IPL and WPL would provide sufficient liquidity to cover counterparty credit support or collateral requirements under the various purchased-power, fuel and receivables sales agreements.
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Off-Balance Sheet Arrangements -
Alliant Energy utilizes off-balance sheet synthetic operating leases to finance its corporate headquarters, corporate aircraft, certain utility railcars and a utility radio dispatch system. Synthetic leases provide favorable financing rates to Alliant Energy while allowing it to maintain operating control of its leased assets. Refer to Note 3 of the “Notes to Consolidated Financial Statements” for future minimum lease payments under, and residual value guarantees by Alliant Energy, of these synthetic leases. Alliant Energy’s credit facility agreements prohibit it from entering into any additional synthetic leases. Alliant Energy uses special purpose entities for its limited recourse utility sale of accounts receivable program whereby IPL uses proceeds from the sale of the accounts receivable and unbilled revenues to maintain
flexibility in its capital structures, take advantage of favorable short-term interest rates and finance a portion of its long-term cash needs. The sale of accounts receivables generates a significant amount of short-term financing for IPL. Refer to Note 4 of Alliant Energy’s “Notes to Consolidated Financial Statements” for aggregate proceeds from the sale of accounts receivable. While Alliant Energy does not have any reason to believe this program would be discontinued, if this financing alternative were not available, IPL anticipates it would have enough short-term borrowing capacity to compensate. Refer to “Ratings Triggers” for the impact of certain credit rating downgrades on IPL related to the accounts receivable sales program. Alliant Energy has reviewed these entities during its implementation of revised Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN 46R), and
determined that consolidation of these entities is not required. Refer to Note 20 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information regarding the implementation of FIN 46R.
Credit Risk -
Alliant Energy’s subsidiaries have limited credit exposure from electric and natural gas sales and non-performance of contractual obligations by its counterparties. Alliant Energy maintains credit risk oversight and sets limits and policies with regards to its counterparties, which management believes minimizes its overall credit risk exposure. However, there is no assurance that such policies will protect Alliant Energy against all losses from non-performance by counterparties.
Certain Financial Commitments
-
Contractual Obligations -
Alliant Energy’s long-term contractual cash obligations as of Dec. 31, 2004 were as follows (in millions):
2005
2006
2007
2008
2009
Thereafter
Total
Long-term debt maturities (Note 8(b))
$102
$70
$271
$196
$353
$1,821
$2,813
Interest - long-term debt obligations
174
168
157
145
134
992
1,770
Capital leases (Note 3)
16
45
10
9
3
7
90
Operating leases (Note 3)
101
105
131
76
71
231
715
Purchase obligations (Note 11(b)):
Purchased-power and fuel commitments
422
187
97
50
39
130
925
Other
13
1
1
1
1
4
21
$828
$576
$667
$477
$601
$3,185
$6,334
IPL’s long-term contractual cash obligations as of Dec. 31, 2004 were as follows (in millions):
2005
2006
2007
2008
2009
Thereafter
Total
Long-term debt maturities (Note 8(b))
$3
$60
$80
$52
$136
$634
$965
Interest - long-term debt obligations
62
62
55
52
49
491
771
Capital leases (Note 3)
15
45
10
8
2
2
82
Operating leases (Note 3)
11
5
4
4
6
18
48
Purchase obligations (Note 11(b)):
Purchased-power and fuel commitments
130
74
39
9
8
30
290
Other
3
--
--
--
--
--
3
$224
$246
$188
$125
$201
$1,175
$2,159
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WPL’s long-term contractual cash obligations as of Dec. 31, 2004 were as follows (in millions):
2005
2006
2007
2008
2009
Thereafter
Total
Long-term debt maturities (Note 8(b))
$88
$--
$105
$60
$--
$239
$492
Interest - long-term debt obligations
31
26
22
18
15
165
277
Operating leases (Note 3)
79
80
80
68
61
191
559
Purchase obligations (Note 11(b)):
Purchased-power and fuel commitments
128
61
32
25
25
65
336
Other
9
--
--
--
--
--
9
$335
$167
$239
$171
$101
$660
$1,673
At Dec. 31, 2004, long-term debt and capital lease obligations as noted in the previous tables were included on the respective Consolidated Balance Sheets. Included in Alliant Energy’s, IPL’s and WPL’s long-term debt obligations was variable rate debt of $86 million, $19 million and $55 million, which represented 3%, 2% and 11%, respectively, of total long-term debt outstanding. The long-term debt amounts exclude reductions related to unamortized debt discounts. Interest on variable rate debt in the previous table was calculated using rates as of Dec. 31, 2004. Purchased-power and fuel commitments represent normal business contracts used to ensure adequate purchased-power, coal and natural gas supplies and to minimize exposure to market price fluctuations. Alliant Energy has entered into various purchased-power commitments that have not yet been directly assigned to IPL and WPL. Such
commitments are included in the Alliant Energy purchase obligations but are not included in the IPL or WPL purchase obligations. Other purchase obligations represent individual commitments incurred during the normal course of business which exceeded $1.0 million at Dec. 31, 2004. In connection with their construction and acquisition programs, Alliant Energy, IPL and WPL also enter into commitments related to such programs on an ongoing basis which are not reflected in the previous tables. Refer to “Cash Flows from (used for) Investing Activities - Construction and Acquisition Expenditures” for additional information. In addition, at Dec. 31, 2004, there were various other long-term
liabilities and deferred credits included on the respective Consolidated Balance Sheets that, due to the nature of the liabilities, the timing of payments cannot be estimated and are therefore excluded from the tables. Refer to Note 6(a) of the “Notes to Consolidated Financial Statements” for anticipated pension and other postretirement benefit funding amounts, which are not included in the previous tables.
Environmental
-
Alliant Energy’s pollution abatement programs are subject to continuing review and are periodically revised due to changes in environmental regulations, construction plans and escalation of construction costs. Alliant Energy continually evaluates the impact of potential future international, federal, state and local environmental rulemakings on its operations. While the final outcome of these rule makings cannot be predicted, Alliant Energy believes that required capital investments and/or modifications resulting from them could be significant, but expects that prudent expenses incurred by IPL and WPL likely would be recovered in rates from its customers. The ability of Alliant Energy’s China facilities to recover expenses attributable to compliance with changes in law, such as environmental regulations through tariff
adjustments, is dependent upon decisions by regional and local governmental bodies which oversee the tariff adjustments. Most agreements governing the operations of Alliant Energy’s China facilities include provisions for recovery of expenses resulting from changes in law. The environmental rulemaking process continually evolves and the following are major emerging issues that could potentially have a significant impact on Alliant Energy’s operations.
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 further actions, if any, from
the information requests from the EPA or third parties.
The 1990 Clean Air Act Amendments mandate preservation of air quality through existing regulations and periodic reviews to ensure adequacy of these provisions based on scientific data. In 1997, the EPA revised National Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter. In 2003, the EPA proposed the Clean Air Interstate Rule that would require emission control upgrades to existing power plants. This rule would reduce the current level of power plant sulfur dioxide emissions approximately 40% by 2010 and 70% by 2015, and nitrogen oxide emission levels 50% by 2010 and 65% by 2015. Additional reduction requirements may also be imposed at the state level for those areas that are in non-attainment with NAAQS. Alliant Energy believes that the required capital investments and/or modifications resulting from these proposed regulations could be significant.
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In 2000, the EPA determined that regulation of hazardous air pollutant emissions from coal and oil-fired electric utility steam generating units was necessary. Under an existing settlement agreement, final utility Maximum Achievable Control Technology (MACT) requirements or alternative regulations must be issued by March 15, 2005. Accordingly, the EPA has published proposed rules requiring control of mercury from coal-fired and nickel from oil-fired generating units. The impact of these regulations on IPL’s and WPL’s generating facilities is subject to the control level mandated in the final rules. The Wisconsin Department of Natural Resources (DNR) also 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.
In November 2004, the EPA’s final Industrial Boiler MACT rule became effective and compliance with these new emission requirements for hazardous air pollutants is required by 2007. This rule applies to fossil-fueled generating units less than 25 MW. Alliant Energy is evaluating the applicability and compliance impact of these new emission requirements on these generating units and whether the associated compliance costs may be significant
.
In 2003, the State Environmental Protection Agency of China issued a regulation requiring thermal power plants to lower emissions to meet new limits for particulate, sulfur and nitrogen oxide from coal- and oil-fired boilers. With the exception of one facility discussed below, Alliant Energy’s China facilities are either currently in compliance with the first phase of this emission standard that was effective January 2005, or have negotiated variances with the local environmental protection bureaus with jurisdiction to further study and implement control and monitoring technology. Alliant Energy currently estimates its share of the capital investments required to meet this new emission standard through 2010 will be approximately $8 million. These costs are expected to be funded by China operations.
In early 2005, one of Alliant Energy’s China facilities received an order from a regulatory agency stating that stricter sulfur
emission controls are required. Discussions are still taking place with the regulatory agency and at this time Alliant Energy is not
able to predict the final outcome, but believes that this issue should not have a material adverse impact on its financial condition
or results of operations.
Alliant Energy is also currently monitoring various other potential international, federal, state and local environmental rulemakings and activities, including, but not limited to: litigation of federal New Source Review Reforms; Regional Haze evaluations for Best Available Retrofit Technology; and several other legislative and regulatory proposals regarding the control of emissions of air pollutants and greenhouse gases from a variety of sources, including generating facilities.
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. IPL and WPL are currently studying such impacts and will have compliance plans in place by the required date of January 2008. IPL and WPL are investigating compliance options and are unable to predict the final outcome, but believe that required capital investments and/or modifications resulting from this regulation could be significant.
WPL is also currently evaluating proposed revisions to the Wisconsin Administrative Code concerning the amount of heat that WPL’s generating stations can discharge into Wisconsin waters. At this time, WPL 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 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 and research solutions. WPL is currently unable to predict the final outcome, but believes that required capital investments and/or modifications resulting from this issue could be significant.
Land and Solid Waste -
In October 2004, IPL received notification from the Iowa DNR regarding groundwater monitoring of four of its ash landfills to ensure groundwater has not been impacted beyond the landfill boundaries.
IPL has addressed the Iowa DNR comments for all four facilities and has developed appropriate plans, awaiting the Iowa DNR approval, for implementation beginning in 2005. Monitoring results will be used to determine if further measures are required and IPL is unable to predict the outcome at this time.
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In 2003, at the request of the Wisconsin DNR, WPL submitted a written plan for facility closure of the Rock River Generating Station landfill and clean-up of the support ponds and all areas where coal combustion waste is present. Removal of ash from half of the remediation area to the landfill was completed in 2004. The remaining targeted ash will be moved to the landfill in 2005 and the landfill will be capped in 2006, with an insignificant total project cost.
Alliant Energy is also monitoring various other land and solid waste regulatory changes. This includes a potential EPA regulation for management of coal combustion product in landfills and surface impoundments that could require installation of monitoring wells at some facilities and an ongoing expanded groundwater monitoring program. Compliance with the polychlorinated biphenols (PCB) Fix-it Rule/Persistent Organic Pollutants Treaty could possibly require replacement of all electrical equipment containing PCB insulating fluid which is a substance known to be harmful to human health. The Wisconsin Department of Commerce is proposing new rules related to flammable, combustible and hazardous liquids stored in above-ground storage tanks in which the primary financial impact would be from a secondary containment requirement for all hazardous materials tanks and for hazardous material unloading areas. Alliant
Energy is unable to predict the outcome of these possible regulatory changes at this time, but believes that the required capital investment and/or modifications resulting from these potential regulations could be significant.
Refer to Note 11(e) of Alliant Energy’s “Notes to Consolidated Financial Statements,” “Business” and “Construction and Acquisition Expenditures” for further discussion of environmental matters.
OTHER MATTERS
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. Refer to Notes 1(l) and 10 of Alliant Energy’s “Notes to Consolidated Financial Statements” for further discussion of Alliant Energy’s derivative financial instruments.
Interest Rate Risk -
Alliant Energy is exposed to risk resulting from changes in interest rates as a result of its issuance of variable-rate debt, IPL’s customer accounts receivable sale program and variable-rate leasing agreements. Alliant Energy manages its interest rate risk by limiting its variable interest rate exposure and by continuously monitoring the effects of market changes on interest rates. Alliant Energy also periodically uses interest rate swap and forward agreements to assist in the management of its interest exposure. In the event of significant interest rate fluctuations, management would take actions to minimize the effect of such changes on Alliant Energy’s results of operations and financial condition. Assuming no change in Alliant Energy’s, IPL’s and WPL’s consolidated financial structure, if variable interest rates were to average
100 basis points higher (lower) in 2005 than in 2004, expense would increase (decrease) by approximately $4.0 million, $1.9 million and $1.2 million, respectively. These amounts were determined by considering the impact of a hypothetical 100 basis point increase (decrease) in interest rates on Alliant Energy’s, IPL’s and WPL’s consolidated variable-rate debt held, the amount outstanding under IPL’s customer accounts receivable sale program and variable-rate lease balances at Dec. 31, 2004.
Commodity Price Risk -
Alliant Energy is exposed to the impact of market fluctuations in the commodity price and transportation costs of electric and natural gas products it procures and markets. Alliant Energy employs established policies and procedures to manage its risks associated with these market fluctuations including the use of various commodity derivatives. Alliant Energy’s exposure to commodity price risks in its utility business is also significantly mitigated by the current rate making structures in place for the recovery of its electric fuel and purchased energy costs as well as its cost of natural gas purchased for resale.
Under PSCW rules, WPL can seek rate increases for increases in the cost of electric fuel and purchased power if it experiences an increase in costs that are more than 3% higher than the estimated costs used to establish rates. Such rules significantly reduce commodity risk for WPL by reducing the regulatory lag related to the timing of changes in rates for increased fuel and purchased energy costs. WPL’s retail gas tariffs provide for subsequent adjustments to its natural gas rates for changes in the current monthly natural gas commodity price index. Also, WPL has a gas performance incentive which includes a sharing mechanism whereby 50% of all gains and losses relative to current commodity prices, as well as other benchmarks, are retained by WPL, with the remainder refunded to or recovered from customers. Such rate mechanisms combined with commodity derivatives discussed above significantly reduce
commodity risk associated with WPL’s cost of natural gas. IPL’s tariffs provide for subsequent adjustments to its electric and natural gas rates for changes in the cost of fuel, purchased energy and natural gas purchased for resale thereby eliminating any price risk for prudently incurred commodity costs. Refer to Note 1(i) of Alliant Energy’s “Notes to Consolidated Financial Statements” for further discussion.
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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 in 2004, Alliant Energy’s pre-tax income in 2005 would (decrease) increase by approximately $6.5 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. At Dec. 31, 2004, Alliant Energy had $16 million of investments accounted for under the equity method of accounting and $10 million of goodwill related to its China investments on its Consolidated Balance Sheet. 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 these investments and/or goodwill balances. 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.
Equity Price Risk -
IPL and WPL maintain trust funds to fund the anticipated nuclear decommissioning costs of DAEC and Kewaunee, respectively. At Dec. 31, 2004, these funds were invested primarily in domestic equity and debt instruments and money market funds (WPL only). Fluctuations in equity prices or interest rates do not affect Alliant Energy’s consolidated results of operations. In 2004, WPL liquidated all of its qualified decommissioning trust fund assets into money market funds as a result of the proposed Kewaunee sale. Refer to Notes 9 and 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for further discussion. Refer to “Critical Accounting Policies - Accounting for Pensions and Other Postretirement Benefits” for the impact on Alliant Energy’s pension and other postretirement benefit costs of changes in the rate of
returns earned by its plan assets, which include equity securities.
Currency Exchange Rate Risk -
Alliant Energy has investments in various countries where the net investments are not hedged, including Brazil, China and New Zealand. As a result, these investments are subject to currency exchange risk with fluctuations in currency exchange rates. At Dec. 31, 2004, Alliant Energy had a cumulative foreign currency translation loss, net of tax benefits, of $56 million, which is primarily related to decreases in the value of the Brazil real of $72 million and increases in the value of the New Zealand dollar of $15 million in relation to the U.S. dollar. This loss is recorded in “Accumulated other comprehensive loss” on Alliant Energy’s Consolidated Balance Sheet. Based on Alliant Energy’s investments at Dec. 31, 2004, a 10% sustained increase/decrease over the next 12 months in the foreign exchange rates of Brazil, China and New
Zealand would result in a corresponding increase/decrease in the cumulative foreign currency translation loss of $50 million. Alliant Energy’s equity income (loss) from its foreign investments is also impacted by fluctuations in currency exchange rates, however such impact is not significant based on the current level of equity earnings. At Dec. 31, 2004, Alliant Energy also had currency exchange risk associated with approximately $37 million of debt outstanding at one of the Brazilian operating companies. Alliant Energy recorded equity income of $1.1 million and $2.4 million in 2004 and 2003, respectively, related to its share of the foreign currency transaction gains on such debt. Based on the loan balance and currency rates at Dec. 31, 2004, a 10% change in the currency rates would result in a $2.8 million pre-tax increase/decrease in net income.
In addition, Alliant Energy has currency exchange risk associated with approximately $32 million of payables at a Canadian subsidiary, which has been reported as assets held for sale and discontinued operations as of Dec. 31, 2004. In 2004 and 2003, Alliant Energy recorded pre-tax income of $1.9 million and $3.2 million, respectively, related to the foreign currency transaction gains on such payables. Based on the payables balance and currency rates at Dec. 31, 2004, a 10% change in the currency rates would result in a $3.2 million pre-tax increase/decrease in net income. In January 2005, Alliant Energy acquired an option to protect $23 million of its exposure against declines in currency rates while still retaining the opportunity to participate in the benefits of increases in currency rates.
Accounting Pronouncements
-
In December 2004, the FASB issued revised SFAS 123 guidance, “Share-Based Payment,” (SFAS 123(R)), which requires companies to recognize compensation expense in an amount equal to the fair value of the share-based payments granted to employees. At the date of adoption, companies must use the modified prospective method which requires recording compensation expense for all awards granted after adoption and for the unvested portion of previously granted awards that remain outstanding. Companies may select the modified prospective or retrospective method for prior reporting periods. Pursuant to Accounting Principles Board Opinion (APB) 25, “Accounting for Stock Issued to Employees,” no stock-based compensation cost is currently reflected in net income in Alliant Energy’s Consolidated Statements of
Income, as all options granted under those plans had an exercise price equal to the quoted market price of the underlying common stock on the date of grant. Alliant Energy is required to adopt SFAS 123(R) by July 1, 2005 and does not anticipate the impacts will be material on its results of operations or financial condition given its limited use of stock options historically and its decision to discontinue using them entirely effective Jan. 1, 2005. Refer to Note 1(m) of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information regarding historical pro forma impacts of options on net income.
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Alliant Energy does not expect the various new accounting pronouncements that were effective in 2004 to have a material impact on its results of operations or financial condition.
Critical Accounting Policies
-
Based on historical experience and various other factors,
Alliant Energy believes the following policies are critical to its business and the understanding of its results of operations as they require critical estimates be made based on the assumptions and judgment of management. The preparation of consolidated financial statements requires management to make various estimates and assumptions that affect revenues, expenses, assets, liabilities and the disclosure of contingencies. The results of these estimates and judgments form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and judgments. Alliant Energy’s management has discussed
these critical accounting policies with the Audit Committee of its Board of Directors. Refer to Note 1 of Alliant Energy’s “Notes to Consolidated Financial Statements” for a discussion of Alliant Energy’s accounting policies and the estimates and assumptions used in the preparation of the consolidated financial statements.
Regulatory Assets and Liabilities -
Alliant Energy’s domestic utility business is regulated by various federal and state regulatory agencies. As a result, it qualifies for the application of SFAS 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71). SFAS 71 recognizes that the actions of a regulator can provide reasonable assurance of the existence of an asset or liability. Regulatory assets or liabilities arise as a result of a difference between accounting principles generally accepted in the U.S. and the accounting principles imposed by the regulatory agencies. Regulatory assets generally represent incurred costs that have been deferred as they are probable of recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for various reasons.
Alliant Energy’s utility subsidiaries recognize regulatory assets and liabilities in accordance with the rulings of their federal and state regulators and future regulatory rulings may impact the carrying value and accounting treatment of Alliant Energy’s regulatory assets and liabilities. Alliant Energy periodically assesses whether the regulatory assets are probable of future recovery by considering factors such as regulatory environment changes, recent rate orders issued by the applicable regulatory agencies and the status of any pending or potential deregulation legislation. The assumptions and judgments used by regulatory authorities continue to have an impact on the recovery of costs, the rate of return on invested capital and the timing and amount of assets to be recovered by rates. A change in these assumptions may result in a material impact on Alliant Energy’s results of operations.
Refer to Note 1(c) of Alliant Energy’s “Notes to Consolidated Financial Statements” for further discussion.
Asset Valuations -
Long-Lived Assets
- Alliant Energy’s Consolidated Balance Sheets include significant long-lived assets, which are not subject to recovery under SFAS 71. As a result, Alliant Energy must generate future cash flows from such assets in a non-regulated environment to ensure the carrying value is not impaired. Alliant Energy assesses the carrying amount and potential impairment of these assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors Alliant Energy considers in determining if an impairment review is necessary include a significant underperformance of the assets relative to historical or projected future operating results, a significant change in Alliant Energy’s use of the acquired assets or business strategy related to such assets, and significant negative industry or economic trends. When Alliant Energy
determines an impairment review is necessary, a comparison is made between the expected undiscounted future cash flows and the carrying amount of the asset. If the carrying amount of the asset is the larger of the two balances, an impairment loss is recognized equal to the amount the carrying amount of the asset exceeds the fair value of the asset. The fair value is determined by the use of quoted market prices, appraisals, or the use of valuation techniques such as expected discounted future cash flows. Alliant Energy must make assumptions regarding these estimated future cash flows and other factors to determine the fair value of the respective assets. Alliant Energy’s assets held for sale are also reviewed for possible impairment each reporting period and impairment charges are recorded if the carrying value of such assets exceeds the estimated fair value less cost to sell.
47
At Dec. 31, 2004, Resources owned $101 million of generation equipment, consisting of two gas turbines and one steam turbine. Resources is deploying the two gas turbines ($80 million) in the 300 MW, simple-cycle, natural gas-fired generating facility under construction near Sheboygan Falls, Wisconsin and continues to review for potential opportunities to utilize the steam turbine ($21 million). As a result, Alliant Energy has assessed the recoverability of the $101 million equipment cost compared to the future anticipated undiscounted cash flows from the Sheboygan Falls project and its opportunities to deploy the steam turbine. The future anticipated cash flows are a significant estimate. Alliant Energy has no current intentions to sell the steam turbine. If a decision was made to sell such equipment, the recoverability of the equipment cost would be assessed by comparing the future anticipated sales
proceeds to the carrying value of the equipment.
Investments
- Alliant Energy’s Consolidated Balance Sheets include investments in several available-for-sale securities accounted for in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). Alliant Energy monitors any unrealized losses from such investments to determine if the loss is considered to be a temporary or permanent decline. The determination as to whether the investment is temporarily versus permanently impaired requires considerable judgment. When the investment is considered permanently impaired, the previously recorded unrealized loss would be recorded directly to the income statement as a realized loss. Alliant Energy’s Consolidated Balance Sheets also contain various other investments that are evaluated for recoverability when indicators of impairment may exist. Refer to Note 9 of Alliant
Energy’s “Notes to Consolidated Financial Statements” for further information related to Alliant Energy’s investments accounted for in accordance with SFAS 115.
Resources holds a non-controlling interest in five Brazilian electric utility companies accounted for under the equity method of accounting. The recoverability of these equity method investments is assessed by comparing the expected future local currency cash flows from these investments and the local currency carrying value of these investments. The expected discounted future cash flows currently exceed the carrying value of these investments. To determine its discount rate, Alliant Energy utilizes a rate of return determined by Brazilian regulators. The future anticipated cash flows and discount rate represent significant estimates. The $326 million carrying value of Alliant Energy’s Brazil investments has been reduced by $137 million of pre-tax cumulative foreign currency translation losses. The net of tax balance of $72 million has been recorded in “Accumulated other comprehensive
loss” on Alliant Energy’s Consolidated Balance Sheet at Dec. 31, 2004. Cumulative foreign currency translation losses are reflected in Alliant Energy’s results of operations only if the related investment is sold or substantially liquidated. If Alliant Energy would decide to exit these Brazil investments in the future, the recoverability of these equity method investments would be assessed by comparing the future anticipated sales proceeds to the carrying value.
At Dec. 31, 2004, Resources held a secured loan receivable (including accrued interest income) of approximately $82 million from an unrelated Mexican real estate 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. Recoverability of Resources’ investment in this project will primarily be based on proceeds from the sales of real estate lots in the master planned community and therefore is dependent on the successful development of the project and sales of real estate. Effective Jan. 1, 2004, Resources ceased accruing interest income related to this loan pending a resolution of the matter discussed in the following paragraph. As a result, Alliant Energy effectively recorded
a valuation allowance of $7 million in 2004 related to this loan. The recoverability of the loan receivable was assessed at Dec. 31, 2004 by comparing the fair value of the land used to secure the loan and the carrying value of the loan including accrued interest. An updated, independent appraisal completed in the fourth quarter of 2004 indicated that the fair value of the collateral, which is a significant estimate, approximated the carrying value of the loan and accrued interest.
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 in order 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 conditions precedent have been satisfied and the transfer of ownership and control of the project was consummated effective February 2005. The cash outlay
for concluding the transfer is not material. Resources will continue to evaluate various alternatives related to the continued development of the resort community and/or the potential sale or sales of the assets.
Resources intends to pursue the course of action best able to protect its interests and maximize the recovery of its investments.
Effective with the transfer of ownership in the first quarter of 2005, Alliant Energy will remove the loan receivable and record the fair value of the real estate lots and certain utility properties of the master-planned resort community in “Non-regulated and other property, plant and equipment” on its Consolidated Balance Sheet. This property, plant and equipment will be assessed for impairment in the future by comparing its carrying value to the anticipated future undiscounted cash flows generated by the real estate lots and utility assets. 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. Alliant Energy does not expect the impact of this transfer will have a significant
impact on its results of operations.
48
Refer to Note 9 of Alliant Energy’s “Notes to Consolidated Financial Statements” for further discussion of Alliant Energy’s Brazil and Mexico investments.
Goodwill
- In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” Alliant Energy is required to evaluate its goodwill for impairment at least annually and more frequently when indicators of impairment may exist. At Dec. 31, 2004, Alliant Energy had $13 million of net goodwill included on its Consolidated Balance Sheet, primarily related to its China reporting unit. Refer to “Market Risk Sensitive Instruments and Positions - Commodity Price Risk” for further discussion. If the fair value of a reporting unit is less than its carrying value, including goodwill, a goodwill impairment charge may be necessary. Alliant Energy estimates the fair value of its reporting units utilizing a combination of market value indicators and the expected discounted future cash flows. This process requires the use of significant management estimates and judgments
regarding cash flow assumptions from future sales, operating costs and discount rates over an indefinite life. Alliant Energy’s cash flow assumptions are derived using a combination of historical trends, internal budgets, strategic plans and
other market information. Alliant Energy tests the sensitivities of these fair value estimates to changes in cash flow assumptions. Each reporting unit is evaluated separately based on the nature of its operations and therefore the assumptions vary by reporting unit relative to its applicable circumstances. To determine its discount rates, Alliant Energy utilizes the capital asset pricing model which is based upon market comparables adjusted for company-specific risk. Refer to Note 16 of Alliant Energy’s “Notes to Consolidated Financial Statements” for information on goodwill impairment charges recorded in 2004 and 2002. Additionally, Alliant Energy continues to monitor its equity method investments in accordance with APB 18, “The Equity Method of Investments in Common Stock.” Refer to Note 14 of Alliant Energy’s “Notes to Consolidated Financial Statements” for
further discussion.
Unbilled Revenues -
Unbilled revenues are primarily associated with Alliant Energy’s utility operations. Energy sales to individual customers are based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding estimated unbilled revenue is recorded. The unbilled revenue estimate is based on daily system demand volumes, estimated customer usage by class, weather impacts, line losses and the most recent customer rates. Such process involves the use of various estimates, thus significant changes in the estimates could have a material impact on Alliant Energy’s results of operations.
Accounting for Pensions and Other Postretirement Benefits -
Alliant Energy accounts for pensions and other postretirement benefits under SFAS 87, “Employers’ Accounting for Pensions,” and SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” respectively. Under these rules, certain assumptions are made which represent significant estimates. There are many factors involved in determining an entity’s pension and other postretirement liabilities and costs each period including assumptions regarding employee demographics (including age, life expectancies, and compensation levels), discount rates, assumed rate of returns and funding. Changes made to the plan provisions may also impact current and future pension and other postretirement costs. Alliant Energy’s assumptions are supported by historical data and
reasonable projections and are reviewed annually with an outside actuary firm and an investment consulting firm. As of Sep. 30, 2004 (Alliant Energy’s measurement date), Alliant Energy was using a 6% discount rate to calculate benefit obligations and a 9% annual rate of return on investments. In selecting an assumed discount rate, Alliant Energy reviews various corporate Aa bond indices. The 9% annual rate of return is consistent with Alliant Energy’s historical returns and is based on projected long-term equity and bond returns, maturities and asset allocations. A 100 basis point change in the discount rate would result in approximate changes of $101 million and $27 million in Alliant Energy’s pension and other postretirement benefit obligations and $8.1 million and $3.2 million in expense in 2005, respectively. A 100 basis point change in the rate of return would result in an approximate change of $6.1 million and $0.9 million in pension and other postretirement
benefit expense in 2005, respectively. Refer to Note 6(a) of the “Notes to Consolidated Financial Statements” for discussion of the impact of a change in the medical trend rates.
Income Taxes -
Alliant Energy accounts for income taxes under SFAS 109, “Accounting for Income Taxes.” Under these rules, certain assumptions are made which represent significant estimates. There are many factors involved in determining an entity’s income tax assets, liabilities, benefits and expense each period. These factors include assumptions regarding Alliant Energy’s future taxable income and its ability to utilize tax credits and loss carryovers as well as the impacts from the completion of audits of the tax treatment of certain transactions. Alliant Energy’s assumptions are supported by historical data and reasonable projections and are reviewed quarterly by management. Significant changes in these assumptions could have a material impact on Alliant Energy’s financial condition and results of operations. Refer to Note 5 of Alliant
Energy’s “Notes to Consolidated Financial Statements” for further discussion.
49
Other Future Considerations
-
In addition to items discussed earlier in MDA, the following items could impact Alliant Energy’s future financial condition or results of operations:
Exchangeable Senior Notes -
The interest deductions Alliant Energy has taken on it federal
tax returns related to Resources’ exchangeable notes are currently under audit by the IRS. Alliant Energy believes these interest deductions comply with the Internal Revenue Code (IRC) and, consequently, has not recorded any tax reserves. The IRS audit team, in conjunction with Alliant Energy, has requested a Technical Advice Memorandum (TAM) from the Chief Counsel’s Office of the IRS. Alliant Energy has been verbally notified that the Chief Counsel’s Office is anticipating issuing an adverse TAM regarding this issue. Alliant Energy has subsequently provided additional information in support of its position. The final results of the TAM are expected in the first half of 2005.
If Alliant Energy receives an adverse TAM related to these interest deductions and the IRS further
requires the interest deductions to be capitalized, it could have a material impact on its results of operations if Alliant Energy cannot generate sufficient capital gains in the future to offset potential capital losses that may result because of the capitalized interest. Based on a conservative evaluation of potential capital gains available, it is anticipated that Alliant Energy would be able to generate capital gains to reduce the potential tax liability to a range of $0 to $20 million. Alliant Energy is not able to predict the ultimate outcome of this matter and is currently exploring numerous options that could mitigate a portion or all of the potential adverse impact. As a worst case scenario, including litigation and possible appeals, this issue may remain unresolved for six to eight years.
Refer to Note 8(b) of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information relating to the exchangeable senior notes.
Brazil -
Alliant Energy continues to closely monitor the financial performance of its Brazilian investments. While such performance improved significantly in 2003, it was 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. Alliant Energy has asserted its rights as a minority shareholder in Companhia Força e Luz Cataguazes-Leopoldina, S.A. (Cataguazes) in an attempt to control costs and reduce debt. Alliant Energy filed a request for arbitration with the International Chamber of Commerce’s International Court of Arbitration in order to resolve this ongoing dispute with its Brazilian partners. Cataguazes itself is also a party to the arbitration. An arbitral tribunal heard this dispute commencing the week of Feb. 14, 2005, and is to issue a final
decision no later than June 30, 2005. If the arbitral tribunal issues a final decision in favor of Alliant Energy, enforcement of that award would have to be sought in the Brazilian courts. Alliant Energy is not able to predict the ultimate outcome of this matter and cannot provide any assurance it would be able to obtain enforcement of any award.
Alliant Energy also filed a request for arbitration with the International Court of Arbitration in order to resolve a separate dispute with its Brazilian partners concerning the completion of the expansion of the Usina Termelétrica de Juiz de Fora S.A. (Juiz de Fora) natural gas-fired generating facility from a simple-cycle to a combined-cycle facility (Alliant Energy holds a direct 50% ownership interest in this facility). To complete earlier plans, the Juiz de Fora facility was scheduled for such 20 MW expansion in early 2006 at an estimated cost of US$26 million. However, initiation of the expansion construction was delayed due to a dispute with Cat-Leo Energia S.A. (Cat-Leo), a company controlled by Cataguazes, which holds the remaining 50% ownership interest, regarding the financing and construction of the expansion. Alliant Energy received a final award from the arbitral tribunal in the first
quarter of 2005, which determined that Cat-Leo improperly interfered with plans to complete the combined-cycle expansion and therefore awarded Alliant Energy approximately US$22 million. The award is being challenged by Cat-Leo at the arbitral tribunal and Alliant Energy believes this issue will be resolved in the first half of 2005. If the final award is upheld, enforcement would have to be sought before the appropriate Brazilian court, a process that could require months to conclude. Successful enforcement would enable Alliant Energy to receive the awarded funds in exchange for its direct 50% interest in the Juiz de Fora facility (although Alliant Energy would still have an indirect interest through its minority shareholder ownership in Cataguazes). Alliant Energy cannot provide any assurance it would be able to obtain enforcement of the award. Concurrently, Alliant Energy continues to discuss with its partner the resolution of these matters including, but not limited to, a
settlement and/or the possible sale of the facility. The Juiz de Fora combined-cycle construction will likely not be completed as originally anticipated. Accordingly, appropriate steps have been taken to adjust the contractually required future performance obligations of this generation asset. If Alliant Energy remains a partner in the Juiz de Fora facility, Alliant Energy is not required to invest any additional capital in the facility. Alliant Energy’s direct equity investment in the Juiz de Fora facility at Dec. 31, 2004 was approximately US$20 million.
Any enforcement action related to these arbitration issues by Alliant Energy against Cat-Leo and/or Cataguazes in which Cat-Leo and/or Cataguazes refuse to comply with a court order could trigger default and/or cross-default provisions of the debt instruments in Brazil held by the operating entities owning the facilities - entities in which Alliant Energy has significant unconsolidated interests - unless the debtor company obtains appropriate waivers or consents from the applicable lenders. If such waivers, consents or similar relief could not be obtained from the lenders and the underlying debt was accelerated, then it would have a material adverse effect on the liquidity and creditworthiness of these debtor entities. Given these complexities, Alliant Energy will evaluate all available alternatives and will pursue the course(s) of action that will best protect its interests and maximize its potential
recoveries of its investments in these entities.
50
Cataguazes and its subsidiaries also have certain debt instruments maturing in 2005. While Alliant Energy expects Cataguazes and its subsidiaries will be able to refinance and/or retire such debt, Alliant Energy cannot provide any assurance
that it will be able to do so. If Cataguazes and its subsidiaries are not able to refinance or retire such debt instruments, Alliant Energy could incur material charges related to its investments in Brazil.
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 is considering and evaluating 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. Refer
to “Other Matters - Critical Accounting Policies - Asset Valuations - Investments” for a further discussion.
AJCA -
In October 2004, the AJCA was passed which includes changes to several provisions of the IRC. In addition to the extension of certain renewable energy production tax credits discussed earlier, the key changes that may impact Alliant Energy include, but are not limited to, a temporary dividends received deduction for foreign earnings repatriated during 2005 and future tax relief for domestic manufacturers (including electric production activities). Alliant Energy plans to repatriate certain foreign earnings in 2005 that were previously expected to be reinvested indefinitely and, as a result, has recorded tax charges of $0.04 per share in the fourth quarter of 2004, at a rate of 5.25%, given Alliant Energy had not previously recorded U.S. tax provisions related to these earnings. Any potential utility business tax benefits realized as a result of this
legislation would be subject to all appropriate regulatory reviews.
Synfuel -
A continued rise in oil prices from current levels could result in a reduction or elimination of the Section 29 tax credits expected
for 2005 to 2007 related to Alliant Energy’s synthetic fuel investment. A phase out or elimination of the Section 29 tax credits
would have no impact on the tax credits resulting from prior production of synthetic fuel. Alliant Energy continues to closely
monitor and assess this issue, including evaluating alternatives to potentially protect the ongoing economic benefits of its
synthetic fuel investment, and cannot predict the ultimate outcome.
Domestic Utility Generating Facilities Outages -
On Feb. 20, 2005, Kewaunee was removed from service after a potential design weakness was identified in a backup cooling system.
Plant engineering staff identified the concern and the unit was shutdown in accordance with the plant license. A modification is
being made to resolve the issue and it is anticipated that the unit will be back in service at full power in April 2005. The
modification costs associated with resolving this issue and the operation and maintenance costs necessary to restart the unit are not
expected to have a material adverse impact on Alliant Energy’s financial condition or results of operations. WPL plans to seek
recovery of the additional purchased-power costs incurred as a result of this outage through either a request for deferral or in the
fuel-related rate case it will be filing in March 2005.
On Feb. 24, 2005, Alliant Energy announced that the Ottumwa Generating Station (OGS) is off-line due to a direct short in a
161-kilovolt step-up transformer. Alliant Energy is currently pursuing all options in order to put OGS back on-line as quickly as
possible including replacement of the failed transformer with a new or used transformer, as well as examining options for repair of
the failed transformer. Alliant Energy is currently unable to predict how long OGS will be unavailable or the costs to resolve this
matter.
Refer to Note 1(i) of Alliant Energy’s “Notes to Consolidated Financial Statements” for information relating to utility fuel cost
recovery.
51
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk are reported under “Other Matters - Market Risk Sensitive Instruments and Positions” in MDA.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Alliant Energy
Page Number
Management’s Annual Report on Internal Control Over Financial Reporting
53
Reports of Independent Registered Public Accounting Firm
54-55
Consolidated Statements of Income for the Years Ended Dec. 31, 2004, 2003 and 2002
56
Consolidated Balance Sheets as of Dec. 31, 2004 and 2003
57
Consolidated Statements of Cash Flows for the Years Ended Dec. 31, 2004, 2003 and 2002
59
Consolidated Statements of Capitalization as of Dec. 31, 2004 and 2003
60
Consolidated Statements of Changes in Common Equity for the Years Ended
Dec. 31, 2004, 2003 and 2002
61
Notes to Consolidated Financial Statements
62
IPL
Report of Independent Registered Public Accounting Firm
98
Consolidated Statements of Income for the Years Ended Dec. 31, 2004, 2003 and 2002
99
Consolidated Balance Sheets as of Dec. 31, 2004 and 2003
100
Consolidated Statements of Cash Flows for the Years Ended Dec. 31, 2004, 2003 and 2002
102
Consolidated Statements of Capitalization as of Dec. 31, 2004 and 2003
103
Consolidated Statements of Changes in Common Equity for the Years Ended
Dec. 31, 2004, 2003 and 2002
104
Notes to Consolidated Financial Statements
105
WPL
Report of Independent Registered Public Accounting Firm
113
Consolidated Statements of Income for the Years Ended Dec. 31, 2004, 2003 and 2002
114
Consolidated Balance Sheets as of Dec. 31, 2004 and 2003
115
Consolidated Statements of Cash Flows for the Years Ended Dec. 31, 2004, 2003 and 2002
117
Consolidated Statements of Capitalization as of Dec. 31, 2004 and 2003
118
Consolidated Statements of Changes in Common Equity for the Years Ended
Dec. 31, 2004, 2003 and 2002
119
Notes to Consolidated Financial Statements
120
Refer to Note 15 of Alliant Energy’s, IPL’s and WPL’s “Notes to Consolidated Financial Statements” for the quarterly financial data required by Item 8.
52
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Alliant Energy Corporation and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Alliant Energy’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Alliant Energy’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2004 using the criteria set forth in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, Alliant Energy’s management believes that, as of December 31, 2004, its internal control over financial reporting was effective based on those criteria.
Deloitte & Touche LLP, Alliant Energy’s independent registered public accounting firm, has issued an attestation report on management’s assessment of its internal control over financial reporting. That attestation report is set forth immediately prior to the report of Deloitte & Touche LLP on the financial statements included herein.
/s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
Chairman and Chief Executive Officer
/s/ Eliot G. Protsch
Eliot G. Protsch
Senior Executive Vice President and Chief Financial Officer
/s/ John E. Kratchmer
John E. Kratchmer
Vice President-Controller and Chief Accounting Officer
March 2, 2005
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of Alliant Energy Corporation:
We have audited management’s assessment, included in the accompanying
Management’s Annual Report on Internal Control Over Financial
Reporting
, that Alliant Energy Corporation and subsidiaries (the “Company”) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in
Internal Control–Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of
directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on the criteria established in
Internal Control–Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the
criteria established in
Internal Control–Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2004 of the Company and
our report dated March 2, 2005 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 2, 2005
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of Alliant Energy Corporation:
We have audited the accompanying consolidated balance sheets and statements of capitalization of Alliant Energy Corporation and
subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, cash flows, and
changes in common equity for each of the three years in the period ended December 31, 2004. Our audits also included the financial
statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinions.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 19 to the consolidated financial statements, on January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.”
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established
in
Internal Control–Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 2, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal
control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 2, 2005
55
ALLIANT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2004
2003
2002
(dollars in millions, except per share amounts)
Operating revenues:
Domestic utility:
Electric
$2,009
.0
$1,917
.1
$1,752
.5
Gas
569
.8
566
.9
394
.0
Other
90
.6
104
.2
85
.4
Non-regulated
289
.3
278
.6
225
.2
2,958
.7
2,866
.8
2,457
.1
Operating expenses:
Domestic utility:
Electric production fuel and purchased power
747
.4
730
.6
651
.8
Cost of gas sold
396
.9
396
.1
249
.0
Other operation and maintenance
707
.2
701
.8
623
.2
Non-regulated operation and maintenance
254
.5
241
.7
200
.1
Depreciation and amortization
332
.2
302
.4
278
.0
Taxes other than income taxes
100
.7
89
.3
103
.5
2,538
.9
2,461
.9
2,105
.6
Operating income
419
.8
404
.9
351
.5
Interest expense and other:
Interest expense
179
.3
207
.5
182
.8
Loss on early extinguishment of debt
8
.9
16
.9
-
Equity (income) loss from unconsolidated investments
(35
.1)
(18
.8)
12
.9
Allowance for funds used during construction
(18
.5)
(20
.7)
(7
.7)
Preferred dividend requirements of subsidiaries
18
.7
16
.9
6
.2
Impairment of available-for-sale securities of McLeodUSA Inc.
0
.6
-
27
.2
Interest income and other
(28
.7)
(21
.8)
(10
.8)
125
.2
180
.0
210
.6
Income from continuing operations before income taxes
294
.6
224
.9
140
.9
Income taxes
83
.8
68
.9
46
.8
Income from continuing operations
210
.8
156
.0
94
.1
Income (loss) from discontinued operations, net of tax
(65
.3)
33
.5
12
.8
Income before cumulative effect of changes in accounting principles
145
.5
189
.5
106
.9
Cumulative effect of changes in accounting principles, net of tax
-
(6
.0)
-
Net income
$145
.5
$183
.5
$106
.9
Average number of common shares outstanding (basic) (000s)
113,274
101,366
90,897
Earnings per average common share (basic):
Income from continuing operations
$1
.86
$1
.54
$1
.04
Income (loss) from discontinued operations
(0
.58)
0
.33
0
.14
Cumulative effect of changes in accounting principles
-
(0
.06)
-
Net income
$1
.28
$1
.81
$1
.18
Average number of common shares outstanding (diluted) (000s)
113,701
101,544
90,959
Earnings per average common share (diluted):
Income from continuing operations
$1
.85
$1
.54
$1
.04
Income (loss) from discontinued operations
(0
.57)
0
.33
0
.14
Cumulative effect of changes in accounting principles
-
(0
.06)
-
Net income
$1
.28
$1
.81
$1
.18
Dividends declared per common share
$1
.0125
$1
.00
$2
.00
The accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
56
ALLIANT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
2004
2003
(in millions)
Property, plant and equipment:
Domestic utility:
Electric plant in service
$6,380
.3
$5,707
.5
Gas plant in service
674
.4
646
.4
Other plant in service
534
.1
530
.8
Accumulated depreciation
(3,166
.5)
(2,982
.9)
Net plant
4,422
.3
3,901
.8
Construction work in progress:
Emery generating facility
-
304
.3
Other
180
.9
151
.8
Other, less accumulated depreciation (accum. depr.) of $3.4 and $3.2
69
.6
68
.6
Total domestic utility
4,672
.8
4,426
.5
Non-regulated and other:
Non-regulated Generation, less accum. depr. of $17.8 and $12.6
266
.2
228
.8
International, less accum. depr. of $45.4 and $33.7
193
.5
198
.9
Other Non-regulated Investments, less accum. depr. of $49.6 and $43.4
87
.1
80
.9
Alliant Energy Corporate Services, Inc. and other, less accum. depr. of $42.6 and $24.3
65
.0
68
.5
Total non-regulated and other
611
.8
577
.1
5,284
.6
5,003
.6
Current assets:
Cash and temporary cash investments
262
.6
240
.8
Restricted cash
13
.2
9
.8
Accounts receivable:
Customer, less allowance for doubtful accounts of $3.9 and $4.8
149
.5
58
.9
Unbilled utility revenues
138
.1
83
.4
Other, less allowance for doubtful accounts of $2.3 and $0.8
69
.5
93
.8
Production fuel, at average cost
59
.5
54
.1
Materials and supplies, at average cost
61
.7
60
.5
Gas stored underground, at average cost
64
.9
49
.3
Regulatory assets
61
.8
61
.8
Assets held for sale
56
.7
193
.1
Other
88
.7
83
.0
1,026
.2
988
.5
Investments:
Investments in unconsolidated foreign entities
540
.4
481
.5
Nuclear decommissioning trust funds
413
.2
381
.5
Investment in American Transmission Company LLC and other
251
.3
258
.8
1,204
.9
1,121
.8
Other assets:
Regulatory assets
426
.1
361
.3
Deferred charges and other
333
.4
322
.3
759
.5
683
.6
Total assets
$8,275
.2
$7,797
.5
The accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
57
ALLIANT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
December 31,
CAPITALIZATION AND LIABILITIES
2004
2003
(in millions, except per
share and share amounts)
Capitalization (Refer to Consolidated Statements of Capitalization):
Common stock - $0.01 par value - authorized 240,000,000 and 200,000,000 shares;
outstanding 115,741,816 and 110,962,910 shares
$1
.2
$1
.1
Additional paid-in capital
1,762
.1
1,643
.6
Retained earnings
871
.9
840
.4
Accumulated other comprehensive loss
(67
.1)
(106
.4)
Shares in deferred compensation trust - 246,572 and 264,673 shares
at an average cost of $27.36 and $27.84 per share
(6
.7)
(7
.4)
Total common equity
2,561
.4
2,371
.3
Cumulative preferred stock of subsidiaries, net
243
.8
243
.8
Long-term debt, net (excluding current portion)
2,299
.5
2,123
.3
5,104
.7
4,738
.4
Current liabilities:
Current maturities
102
.3
69
.3
Variable rate demand bonds
39
.1
55
.1
Commercial paper
83
.0
107
.5
Other short-term borrowings
18
.9
21
.5
Accounts payable
295
.8
296
.2
Accrued interest
45
.5
44
.0
Accrued taxes
103
.2
68
.8
Liabilities held for sale
14
.0
48
.3
Other
176
.9
147
.7
878
.7
858
.4
Other long-term liabilities and deferred credits:
Deferred income taxes
775
.5
702
.0
Deferred investment tax credits
44
.0
49
.1
Regulatory liabilities
647
.2
654
.2
Asset retirement obligations
369
.3
345
.7
Pension and other benefit obligations
185
.8
188
.3
Other
220
.4
209
.1
2,242
.2
2,148
.4
Minority interest
49
.6
52
.3
Commitments and contingencies (Note 11)
Total capitalization and liabilities
$8,275
.2
$7,797
.5
The accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
58
ALLIANT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2004
2003
2002
(in millions)
Cash flows from operating activities:
Net income
$145
.5
$183
.5
$106
.9
Adjustments to reconcile net income to net cash flows from operating activities:
(Income) loss from discontinued operations, net of tax
65
.3
(33
.5)
(12
.8)
Depreciation and amortization
332
.2
302
.4
278
.0
Other amortizations
66
.2
73
.7
51
.6
Deferred tax expense and investment tax credits
58
.6
58
.0
13
.4
Equity (income) loss from unconsolidated investments, net
(35
.1)
(18
.8)
12
.9
Distributions from equity method investments
34
.4
24
.3
21
.7
Gains on dispositions of assets, net
(19
.8)
(5
.6)
(0
.2)
Non-cash valuation charges
3
.9
11
.0
50
.6
Other
(1
.6)
2
.5
(13
.9)
Other changes in assets and liabilities:
Accounts receivable
(20
.0)
(60
.2)
(7
.8)
Sale of utility accounts receivable
(101
.0)
(26
.0)
24
.0
Gas stored underground
(15
.6)
(13
.2)
4
.5
Accounts payable
36
.2
(2
.2)
14
.9
Accrued taxes
34
.4
(35
.1)
18
.8
Benefit obligations and other
(82
.0)
(0
.1)
(21
.3)
Net cash flows from operating activities
501
.6
460
.7
541
.3
Cash flows used for investing activities:
Construction and acquisition expenditures:
Domestic utility business
(538
.6)
(580
.8)
(405
.8)
Non-regulated businesses
(95
.2)
(246
.8)
(209
.9)
Alliant Energy Corporate Services, Inc. and other
(15
.4)
(9
.6)
(32
.7)
Nuclear decommissioning trust funds
(15
.0)
(14
.1)
(22
.9)
Proceeds from asset sales
42
.4
522
.5
26
.0
Other
(17
.7)
53
.1
19
.7
Net cash flows used for investing activities
(639
.5)
(275
.7)
(625
.6)
Cash flows from (used for) financing activities:
Common stock dividends
(114
.0)
(101
.3)
(181
.0)
Proceeds from issuance of common stock
115
.1
345
.6
56
.1
Proceeds from issuance of preferred stock of subsidiary
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