Alliant Energy 10-K 2006
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:
Securities registered pursuant to Section 12 (g) of the Act: Wisconsin Power and Light Company Preferred Stock
Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
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 large accelerated filers, accelerated filers, or non-accelerated filers. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Indicate by checkmark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2005:
Number of shares outstanding of each class of common stock as of Jan. 31, 2006:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statements relating to Alliant Energy Corporations and Wisconsin Power and Light Companys 2006 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. Unless otherwise noted, the information herein has been revised to exclude discontinued operations and assets and liabilities held for sale for all periods presented. Refer to Note 16 of Alliant Energys Notes to Consolidated Financial Statements for additional information.
ITEM 1. BUSINESS
The primary first tier subsidiaries of Alliant Energy are: IPL, WPL, Resources and Corporate Services. Alliant Energy is operating as an investor-owned public utility holding company under various regulatory constraints. 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 and Minnesota, as well as the utility operations of Illinois properties that Alliant Energy is divesting. 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, 2005, IPL supplied electric and gas service to 537,727 and 238,999 (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. In 2005, 2004 and 2003, 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, 2005, WPL supplied electric and gas service to 452,679 and 179,289 (excluding transportation and other) customers, respectively. WPL also provides various other energy-related products and services. In 2005, 2004 and 2003, 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), which was incorporated in 1908. South Beloit is a public utility supplying electric, gas and water service, principally in Winnebago County, Illinois, and which Alliant Energy is divesting.
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.
Refer to Note 13 of the Notes to Consolidated Financial Statements for further discussion of business segments, which information is incorporated herein by reference.
B. INFORMATION RELATING TO ALLIANT ENERGY ON A CONSOLIDATED BASIS
At Dec. 31, 2005, Alliant Energys consolidated subsidiaries that are included in its continuing operations had the following full- and part-time employees.
At Dec. 31, 2005, Alliant Energy employees covered by collective bargaining agreements were as follows (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 2006 and 2007.
3) REGULATION - Alliant Energy, IPL and WPL are subject to regulation by various federal, state, international and local agencies. The following includes the primary regulations impacting Alliant Energys, IPLs and WPLs business.
Federal Energy Regulatory Commission (FERC) and the Public Utility Holding Company Act - 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. Refer to Rates and Regulatory Matters and Liquidity and Capital Resources in MDA for discussion of the Energy Policy Act that was enacted in 2005 and the repeal of the Public Utility Holding Company Act of 1935 (PUHCA 1935).
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, Alliant Energy has international investments that are subject to environmental regulations in the countries in which it operates.
Iowa Utilities Board (IUB) - IPL is subject to regulation by the IUB for Iowa service territories 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. In 2001, the Iowa General Assembly understood the importance of attracting the development of electric power generating and transmission facilities within the state in sufficient quantity to ensure reliable electric service to Iowa consumers and provide economic benefits to the state. Consistent with this legislative intent, Iowa enacted HF 577, which provides companies with the necessary rate making principles - and resulting, increased regulatory and investment certainty - prior to making certain generation investments in Iowa.
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 Wisconsin service territories 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. Refer to Rates and Regulatory Matters in MDA for further discussion, including recent progressive legislation passed in Wisconsin which provides increased regulatory and investment certainty prior to making certain generation investments.
Minnesota Public Utilities Commission (MPUC) - IPL is subject to regulation by the MPUC for Minnesota service territories 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 Illinois service territories 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.
New Zealand - Alliant Energy has an equity investment in TrustPower Ltd., a hydro and wind generation utility company, which is regulated by the Electricity Commission (Commission). The Commission is appointed by, and reports to, the Minister of Energy. The Commission has the authority to recommend new regulations directly to the Minister of Energy 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 Notes 1(c), 1(i) and 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.
C. INFORMATION RELATING TO UTILITY OPERATIONS
Alliant Energy realized 50%, 46%, 3% and 1% of its 2005 electric utility revenues in Iowa, Wisconsin, Minnesota and Illinois, respectively. Approximately 88% was regulated by the respective state commissions while the other 12% was regulated by FERC. Alliant Energy realized 49%, 45%, 3% and 3% of its 2005 gas utility revenues in Iowa, Wisconsin, Minnesota and Illinois, respectively.
IPL realized 92%, 6% and 2% of its 2005 electric utility revenues in Iowa, Minnesota and Illinois, respectively. Approximately 94% was regulated by the respective state commissions while the other 6% was regulated by FERC. IPL realized 93%, 5% and 2% of its 2005 gas utility revenues in Iowa, Minnesota and Illinois, respectively. WPL realized 99% of its 2005 electric utility revenues in Wisconsin and 1% in Illinois. Approximately 82% was regulated by the PSCW or the ICC while the other 18% was regulated by FERC. WPL realized 96% of its 2005 gas utility revenues in Wisconsin and 4% 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 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 those customers.
1) 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, 2005 was as follows:
Wholesale customers in the above table are billed per standardized pricing mechanisms that are detailed in tariffs approved by FERC through wholesale rate case proceedings. In addition, IPL and WPL have bulk power customers, included in Other customers in the above table, that are billed according to negotiated, long-term customer-specific contracts, which are approved by FERC on an individual basis.
2005 electric utility operations accounted for 74% and 76% of operating revenues and 96% and 84% 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 2005, the maximum peak hour demands for IPL and WPL were 3,077 megawatts (MW) and 2,854 MW, respectively, both on Aug. 9, 2005. In 2005, the maximum peak hour demand for Alliant Energy was 5,932 MW on Aug. 9, 2005, which was the coincident peak of the entire Alliant Energy system.
Electric Supply - Alliant Energy has met historical customer demand of electricity and expects to continue meeting future demand through internally generated electric supply, 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. Refer to the Electric Operating Information tables for details on the sources of electric supply for Alliant Energy, IPL and WPL from 2001 to 2005. Alliant Energys mix of electric supply has experienced changes as a result of the recent sales of its interests in its nuclear generating facilities and the addition of natural-gas fired generating facilities to its generation portfolio. Refer to Strategic Overview - Utility Generation Plan in MDA for discussion of Alliant Energys utility generation plan. While Alliant Energy currently expects to meet utility customer demands in the future, 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.
Generation - IPL and WPL own a portfolio of electric generating facilities with a diversified fuel mix including coal, natural gas and renewable resources. Refer to Item 2. Properties for information on IPLs and WPLs electric generating stations.
Average Fuel Costs - The average cost of delivered fuel per million British Thermal Units used for electric generation was as follows:
Coal - Coal is the primary fuel source for Alliant Energys internally generated electric supply. Electric supply from coal-fired generating facilities represented 52%, 58% and 57% of IPLs total sources of electric energy and 49%, 55% and 54% of WPLs total sources of electric energy during 2005, 2004 and 2003, respectively. Alliant Energy, through Corporate Services, IPL and WPL, has entered into contracts with different suppliers to help ensure that a specified supply of coal is available at known prices for IPL and WPL for 2006 through 2010. As of Dec. 31, 2005, these contracts provide for a portfolio of coal supplies that cover approximately 95%, 74%, 49%, 21% and 7% of IPLs and WPLs estimated coal supply needs for 2006 through 2010, 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 2005 were 39 days for generating stations with year-round deliveries and 83 days for generating stations with seasonal deliveries. Refer to Other Matters - Other Future Considerations - Coal Delivery Disruptions in MDA for discussion of coal delivery disruptions caused by railroad train derailments in 2005.
Average delivered fossil fuel costs are expected to continue to increase in the future due to price structures and adjustment provisions in existing coal contracts, rate structures and adjustment provisions in existing transportation contracts, expiration of 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. A few of the existing coal contracts have provisions for price adjustments should specific indices change. 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, emission restrictions related to sulfur dioxide, nitrogen oxide and mercury along with other environmental limitations on generating stations continue to increase and 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 reasonably 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, given the term lengths of its transportation agreements, Alliant Energy believes it is reasonably insulated against future higher base coal transportation rates from the major railroads. As of Dec. 31, 2005, existing coal transportation agreements cover 100% of IPLs and WPLs estimated needs through 2006, approximately 91% for 2007 and 64% for 2008 through 2010. 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.
Natural Gas - Alliant Energy owns several natural gas-fired generating facilities that help meet customer demand for electricity especially during peak hour demands. Electric supply from natural gas-fired generating facilities represented 6%, 2% and 2% of Alliant Energys total sources of electric energy for its electric customers during 2005, 2004 and 2003, respectively. Increased electric supply from natural gas-fired generating facilities during 2005 was primarily due to generation from IPLs 565 MW, natural gas-fired Emery Generating Facility (Emery) that was placed in service in May 2004 and Resources 300 MW, natural gas-fired Sheboygan Falls Energy Facility (SFEF) that began commercial operations in June 2005. WPL has exclusive rights to the output of SFEF under an affiliated lease agreement. Refer to Gas Utility Operations for discussion of contracts for the supply and transportation of natural gas required for natural gas-fired generating facilities.
Nuclear - Electric supply from nuclear generating facilities represented 17%, 19% and 16% of IPLs total sources of electric energy and 2%, 11% and 11% of WPLs total sources of electric energy during 2005, 2004 and 2003, respectively. In July 2005, WPL sold its interest in the Kewaunee Nuclear Power Plant (Kewaunee) to a subsidiary of Dominion Resources, Inc. (Dominion) and upon closing of the sale entered into a long-term purchased power agreement with Dominion to purchase energy and capacity from Kewaunee. In January 2006, IPL sold its interest in the Duane Arnold Energy Center (DAEC) to a subsidiary of FPL Group, Inc. (FPL) and upon closing of the sale entered into a purchased power agreement with FPL to purchase energy and capacity from DAEC. As a result of these transactions, Alliant Energy no longer has an ownership interest in any nuclear generating facilities. Alliant Energy entered into these transactions to reduce the financial and operational uncertainty associated with nuclear generating facility ownership and operations while still retaining the benefit of the output from such nuclear generating facilities. For additional information regarding these sales refer to Notes 17 and 18 of Alliant Energys Notes to Consolidated Financial Statements.
Purchased Power - Alliant Energy enters into purchased power commitments to meet a portion of its customer demand of electricity. Purchased power represented 21%, 20% and 25% of IPLs total sources of electric energy and 46%, 32% and 31% of WPLs total sources of electric energy during 2005, 2004 and 2003, respectively. IPLs level of purchased power during these periods was impacted by scheduled refueling outages at DAEC in 2005 and 2003 and Emery being placed into service in May 2004. WPLs level of purchased power during these periods was impacted by the sale of its interest in Kewaunee in July 2005. Refer to Notes 17 and 18 of Alliant Energys Notes to Consolidated Financial Statements for additional details regarding recent purchased power agreements related to Kewaunee and DAEC, respectively, and Notes 3(a) and 11(b) of Alliant Energys Notes to Consolidated Financial Statements for details relating to purchased power commitments. Refer to Other Matters - Other Future Considerations - Calpine Bankruptcy in MDA for discussion of WPLs purchased power agreements with Calpine Corporation subsidiaries related to the RockGen and Riverside generating facilities.
Electric Transmission Business and Energy Markets -
WPL - In 2001, WPL transferred its transmission assets to ATC in exchange for an ownership interest in ATC. As of Dec. 31, 2005, WPL held a 21% ownership interest in ATC with a carrying value of $152 million. ATC is an independent for-profit, transmission-only company and is a transmission-owning member of the Midwest Independent System Operator (MISO) and Reliability First Corporation Regional Reliability Council (Reliability First). Reliability First is the successor organization to the Mid-American Interconnected Network, Inc., which ceased operations Dec. 31, 2005. ATC realizes its revenues from the provision of transmission services to both participants in ATC as well as non-participants. During 2005, 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 is continuing its efforts to improve transmission reliability and import capabilities into Wisconsin, including construction of a 345-kilovolt transmission line, which 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. WPLs anticipated capital contributions to ATC in 2006 and 2007 are $12 million and $11 million, respectively.
IPL - IPL maintains and operates its own transmission assets which had a book value of $442 million as of Dec. 31, 2005. Refer to Properties for additional information regarding IPLs electric transmission properties. IPL has a non-cancelable operation agreement, which will terminate on Dec. 31, 2035, with Central Iowa Power Cooperative (CIPCO) 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. Refer to Strategic Overview - Transmission Business in MDA for discussion of the options IPL is evaluating related to the future of its transmission assets.
Regional Transmission Participation - IPL and WPL are members of the Midwest Reliability Organization and Reliability First, 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.
MISO Wholesale Energy Market - IPL and WPL are also members of MISO, a FERC-approved Regional Transmission Organization, which is responsible for monitoring and ensuring equal access to the transmission system in its service territory. On April 1, 2005, IPL and WPL began participation in the restructured wholesale energy market operated by MISO. The implementation of this restructured market marked a significant change in the way IPL and WPL buy and sell wholesale electricity, obtain transmission services and schedule generation. In the restructured market, IPL and WPL offer their generation and bid their demand into the market on an hourly basis. MISO evaluates IPLs, WPLs and other market participants energy injections into, and withdrawals from, the system to economically dispatch the entire MISO system on an hourly basis. MISO settles these hourly offers and bids based on locational marginal prices, which are market-driven values based on the specific time and location of the purchase and/or sale of energy. The restructured market is intended to send price signals to stakeholders where generation or transmission system expansion is needed. This market-based approach is expected to result in lower overall costs in areas with abundant transmission capacity. In areas of constrained transmission capacity, such as Wisconsin, costs could be higher due to the congestion and marginal loss pricing components. Refer to Rates and Regulatory Matters in MDA for discussion of the regulatory impacts of costs related to MISO.
As part of the MISO market restructuring, physical transmission rights of IPL and WPL were replaced with Financial Transmission Rights (FTRs). FTRs provide a hedge for congestion costs that incur in the MISO day-ahead energy market. Both IPL and WPL have been awarded FTRs by MISO that are in place during the period Sep. 1, 2005 through May 31, 2006. Based on the FTRs 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 FTRs have not differed significantly from the financial impacts associated with physical transmission rights that existed prior to the MISO market.
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 of 1969; Toxic Substances Control Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act and Emergency Planning and Community Right-to-Know Act of 1986; Endangered Species Act; Nuclear Waste Policy Act of 1982, as amended in 1987; Occupational Safety and Health Act; National Energy Policy Act of 1992; Federal Insecticide, Fungicide and Rodenticide Act; Hazardous Materials Transportation Act; and Pollution Prevention Act. 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 continue to increase in the future. Alliant Energy anticipates these prudently incurred costs for IPL and WPL will be recoverable through future rate case proceedings.
Refer to Liquidity and Capital Resources in MDA for further discussion of electric environmental matters.
2) 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, 2005 were as follows:
2005 gas utility operations accounted for 22% and 23% of operating revenues and 5% and 19% 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 primarily 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 2005, 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.
Alliant Energy owns several natural gas-fired generating facilities including Emery and SFEF and has responsibility under purchased power agreements to supply natural gas to certain generating facilities including Riverside and RockGen. WPL has contracted with ANR to provide firm pipeline transportation of 60,000 Dths per day for the Riverside plant and 52,800 Dths per day (June to September) for SFEF. IPL and WPL also have contracts with several companies to provide fixed-price natural gas supply for these generating facilities with the longest contracts having terms through October 2006. In addition to entering into fixed-price supply contracts, IPL and WPL have hedging programs reviewed by the IUB and PSCW, respectively, to help protect against the impacts of volatile natural gas prices. IPL and WPL expect these fixed-price supply contracts and hedging programs will substantially mitigate the impact on its electric customers of volatile natural gas costs for these generating facilities through December 2007.
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 2005.
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.
D. INFORMATION RELATING TO NON-REGULATED OPERATIONS
Resources manages a portfolio of wholly-owned subsidiaries and additional investments through distinct platforms: Non-regulated Generation, International and other non-regulated investments.
Non-regulated Generation - manages Alliant Energys non-regulated electric generating facilities. In 2005, Resources changed its focus from acquiring and developing new generating facilities to managing assets it currently owns. In June 2005, Resources completed the construction and commenced commercial operation of the 300 MW, simple-cycle, natural gas-fired SFEF near Sheboygan Falls, Wisconsin. Resources owns SFEF and leases it to WPL for an initial period of 20 years. Refer to Note 3(b) of WPLs Notes to Consolidated Financial Statements for additional information regarding the SFEF lease. Resources also owns 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.
International - Internationals remaining investments include two equity investments in New Zealand as well as several generating facilities in China that Alliant Energy is divesting. Refer to Note 9 of Alliant Energys Notes to Consolidated Financial Statements for information regarding Internationals New Zealand investments and the sale of Alliant Energys investments in Brazil in January 2006.
Other non-regulated investments - includes investments in environmental engineering and site remediation, transportation, construction management services for wind farms and several other modest investments, as well as a resort development in Mexico (Laguna del Mar) and gas gathering pipeline systems that Alliant Energy is divesting. 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. Construction management services for wind farms includes WindConnect, a construction management service company that provides expertise in engineering, designing, constructing and maintaining wind electric system projects.
Refer to Strategic Overview in MDA and Note 16 of Alliant Energys Notes to Consolidated Financial Statements for information on Alliant Energys focused approach to its non-regulated operations as well as various divestitures that Alliant Energy has completed and is currently pursuing.
E. DISCLOSURE CONCERNING WEBSITE ACCESS TO REPORTS
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 Securities and Exchange Commission (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 1A. RISK FACTORS
You should carefully consider each of the risks described below relating to Alliant Energy, IPL and WPL, together with all of the other information contained in this combined Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks develop into actual events, our business, financial condition, results of operations or cash flows could be materially and adversely affected and you may lose all or part of your investment.
Risks related to the regulation of our business could impact the rates we are able to charge, our costs and our profitability - We are subject to comprehensive regulation by federal and state regulatory authorities, which significantly influences our operating environment and the ability to timely recover costs from customers. In particular, our utilities are regulated by regulatory authorities with jurisdiction over public utilities, including the IUB, the PSCW, the ICC, the MPUC and FERC. These authorities regulate many aspects of our operations, including, but not limited to: construction and maintenance of facilities; operations; safety; issuance of securities; accounting matters; transactions between affiliates; rates charged to customers; our ability to site and construct new generation plants; costs of fuel, purchased power and natural gas that can be recovered from customers; and the authorized rates of return on capital. The ability of our utilities to obtain rate adjustments
to maintain current rates of return depends upon regulatory action under applicable statutes and regulations, and we cannot assure that rate adjustments will be obtained or current authorized rates of return on capital will be earned. These regulatory authorities are also empowered to impose financial penalties and other sanctions on us and our utilities if found to have violated statutes and regulations governing utility operations. Currently, IPL and WPL have certain pending rate cases. If IPL and WPL do not receive the expected amount of rate relief, rates are reduced, the increased rates are not approved on a timely basis or costs are otherwise unable to be recovered through rates, we may experience an adverse impact on our financial condition, results of operations and cash flows. We, through our international subsidiaries, are also subject to international rate regulation in the foreign markets in which we operate.
We are unable to predict the impact on our business and operating results from the future regulatory activities of any of these agencies. Changes in regulations or the imposition of additional regulations may require us to incur additional expenses or change business operations or our business plan, particularly as it relates to our utilities, which may have an adverse impact on our financial condition, results of operations and cash flows. In addition, federal regulatory reforms mandated by the Energy Policy Act of 2005 may produce unexpected changes and costs in the public utility industry that could cause us to incur additional expenses or change business operations, which may have an adverse impact on our financial condition, results of operations and cash flows.
Changes in commodity prices may increase the cost of producing electric energy or decrease the amount our subsidiaries receive from selling electric energy, harming our financial performance - The prices that we may obtain for electric energy may not compensate for changes in coal, natural gas or energy spot-market costs, or changes in the relationship between such costs and the market prices of electric energy, and so our utilities may be unable to pass on the changes in costs to their customers, which may result in an adverse effect on our financial condition, results of operations and cash flows. We are heavily exposed to changes in the price and availability of coal because the majority of the electricity generated by us is from our coal-fired generating facilities. We, through our utilities, have contracts of varying durations for the supply and transportation of coal for most of our existing generating capability, but as these contracts end or otherwise are not honored, we may not be able to purchase coal on terms as favorable as the current contracts. Further, we rely on coal primarily from the Power River Basin in Wyoming and any disruption of coal production in, or transportation from, that region may cause us to incur additional costs and adversely affect our financial condition. Our utilities also have responsibility to supply gas to natural gas-fired electric generating facilities that we own and lease, which increase our exposure to the more volatile market prices of natural gas. We, through our utilities, have natural gas supply contracts in place which are generally short term in duration. The gas supply commitments are either fixed price in nature or market-based. As some of the contracts are market-based, and all of the contracts are short-term, we may not be able to purchase gas on terms as favorable as the current contracts when the current contracts expire. Further, natural gas supplies originate primarily in the Gulf of Mexico region of the U.S. and any disruption of production of natural gas in that region, and transportation of natural gas from that region, may cause us to incur additional costs to purchase natural gas that may adversely impact our financial condition, results of operations and cash flows.
We are engaged in sales of assets and businesses; however, market conditions and other factors may hinder this strategy - We are in the process of selling, and may continue to sell, non-core assets. Sales prices for assets and businesses could fluctuate. Asset sales under poor market conditions could result in substantial losses. Buyers may find it difficult to obtain financing to purchase these assets. As part of any asset sale, we face challenges associated with pricing the assets correctly and limiting our environmental or other retained liabilities. These transactions also may divert management attention and other resources from day-to-day operations. Several factors specific to us could make asset sales particularly challenging. We are subject to regulatory approvals for the sale of certain assets, as are potential purchasers. These approvals can impose delays and structuring complications on asset sale transactions. Potential buyers may be reluctant to enter into agreements to purchase assets from us if they believe that required consents and approvals will result in significant delays or uncertainties in the transaction process. Some of the assets we are selling are international assets, located in China and Mexico, and are subject to international regulatory approvals. Further, the value of our international assets may fluctuate due to political and economic instability, local labor market conditions, the impact of government regulations and taxation, differences in business practices and fluctuations in foreign exchange rates in countries where those assets or buyers are located and we may not be able to realize the full value of our international assets.
Costs of compliance with new laws and the incurrence of liabilities, particularly related to the environment, could adversely affect our profitability - Our operations are subject to extensive regulation including environmental protection. New laws and regulations affecting our operations have been and may be adopted, including the Clean Air Mercury Rule and the Clean Air Interstate Rule, each as adopted by the EPA, and new interpretations of existing laws and regulations could be adopted or become applicable to us or our facilities, which may substantially increase compliance expenditures made by us in the future. We also have current or previous ownership interests in sites previously associated with the production of gas for
which we may be liable for investigation, remediation and monitoring costs relating to the sites. Compliance with current and future federal and state environmental laws and regulations may result in increased capital, operating and other costs, including remediation and containment expenses and monitoring obligations. We cannot predict with certainty the amount and timing of all future expenditures (including the potential or magnitude of fines or penalties) related to environmental matters because of the difficulty of estimating clean-up and compliance costs, the uncertainty in quantifying liabilities under environmental laws that impose joint and several liabilities on all potentially responsible parties, the possibility that changes will be made to the current environmental laws and regulations, and the uncertainty regarding the type of compliance that will be required by final rules and regulations. Future changes in the interpretation of the Clean Air Acts New Source Review provisions could potentially increase our operating and maintenance costs substantially.
Our operating results may fluctuate on a seasonal and quarterly basis and can be adversely affected by the impacts of weather - Our electric and gas utility businesses are seasonal businesses and weather patterns can have a material impact on their operating performance. Demand for electricity is greater in the summer months associated with cooling. In addition, market prices for electricity peak in the summer. Demand for natural gas depends significantly upon weather patterns in winter months due to heavy use for residential and commercial heating. As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis. In addition, our utilities have historically generated less revenues and income when weather conditions are warmer in the winter and cooler in the summer. We expect that unusually mild winters and summers could have an adverse effect on our financial condition, results of operations and cash flows.
At times, demand for electric energy could exceed our supply capacity - We are currently obligated to supply electric energy in parts of Iowa, Wisconsin, Minnesota and Illinois. From time to time and because of unforeseen circumstances, the demand for electric energy required to meet these obligations could exceed our available electric generating capability and energy commitments pursuant to long-term purchase power agreements. If this occurs, we would have to buy electric energy on the market. Our utilities may not always have the ability to pass the costs of purchasing the electric energy on to their customers, and even if they are able to do so, there may be a significant delay between the time the costs are incurred and the time the costs are recovered. Since these situations most often occur during periods of peak demand, it is possible that the market price for electric energy at the time we purchase it could be very high. Even if a supply shortage was brief, we could suffer substantial losses that could diminish our financial condition, results of operations and cash flows.
Failure to provide reliable service to our utility customers could adversely affect our operating results - Our utilities are obligated to provide safe and reliable service to their customers within their service territories. Meeting this commitment requires significant capital and other resources. Failure to provide safe and reliable service, including effects of equipment failures in electric and gas delivery systems, could adversely affect our operating results through reduced revenues and increased maintenance and capital costs. The North American transmission grid is highly interconnected and, in extraordinary circumstances, disruptions at particular points within the grid could cause an extensive power outage in our delivery systems. Power outages in our service territories could result from factors outside of our control or service territories.
The transmission system in our utilities service area is constrained, which could impact our ability to provide reliable service to our utility customers and increase the cost of purchased power - The transmission system in our utilities service territories, especially in Wisconsin, is constrained, limiting our ability to transmit electric energy within our service territories and access electric energy from outside of our service territories. The transmission constraints could result in failure to provide reliable service to our utility customers or not being able to access lower cost sources of electric energy.
Threats of terrorism and catastrophic events that could result from terrorism or natural disasters may impact our operations in unpredictable ways - We are subject to direct and indirect effects of terrorist threats and activities. Generation and transmission facilities, in general, have been identified as potential targets. The effects of terrorist threats and activities include, among other things, terrorist actions or responses to such actions or threats, the inability to generate, purchase or transmit electric energy, the risk of significant slowdown in growth or a decline in the U.S. economy, disruption or volatility in, or other effects on capital markets, and the increased cost and adequacy of security and insurance. Catastrophic natural disasters may also impact our operations. Natural disasters may adversely impact our ability to generate, purchase or transmit electric energy or obtain fuel sources and may significantly slow growth, or cause a decline, in the economy within our service territories.
The operation of electric generating stations or the construction or capital improvement of utility facilities may involve unanticipated changes or delays in operations that could negatively impact our business, and our financial condition, results of operations and cash flows - The operation of electric generating stations involves many risks, including start-up risks, breakdown or failure of equipment, transmission lines or pipelines, use of technology, the dependence on a specific fuel source, including the supply and transportation of fuel, as well as the risk of performance below expected or contracted levels of output or efficiency. These risks could negatively impact our business through asset degradation, lost revenues or increased costs, including the cost of replacement power. Additionally, our ability to successfully and timely complete construction of utility facilities or planned capital improvements to existing facilities within established budgets is contingent upon many variables and may be subject to substantial risks. Should such efforts be unsuccessful, we could be subject to additional costs and increased risk of non-recovery of construction or improvement costs through rates.
A downgrade in our credit ratings could negatively affect borrowing costs and access to capital to operate our business - Our credit ratings may be dependent on, among other things, the success of execution of our strategic plan. If our business changes as a result of market or other conditions, our ratings could be adversely affected. The failure to meet the goals set forth in our strategic plan from time to time could cause our credit ratings to be lowered. If either Standard & Poors Ratings Services or Moodys Investors Service were to downgrade our credit ratings, then borrowing costs would increase, which would diminish our financial results, and our potential pool of investors and funding sources could decrease. In addition, some of our subsidiaries access debt and other capital from various sources and carry their own credit ratings. Any downgrade or other event negatively affecting the credit ratings of these subsidiaries could make their own costs of borrowing higher or access to funding sources more limited, which in turn could increase our need to provide liquidity in the form of capital contributions or loans to such subsidiaries, thus reducing the liquidity and borrowing availability of the consolidated group. We, and particularly our utility business, rely on accessing the capital markets to support capital expenditure programs and other capital requirements, including expenditures to build utility infrastructure and comply with future regulatory requirements. If our access to capital were to become significantly constrained or costs of capital increased significantly due to lowered credit ratings, prevailing market or industry conditions, regulatory constraints or other factors, our financial condition, results of operations and cash flows could be significantly adversely affected.
We are subject to limitations on our ability to pay dividends - Alliant Energy is a holding company with no significant operations of its own. Accordingly, the primary sources of funds for Alliant Energy to pay dividends to its shareowners are dividends and distributions from its subsidiaries and investments. Our subsidiaries and investments are separate and distinct legal entities and have no obligation to pay any amounts to us, whether by dividends, loans or other payments. The ability of our subsidiaries and investments to pay dividends or make distributions to us and, accordingly, our ability to pay dividends on Alliant Energy common stock will depend on regulatory limitations and the earnings, cash flows, capital requirements and general financial condition of our subsidiaries and investments. Our utilities each have dividend payment restrictions based on their respective bond indentures, the terms of their outstanding preferred stock and regulatory limitations applicable to them. If we do not receive adequate dividends and distributions from our subsidiaries and investments, then we may not be able to make, or may have to reduce, dividend payments on Alliant Energy common stock.
We are subject to employee workforce factors that could affect our businesses and financial condition - We are subject to employee workforce factors, including loss or retirement of key personnel, availability of qualified personnel, collective bargaining agreements with employees and work stoppage that could affect our businesses and financial condition, results of operations and cash flows.
Energy industry changes, including changes in technology, could have a negative effect on our businesses - As a public utility holding company with significant utility assets, we conduct our utility operations in an ever-changing business environment. Competitive pressures, including advances in technology that reduce the costs of alternative methods of producing electric energy to a level that is competitive with that of current electric production methods, could result in our utilities losing market share and customers and incurring stranded costs (i.e., assets and other costs rendered unrecoverable through customer rates as a result of competitive pricing), which would be borne by our shareowners. Although the pace of restructuring in our 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, we cannot predict the timing of a restructured electric industry or the impact on our financial condition, results of operations or cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
IPLs electric generating stations at Dec. 31, 2005, were as follows:
All KWs shown below represent the 2005 summer generating capability.
At Dec. 31, 2005, IPL owned approximately 20,111 miles of overhead electric distribution line and 2,283 miles of underground electric distribution cable, as well as 7,084 miles of electric transmission line and 792 distribution and transmission substations substantially all located in Iowa and Minnesota. IPLs gas properties consist primarily of mains and services, meters, regulating and gate stations and other related distribution equipment. The gas distribution facilities of IPL at Dec. 31, 2005, included approximately 4,906 miles, 227 miles and 255 miles of gas mains located in Iowa, Minnesota and Illinois, respectively. IPLs other property included in Other plant in service on its Consolidated Balance Sheets consists primarily of operating and storeroom facilities, vehicles, computer hardware and software, communication equipment and other miscellaneous tools and equipment. IPLs properties are suitable for their intended use and substantially all are held subject to the liens of indentures relating to IPLs Collateral Trust Bonds and First Mortgage Bonds. Refer to Strategic Overview in MDA for discussion of Alliant Energys utility generation plan, IPLs transmission assets and IPLs properties in Illinois that it is divesting.
WPLs electric generating stations at Dec. 31, 2005, were as follows:
All KWs shown below represent the 2005 summer generating capability.
At Dec. 31, 2005, WPL owned approximately 17,035 miles of overhead electric distribution line and 3,771 miles of underground electric 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 gas properties consist primarily of mains and services, meters, regulating and gate stations and other related distribution equipment. The gas distribution facilities of WPL at Dec. 31, 2005, included approximately 3,771 miles and 164 miles of gas mains located in Wisconsin and Illinois, respectively. WPLs other property included in Other plant in service on its Consolidated Balance Sheets consists primarily of operating and storeroom facilities, vehicles, computer hardware and software, communication equipment and other miscellaneous tools and equipment. WPLs 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 generation plan and WPLs properties in Illinois that it is divesting. Refer to Note 3(b) of WPLs Notes to Consolidated Financial Statements for information regarding WPLs lease of SFEF from Resources Non-regulated Generation business. Refer to Note 17 of Alliant Energys Notes to Consolidated Financial Statements for information regarding the sale of WPLs interest in Kewaunee.
Resources principal properties included in Property, plant and equipment on Alliant Energys Consolidated Balance Sheet at Dec. 31, 2005 were as follows:
Non-regulated Generation - includes two principal electric generating facilities: 1) a 309 MW, tolled (through May 2008), natural gas-fired facility in Neenah, Wisconsin; and 2) a 300 MW, natural gas-fired facility near Sheboygan Falls, Wisconsin, which is leased to WPL. In addition, Industrial Energy Applications, Inc. owns standby generation and steam production systems substantially all located in Iowa and Resources owns a steam turbine.
Other non-regulated investments - includes a short-line railway in Iowa with 112 railroad track miles, 13 active locomotives and 190 railcars; and a barge terminal on the Mississippi River.
ITEM 3. LEGAL PROCEEDINGS
Alliant Energy - Alliant Energy asserted its rights in a series of judicial and administrative proceedings as a minority shareholder in Companhia Força e Luz Cataguazes-Leopoldina, S.A. (Cataguazes), Alliant Energys former Brazil investment, in an attempt to control costs and reduce debt. Two of these proceedings, separate arbitrations under the International Chamber of Commerce, resulted in final and binding orders on the merits of the claims. Alliant Energys rights and responsibilities under both of the arbitration decisions and all other judicial and administrative proceedings were transferred to the purchaser of Alliant Energys Brazil investments in January 2006. In addition, Alliant Energys rights and responsibilities, except the non-refundable deposit previously paid to Alliant Energy, under a settlement agreement of the arbitration award related to the Usina Termelétrica de Juiz de Fora S.A. (Juiz de Fora) natural gas-fired generating facility were transferred to the purchaser of Alliant Energys Brazil investments in January 2006. Alliant Energy no longer has any interest in these proceedings.
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, results of operations or cash flows.
Additional information required by Item 3 with regards to environmental matters is included in C. Information Relating to Utility Operations - Electric Utility Operations in Business, Liquidity and Capital Resources in MDA and Note 11(e) of Alliant Energys 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, Notes 1(c) and 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 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, 2005):
Executive Officers of Alliant Energy
William D. Harvey, 56, was elected Chairman of the Board effective February 2006 and President and Chief Executive Officer (CEO) effective July 2005 and has been a board member since January 2005. He previously served as President and Chief Operating Officer (COO) since 2004 and Executive Vice President (EVP)-Generation from 1998 to 2003.
Eliot G. Protsch, 52, 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, 54, was elected EVP and General Counsel effective October 1998.
Thomas L. Aller, 56, 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.
Dundeana K. Doyle, 47, was elected VP-Strategy and Risk effective May 2003. She previously served as VP-Infrastructure Security since 2002 and as VP-Customer Operations of IPL, WPL and Corporate Services from 1998 to 2002.
Thomas L. Hanson, 52, was elected VP and Treasurer effective April 2002. He previously served as Managing Director-Generation Services since 2001.
Patricia L. Kampling, 46, was elected VP-Finance effective August 2005. She previously served as Treasurer of IPSCO Inc. since September 2004 and Senior VP and CFO of Exelon Enterprises Company, LLC (a subsidiary of Exelon Corporation) from 2000 to 2002.
John E. Kratchmer, 43, 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
William D. Harvey, 56, was elected Chairman of the Board effective February 2006 and CEO effective July 2005 and has been a board member since January 2005. He previously served as COO since 2004 and EVP-Generation from 1998 to 2003.
Thomas L. Aller, 56, was elected President effective January 2004.
Eliot G. Protsch, 52, 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, 54, was elected EVP and General Counsel effective October 1998.
Thomas L. Hanson, 52, was elected VP and Treasurer effective April 2002.
Patricia L. Kampling, 46, was elected VP-Finance effective August 2005.
John E. Kratchmer, 43, was elected VP-Controller and CAO effective October 2002.
Executive Officers of WPL
William D. Harvey, 56, was elected Chairman of the Board effective February 2006 and CEO effective July 2005 and has been a board member since January 2005. He previously served as COO since 2004 and President from 1998 to 2003.
Barbara J. Swan, 54, was elected President effective January 2004. She previously served as EVP and General Counsel since 1998.
Eliot G. Protsch, 52, was elected CFO effective January 2004. He previously served as EVP and CFO since September 2003 and EVP-Energy Delivery from 1998 to September 2003.
Thomas L. Aller, 56, was elected Senior VP-Energy Delivery effective January 2004.
Thomas L. Hanson, 52, was elected VP and Treasurer effective April 2002.
Patricia L. Kampling, 46, was elected VP-Finance effective August 2005.
John E. Kratchmer, 43, was elected VP-Controller and CAO effective October 2002.
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, 2005: $28.04
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, approval from its Board of Directors and other factors. In January 2006, Alliant Energy announced an increase in its quarterly common stock dividend from $0.2625 per share to $0.2875 per share, which is equivalent to an annual rate of $1.15 per share, beginning with the Feb. 15, 2006 dividend payment.
At Dec. 31, 2005, there were approximately 46,912 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 2005 and 2004, IPL paid dividends on its common stock of $110 million and $102 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 2005 and 2004, WPL paid dividends on its common stock of $90 million and $89 million, respectively, to Alliant Energy. In its July 2005 rate order, the PSCW stated WPL may not pay annual common stock dividends, including pass-through of subsidiary dividends, in excess of $92 million to Alliant Energy if WPLs actual average common equity ratio, on a financial basis, is or will fall below the test year authorized level of 53.14%. 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, 2005, 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, 2005 was as follows:
(1) Refer to IPL Results of Operations in MDA for a discussion of the 2005, 2004 and 2003 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 2005, 2004 and 2003 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.
This MDA 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. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report. Unless otherwise noted, all per share references in MDA refer to earnings per diluted share.
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 certain 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 results of operations; economic and political conditions in Alliant Energys service territories; federal, state and international regulatory or governmental actions, including the impact of the Energy Policy Act of 2005 (EPAct 2005) and other energy-related legislation in Congress and federal tax legislation; the ability to obtain adequate and timely rate relief to allow for, among other things, the recovery of operating costs and deferred expenditures, the earning of reasonable rates of return in current and future rate proceedings and the payment of expected levels of dividends; unanticipated construction and acquisition expenditures; unanticipated issues in connection with Alliant Energys construction of new generating facilities; issues related to the supply of fuel and purchased electricity and price thereof, including the ability to recover purchased power, fuel and fuel-related costs through rates in a timely manner; the impact higher fuel and fuel-related prices may have on customer demand for utility services, customers ability to pay utility bills and Alliant Energys ability to collect unpaid utility bills; unplanned outages at Alliant Energys generating facilities and risks related to recovery of increased costs through rates; issues related to electric transmission, including operating in the new Midwest Independent System Operator (MISO) energy market, the impact of potential future billing adjustments from MISO, recovery of costs incurred, and federal legislation and regulation affecting such transmission; impact of weather hedges on Alliant Energys utility earnings; costs associated with Alliant Energys environmental remediation efforts and with environmental compliance generally; unanticipated issues related to the Calpine Corporation (Calpine) bankruptcy that could adversely impact Alliant Energys purchased power agreements; 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; volatile foreign exchange rates; material declines in the fair market value of, or expected cash flows from, Alliant Energys investments; Alliant Energys ability to continue cost controls and operational efficiencies; Alliant Energys ability to identify and successfully complete potential acquisitions and/or development projects; Alliant Energys ability to complete its proposed or potential divestitures of various businesses and investments, including China, Mexico and New Zealand, on a timely basis and for anticipated proceeds; Alliant Energys ability to achieve its dividend payout ratio goal; access to technological developments; employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages; current or future litigation, regulatory investigations, proceedings or inquiries; the direct or indirect effect resulting from terrorist incidents or responses to such incidents; the effect of accounting pronouncements issued periodically by standard-setting bodies; continued access to the capital markets; the ability to utilize any tax capital losses generated to-date and those that may be generated in the future; the ability to successfully complete ongoing tax audits and appeals with no material impact on Alliant Energys earnings and cash flows; inflation and interest rates; and factors listed in Risk Factors in Item 1A and 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 is an investor-owned public utility holding company whose first tier subsidiaries include IPL, WPL, Resources and Corporate Services. IPL is a public utility engaged principally in the generation, transmission, distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in selective markets in Iowa and Minnesota, as well as the utility operations of Illinois properties that Alliant Energy is divesting. 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, as well as the utility operations of Illinois properties that Alliant Energy is divesting. Resources is the parent company for Alliant Energys non-regulated businesses. Corporate Services provides administrative services to Alliant Energy and its subsidiaries.
Alliant Energy manages three primary businesses as defined below: 1) utility business (IPL and WPL); 2) non-regulated businesses (Resources and subsidiaries); and 3) other.
Utility Business - IPL and WPL own a portfolio of electric generating facilities with a diversified fuel mix including coal, 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 utility business also procures natural gas from various suppliers to provide service to approximately 400,000 gas customers in the upper Midwest. Alliant Energys utility business is its primary source of earnings and cash flows. The earnings and cash flows from the 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 (generation projects); International (foreign energy delivery, generation and infrastructure systems in New Zealand, as well as the remaining generating facilities in China that Alliant Energy is divesting); and other non-regulated investments (includes investments in environmental engineering and site remediation, transportation, construction management services for wind farms and several other modest investments, as well as a resort development in Mexico and gas pipeline gathering systems that Alliant Energy is divesting).
Other - includes the operations of Corporate Services as well as Alliant Energy (the parent holding company).
Summary of Historical Results of Operations - Alliant Energys earnings per average common share (EPS) were as follows:
Additional details regarding Alliant Energys net income (loss) were as follows (in millions):
Higher earnings from Alliant Energys utility business in 2005 compared to 2004 were largely due to higher electric margins and $0.08 per share of earnings from the impact of issues resolved in a federal income tax audit. These items were partially offset by higher generation-related, depreciation and regulatory-related costs. Earnings from continuing operations at Alliant Energys non-regulated businesses were lower in 2005 compared to 2004 largely due to pre-tax, non-cash asset valuation charges of $334 million (after-tax charges of $202 million, or $1.73 per share) related to Alliant Energys Brazil investments and pre-tax charges of $54 million (after-tax charges of $34 million, or $0.29 per share) related to further debt reductions at Resources in 2005. These items were partially offset by improved operating results from Alliant Energys International and other businesses and the reversal of deferred income tax asset valuation allowances in 2005 resulting from a change in Alliant Energys anticipated ability to utilize capital losses prior to their expiration. The 2004 non-regulated results included a gain realized from the sale of Alliant Energys remaining interest in Whiting Petroleum Corporation (WPC) and pre-tax charges of $9 million (after-tax charges of $5 million, or $0.05 per share) related to early debt reductions.
In spite of extremely mild weather conditions in 2004, Alliant Energys earnings from its 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 utility electric and gas service territories had a negative impact on its 2004 earnings of approximately $0.18 per share. Earnings from continuing operations at Alliant Energys non-regulated businesses improved in 2004 compared to 2003 primarily due to a $21 million decrease in interest expense, the gain realized on the sale of Alliant Energys remaining interest in WPC in 2004 and lower charges 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 2005, 2004 and 2003.
Summary - Alliant Energy is committed to maintaining sustained, long-term strong financial performance with a strong balance sheet and investment grade credit ratings. Alliant Energys utility business is expected to provide the majority of Alliant Energys earnings and cash flows in the future and the larger share of its long-term earnings growth through investments in new utility generation, by earning returns authorized by regulators and by continuing its focus on controlling costs. Alliant Energy is utilizing a comprehensive Lean Six Sigma program to assist it in generating cost savings and operational efficiencies in both its utility and non-regulated businesses.
Utilities as Primary Business Platform - Alliant Energys utility business is the dominant growth platform within its strategic plan, and is where Alliant Energy expects to invest substantially all of its capital in 2006 and 2007. Refer to Liquidity and Capital Resources - Cash Flows used for Continuing Investing Activities - Construction and Acquisition Expenditures for additional information. The strategic plan for Alliant Energys utility operations is concentrated on: 1) building and maintaining the generation and infrastructure necessary to provide Alliant Energys utility customers with safe, reliable and environmentally sound energy service; 2) earning returns authorized by its regulators; 3) controlling costs to mitigate potential rate increases; and 4) evaluating strategic options for IPLs transmission assets. Refer to Transmission Business and Utility Business Divestitures for additional information.
Progressive legislation passed in Iowa and Wisconsin provides companies with the necessary rate making principles - and resulting increased regulatory and investment certainty - prior to making certain generation investments. These changes have enabled Alliant Energy to pursue additional generation investments in its utility business to serve its customers and to provide shareowners with greater certainty regarding the returns on these investments. Refer to Utility Generation Plan for additional information.
Focused Approach to Non-regulated Operations - Alliant Energy is committed to streamlining its portfolio of non-regulated businesses to a relatively small portfolio of lower-risk, mature businesses, which are accretive to earnings but not significant users of capital. Consistent with this strategic focus, Alliant Energy has completed the divestiture of numerous non-regulated businesses in the past three years and is in the process of divesting additional non-regulated businesses. Refer to Non-regulated Business Divestitures for details of non-regulated asset divestiture activity in 2005 and to-date in 2006.
Utility Generation Plan - Alliant Energys current utility generation plan for the 2006 to 2013 time period reflects the need to increase base-load generation in both Iowa and Wisconsin. The proposed new generation is expected 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. Alliant Energy currently expects to add approximately 600 megawatts (MW) of owned-generation between 2006 and 2013, which includes approximately 500 MW of clean-coal technology generation (250 MW at IPL in 2013 or 2014 and 250 MW at WPL in 2012) and up to 100 MW of wind generation at WPL in 2007 or 2008. The addition of such generation is expected to require approximately $1.0 billion ($450 million for IPL and $550 million for WPL) in capital expenditures, excluding allowance for funds used during construction, from 2006 to 2013. WPLs previous plans to pursue a 500 MW jointly-owned base-load electric plant with Wisconsin Public Service Corporation have changed and WPL now plans to pursue additional options for its 250 MW of clean-coal technology generation in 2012.
Alliant Energys utility generation plan also assumes Alliant Energy will enter into purchased power agreements to add approximately 20 anaerobic digesters in each of Iowa and Wisconsin and either own or enter into purchased power agreements to add 350 MW of wind generation. In July 2005, Alliant Energy announced that it signed a purchased power agreement to proceed with an Iowa-based wind energy farm to develop up to 150 MW of renewable energy by the end of 2007. Allocation of the energy from the Iowa facility to IPL and WPL will be determined at a later date. Alliant Energy continues to monitor developments related to state and federal renewable portfolio standards and federal and state tax incentives. Alliant Energy reviews and updates, as deemed necessary and in accordance with regulatory requirements, its utility generation requirements and expects to adjust its plans as needed to meet any of these standards or to react to any market factors increasing or decreasing the availability or cost effectiveness of the various renewable energy technologies.
Alliant Energy currently has agreements with Calpine subsidiaries related to the purchase of energy and capacity from the 466 MW RockGen Energy Center in Christiana, Wisconsin and the 603 MW (Alliant Energy leases 481 MW of this total capacity under its current purchased power agreement) Riverside Energy Center in Beloit, Wisconsin and has the option to purchase these two facilities in 2009 and 2013, respectively. Alliant Energy is currently unable to determine what impacts Calpines recent bankruptcy filing will have on these two purchased power agreements. Refer to Note 20 of Alliant Energys Notes to Consolidated Financial Statements and Other Matters - Other Future Considerations - Calpine Bankruptcy for additional information.
The 300 MW, simple-cycle, natural gas-fired Sheboygan Falls Energy Facility (SFEF) near Sheboygan Falls, Wisconsin began commercial operation at the beginning of June 2005, ahead of schedule and under budget. In May 2005, the Public Service Commission of Wisconsin (PSCW) approved the lease of this facility to WPL under the Wisconsin leased generation law. Resources Non-regulated Generation business owns SFEF and leases it to WPL for an initial period of 20 years, with an option for two lease renewal periods thereafter. WPL is responsible for the operation and fuel supply of SFEF and has exclusive rights to its output. Refer to Note 3(b) of WPLs Notes to Consolidated Financial Statements for further discussion.
Non-regulated Business Divestitures - In January 2006, Alliant Energy completed the sale of all of its Brazil investments to a Brazil-based investor for a sales price of $152 million. Refer to Note 9 of Alliant Energys Notes to Consolidated Financial Statements for additional information. In the fourth quarter of 2005, Alliant Energy completed the divestitures of its synthetic fuel investment and oil gathering pipeline system for a modest amount of proceeds. In the second quarter of 2005, Alliant Energy completed the sale of both Cogenex Corporation, its energy services business, and its biomass facility and received net cash proceeds of approximately $35 million.
In July 2005, Alliant Energy announced its intention to divest its interest in 10 generating facilities in China and its investment in Mexico. Alliant Energy divested its interest in three of its facilities in China in 2005 for approximately $34 million in proceeds. Alliant Energy has entered into sale agreements in 2006 for its interest in five additional facilities for an aggregate purchase price of approximately $88 million. Alliant Energy continues its efforts to divest its interests in its two remaining facilities, which have an aggregate carrying value of less than $5 million. Alliant Energy expects to complete all of its China divestitures by the end of the second quarter of 2006. Alliant Energy also expects to complete the divestiture of its investments in Mexico and two remaining gas gathering pipeline systems no later than September 2006 and June 2006, respectively. At Dec. 31, 2005, the carrying values of Alliant Energys remaining investments in Mexico, China and gas gathering pipeline systems were approximately $90 million, $87 million and $15 million, respectively.
Alliant Energy is currently evaluating the best use of the expected proceeds from the sales of these businesses. All of these businesses (except for the Brazil and synthetic fuel investments) had been reported as assets held for sale and discontinued operations at Dec. 31, 2005. Alliant Energys Brazil and synthetic fuel investments were accounted for under the equity method of accounting therefore their results are not eligible to be reclassified as discontinued operations. The 2005 results from the Brazil and synthetic investments, including allocated interest expense and overhead charges, were ($1.70) and $0.05 per share, respectively, and are reflected in Alliant Energys consolidated EPS from continuing operations. Refer to Note 16 of Alliant Energys Notes to Consolidated Financial Statements for additional information.
In addition to the non-regulated business divestitures discussed above, Alliant Energy continues to evaluate its alternatives to maximize value from its investments in New Zealand. Alliant Energy is a party to certain investment agreements that, in some instances, limit Alliant Energys flexibility to sell its New Zealand investments until early 2007.
Utility Business Divestitures - In January 2006, IPL completed the sale of its 70% ownership interest in the Duane Arnold Energy Center (DAEC) and certain related assets to a subsidiary of FPL Group, Inc. for approximately $329 million in net cash proceeds, subject to customary post-closing adjustments. IPL used $130 million of the net proceeds to reduce its short-term debt, $125 million to reduce its level of accounts receivable sold and the remainder for investments in short-term securities and general corporate purposes. IPL plans to dividend $110 million to Alliant Energy in March 2006 as a result of the DAEC sale. In July 2005, WPL completed the sale of its interest in the Kewaunee Nuclear Power Plant (Kewaunee) to a subsidiary of Dominion Resources, Inc. WPL received $75 million at closing, which it used for debt reduction. Refer to Notes 17 and 18 of Alliant Energys Notes to Consolidated Financial Statements for additional information.
In June 2005, IPL and WPL each signed separate definitive agreements for the sale of their respective electric and gas distribution properties in Illinois for a combined total of approximately $47 million. In June 2005, WPL reached an agreement on the sale of its water utility in South Beloit, Illinois for approximately $4 million. Pending all regulatory approvals, these sales are expected to close in 2006. In July 2005, WPL completed the sale of its Ripon water utility for approximately $5 million.
As of Dec. 31, 2005, all of these utility businesses have been reported as assets held for sale, and none of them have been reported as discontinued operations. Refer to Note 16 of the Notes to Consolidated Financial Statements for additional information.
Transmission Business - Alliant Energy continues to monitor developments in the electric transmission industry. As of Dec. 31, 2005, WPLs investment in American Transmission Co. LLC (ATC) was $152 million, reflecting a 21% ownership interest in the business. IPL continues to own its transmission assets, the book value of which was $442 million as of Dec. 31, 2005. Alliant Energy continues to evaluate options for participation for its IPL assets in an independent transmission entity, be it ATC or some other entity.
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 electric rates, electric transmission 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.
Recent Utility Rate Case Developments - Details of Alliant Energys 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); Q4=fourth quarter):
(a) Emery Generating Station (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 above table reflect the recovery of increased costs incurred or expected to be incurred by IPL and WPL. 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 material increase in net income. Refer to Other Matters - Market Risk Sensitive Instruments and Positions - Commodity Price Risk for further discussion of the impact of increased fuel and purchased power costs on results of operations.
Recent Regulatory-related Legislative Developments - In August 2005, the EPAct 2005 was enacted. In general, the legislation is intended to improve reliability and market transparency, provide incentives to promote the construction of needed energy infrastructure and foster development of a wide range of energy options that promote economic growth and greater energy independence. Among other things, the legislation provides for shorter recovery periods for certain electric transmission and gas distribution lines, extends the renewable energy production tax credit through 2007, provides a seven-year recovery period for certain certified pollution control facilities and provides for the repeal of the Public Utility Holding Company Act of 1935 (PUHCA 1935) and the Public Utility Regulatory Policy Act of 1978. In December 2005, FERC issued final rules, effective February 2006, to effectuate the repeal of PUHCA 1935 and FERCs new authority to regulate public utility holding companies under the Public Utility Holding Company Act of 2005 (PUHCA 2005) which was enacted as part of the EPAct 2005. These rules provide detail on the authority of FERC to address and review various issues, including affiliate transactions, public utility mergers, acquisitions and dispositions, and books and records requirements. Refer to Liquidity and Capital Resources - FERC and Public Utility Holding Company Act (PUHCA) Financing Authority for discussion of Alliant Energys financing authority under PUHCA 2005.
In May 2005, a new law impacting rate making was signed by the Governor in Wisconsin. The new law allows a public utility that proposes to purchase or construct an electric generating facility to apply to the PSCW for an order that specifies in advance the rate making principles that the PSCW will apply to the electric generating facility costs in future rate making proceedings. These changes are designed to give Wisconsin utilities more regulatory certainty, including providing utilities with a fixed rate of return on these investments, when financing electric generation projects. The new law requires the PSCW to establish rules to administer the requirements of such law. In December 2005, the PSCW issued a proposed final rule which is anticipated to become effective in the first quarter of 2006.
Other Recent Regulatory Developments -
Utility Fuel Cost Recovery - WPLs retail electric rates are based on forecasts of forward-looking test year periods and include estimates of future monthly fuel costs (includes fuel and purchased energy costs) anticipated during the test year. During each electric retail rate proceeding, the PSCW sets fuel monitoring ranges based on the forecasted fuel costs used to determine rates in such proceeding. If WPLs actual fuel costs fall outside these fuel monitoring ranges during the test year period, the PSCW can authorize an adjustment to future retail electric rates.
The fuel monitoring ranges set by the PSCW include three different ranges based on monthly costs, annual costs and cumulative costs during the test year. In order for WPL to be authorized to file for a proceeding to increase rates related to increased fuel costs during the test year period, WPL must demonstrate first that (1) any actual monthly costs during the test year period exceed the monthly range or (2) the actual cumulative costs to date during the test year period exceed the cumulative range. In addition, the annual projected costs (that include cumulative actual costs) for the test period must also exceed the annual range. Any affected party, including WPL or the PSCW, may initiate a proceeding to decrease rates due to decreases in fuel costs during the test year period based on the same criteria as required for an increase in rates, except the ranges are smaller for decreases than for increases. 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 a 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 February 2006, the PSCW approved the issuance of an order changing WPLs fuel cost monitoring ranges to plus 8% or minus 2% for the monthly range; plus 2% or minus 0.5% for the annual range; and for the cumulative range, plus 8% or minus 2% for the first month, plus 5% or minus 1.25% for the second month, and plus 2% or minus 0.5% for the remaining months of the monitoring period.
The PSCW has initiated a general docket requesting comments by the affected utilities and other interested parties to be filed by March 3, 2006 on whether revisions to the fuel rules are needed and the scope of those proposed changes prior to initiating a formal administrative code revision proceeding. WPL is working with the PSCW staff, other affected utilities and other interested parties in developing a consensus position on the scope and details of potential changes.
Coal Delivery Disruption - In July 2005, Alliant Energy announced plans to seek recovery of incremental purchased energy costs associated with coal conservation efforts currently underway at IPL and WPL due to coal delivery disruptions. In August 2005, WPL received approval from the PSCW to defer these incremental costs associated with WPLs retail service, then estimated at $14 million to $22 million. WPL currently charges wholesale customers these incremental costs through the fuel adjustment clause. IPL currently recovers these costs through retail rate adjustments associated with its energy adjustment clause. Refer to Note 1(c) of Alliant Energys Notes to Consolidated Financial Statements and Other Matters - Other Future Considerations - Coal Delivery Disruptions for further discussion.
Proposed Generating Facility - In June 2005, WPL received approval from the PSCW to defer incremental pre-certification and pre-construction costs as a result of siting and building its proposed base-load power plant discussed in further detail in Strategic Overview - Utility Generation Plan.
Reduction in Workforce - In May 2005, Alliant Energy announced plans to reduce certain corporate and operations support positions. The net impacts of this reduction in workforce on WPL have been estimated to be minimal in 2005 and to result in a reduction in costs in 2006. Because WPLs 2005/2006 retail rate case was pending approval at the time of this announcement, and the impacts of this reduction in workforce were not addressed in this retail rate case, WPL received approval from the PSCW in August 2005 to defer all costs/benefits incurred/realized by WPL related to the reduction in workforce until its next rate case. The impacts of this reduction in workforce on IPLs Iowa gas operations were incorporated into the settlement proposal for its Iowa retail natural gas rate case, which was approved by the Iowa Utilities Board (IUB) in October 2005. The impacts on IPLs Iowa electric operations will be addressed in its next electric retail rate case filed with the IUB.
Kewaunee Outage - WPL received approval from the PSCW to defer incremental fuel-related costs, beginning April 15, 2005, associated with the extension of the unplanned outage at Kewaunee prior to its sale in July 2005. Deferral of incremental operation and maintenance costs related to the unplanned outage was also approved by the PSCW. Refer to Notes 1(c) and 17 of Alliant Energys Notes to Consolidated Financial Statements for additional information.
MISO - On April 1, 2005, IPL and WPL began participation in the restructured wholesale energy market operated by MISO. The implementation of this restructured market marked a significant change in the way IPL and WPL buy and sell wholesale electricity, obtain transmission services and schedule generation. In March 2005, the PSCW approved the deferral of certain incremental costs incurred by WPL to participate in this market, which will be effective until WPL files its next base rate case with the PSCW. The IUB has approved a temporary waiver, effective until May 31, 2006, allowing the costs and credits incurred by IPL to participate in this market that relate to its Iowa retail customers to be included in IPLs Iowa energy adjustment clause. IPL will be filing for a two-year extension of this temporary waiver in the first quarter of 2006. IPL and WPL are currently working through the regulatory process to establish long-term recovery mechanisms for these costs.
Mixed Service Costs - 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. Refer to Note 1(c) of Alliant Energys Notes to Consolidated Financial Statements for updated information regarding this issue.
DAEC Sale - Refer to Note 18 of Alliant Energys Notes to Consolidated Financial Statements for discussion of regulatory impacts of the gain realized from the sale of IPLs interest in DAEC in January 2006.
ALLIANT ENERGY RESULTS OF OPERATIONS
Overview - Refer to Executive Summary for an overview of Alliant Energys 2005, 2004 and 2003 earnings and the various components of Alliant Energys business.
Utility Electric Margins - Electric margins, megawatt-hour (MWh) sales and cooling degree day data for Alliant Energy were as follows: