Alliant Energy 10-K 2005
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
This combined Form 10-K is separately filed by Alliant Energy Corporation, Interstate Power and Light Company and Wisconsin Power and Light Company. Information contained in the Form 10-K relating to Interstate Power and Light Company and Wisconsin Power and Light Company is filed by such registrant on its own behalf. Each of Interstate Power and Light Company and Wisconsin Power and Light Company makes no representation as to information relating to registrants other than itself.
Securities registered pursuant to Section 12 (b) of the Act:
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2004:
Number of shares outstanding of each class of common stock as of Feb. 28, 2005:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statements relating to Alliant Energy Corporations and Wisconsin Power and Light Companys 2005 Annual Meetings of Shareowners are, or will be upon filing with the Securities and Exchange Commission, incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Refer to Forward-Looking Statements in Managements Discussion and Analysis of Financial Condition and Results of Operations (MDA) for information and disclaimers regarding forward-looking statements contained in this Annual Report on Form 10-K.
This Annual Report on Form 10-K includes information relating to Alliant Energy Corporation (Alliant Energy), Interstate Power and Light Company (IPL) and Wisconsin Power and Light Company (WPL) (as well as Alliant Energy Resources, Inc. (Resources) and Alliant Energy Corporate Services, Inc. (Corporate Services)). Where appropriate, information relating to a specific entity has been segregated and labeled as such. Refer to Note 16 of Alliant Energys Notes to Consolidated Financial Statements for information related to Alliant Energys assets held for sale and discontinued operations.
ITEM 1. BUSINESS
The primary first tier subsidiaries of Alliant Energy are: IPL, WPL, Resources and Corporate Services. Among various other regulatory constraints, Alliant Energy is operating as a registered public utility holding company subject to the limitations imposed by the Public Utility Holding Company Act of 1935 (PUHCA). Alliant Energy was incorporated in Wisconsin in 1981. A brief description of the primary first-tier subsidiaries of Alliant Energy is as follows:
1) IPL - incorporated in 1925 in Iowa as Iowa Railway and Light Corporation. 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. In Iowa, non-exclusive franchises, which cover the use of streets and alleys for public utility facilities in incorporated communities, are granted for a maximum of 25 years by a majority vote of local qualified residents. At Dec. 31, 2004, IPL supplied electric and gas service to 531,927 and 236,808 (excluding transportation and other) customers, respectively. IPL also provides steam services to certain customers in one community in Iowa and various other energy-related products and services, including construction management services for wind farms. In 2004, 2003 and 2002, IPL had no single customer for which electric, gas, steam and/or other sales accounted for 10% or more of IPLs consolidated revenues.
2) WPL - incorporated in 1917 in Wisconsin as Eastern Wisconsin Electric Company. 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. Nearly all of WPLs customers are located in south and central Wisconsin. WPL operates in municipalities pursuant to permits of indefinite duration, which are regulated by Wisconsin law. At Dec. 31, 2004, WPL supplied electric and gas service to 445,198 and 176,045 (excluding transportation and other) customers, respectively. WPL also provides various other energy-related products and services, including construction management services for wind farms. In 2004, 2003 and 2002, WPL had no single customer for which electric, gas and/or other sales accounted for 10% or more of WPLs consolidated revenues. WPL Transco LLC is a wholly-owned subsidiary of WPL and holds WPLs investment in American Transmission Company LLC (ATC). WPL also owns all of the outstanding capital stock of South Beloit Water, Gas and Electric Company (South Beloit), a public utility supplying electric, gas and water service, principally in Winnebago County, Illinois, which was incorporated in 1908.
3) RESOURCES - incorporated in 1988 in Wisconsin. Alliant Energys non-regulated investments are organized under Resources. Refer to D. Information Relating to Non-regulated Operations for additional details.
4) CORPORATE SERVICES - incorporated in 1997 in Iowa. Corporate Services provides administrative services to Alliant Energy and its subsidiaries as required under PUHCA.
Refer to Note 13 of the Notes to Consolidated Financial Statements for further discussion of business segments, which information is incorporated herein by reference.
As of Dec. 31, 2004, Alliant Energys consolidated subsidiaries had the following employees (full-time and part-time):
(IBEW=International Brotherhood of Electrical Workers; IUOE=International Union of Operating Engineers)
2) CAPITAL EXPENDITURE AND INVESTMENT PLANS
Refer to Liquidity and Capital Resources in MDA for discussion of anticipated construction and acquisition expenditures for 2005 and 2006.
PUHCA - Alliant Energy operates as a registered public utility holding company subject to regulation by the Securities and Exchange Commission (SEC) under PUHCA. Regulation under PUHCA includes provisions relating to the issuance and sales of securities, acquisitions and sales of certain utility properties, acquisitions and retention of interests in non-utility businesses, including exempt wholesale generators (EWGs) and foreign utility companies (FUCOs), and the services provided by Corporate Services to Alliant Energy and its subsidiaries. Under an SEC order issued in December 2004, Alliant Energy has aggregate investment authority through Dec. 31, 2007 for EWGs and FUCOs equivalent to 100% of consolidated retained earnings as defined in the regulations. At Dec. 31, 2004, Alliant Energys remaining investment authority under this order was approximately $283 million.
Iowa Utilities Board (IUB) - IPL is subject to regulation by the IUB for service territories in Iowa for retail utility rates and standards of service, accounting requirements, approval of the location and construction of electric generating facilities having a capacity in excess of 25,000 kilowatts (KW), and in other respects. Requests for rate relief are based on historical test periods, adjusted for certain known and measurable changes occurring up to nine months from the end of the historical test year. The IUB must decide on requests for rate relief within 10 months of the date of the application for which relief is filed, or the interim rates granted become permanent. Interim rates can be placed in effect after 10 days of the rate application filing, subject to refund, and must be based on past precedent.
Public Service Commission of Wisconsin (PSCW) - Alliant Energy is subject to regulation by the PSCW. The PSCW regulates, among other things, the type and amount of Alliant Energys investments in non-utility businesses and other affiliated interest activities. WPL is also subject to regulation by the PSCW for service territories in Wisconsin for retail utility rates and standards of service, accounting requirements, issuance and use of proceeds of securities, approval of the location and construction of electric generating facilities, certain other additions and extensions to facilities, and in other respects. WPL is required to file rate cases with the PSCW using a forward-looking test year period.
Minnesota Public Utilities Commission (MPUC) - IPL is subject to regulation by the MPUC for service territories in Minnesota for retail utility rates and standards of service, accounting requirements, issuance and use of proceeds of securities, and in other respects. Requests for rate relief can be based on either historical or projected data and interim rates are permitted. The MPUC must reach a final decision within 10 months of filing for rate relief. The MPUC also has jurisdiction to annually approve IPLs capital structure.
Illinois Commerce Commission (ICC) - IPL and South Beloit are subject to regulation by the ICC for service territories in Illinois for retail utility rates and standards of service, accounting requirements, issuance and use of proceeds of securities, certain additions and extensions to facilities, and in other respects. Requests for rate relief must be decided within 11 months of filing.
Federal Energy Regulatory Commission (FERC) - FERC has jurisdiction under the Federal Power Act over certain electric utility facilities and operations, wholesale rates and accounting practices of IPL and WPL, and in certain other respects. In addition, certain natural gas facilities and operations of IPL and WPL are subject to the jurisdiction of FERC under the Natural Gas Act.
Environmental - The United States of America (U.S.) Environmental Protection Agency (EPA) administers certain federal regulatory programs and has delegated the administration of other environmental regulatory programs to the applicable state environmental agencies. In general, the state agencies have jurisdiction over safety, air and water quality, and waste handling standards associated with electric power generation, including the level and flow of water pertaining to hydroelectric generation. In certain cases, the state environmental agencies have delegated the administration of environmental programs to local agencies. In addition, International has investments that are subject to environmental regulations in the countries in which they operate.
Nuclear - IPL and WPL are directly and indirectly subject to the jurisdiction of the Nuclear Regulatory Commission (NRC), with respect to the Duane Arnold Energy Center (DAEC) and the Kewaunee Nuclear Power Plant (Kewaunee), respectively. Among other things, the NRC regulates the disposal of nuclear fuel and other radioactive wastes.
Brazil - Alliant Energy owns unconsolidated investments in five Brazilian electric utility companies, which are regulated by the Brazilian federal government, acting through the Ministry of Mines and Energy, which has exclusive authority over the electric sector through its regulatory powers. Regulatory policy for the sector is implemented by an autonomous national electric energy agency (Agencia Nacional de Energia Eletrica (ANEEL)), which delegates certain functions to agencies based in various states of Brazil. However, ANEEL cannot delegate any authority regarding tariffs to state agencies.
China - Alliant Energy owns interests in various generating facilities located in China that are regulated at various local and national levels by the Chinese government. The Chinese government continues to reform its regulatory and legal framework. Enforcement of the regulations is largely dependent upon local and provincial authorities. Because Alliant Energys facilities are small- to medium-sized co-generation plants, tariff adjustments are generally decided by the provincial-level Planning Commission, Pricing Bureau, and Economic Trade Commission, with input from their local counterparts and major customers. Most agreements governing the operations of Alliant Energys facilities include provisions for recovery of expenses resulting from changes in law.
New Zealand - Alliant Energy owns an unconsolidated investment in a generation utility company, which is regulated by the Electricity Commission (Commission). The Commission, while not a governmental department, is appointed by, and reports to, the Minister of Energy. The Commission has the authority to recommend new regulations directly to the Minister and has the responsibility for monitoring compliance, investigating alleged breaches, and taking necessary enforcement action with respect to rules and regulations. The Commission has established rules governing wholesale, retail, security, transmission and distribution in the form of a multilateral contract among electricity generators, retailers, distribution companies, transmission companies and end-consumers and has contracted for reserve energy to be used in periods of extreme energy shortages.
Refer to Note 2 of Alliant Energys Notes to Consolidated Financial Statements and Rates and Regulatory Matters in MDA for additional information regarding regulation and utility rate matters.
4) STRATEGIC OVERVIEW
Refer to Strategic Overview in MDA for discussion of various strategic actions Alliant Energy has taken to strengthen its financial profile and information regarding Alliant Energys strategic plan.
Alliant Energy realized 49%, 46%, 3% and 2% of its 2004 electric utility revenues in Iowa, Wisconsin, Minnesota and Illinois, respectively. Approximately 91% was regulated by the respective state commissions while the other 9% was regulated by FERC. Alliant Energy realized 51%, 43%, 3% and 3% of its 2004 gas utility revenues in Iowa, Wisconsin, Minnesota and Illinois, respectively.
IPL realized 92%, 6% and 2% of its 2004 electric utility revenues in Iowa, Minnesota and Illinois, respectively. Approximately 96% was regulated by the respective state commissions while the other 4% was regulated by FERC. IPL realized 93%, 5% and 2% of its 2004 gas utility revenues in Iowa, Minnesota and Illinois, respectively. WPL realized 99% of its 2004 electric utility revenues in Wisconsin and 1% in Illinois. Approximately 85% was regulated by the PSCW or the ICC while the other 15% was regulated by FERC. WPL realized 97% of its 2004 gas utility revenues in Wisconsin and 3% in Illinois.
The electric energy markets in Iowa and Wisconsin continue to be regulated by the IUB and PSCW, respectively. Retail electric customers in these markets currently do not have the ability to choose their electric supplier. However, in order to increase sales, IPL and WPL work to attract new customers into their service territories. As a result, there is competition among utilities to keep energy rates low. Although Iowa and Wisconsin electric energy markets are regulated, IPL and WPL also still face competition from other energy sources.
Federal and state regulators continue to implement policies to bring more competition to the gas industry. While the gas utility distribution function is expected to remain a highly regulated function, sales of the natural gas commodity and related services are expected to become increasingly subject to competition from third parties. However, it remains uncertain if and when the current economic disincentives for small customers to choose an alternative gas commodity supplier may be removed such that the utility business begins to face competition for the sale of gas to its customers.
1) DOMESTIC ELECTRIC UTILITY OPERATIONS
General - IPL and WPL provide electric service in Iowa, southern and central Wisconsin, southern Minnesota and northern and northwestern Illinois. The number of electric customers and communities served at Dec. 31, 2004 was as follows:
2004 electric utility operations accounted for 73% and 78% of operating revenues and 94% and 90% of operating income for IPL and WPL, respectively.
Electric sales are seasonal to some extent with the annual peak normally occurring in the summer months. In 2004, the maximum peak hour demands for IPL and WPL were 3,017 megawatts (MW) and 2,627 MW, respectively, both on July 20, 2004. In 2004, the maximum peak hour demand for Alliant Energy was 5,644 MW on July 20, 2004, which was the coincident peak of the entire Alliant Energy system.
Transmission Business - WPL - In 2001, WPL transferred its transmission assets to ATC and had an ownership interest in ATC of approximately 24% at Dec. 31, 2004. ATC is an independent for-profit, transmission-only company and is a transmission-owning member of the Midwest Independent System Operator (MISO) and Mid-America Interconnected Network, Inc. Regional Reliability Council (MAIN). ATC realizes its revenues from the provision of transmission services to both participants in ATC as well as non-participants. During 2004, ATC distributed in the form of dividends approximately 80% of its earnings to the equity holders and, although no assurance can be given, Alliant Energy anticipates ATC will continue this dividend payout ratio in the future. ATC has announced plans to improve transmission reliability and import capabilities into Wisconsin, including construction of a 345-kilovolt transmission line. Pending various regulatory approvals, the 345-kilovolt transmission line is expected to be in service in 2008. As these facilities are constructed, they will serve to enhance Alliant Energys operating flexibility and its access to lower-cost energy. ATC also has various transmission interconnections with four other transmission owning utilities in the Midwest.
IPL - IPL maintains and operates its own transmission and substation facilities. Refer to Properties for additional information regarding IPLs electric transmission properties. IPL has a non-cancelable operation agreement with Central Iowa Power Cooperative (CIPCO), which will terminate on Dec. 31, 2035, that provides for the joint use of certain transmission facilities of IPL and CIPCO. IPL has transmission interconnections at various locations with nine other transmission owning utilities in the Midwest. These interconnections, along with the interconnections of ATC, enhance the overall reliability of the Alliant Energy transmission system and provide access to multiple sources of economic and emergency energy.
In 2002, IPL filed for IUB and MPUC approval to transfer its transmission assets to TRANSLink Transmission Company LLC (TRANSLink), a proposed independent for-profit, transmission-only company. In 2003, TRANSLink announced that upon direction of the participant utilities, formation of TRANSLink had been suspended due to continued regulatory and market uncertainty. IPL continues to support the idea of an independent transmission company model but is not currently actively pursuing this option for its transmission business. IPL continues to monitor market and legislative developments but cannot currently predict the ultimate path it may pursue regarding its transmission business.
Regional Transmission Participation - IPL and WPL are members of MAIN and the newly developed Midwest Reliability Organization (MRO), both of which are regional members of the North American Electric Reliability Council (NERC). Each regional member of NERC is responsible for setting policies to ensure reliability in its area through coordination of planning and operations. As a result of an agreement between members of MAIN, IPL and WPL will cease participation in MAIN at the end of 2005 and at that time IPL and WPL will only have membership in the MRO.
In February 2004, as a result of the Northeast blackout in August 2003, the NERC Board of Trustees issued a plan of action to prevent and mitigate the impacts of future cascading blackouts, and implemented numerous recommendations of a NERC Technical Review Team. Alliant Energy has complied with the requirements of NERC to date, and expects to implement future required changes as they become known.
IPL and WPL are also members of the MISO, a FERC approved Regional Transmission Organization (RTO), which is responsible for monitoring and ensuring equal access to the transmission system in its service territory. The MISO is currently in the process of restructuring the bulk power market in its domain. This restructuring is expected to become effective April 1, 2005 and could have an impact on the costs associated with Alliant Energy serving its utility customers energy requirements. The IUB has approved a temporary waiver, effective until May 31, 2006, allowing the costs and credits associated with the market restructuring to be included in IPLs fuel cost recovery program. WPL and other Wisconsin investor owned utility companies have jointly requested approval from the PSCW to defer any net incremental retail transmission-related costs resulting from the market restructuring. This treatment was approved for several Wisconsin utility companies in recent base rate cases and WPL anticipates that approval of this request will be provided in its next base rate case.
As part of the MISO market restructuring, physical transmission rights of IPL and WPL are being replaced with Financial Transmission Rights (FTR). FTR provide a hedge for congestion costs that incur in the MISO day-ahead energy market. Both IPL and WPL have been awarded FTR by MISO that will be in place during the period April 1, 2005 through August 31, 2005. Prior to August 31, 2005, MISO will hold an FTR allocation for the period September 1, 2005 through May 31, 2006. Based on the FTR awarded to IPL and WPL to date and future expected allocations, along with the regulatory recovery treatment of MISO costs, the financial impacts associated with FTR should not differ significantly from the financial impacts associated with physical transmission rights that exist prior to the MISO market.
MISO will operate day-ahead and real-time energy markets. The day-ahead market will be a forward financial market in which clearing prices will be calculated for each hour of the next operating day. The clearing prices will be based on generation offers and demand bids. The real-time market will be a balancing market in which MISO will balance generation and demand in real-time. Energy differentials between the day-ahead and real-time markets will be settled in the real-time market.
Power Supply - Alliant Energy currently anticipates meeting its 2005 power supply requirements through internally generated power, purchased-power contracts utilizing existing firm transmission rights, and additional power purchases from existing generating units located within and outside of Alliant Energys service territory. While Alliant Energy currently expects to meet utility customer demands in 2005, unanticipated regional or local reliability issues could still arise in the event of unexpected delays in the construction of new generating and/or transmission facilities, power plant outages, transmission system outages or extended periods of extremely hot weather. Refer to Strategic Overview in MDA for discussion of Alliant Energys domestic utility generation plan.
Average Fuel Costs - Refer to the Electric Operating Information tables for details on the sources of electric energy for Alliant Energy, IPL and WPL from 2002 to 2004. The average cost of delivered fuel per million British Thermal Units used for electric generation was as follows:
Coal - Alliant Energy, through Corporate Services, IPL and WPL, has entered into contracts with different suppliers to ensure that a specified supply of coal is available at known prices for IPL and WPL for 2005 through 2009. As of Dec. 31, 2004, these contracts provide for a portfolio of coal supplies that cover approximately 94%, 74%, 41%, 20% and 5% of IPLs and WPLs estimated coal supply needs for 2005 through 2009, respectively. Management believes this portfolio of coal supplies represents a reasonable balance between the risks of insufficient supplies and those associated with larger open positions subject to price volatility in the coal markets. Alliant Energy expects to meet remaining coal requirements from either future contracts or purchases in the spot market.
The majority of the coal utilized by IPL and WPL is from the Wyoming Powder River Basin. A majority of this coal is transported by rail-car directly from Wyoming to IPLs and WPLs generating stations, with the remainder transported from Wyoming to the Mississippi River by rail-car and then via barges to the final destination. As protection against interruptions in coal deliveries, IPL and WPL strive to maintain average coal inventory supply targets of 25 to 50 days for generating stations with year-round deliveries and 30 to 150 days (depending upon the time of year) for generating stations with seasonal deliveries. Actual averages for 2004 were 36 days for generating stations with year-round deliveries and 89 days for generating stations with seasonal deliveries.
Average delivered fossil fuel costs are expected to increase in the future due to price structures in existing coal contracts, rate structures and adjustment provisions in existing transportation contracts and recent coal market trends. Existing coal commodity contracts with terms of greater than one year have fixed future year prices that generally reflect recent upward market trends. Rate adjustment provisions in transportation contracts are primarily based on changes in the Rail Cost Adjustment Factor as published by the U.S. Surface Transportation Board. Other factors which may impact coal prices for future commitments are increasing costs for supplier mineral rights, increasing costs to mine the coal and changes in various associated laws and regulations. For example, sulfur dioxide and nitrogen oxide emission restrictions and other environmental limitations on generating stations have increased significantly and proposed additional restrictions (including mercury emissions), if enacted, will likely limit the ability to obtain, and further increase the cost of, adequate coal supplies. Alliant Energy believes that given its current coal procurement process, the specific coal market in its primary purchase region, and regulatory cost-recovery mechanisms, it is insulated against the present volatile coal price environment. Alliant Energys coal procurement process stresses periodic purchases, staggering of contract terms, stair-stepped levels of coverage going forward for five to six years and supplier diversity. Similarly, Alliant Energy believes it is adequately insulated against future higher base coal transportation rates from the major railroads. As of Dec. 31, 2004, existing coal transportation agreements cover 100% of IPLs and WPLs estimated needs through 2005, approximately 88% for both 2006 and 2007 and 46% for 2008 through 2014. Refer to Note 1(i) for discussion of IPLs and WPLs rate recovery of fuel costs and Note 11(b) for details relating to coal purchase commitments in the Notes to Consolidated Financial Statements.
Purchased-Power - Purchased-power represented 20%, 25% and 23% of IPLs total megawatt-hour (MWh) requirements and 32%, 31% and 30% of WPLs total MWh requirements during 2004, 2003 and 2002, respectively. IPLs and WPLs level of purchased-power during these periods was impacted by scheduled refueling outages at DAEC in 2003 and at Kewaunee in 2004 and 2003. IPLs level of purchased-power was also lower during 2004 due to the 565 MW Emery Generating Station being placed into service in May 2004. Refer to Notes 3 and 11(b) of the Notes to Consolidated Financial Statements for details relating to purchased-power commitments.
Nuclear - Summary - IPL and WPL own partial interests in two nuclear generating facilities, DAEC and Kewaunee, respectively, which the Nuclear Management Company, LLC (NMC) operates under contract to the majority owners that remain in effect until notice of termination is provided one year prior to such termination would be effective. Alliant Energy has a 20% ownership interest in the NMC. The NMC operates all nuclear plants owned by the NMC members, which provides long-term safety, reliability and operational benefits for the plant owners. The NMC currently operates eight nuclear generating units at six sites but has no ownership interest in the plants it operates and bears no financial risk associated with operation of the plants. The plant owners retain all rights to the energy generated at the plants and all financial responsibility for their safe operation, maintenance and decommissioning. Certain details for DAEC and Kewaunee are as follows:
Proposed Sales of Kewaunee and DAEC - Refer to Notes 17 and 18 of Alliant Energys Notes to Consolidated Financial Statements for information on Alliant Energys proposed sales of its interests in Kewaunee and DAEC. In addition, the owners of Kewaunee and DAEC have given notice that they will terminate the operating agreement with the NMC effective with these proposed sales.
Nuclear Operating Issues - The NRC has significant regulatory authority over the design and operation of nuclear generating facilities with regard to environmental considerations and public health and safety. The treatment of costs associated with nuclear plant operation is regulated by various regulatory jurisdictions for companies owning the plants.
IPLs anticipated nuclear-related construction expenditures at DAEC for 2005 and 2006 are approximately $16 million and $4 million, respectively. WPL anticipates the proposed sale of Kewaunee will close in 2005 and therefore, does not anticipate any significant construction expenditures related to Kewaunee in 2005 or 2006. Depending on the outcome of the proposed sales of DAEC and Kewaunee, these anticipated nuclear-related construction expenditures may change.
Refueling Outages and Procurement of Nuclear Fuel - NMC, acting on behalf of IPL and the other DAEC owners, purchases uranium and enrichment services for DAEC using a combination of spot market and medium term contracts. This procurement is complete for a spring 2005 DAEC refueling outage and has begun for a 2007 refueling outage. Arrangements for the fabrication of nuclear fuel are in place through the 2011 refueling of DAEC. WPSC purchases uranium concentrates and conversion, enrichment and fabrication services for nuclear fuel assemblies at Kewaunee on behalf of WPL. Sufficient fuel is in inventory for a spring 2006 refueling outage and additional fuel will be purchased in 2005 for a fall 2007 refueling outage. WPSCs uranium inventory policy is to maintain sufficient inventory for up to two reloads of fuel. Refer to Notes 1(g), 1(i), 1(j) and 3 of Alliant Energys Notes to Consolidated Financial Statements for additional information related to DAEC and Kewaunee refueling outages and fuel expenses.
Nuclear Liability/Insurance - Liability for nuclear accidents is governed by the Price-Anderson Act of 1988 as amended (Act), which sets a statutory limit of $10.8 billion for liability to the public for a single nuclear power plant incident and requires nuclear power plant operators to provide financial protection for this amount. Financial protection for a nuclear incident is provided through a combination of liability insurance ($300 million) and industry-wide retrospective payment plans ($10.5 billion). Under the industry-wide plan, the owners of each operating licensed nuclear reactor in the U.S. are subject to an assessment in the event of a nuclear incident at any nuclear plant in the U.S. The applicability of the Act to IPL and WPL, as existing nuclear power plant owners, continues for the remainder of the operating lives of the plants they own.
IPL and WPL are members of Nuclear Electric Insurance Limited (NEIL), which provides $2.1 billion and $1.8 billion of insurance coverage for DAEC and Kewaunee, respectively, for certain losses for property damage, decontamination and premature decommissioning. The proceeds from such insurance, however, must first be used for reactor stabilization and site decontamination before they can be used for plant repair and premature decommissioning. NEIL also provides separate coverage for additional expenses incurred during certain outages. Owners of nuclear generating stations insured through NEIL are subject to retroactive premium adjustments if losses exceed accumulated reserve funds. NEILs accumulated reserve funds are currently sufficient to more than cover its exposure in the event of a single incident under the primary and excess property damage or additional expense coverages. However, IPL and WPL could be assessed if losses exceed the accumulated reserve funds. A summary of IPLs and WPLs share of maximum possible retrospective liability, property and additional expense assessments is as follows (in millions):
These limits are subject to adjustments for changes in the number of participants and inflation in future years. In the event of a catastrophic loss at DAEC or Kewaunee, the amount of insurance available may not be adequate to cover property damage, decontamination and premature decommissioning. Uninsured losses, to the extent not recovered through rates, would be borne by IPL or WPL, as the case may be, and could have a material adverse effect on their respective financial condition and results of operations. IPL and WPL are not currently aware of any losses that they believe are likely to result in an assessment.
Spent Nuclear Fuel (High Level Waste) Disposal - The Nuclear Waste Policy Act of 1982, as amended in 1987 (NWPA), assigned responsibility to the U.S. Department of Energy (DOE) to provide for the permanent disposal of spent nuclear fuel in exchange for payments by contract holders and also requires generators and owners of spent nuclear fuel to provide for interim storage until the fuel is accepted by the DOE. IPL, on behalf of the DAEC owners, and WPSC, on behalf of the Kewaunee owners, entered into contracts with the DOE for this disposal service and have made the agreed payments to the Nuclear Waste Fund held by the U.S. Treasury. The contracts provided for this service to begin in 1998; however, the DOE has experienced delays in its efforts and acceptance of spent nuclear fuel is now expected to occur sometime after 2010. The DOE is currently proceeding with the licensing phase for a permanent spent fuel storage facility in the Yucca Mountain area of Nevada.
In accordance with their interim storage responsibility, IPL and WPSC have been and will continue storing spent nuclear fuel on-site at DAEC and Kewaunee, respectively, until removal by the DOE to its permanent repository occurs. Interim storage activities at reactor sites, regardless of DOE delays or acceptance schedules, will extend after final reactor shutdown. Construction of a dry cask storage facility by IPL at DAEC has been completed and the transfer of approximately 10 years worth of spent nuclear fuel was completed in 2003. The dry storage facility provides assurance that both the operating and post-shutdown storage needs of DAEC are satisfied. Kewaunee has sufficient fuel storage capacity to meet its operating storage needs through 2009. Additional storage facilities will be needed at Kewaunee by 2010 for full offload capability for future outages.
In January 2004, IPL, on behalf of itself and the other DAEC co-owners, filed a claim against the U.S. government for recovery of damages due to the DOEs delay in accepting spent nuclear fuel. WPSC (on behalf of itself and WPL) and a number of utility companies with nuclear assets have also filed similar claims against the DOE for its failure to accept spent nuclear fuel in a timely manner. Determination and adjudication of the specific claim amount depends upon resolution of related court cases involving DOE acceptance rates and acceptance orders of spent nuclear fuel. Alliant Energy does not anticipate resolution of this issue until 2006 at the earliest and cannot currently predict the ultimate outcome. Any recoveries from the DOE would be subject to all appropriate regulatory reviews.
Low-Level Radioactive Waste Disposal - The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates that each state must take responsibility for the storage of low-level radioactive waste produced within its borders. However, disposal facilities located near Barnwell, South Carolina and Clive, Utah continue to accept the low-level waste from DAEC and Kewaunee, thereby minimizing the amount of low-level waste stored on-site and delaying the need for any action by individual states or groups of states to develop new facilities. While it is difficult to predict how long the South Carolina and Utah facilities will continue to accept low-level radioactive waste, DAEC and Kewaunee each have on-site storage capability for at least 10 years of waste generation beyond any date that both facilities might cease to accept such waste.
The costs associated with high- and low-level waste disposal and storage are currently recovered through IPLs and WPLs rates and therefore do not have a material impact on their respective financial conditions or results of operations.
Additional Nuclear Discussion - Additional discussions of various other nuclear issues relating to DAEC and/or Kewaunee are included in Notes 1(g), 1(j), 3, 9, 11(f), 12, 17, 18 and 19 of the Notes to Consolidated Financial Statements.
Electric Environmental Matters - Alliant Energy is regulated in environmental matters by federal, state and local agencies. Such regulations are the result of a number of environmental laws passed by the U.S. Congress, state legislatures and local governments and enforced by federal, state and local regulatory agencies. The laws impacting Alliant Energys operations include, but are not limited to, the Safe Drinking Water Act; Clean Water Act; Clean Air Act (CAA), as amended by the CAA Amendments of 1990; National Environmental Policy Act; Toxic Substances Control Act; Emergency Planning and Community Right-to-Know Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986; Endangered Species Act; NWPA; Occupational Safety and Health Act; and National Energy Policy Act of 1992. Alliant Energy regularly obtains federal, state and local permits to assure compliance with the environmental protection laws and regulations. Costs associated with such compliance have increased in recent years and are expected to increase moderately in the future. Alliant Energy anticipates these prudently incurred costs for IPL and WPL will be recoverable through future rate case proceedings.
In 2003, WPLs Columbia Energy Center received a Notice of Violation from the Wisconsin Department of Natural Resources (DNR) alleging certain violations of its Wisconsin Pollutant Discharge Elimination System permit. In 2004, Alliant Energy, the Wisconsin DNR and the Wisconsin Department of Justice entered into a settlement agreement to resolve the matter. All of the required settlement actions have been implemented and all that remains is compliance and on going requirements. None of these actions had a material adverse effect on WPLs financial condition or results of operations.
Refer to Liquidity and Capital Resources in MDA for further discussion of electric environmental matters.
Alliant Energy Corporation
Interstate Power and Light Company
Wisconsin Power and Light Company
2) DOMESTIC GAS UTILITY OPERATIONS
IPL and WPL provide gas service in Iowa, southern and central Wisconsin, southern Minnesota and northern and northwestern Illinois. The number of gas customers and communities served at Dec. 31, 2004 were as follows:
2004 gas utility operations accounted for 22% and 21% of operating revenues and 4% and 14% of operating income for IPL and WPL, respectively, which include providing gas services to retail and transportation customers.
IPL and WPL maintain purchase agreements with over 30 suppliers of natural gas from all gas producing regions of the U.S. and Canada. The majority of the gas supply contracts are for terms of six months or less, with the remaining supply contracts having terms through 2006. IPLs and WPLs gas supply commitments are either fixed price in nature or market-based.
In providing gas commodity service to retail customers, Corporate Services administers a diversified portfolio of transportation and storage contracts on behalf of IPL and WPL. Transportation contracts with Northern Natural Gas Company (NNG), Natural Gas Pipeline Co. of America (NGPL) and ANR Pipeline (ANR) allow access to gas supplies located in the U.S. and Canada. Arrangements with Firm Citygate Supplies (FCS) provide IPL and WPL with gas delivered directly to their service territories. In 2004, the maximum daily delivery capacity for IPL and WPL was as follows (in dekatherms (Dth)):
In addition to sales of natural gas to retail customers, IPL and WPL provide transportation service to commercial and industrial customers by moving customer-owned gas through their distribution systems to the customers meters. Revenues are collected for this service pursuant to transportation tariffs.
In providing gas commodity service for electric generation needs, Corporate Services administers certain transportation contracts on behalf of WPL. WPL has contracted with ANR for 60,000 Dths per day of pipeline transportation for the Riverside plant. IPL and WPL have also contracted for gas supply for electric generation with several companies to provide fixed-price gas, with the longest contracts having terms through October 2006.
The gas sales of IPL and WPL follow a seasonal pattern. There is an annual base load of gas used for heating and other purposes, with a large heating peak occurring during the winter season. Natural gas obtained from producers, marketers and brokers, as well as gas in storage, is utilized to meet the peak heating season requirements. Storage contracts allow IPL and WPL to purchase gas in the summer, store the gas in underground storage fields and deliver it in the winter. Gas storage met approximately 30% of both IPLs and WPLs annual gas requirements in 2004.
Refer to Note 1(i) for information relating to utility natural gas cost recovery and Note 11(b) for discussion of natural gas commitments in the Notes to Consolidated Financial Statements.
Gas Environmental Matters - Refer to Note 11(e) of Alliant Energys Notes to Consolidated Financial Statements for discussion of gas environmental matters.
Alliant Energy Corporation
Interstate Power and Light Company
Wisconsin Power and Light Company
Resources manages a portfolio of wholly-owned subsidiaries and additional investments through distinct platforms: International, Non-regulated Generation and Other Non-regulated Investments. Resources intends to concentrate its strategic focus on the profitability and cash flow of these platforms and will consider additional divestitures if provided the right opportunity to maximize value and/or eliminate unwarranted risk as part of its ongoing efforts to streamline its portfolio of businesses. Refer to Strategic Overview in MDA for further discussion.
International - has invested in energy generation and distribution companies and projects in select growing markets. Currently, International has investments in Brazil, China and New Zealand. International has developed local partnerships to obtain knowledge of each local markets business trends and customs. Refer to Note 9 of Alliant Energys Notes to Consolidated Financial Statements for additional information related to Alliant Energys investments in foreign entities.
Non-regulated Generation - currently supports the development, financing and construction of generation to meet the needs of Alliant Energys domestic utility business. A 300 MW simple-cycle, natural gas-fired generating facility is under construction near Sheboygan Falls, Wisconsin, which is expected to be completed in time to meet increased summer demand in 2005. Alliant Energy is proposing that Resources 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 $120 million had already been expended as of Dec. 31, 2004. The proposed structure is subject to final PSCW approval. In 2003, Resources purchased a 309 MW, non-regulated, tolled, natural gas-fired power plant in Neenah, Wisconsin. The entire power output of the facility is sold under contract to Milwaukee-based We Energies through May 2008. Also included in Non-regulated Generation is Industrial Energy Applications, Inc., which provides on-site energy services with small standby generators.
Other Non-regulated Investments - includes investments in environmental engineering and site remediation, transportation, Laguna del Mar, synthetic fuel and energy technologies investments, as well as oil and gas gathering pipeline systems and a biomass facility that Alliant Energy recently decided to divest. Environmental engineering and site remediation includes RMT, Inc., an environmental and engineering consulting company that serves clients nationwide in a variety of industrial market segments and specializes in consulting on solid and hazardous waste management, site remediation, ground water quality monitoring and detection, and air quality control. Transportation includes a short-line railway that provides freight service between Cedar Rapids and Iowa City; barge terminal and hauling services on the Mississippi River; and other transfer and storage services. Laguna del Mar is a Mexican development company that is developing a master-planned resort community in Mexico. Alliant Energy Synfuel LLC has 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 generated.
Refer to Note 16 of Alliant Energys Notes to Consolidated Financial Statements for information on other non-regulated businesses that Alliant Energy is pursuing the divestiture of in order to strengthen its financial profile and narrow its strategic focus.
Alliant Energy makes its periodic and current reports, and amendments to those reports, available, free of charge, on its website at www.alliantenergy.com/investors on the same day as such material is electronically filed with, or furnished to, the SEC. Alliant Energy is not including the information contained on its website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
IPLs principal electric generating stations at Dec. 31, 2004, were as follows:
All KWs shown below represent the 2004 summer generating capability.
At Dec. 31, 2004, IPL owned approximately 20,475 miles of overhead distribution line and 2,158 miles of underground distribution cable, as well as 7,082 miles of electric transmission line and 792 distribution and transmission substations, substantially all located in Iowa and Minnesota. IPLs principal properties are suitable for their intended use and substantially all are held subject to the liens of indentures relating to IPLs bonds. Refer to Strategic Overview in MDA for discussion of Alliant Energys domestic generation plan.
Refer to "Other Matters - Other Future Considerations - Domestic Utility Generating Facilities Outages" in MDA for discussion of a current outage at the Ottumwa Generating Station.
WPLs principal electric generating stations at Dec. 31, 2004, were as follows:
All KWs shown below represent the 2004 summer generating capability.
At Dec. 31, 2004, WPL owned approximately 17,037 miles of overhead distribution line and 3,513 miles of underground distribution cable, as well as 163 distribution substations located adjacent to the communities served, substantially all located in Wisconsin. In 2001, WPLs transmission assets were transferred to ATC. WPLs principal properties are suitable for their intended use and substantially all are held subject to the lien of WPLs First Mortgage Bond indenture. Refer to Strategic Overview in MDA for further discussion of Alliant Energys domestic generation plan.
Resources principal properties included in Property, plant and equipment on Alliant Energys Consolidated Balance Sheet at Dec. 31, 2004 were as follows:
ITEM 3. LEGAL PROCEEDINGS
Alliant Energy - Alliant Energy, through its subsidiary Alliant Energy Holdings Do Brasil Limitada, filed a request for arbitration with the International Court of Arbitration against its Brazilian partners in Companhia Forca e Luz Cataguazes-Leopoldina, S.A. (Cataguazes) and against Cataguazes. The partners named in the request for arbitration are Itacatu S.A. and Gipar S.A. The nature of the dispute is an alleged violation by the partners of a shareholders agreement to which all parties are bound. The arbitration seeks equitable relief and damages. For further information, refer to Other Matters - Other Future Conditions - Brazil in MDA.
IPL - None.
WPL - None.
In addition to the legal proceedings discussed in Alliant Energys, IPLs and WPLs reports to the SEC, Alliant Energy, IPL and WPL are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material adverse effect on Alliant Energys, IPLs or WPLs financial condition or results of operations.
Additional information required by Item 3 with regards to environmental matters is included in C. Information Relating to Domestic Utility Operations - Domestic Electric Utility Operations in Business, Liquidity and Capital Resources in MDA and Note 11(e) of the Notes to Consolidated Financial Statements, which information is incorporated herein by reference.
The information required by Item 3 with regards to rate matters is included in Business, Note 2 of Alliant Energys Notes to Consolidated Financial Statements and Rates and Regulatory Matters in MDA, which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None of the executive officers for Alliant Energy, IPL or WPL listed below are related to any member of the Board of Directors or nominee for director or any other executive officer. All of the executive officers of Alliant Energy also serve as executive officers of both IPL and WPL. Mr. Davis has an employment agreement with Alliant Energy pursuant to which his term of office is established. All other executive officers have no definite terms of office and serve at the pleasure of the Board of Directors. The executive officers of Alliant Energy, IPL and WPL as of the date of this filing are as follows (numbers following the names represent the officers age as of Dec. 31, 2004):
Executive Officers of Alliant Energy
Erroll B. Davis, Jr., 60, was elected Chairman of the Board effective April 2000, has served as Chief Executive Officer (CEO) since 1990 and has been a board member since 1988. He previously also served as President from 1990 through 2003.
William D. Harvey, 55, was elected President and Chief Operating Officer (COO) effective January 2004 and was appointed as a board member effective January 2005. He previously served as Executive Vice President (EVP)-Generation since 1998.
Eliot G. Protsch, 51, was elected Senior EVP and Chief Financial Officer (CFO) effective January 2004. He previously served as EVP and CFO since September 2003 and as EVP-Energy Delivery from 1998 to September 2003.
Barbara J. Swan, 53, was elected EVP and General Counsel effective October 1998.
Thomas L. Aller, 55, was elected Senior Vice President-Energy Delivery effective January 2004. He previously served as interim EVP-Energy Delivery since September 2003 and as Vice President (VP)-Investments at Resources from 1998 to 2003.
Thomas L. Hanson, 51, was elected VP and Treasurer effective April 2002. He previously served as Managing Director-Generation Services since 2001 and General Manager-Business and Financial Performance, Generation from 1998 to 2001.
John E. Kratchmer, 42, was elected VP-Controller and Chief Accounting Officer (CAO) effective October 2002. He previously served as Corporate Controller and CAO since 2000.
Executive Officers of IPL
Erroll B. Davis, Jr., 60, was elected Chairman of the Board effective April 2000 and CEO effective April 1998.
William D. Harvey, 55, was elected COO effective January 2004 and was appointed as a board member effective January 2005. He previously served as EVP-Generation since 1998.
Thomas L. Aller, 55, was elected President effective January 2004.
Eliot G. Protsch, 51, was elected CFO effective January 2004. He previously served as EVP and CFO since September 2003 and also as President from 1998 through 2003.
Barbara J. Swan, 53, was elected EVP and General Counsel effective October 1998.
Thomas L. Hanson, 51, was elected VP and Treasurer effective April 2002.
John E. Kratchmer, 42, was elected VP-Controller and CAO effective October 2002.
Executive Officers of WPL
Erroll B. Davis, Jr., 60, was elected Chairman of the Board effective April 2000 and CEO effective April 1998.
William D. Harvey, 55, was elected COO effective January 2004 and was appointed as a board member effective January 2005. He previously served as President since 1998.
Barbara J. Swan, 53, was elected President effective January 2004. She previously served as EVP and General Counsel since 1998.
Eliot G. Protsch, 51, was elected CFO effective January 2004. He previously served as EVP and CFO since September 2003 and EVP-Energy Delivery since 1998.
Thomas L. Aller, 55, was elected Senior VP-Energy Delivery effective January 2004.
Thomas L. Hanson, 51, was elected VP and Treasurer effective April 2002.
John E. Kratchmer, 42, was elected VP-Controller and CAO effective October 2002.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Alliant Energys common stock trades on the New York Stock Exchange under the symbol LNT. Quarterly sales price ranges and dividends with respect to Alliant Energys common stock were as follows:
Stock closing price at Dec. 31, 2004: $28.60
Although Alliant Energys 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 Energys 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 Energys stock, including holders through Alliant Energys 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 WPLs actual average common equity ratio, on a regulatory financial basis, is or will fall below the authorized level of 54.01%. WPLs 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:
ITEM 6. SELECTED FINANCIAL DATA
(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 IPLs common stock outstanding. As such, earnings per share data is not disclosed herein.
(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 WPLs common stock outstanding. As such, earnings per share data is not disclosed herein.
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 Corporations (Alliant Energys) 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 Energys 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 Energys nuclear facilities and unanticipated issues relating to the anticipated sale of Alliant Energys interests in the Kewaunee Nuclear Power Plant (Kewaunee) and Duane Arnold Energy Center (DAEC); costs associated with Alliant Energys environmental remediation efforts and with environmental compliance generally; developments that adversely impact Alliant Energys ability to implement its strategic plan; the amount of premiums incurred in connection with Alliant Energys planned debt reductions; the results from Alliant Energys International investments; stable foreign exchange rates; no material permanent declines in the fair market value of, or expected cash flows from, Alliant Energys investments; Alliant Energys ability to continue its comprehensive cost-cutting and operational efficiency efforts; Alliant Energys ability to identify and successfully complete potential acquisitions and development projects; Alliant Energys ability to complete its proposed divestitures of various businesses and investments in a timely fashion and for anticipated proceeds; Alliant Energys 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 Energys 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.
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 Energys 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 Energys 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.
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 Energys diluted EPS was as follows:
Additional details regarding Alliant Energys net income were as follows (in millions):
In spite of extremely mild weather conditions in 2004, Alliant Energys 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 Energys 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 Energys 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 Energys 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.
Summary - Alliant Energys 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 Energys domestic utility customers with safe, reliable and environmentally sound energy service, increasing the returns on invested capital in all of Alliant Energys businesses and streamlining Alliant Energys 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 Energys 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 Energys 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.
Alliant Energys 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 Energys 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 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 Energys asset divestiture activities in 2004 and to date in 2005.
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 Energys 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 Energys shareowners.
Domestic Utility Business - Alliant Energy is currently pursuing the sale of its two nuclear generating facilities, WPLs 41% interest in Kewaunee and IPLs 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 WPLs and WPSCs 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 Energys 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 WPLs 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 Energys 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 IPLs and WPLs plans for construction and financing of new generation facilities and related activities.
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 Energys 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 Energys 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)):
(a) Emery - 12.23% and Other - 10.7%
With the exception of recovering a return on Emery, which was a large component of IPLs 2004 retail Iowa electric rate case, and on other additions to IPLs and WPLs 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 WPLs 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.
WPLs 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.
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 IPLs 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 IPLs 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 IPLs results of operations or financial position should the IRS reject IPLs 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
Overview - Refer to Executive Summary for an overview of Alliant Energys 2004, 2003 and 2002 earnings and the various components of Alliant Energys business.
Domestic Utility Electric Margins - Electric margins, megawatt-hour (MWh) sales and cooling degree day data for Alliant Energy were as follows: