(As filed May 18, 2001)
File No. 70-[____]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM U-1
APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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ALLIANT ENERGY CORPORATION
ALLIANT ENERGY RESOURCES, INC.
222 West Washington Avenue
Madison, Wisconsin 53703
(Names of companies filing this statement and
addresses of principal executive offices)
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ALLIANT ENERGY CORPORATION
(Name of top registered holding company parent)
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Edward M. Gleason, Vice President - Treasurer
and Corporate Secretary
Alliant Energy Corporation
222 West Washington Avenue
Madison, Wisconsin 53703
(Name and address of agent for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application or Declaration to:
Barbara J. Swan, General Counsel William T. Baker, Jr., Esq.
Alliant Energy Corporation Thelen Reid & Priest LLP
222 West Washington Avenue 40 West 57th Street
Madison, Wisconsin 53703 New York, New York 10019
TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.................................1
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1.1 Introduction........................................................1
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1.2 Alliant Energy's Current Financing Authority........................1
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1.2.1 Merger Order (File No. 70-8891).............................1
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1.2.2 Money Pool Order (File No. 70-9317).........................2
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1.2.3 Financing Order (File No. 70-9455)..........................2
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1.3 Summary of Requested Approvals......................................3
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1.4 Use of Proceeds.....................................................6
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1.5 Description of External Financing Program...........................6
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1.5.1 Alliant Energy External Financing...........................6
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1.5.2 Non-Utility Subsidiary Financings..........................10
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1.6 Guarantees.........................................................10
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1.6.1 Alliant Energy Guarantees..................................10
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1.6.2 Non-Utility Subsidiary Guarantees..........................11
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1.7 Hedging Transactions...............................................11
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1.7.1 Interest Rate Hedges.......................................11
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1.7.2 Anticipatory Hedges........................................11
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1.8 Changes in Capital Stock of Subsidiaries...........................12
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1.9 Financing Subsidiaries.............................................12
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1.10 Intermediate Subsidiaries and Subsequent Reorganizations...........13
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1.11 Additional Investments in Energy Assets............................15
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1.12 Sales of Services and Goods Among AER and Other Non-Utility
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Subsidiaries of Alliant Energy.....................................15
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1.13 Activities of Rule 58 Subsidiaries Outside the United States.......16
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1.14 Payment of Dividends Out of Capital and Unearned Surplus and
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Acquisition, Retirement or Redemption of Securities................18
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1.15 Investments in EWGs and FUCOs......................................19
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1.15.1 Description of Current Portfolio of Projects...............21
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1.15.2 Potential Investments in Additional Exempt Projects........24
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1.16 Certificates of Notification.......................................25
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ITEM 2. FEES, COMMISSIONS AND EXPENSES.....................................27
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ITEM 3. APPLICABLE STATUTORY PROVISIONS....................................27
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3.1 General............................................................27
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3.2 Compliance with Rules 53 and 54....................................27
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3.3 Standards of Rule 53(c)............................................28
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3.3.1 Project Review Procedures/Risk Mitigation Techniques.......30
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3.3.2 Financial Results and other Benefits of Existing
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Projects...................................................35
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3.3.3 Current Financial Condition of Alliant Energy and
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the Utility Subsidiaries...................................37
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3.3.4 Financing Plan for New Investments; Merrill
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Lynch Letter...............................................42
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3.3.5 Protection of Utility Subsidiaries; State Commission
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Letters....................................................46
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3.3.6 Alliant Energy's Request is Supported by Other
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Commission Orders under Rule 53(c).........................47
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ITEM 4. REGULATORY APPROVALS...............................................49
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ITEM 5. PROCEDURE..........................................................49
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ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS..................................49
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A. EXHIBITS...........................................................49
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B. FINANCIAL STATEMENTS...............................................50
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ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS............................51
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
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1.1 Introduction. Alliant Energy Corporation ("Alliant Energy") is a
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registered holding company under the Public Utility Holding Company Act of 1935,
as amended (the "Act").1 Its public-utility subsidiaries are Wisconsin Power
and Light Company ("WP&L"), South Beloit Water, Gas and Electric Company,
Interstate Power Company ("IPC"), and IES Utilities Inc ("IES") (collectively,
the "Utility Subsidiaries"). Together, the Utility Subsidiaries provide
public-utility service to approximately 930,000 electric and 398,000 retail gas
customers in parts of Wisconsin, Iowa, Minnesota, and Illinois. Alliant Energy
also indirectly holds 26% of the common stock of ATC Management Inc. and a 26%
membership interest in American Transmission Company, LLC, which were formed to
acquire, own and manage the transmission assets of WP&L and certain other
Wisconsin electric utility companies.
Alliant Energy's direct non-utility subsidiaries include Alliant Energy
Corporate Services, Inc. ("Alliant Services"), a subsidiary service company, and
Alliant Energy Resources, Inc. ("AER"), which serves as the holding company for
substantially all of Alliant Energy's non-utility investments and subsidiaries.
AER owns seven principal direct subsidiaries which engage, directly and
indirectly through other subsidiaries, in (i) providing environmental consulting
and engineering services, (ii) the development, ownership and management of
investments in affordable multi-unit housing properties, (iii) providing various
financial services, including the origination and sale of mortgages for
tax-advantaged affordable housing, (iv) energy-related businesses, including,
among others, the brokering and marketing of electricity and natural gas, gas
supply and fuel management services, oil and gas production, steam production
and sale, and energy-management services, (v) owning and/or operating "foreign
utility companies," as defined in Section 33 of the Act, (vi) transportation,
and (vii) management of investments in telecommunications.
As used in this Application or Declaration, the term "Non-Utility
Subsidiaries" means AER and each of its current and future direct and indirect
non-utility subsidiaries, and the term "Subsidiaries" means the Utility
Subsidiaries, Alliant Services, and any Non-Utility Subsidiaries.
1.2 Alliant Energy's Current Financing Authority. Alliant Energy's
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current financing authority is contained in three separate orders, as follows:
1.2.1 Merger Order (File No. 70-8891). Under the terms of the
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Merger Order, Alliant Energy is authorized to issue from time to time through
December 31, 2001, up to 11 million shares of common stock, $.01 par value per
share ("Common Stock") through its dividend reinvestment and stock purchase
plan, long-term equity incentive plan and certain other employee benefit plans
(the "Stock Plans").2 Through March 31, 2001, Alliant Energy has issued and
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1 WPL Holdings, Inc., et al., Holding Co. Act Release No. 26856 (April 14,
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1998) (the "Merger Order").
2 By supplemental order issued March 16, 2000 (Holding Co. Act Release No.
27156), the Commission authorized Alliant Energy to issue shares of Common Stock
pursuant to a deferred compensation plan for directors, within the limits set
forth in the Merger Order.
sold 4,887,379 shares of Common Stock pursuant to the Stock Plans (including
shares acquired by Alliant Energy in the open market).
1.2.2 Money Pool Order (File No. 70-9317). By order dated December
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18, 1998,3 as modified and extended by order dated December 15, 2000 4 (as
modified and extended, the "Money Pool Order"), Alliant Energy is authorized to
issue notes and/or commercial paper from time to time through June 30, 2004, and
to fund separate money pools for intrasystem borrowings by Alliant Energy's
utility and non-utility subsidiaries. Specifically, Alliant Energy is authorized
to issue and sell notes and/or commercial paper in an aggregate principal amount
at any time outstanding not to exceed $1 billion ("Short-term Debt") and to
utilize the proceeds of such borrowings to make loans through the system utility
money pool to the Utility Subsidiaries and Alliant Services in an aggregate
amount not to exceed $475 million in 2001 and $525 million through the remainder
of the authorization period, and certain of the Utility Subsidiaries are
authorized to make borrowings from and extend credit to each other through the
utility money pool. Alliant Energy is also authorized to provide guarantees or
other forms of credit support in an amount not to exceed $600 million at any
time outstanding on behalf of AER and other Non-Utility Subsidiaries to enable
those companies to carry on in the ordinary course of their respective
businesses. This guarantee authority has been used primarily to support AER's
commercial paper program, which is used to fund the system non-utility money
pool.
1.2.3 1999 Financing Order (File No. 70-9455). By order dated August
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26, 1999,5 as modified by orders dated February 4, 2000 6 and February 12,
2001 7 (as modified, the "1999 Financing Order"), Alliant Energy,
AER, and Alliant Energy's other direct and indirect Non-Utility Subsidiaries
are authorized to engage in a program of financing and other related
transactions for the period through December 31, 2001. Specifically, the
Commission has authorized: (i) Alliant Energy to issue and sell from time to
time up to 15 million shares of Common Stock; (ii) Alliant Energy to issue and
sell up to $400 million principal amount of unsecured debentures ("Debentures")
at any time outstanding having a maturity of up to 40 years, provided that the
aggregate amount of Debentures and Short-term Debt at any time outstanding may
not exceed $1.1 billion; (iii) Alliant Energy to enter into guarantees, obtain
letters of credit, enter into expense agreements or otherwise provide credit
support with respect to the obligations of its Subsidiaries as may be
appropriate to enable such Subsidiaries to carry on in the ordinary course of
business, in an aggregate amount not to exceed $1 billion outstanding at any one
time;8 (iv) AER and other Non-Utility Subsidiaries to provide guarantees and
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3 Holding Co. Act Release No. 26956.
4 Holding Co. Act Release No. 27304. In a separate proceeding (File No.
70-9837), Alliant Energy, IES and IPC are seeking approval for the merger of IPC
into IES, in connection with which the separate money pool borrowing limits of
IPC and IES would be combined.
5 Holding Co. Act Release No. 27069.
6 Holding Co. Act Release No. 27130.
7 Holding Co. Act Release No. 27344.
8 The guarantees authorized under the 1999 Financing Order are separate
from and in addition to guarantees provided by Alliant Energy in accordance with
the terms of the Money Pool Order, which, as indicated, primarily support AER's
commercial paper program.
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other forms of credit support with respect to obligations of other Non-Utility
Subsidiaries in an aggregate amount not to exceed $300 million outstanding at
any one time, exclusive of guarantees and other forms of credit support that are
exempt under Rules 45(b) and 52 of the Act; (v) Alliant Energy and, to the
extent not exempt under the Act, Non-Utility Subsidiaries to enter into interest
rate hedges with respect to existing indebtedness and to enter into certain
anticipatory interest rate hedging transactions; (vi) Alliant Energy and
Non-Utility Subsidiaries to organize and acquire the securities of one or more
financing subsidiaries ("Financing Subsidiaries") and, to the extent not exempt
under Rules 45(b) and 52, to guarantee the obligations of such Financing
Subsidiaries; (vii) Alliant Energy and AER to acquire the equity securities of
one or more intermediate subsidiaries ("Intermediate Subsidiaries") that are
organized exclusively for the purpose of acquiring, holding and/or financing the
acquisition and ownership of securities of or interests in "exempt wholesale
generators" ("EWGs"), as defined in Section 32 of the Act or "foreign utility
companies" ("FUCOs"), as defined in Section 33 of the Act, "energy-related
companies," as defined in Rule 58 ("Rule 58 Companies"), "exempt
telecommunications companies" ("ETCs"), as defined in Section 34 of the Act, and
other non-exempt non-utility companies as authorized in separate proceedings;
(viii) AER and other Non-Utility Subsidiaries to invest up to $345 million 9 in
certain categories of non-utility energy-related assets ("Energy Assets"),
including gas and oil exploration properties, in the United States and Canada;
(ix) AER and Non-Utility Subsidiaries to provide services and sell goods to each
other at prices determined without regard to cost, subject to certain
limitations; (x) AER and current or future Rule 58 Companies to engage in
certain activities permitted under Rule 58 outside the United States, subject to
certain limitations and to an ongoing reservation of jurisdiction; and (xi) AER
and its current and future non-exempt Non-Utility Subsidiaries to pay dividends
out of capital and unearned surplus, to the extent permitted under applicable
corporate law and the terms of an credit agreements.
1.3 Summary of Requested Approvals. Alliant Energy and AER, on behalf of
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itself and its direct and indirect non-exempt Non-Utility Subsidiaries (the
"Applicants"), herein request approval for a program of external financing,
credit support arrangements, and other related proposals for the period through
December 31, 2005 ("Authorization Period"). It is intended that the
authorization granted in this proceeding will replace and supersede the
authorizations of the Applicants under the Merger Order (insofar as it relates
to the issuance of Common Stock under shareholder and employee plans) and the
1999 Financing Order. The authorization of Alliant Energy and certain of the
Utility Subsidiaries under the Money Pool Order is unaffected by this
Application or Declaration, except that Alliant Energy's utilization of proceeds
of Short-term Debt to make investments in EWGs and FUCOs would be subject to the
EWG/FUCO Investment Limitation proposed in Item 1.15 below.
Specifically, the Applicants are requesting authorization for:
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9 AER and Non-Utility Subsidiaries were initially authorized to invest up
to $125 million in Energy Assets and subsequently authorized to invest an
additional $220 million in Energy Assets.
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(i) Alliant Energy to issue and sell from time to time Common Stock and
preferred stock ("Preferred Stock") and, directly or indirectly
through one or more Financing Subsidiaries, unsecured long-term debt
securities ("Long-term Debt") and other forms of preferred or
equity-linked securities in an aggregate amount at any time
outstanding not to exceed $1.5 billion.
(ii) Alliant Energy to issue up to 8 million shares of Common Stock
pursuant to its dividend reinvestment plan and incentive compensation
and stock-purchase plans maintained for its and its Subsidiaries'
officers and employees and non-management directors, such shares to be
in addition to any shares of Common Stock issued under the authority
requested in (i), above.
(iii) Alliant Energy and Non-Utility Subsidiaries to make loans to any
Non-Utility Subsidiary of Alliant Energy that is less than wholly
owned at interest rates and maturities designed to provide a return to
the lending company of not less than its effective cost of capital.
(iv) Alliant Energy to issue guarantees and provide other forms of credit
support ("Alliant Energy Guarantees") with respect to the securities
or other obligations of its Subsidiaries in an aggregate principal or
nominal amount not to exceed $3 billion at any one time outstanding,10
in addition to any guarantees that are exempt pursuant to Rule 45(b),
provided that the amount of any securities issued by a Financing
Subsidiary of Alliant Energy that are guaranteed by Alliant Energy
will not count against this limitation but will instead be counted
against the overall financing authority requested in (i), above.
(v) AER and other Non-Utility Subsidiaries to provide guarantees and other
forms of credit support ("Non-Utility Subsidiary Guarantees") with
respect to obligations of other Non-Utility Subsidiaries in an
aggregate principal or nominal amount not to exceed $600 million at
any one time outstanding, in addition to any guarantees that are
exempt pursuant to Rule 45(b) and Rule 52.
(vi) Alliant Energy and, to the extent not exempt under Rule 52, any
Non-Utility Subsidiary to enter into hedging transactions ("Interest
Rate Hedges") with respect to existing indebtedness of such company in
order to manage and minimize interest rate costs, and to enter into
hedging transactions ("Anticipatory Hedges") with respect to
anticipatory debt issuances in order to lock-in current interest rates
and/or manage interest rate risk exposure.
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10 The amount of Alliant Energy Guarantees for which authorization is
sought herein shall continue to be in addition to the $600 million of credit
support Alliant Energy may provide to AER and other Non-Utility Subsidiaries in
accordance with the Money Pool Order.
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(vii) Alliant Energy and its Non-Utility Subsidiaries to change the terms
of the authorized stock capitalization of any other Subsidiary,
provided that, if such Subsidiary is less than wholly owned, all other
shareholders consent to such change.
(viii) Alliant Energy and the Non-Utility Subsidiaries to acquire the
equity securities of one or more Financing Subsidiaries and to
guarantee the securities issued by such Financing Subsidiaries, to the
extent not exempt pursuant to Rule 45(b) and Rule 52, and Financing
Subsidiaries to transfer the proceeds of any financing to its parent
or as directed by its parent.
(ix) Alliant Energy and AER to acquire, directly or indirectly, the equity
securities of one or more Intermediate Subsidiaries organized
exclusively for the purpose of acquiring, financing, and holding the
securities of one or more existing or future Non-Utility Subsidiaries,
including but not limited to EWGs, FUCOs, Rule 58 Companies, and ETCs,
provided that Intermediate Subsidiaries may also engage in preliminary
project development activities and provide management, administrative,
operating and technical services to such entities; and to consolidate
or otherwise reorganize all or any part of their direct or indirect
investments in Non-Utility Subsidiaries.
(x) AER, directly or through one or more Non-Utility Subsidiaries, to
expend up to $800 million at any one time outstanding to construct or
acquire Energy Assets that are incidental and related to the energy
marketing and oil and gas production operations of its subsidiaries,
and/or the securities of one or more existing or new companies
substantially all of whose physical properties consist or will consist
of Energy Assets, provided that the acquisition and ownership of such
Energy Assets would not cause AER or any of its Non-Utility
Subsidiaries to be or become an "electric utility company" or "gas
utility company," as defined in Sections 2(a)(3) and 2(a)(4),
respectively.
(xi) AER and other Non-Utility Subsidiaries to provide services and sell
goods to each other at fair market prices, subject to certain proposed
limitations.
(xii) Rule 58 Companies to engage in certain categories of activities
permitted thereunder both within and outside the United States,
subject to certain proposed limitations.
(xiii) AER and other Non-Utility Subsidiaries to pay dividends out of
capital and unearned surplus and/or acquire, retire or redeem
securities issued to associate companies to the extent allowed under
applicable law and the terms of any credit or security instruments to
which they may be parties.
(xiv) Alliant Energy to increase its "aggregate investment" limit in EWGs
and FUCOs to $1.75 billion (the "EWG/FUCO Investment Limitation").
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1.4 Use of Proceeds. The proceeds from the financings authorized by
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the Commission pursuant to this Application or Declaration will be used for
general corporate purposes, including (i) financing, in part, investments by and
capital expenditures of Alliant Energy and its Non-Utility Subsidiaries,
including, without limitation, the funding of future investments in EWGs, FUCOs,
and Rule 58 Companies, (ii) the acquisition, retirement or redemption by Alliant
Energy or any Non-Utility Subsidiary of any of its own securities, and (iii)
financing working capital requirements of Alliant Energy and the Subsidiaries.
The Applicants represent that no financing proceeds will be used to acquire
the equity securities of any new subsidiary unless such acquisition has been
approved by the Commission in this proceeding or in a separate proceeding or in
accordance with an available exemption under the Act or rules thereunder,
including Sections 32 and 33 and Rule 58. Alliant Energy states that the
aggregate amount of proceeds of financing and Alliant Energy Guarantees approved
by the Commission in this proceeding, together with proceeds of financing
authorized in the Money Pool Order, used to fund investments in EWGs and FUCOs
will not, when added to Alliant Energy's "aggregate investment" (as defined in
Rule 53) in all such entities at any point in time, exceed the EWG/FUCO
Investment Limitation proposed herein. Further, Alliant Energy represents that
the proceeds of financing and Alliant Energy Guarantees and Non-Utility
Guarantees utilized to fund investments in Rule 58 Companies will be subject to
the limitations of that rule. Lastly, Alliant Energy represents that it will not
seek to recover through higher rates of any of the Utility Subsidiaries losses
attributable to any operations of its Non-Utility Subsidiaries.
Alliant Energy further represents that it will maintain common equity as a
percentage of its consolidated capitalization (inclusive of short-term debt) at
30% or above during the Authorization Period, and will also maintain common
equity as a percentage of capitalization of each of the Utility Subsidiaries at
30% or above during the Authorization Period.
1.5 Description of External Financing Program.
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1.5.1 Alliant Energy External Financing. Alliant Energy requests
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authority to issue and sell from time to time Common Stock and Preferred Stock
and, directly or indirectly through one or more Financing Subsidiaries,
Long-term Debt and other forms of preferred or equity-linked securities in an
aggregate amount at any time outstanding not to exceed $1.5 billion. Alliant
Energy contemplates that such securities would be issued and sold directly to
one or more purchasers in privately-negotiated transactions or to one or more
investment banking or underwriting firms or other entities who would resell such
securities without registration under the Securities Act of 1933 in reliance
upon one or more applicable exemptions from registration thereunder, or to the
public either (i) through underwriters selected by negotiation or competitive
bidding or (ii) through selling agents acting either as agent or as principal
for resale to the public either directly or through dealers.
(a) Common Stock. Alliant Energy may issue and sell Common Stock,
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or options, warrants or other stock purchase rights exercisable for Common
Stock, pursuant to underwriting agreements of a type generally standard in the
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industry. Public distributions may be pursuant to private negotiation with
underwriters, dealers or agents, as discussed below, or effected through
competitive bidding among underwriters. In addition, sales may be made through
private placements or other non-public offerings to one or more persons. All
such Common Stock sales will be at rates or prices and under conditions
negotiated or based upon, or otherwise determined by, competitive capital
markets.
Specifically, Alliant Energy may issue and sell Common Stock through
underwriters or dealers, through agents, or directly to a limited number of
purchasers or a single purchaser. If underwriters are used in the sale of Common
Stock, such securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. Common Stock may be offered to
the public either through underwriting syndicates (which may be represented by a
managing underwriter or underwriters designated by Alliant Energy) or directly
by one or more underwriters acting alone. Common Stock may be sold directly by
Alliant Energy or through agents designated by Alliant Energy from time to time.
If dealers are utilized in the sale of Common Stock, Alliant Energy will sell
such securities to the dealers, as principals. Any dealer may then resell such
Common Stock to the public at varying prices to be determined by such dealer at
the time of resale. If Common Stock is being sold in an underwritten offering,
Alliant Energy may grant the underwriters thereof a "green shoe" option
permitting the purchase from Alliant Energy at the same price of additional
shares then being offered solely for the purpose of covering over-allotments.
Alliant Energy may also issue Common Stock or options, warrants or other
stock purchase rights exercisable for Common Stock in public or
privately-negotiated transactions in exchange for the equity securities or
assets of other companies, provided that the acquisition of any such equity
securities or assets has been authorized in a separate proceeding or is exempt
under the Act or the rules thereunder (specifically, Rule 58).
Alliant Energy also proposes to issue Common Stock and/or purchase shares
of its Common Stock (either currently or under forward contracts) in the open
market for purposes of reissuing such shares at a later date under plans that
are maintained for stockholders, officers and employees, and nonemployee
directors. Currently, Alliant Energy maintains three plans under which it may
directly issue or purchase in the open market shares of Common Stock, which are
described as follows (and referred to collectively as the "Stock Plans"):
o Alliant Energy Corporation Long Term Equity Incentive Plan. The Long
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Term Equity Incentive Plan ("Incentive Plan") is intended to promote
the success and enhance the value of the company by linking the
personal interests of plan participants to those of Alliant Energy's
shareowners, and by providing plan participants with an incentive for
outstanding performance. The Incentive Plan provides for grants of
stock options, restricted stock and performance units/shares with
respect to Common Stock. The Incentive Plan is administered by the
compensation and personnel committee of the Alliant Energy's Board of
Directors, which selects from all eligible employees those to whom
awards should be granted under the terms of the Incentive Plan.
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Alliant Energy has registered 3,800,000 shares of Common Stock for
issuance or delivery under the Incentive Plan. See Registration
Statement on Form S-8, incorporated by reference herein as Exhibit
C-1.
o Alliant Energy Corporation 401(K) Savings Plan. The Alliant Energy
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Corporation 401(K) Plan ("401(K) Plan") permits eligible employees to
make deferred cash contributions through payroll deductions in any
amount from 1% of compensation up to 15% of compensation, subject to
the annual limit on contributions prescribed under the Internal
Revenue Code. Alliant Energy system companies currently provide
matching contributions equal to 50% of an employee's contribution, up
to a maximum of 3% of an employee's compensation. Employee
contributions may be invested in one or more investment funds,
including the Alliant Energy Common Stock Fund. Matching contributions
are all invested in the Alliant Energy Common Stock Fund. Alliant
Energy has registered 1,200,000 shares of Common Stock for issuance or
delivery under the 401(K) Plan. See Registration Statement on Form
S-8, incorporated by reference herein as Exhibit C-2.
o Alliant Energy Corporation Shareowner Direct Plan. The Alliant Energy
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Corporation Shareowner Direct Plan ("Direct Plan") provides
participants with a convenient way to purchase shares of Common Stock
and to reinvest all or a portion of the dividends received on their
shares of Common Stock. Persons not presently owning shares of Common
Stock may become Direct Plan participants, assuming certain
qualifications are met, by making an initial cash investment of not
more than $120,000. Participants may acquire additional shares of
Common Stock by making optional cash investments in amounts of not
less then $25 per investment nor more than $120,000 per calendar year,
inclusive of any initial investment. Participants who are employees of
Alliant Energy or its Subsidiaries may also acquire additional shares
of Common Stock by making optional cash investments via payroll
deductions. Optional cash investments made through payroll deductions
may not be more than $120,000 per calendar year, inclusive of any
initial investment and any optional cash investments made by means
other than payroll deduction. The price of shares of Common Stock
purchased from Alliant Energy (i.e., newly-issued shares) is equal to
the average (computed to four decimal places) of the high --- and low
sales prices of shares of Common Stock as reported on the New York
Stock Exchange Composite Tape on the applicable investment date or, if
no trading occurs on the applicable investment date, a price
determined with reference to the next preceding date on which the
Common is traded on the New York Stock Exchange. The price of shares
of Common Stock purchased for participants on the open market or in
privately negotiated transactions will be the weighted average price
of all such shares purchased for the applicable investment date.
Alliant Energy has registered 7,000,000 shares of Common Stock for
issuance under the Direct Plan. See Registration Statement on Form
S-3, incorporated by reference herein as Exhibit C-3.
Alliant Energy proposes to issue shares of its Common Stock, as well as
stock options, "phantom" stock awards, restricted stock awards, and other Common
Stock-based awards in an aggregate amount of up to 8 million shares (as such
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number may hereafter be adjusted to reflect any stock split) in order to satisfy
its obligations under the Stock Plans. Shares of Common Stock issued or
purchased for delivery under the Stock Plans may either be newly issued shares,
treasury shares or shares purchased in the open market. Alliant Energy will make
open-market purchases of Common Stock in accordance with the terms of or in
connection with the operation of the Stock Plans pursuant to Rule 42. Alliant
Energy also proposes, within the limitations set forth herein, to issue and/or
purchase shares of Common Stock pursuant to these existing Stock Plans, as they
may be amended or extended, and similar plans or plan funding arrangements
hereafter adopted without any additional Commission order. Stock transactions of
this variety would thus be treated the same as other stock transactions
permitted pursuant to this Application or Declaration.
(b) Preferred Stock, Long-term Debt and other Preferred or
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Equity-Linked Securities. Preferred Stock or other types of preferred or
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equity-linked securities may be issued in one or more series with such rights,
preferences, and priorities as may be designated in the instrument creating each
such series, as determined by Alliant Energy's board of directors. All such
securities will be redeemed no later than 50 years after the issuance thereof.
The dividend rate on any series of Preferred Stock or other preferred or
equity-linked securities will not exceed at the time of issuance 500 basis
points over the yield to maturity of a U.S. Treasury security having a remaining
term equal to the term of such securities. Dividends or distributions on
Preferred Stock or other preferred or equity-linked securities will be made
periodically and to the extent funds are legally available for such purpose, but
may be made subject to terms which allow the issuer to defer dividend payments
or distributions for specified periods. Preferred Stock or other preferred or
equity-linked securities may be convertible or exchangeable into shares of
Common Stock.
Long-term Debt of a particular series (a) may be convertible into any other
securities of Alliant Energy, (b) will have a maturity ranging from one to 50
years, (c) will bear interest at a rate not to exceed at the time of issuance
500 basis points over the yield to maturity of a U.S. Treasury security having a
remaining term equal to the term of such Long-term Debt, (d) may be subject to
optional and/or mandatory redemption, in whole or in part, at par or at various
premiums above the principal amount thereof, (e) may be entitled to mandatory or
optional sinking fund provisions, (f) may provide for reset of the coupon
pursuant to a remarketing arrangement, and (g) may be called from existing
investors by a third party. The maturity dates, interest rates, redemption and
sinking fund provisions and conversion features, if any, with respect to the
Long-term Debt of a particular series, as well as any associated placement,
underwriting or selling agent fees, commissions and discounts, if any, will be
established by negotiation or competitive bidding. Alliant Energy commits to
maintain a rating for all Long-term Debt that is at the investment grade level
as established by a nationally recognized statistical rating organization, as
that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under
the Securities Exchange Act of 1934.
-9-
1.5.2 Non-Utility Subsidiary Financings. Alliant Energy, through AER
---------------------------------
and other Non-Utility Subsidiaries, will continue to be active in the
development and expansion of energy-related or otherwise functionally-related,
non-utility businesses. In order to finance investments in such competitive
businesses, it will be necessary for AER and other Non-Utility Subsidiaries to
have the ability to engage in financing transactions that are commonly accepted
for such types of investments. It is believed that, in almost all cases,
financings by AER and other Non-Utility Subsidiaries will be exempt from
Commission authorization pursuant to Rule 52(b).
In order to be exempt under Rule 52(b), any loans by Alliant Energy to a
Non-Utility Subsidiary or by any Non-Utility Subsidiary, including a Financing
Subsidiary, to another Non-Utility Subsidiary must have interest rates and
maturities that are designed to parallel the lending company's effective cost of
capital. However, in the limited circumstances where the Non-Utility Subsidiary
making the borrowing is not wholly owned by Alliant Energy, directly or
indirectly, authority is requested under the Act for Alliant Energy or AER or
any other Non-Utility Subsidiary, as the case may be, to make such loans to such
subsidiaries at interest rates and maturities designed to provide a return to
the lending company of not less than its effective cost of capital. If such
loans are made to a Non-Utility Subsidiary, such company will not sell any
services to any associate Non-Utility Subsidiary unless such company falls
within one of the categories of companies to which goods and services may be
sold on a basis other than "at cost," as described below in Item 1.12.
Furthermore, in the event any such loans are made, Alliant Energy will include
in the next certificate filed pursuant to Rule 24 in this proceeding
substantially the same information as that required on Form U-6B-2 with respect
to such transaction.11
1.6 Guarantees.
----------
1.6.1 Alliant Energy Guarantees. Alliant Energy requests
-------------------------
authorization to enter into guarantees, obtain letters of credit, enter into
expense agreements or otherwise provide credit support (collectively, "Alliant
Energy Guarantees") with respect to the obligations of any Subsidiary as may be
appropriate to enable such Subsidiary to carry on in the ordinary course of its
business, in an aggregate principal amount not to exceed $3 billion outstanding
at any one time, excluding any forms of credit support that are exempt under
Rule 45(b), provided however, that the amount of any Alliant Energy Guarantees
in respect of obligations of any Subsidiaries shall also be subject to the
limitations of Rule 53(a)(1) or Rule 58(a)(1), as applicable. The Alliant Energy
Guarantees proposed to be provided herein are in addition to guarantees by
Alliant Energy authorized in the Money Pool Order. Alliant Energy requests
authority to charge each Subsidiary a fee for providing credit support that is
determined by multiplying the amount of the Alliant Energy Guarantee provided by
the cost of obtaining the liquidity necessary to perform the guarantee (for
example, bank line commitment fees or letter of credit fees, plus other
transactional expenses) for the period of time the guarantee remains
outstanding.
------------------------
11 The Commission has previously authorized substantially similar
proposals. See e.g., Entergy Corporation, et al., Holding Co. Act Release No.
-------- ---------------------------
27039 (June 22, 1999); NiSource Inc., Holding Co. Act Release No. 27265 (Nov. 1,
-------------
2000).
-10-
1.6.2 Non-Utility Subsidiary Guarantees. In addition, AER and other
---------------------------------
Non-Utility Subsidiaries request authority to provide to other Non-Utility
Subsidiaries guarantees and other forms of credit support ("Non-Utility
Subsidiary Guarantees") in an aggregate principal amount not to exceed $600
million outstanding at any one time, exclusive of any guarantees and other forms
of credit support that are exempt pursuant to Rule 45(b) and Rule 52(b),
provided however, that the amount of any Non-Utility Subsidiary Guarantees in
respect of obligations of any Rule 58 Companies shall also be subject to the
limitations of Rule 58(a)(1). The Non-Utility Subsidiary providing any such
credit support may charge its associate company a fee for each guarantee
provided on its behalf determined in the same manner as specified above.
1.7 Hedging Transactions.
--------------------
1.7.1 Interest Rate Hedges. Alliant Energy, and to the extent not
--------------------
exempt pursuant to Rule 52, the Non-Utility Subsidiaries, request authorization
to enter into interest rate hedging transactions with respect to existing
indebtedness ("Interest Rate Hedges"), subject to certain limitations and
restrictions, in order to reduce or manage interest rate cost. Interest Rate
Hedges would only be entered into with counterparties ("Approved
Counterparties") whose senior unsecured debt ratings, or the senior unsecured
debt ratings of the parent companies of the counterparties, as published by
Standard and Poor's Ratings Group, are equal to or greater than BBB, or an
equivalent rating from Moody's Investors Service, Fitch Investor Service or Duff
and Phelps.
Interest Rate Hedges will involve the use of financial instruments commonly
used in today's capital markets, such as interest rate swaps, caps, collars,
floors, and structured notes (i.e., a debt instrument in which the principal
and/or interest payments are indirectly linked to the value of an underlying
asset or index), or transactions involving the purchase or sale, including short
sales, of U.S. Treasury Securities. The transactions would be for fixed periods
and stated notional amounts. Fees, commissions and other amounts payable to the
counterparty or exchange (excluding, however, the swap or option payments) in
connection with an Interest Rate Hedge will not exceed those generally
obtainable in competitive markets for parties of comparable credit quality.
1.7.2 Anticipatory Hedges. In addition, Alliant Energy and the
-------------------
Non-Utility Subsidiaries request authorization to enter into interest rate
hedging transactions with respect to anticipated debt offerings (the
"Anticipatory Hedges"), subject to certain limitations and restrictions. Such
Anticipatory Hedges would only be entered into with Approved Counterparties, and
would be utilized to fix and/or limit the interest rate risk associated with any
new issuance through (i) a forward sale of exchange-traded U.S. Treasury futures
contracts, U.S. Treasury Securities and/or a forward swap (each a "Forward
Sale"), (ii) the purchase of put options on U.S. Treasury Securities (a "Put
Options Purchase"), (iii) a Put Options Purchase in combination with the sale of
call options on U.S. Treasury Securities (a "Zero Cost Collar"), (iv)
transactions involving the purchase or sale, including short sales, of U.S.
Treasury Securities, or (v) some combination of a Forward Sale, Put Options
Purchase, Zero Cost Collar and/or other derivative or cash transactions,
including, but not limited to structured notes, caps and collars, appropriate
for the Anticipatory Hedges.
-11-
Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") with
brokers through the opening of futures and/or options positions traded on the
Chicago Board of Trade ("CBOT"), the opening of over-the-counter positions with
one or more counterparties ("Off-Exchange Trades"), or a combination of
On-Exchange Trades and Off-Exchange Trades. Alliant Energy or a Non-Utility
Subsidiary will determine the optimal structure of each Anticipatory Hedge
transaction at the time of execution.
The Applicants represent that each Interest Rate Hedge and Anticipatory
Hedge will qualify for hedge accounting treatment under generally acceptable
accounting practices ("GAAP"). The Applicants will also comply with the then
existing financial disclosure requirements of the Financial Accounting Standards
Board associated with hedging transactions.12
1.8 Changes in Capital Stock of Subsidiaries. The portion of an individual
----------------------------------------
Subsidiary's aggregate financing to be effected through the sale of stock to
Alliant Energy or other immediate parent company during the Authorization Period
pursuant to Rule 52 and/or pursuant to an order issued in this proceeding cannot
be ascertained at this time. The proposed sale of capital securities may in some
cases exceed the then authorized capital stock of such Subsidiary. In addition,
the Subsidiary may choose to use capital stock with no par value. Also, a
Subsidiary may wish to engage in a reverse stock split to reduce franchise taxes
or for other corporate purposes. As needed to accommodate such proposed
transactions and to provide for future issuances of securities, the Applicants
request authority to change the terms of any Subsidiary's authorized
capitalization by an amount deemed appropriate by Alliant Energy or other parent
company, provided that, if a Subsidiary is not wholly owned, the consent of all
other shareholders has been obtained for such change. A Subsidiary would be able
to change the par value, or change between par value and no-par value stock,
without additional Commission approval. Any such action by a Utility Subsidiary
would be subject to and would only be taken upon the receipt of any necessary
approvals by the state commission in the state or states where the Utility
Subsidiary is incorporated and doing business.13
1.9 Financing Subsidiaries. Alliant Energy and the Non-Utility
----------------------
Subsidiaries request authority to acquire, directly or indirectly, the equity
securities of one or more Financing Subsidiaries, which would be organized
specifically for the purpose of facilitating the financing of the authorized and
exempt activities (including exempt and authorized acquisitions) of Alliant
Energy and the Non-Utility Subsidiaries through the issuance of long-term debt
or equity securities, including but not limited to monthly income preferred
securities, to third parties, and to transfer the proceeds of such financings to
------------------------
12 The Commission has previously authorized substantially similar
proposals. See 1999 Financing Order; also see New Century Energies, Inc., et
--- -------------------- -------- ------------------------------
al., Holding Co. Act Release No. 27000 (April 7, 1999); and Ameren Corp., et
--- ----------------
al., Holding Co. Act Release No. 27053 (July 23, 1999).
---
13 The Commission has previously authorized substantially similar
proposals. See Conectiv, Inc., Holding Co. Act Release No. 26833 (Feb. 26,
--- --------------
1998); and NiSource Inc, Holding Co. Act Release No. 27265 (Nov. 1, 2000).
------------
-12-
or as directed by the Financing Subsidiary's parent. Alliant Energy may, if
required, guarantee or enter into expense agreements in respect of the
obligations of any Financing Subsidiary that it organizes. The Non-Utility
Subsidiaries may also provide guarantees and enter into expense agreements, if
required, on behalf of such entities pursuant to Rules 45(b)(7) and 52, as
applicable. The amount of any securities issued by a Financing Subsidiary of
Alliant Energy would be counted against the limitation on the amounts of similar
types of securities that Alliant Energy is authorized to issue directly, as set
forth in this Application or Declaration or in an order or orders issued in any
other proceeding. To avoid double counting, however, any such credit support
provided by Alliant Energy would not also be counted against the limitation on
Alliant Energy Guarantees, as set forth in Item 1.6.1, above.14
1.10 Intermediate Subsidiaries and Subsequent Reorganizations. Alliant
--------------------------------------------------------
Energy and AER propose to acquire, directly or indirectly, the securities of one
or more Intermediate Subsidiaries, which would be organized exclusively for the
purpose of acquiring, holding and/or financing the acquisition of the securities
of or other interest in one or more EWGs or FUCOs, Rule 58 Companies, ETCs or
other non-exempt Non-Utility Subsidiaries (as authorized in this proceeding or
in a separate proceeding), provided that Intermediate Subsidiaries may also
engage in development activities and administrative activities relating to such
subsidiaries. To the extent such transactions are not exempt from the Act or
otherwise authorized or permitted by rule, regulation or order of the Commission
issued thereunder, Alliant Energy requests authority for Intermediate
Subsidiaries to engage in development activities ("Development Activities") and
administrative activities ("Administrative Activities") relating to such
subsidiaries.
Development Activities will be limited to due diligence and design review;
market studies; preliminary engineering; site inspection; preparation of bid
proposals, including, in connection therewith, posting of bid bonds; application
for required permits and/or regulatory approvals; acquisition of site options
and options on other necessary rights; negotiation and execution of contractual
commitments with owners of existing facilities, equipment vendors, construction
firms, power purchasers, thermal "hosts," fuel suppliers and other project
contractors; negotiation of financing commitments with lenders and other
third-party investors; and such other preliminary activities as may be required
in connection with the purchase, acquisition, financing or construction of
facilities or the acquisition of securities of or interests in new businesses.
Administrative Activities will include providing ongoing personnel, accounting,
engineering, legal, financial, operating, technical and other support services
necessary to manage Alliant Energy's investments in Non-Utility Subsidiaries.
An Intermediate Subsidiary may be organized, among other things, (1) in
order to facilitate the making of bids or proposals to develop or acquire an
interest in any EWG or FUCO, Rule 58 Company, ETC or other non-exempt
Non-Utility Subsidiary; (2) after the award of such a bid proposal, in order to
facilitate closing on the purchase or financing of such acquired company; (3) at
any time subsequent to the consummation of an acquisition of an interest in any
------------------------
14 The Commission has previously authorized substantially similar
proposals. See The Southern Company, Holding Co. Act Release No. 27134 (Feb. 9,
--- --------------------
2000) and NiSource Inc., Holding Co. Act Release No. 27265 (Nov. 1, 2000).
-------------
-13-
such company in order, among other things, to effect an adjustment in the
respective ownership interests in such business held by Alliant Energy or AER
and non-affiliated investors; (4) to facilitate the sale of ownership interests
in one or more acquired non-utility companies; (5) to comply with applicable
laws of foreign jurisdictions limiting or otherwise relating to the ownership of
domestic companies by foreign nationals; (6) as a part of tax planning in order
to limit Alliant Energy's exposure to U.S. and foreign taxes; (7) to further
insulate Alliant Energy and the Utility Subsidiaries from operational or other
business risks that may be associated with investments in non-utility companies;
or (8) for other lawful business purposes.
Investments in Intermediate Subsidiaries may take the form of any
combination of the following: (1) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of equity interests; (2) capital contributions; (3) open account
advances with or without interest; (4) loans; and (5) guarantees issued,
provided or arranged in respect of the securities or other obligations of any
Intermediate Subsidiaries. Funds for any direct or indirect investment in any
Intermediate Subsidiary will be derived from (1) financings authorized in this
proceeding; (2) any appropriate future debt or equity securities issuance
authorization obtained by Alliant Energy from the Commission; and (3) other
available cash resources, including proceeds of securities sales by AER or other
Non-Utility Subsidiary pursuant to Rule 52. To the extent that Alliant Energy
provides funds or guarantees directly or indirectly to an Intermediate
Subsidiary which are used for the purpose of making an investment in any EWG or
FUCO or a Rule 58 Company, the amount of such funds or guarantees will be
included in Alliant Energy's "aggregate investment" in such entities, as
calculated in accordance with Rule 53 or Rule 58, as applicable.15
In addition, to the extent that such transactions are not otherwise exempt
under the Act or Rules thereunder,16 Alliant Energy requests approval to
consolidate or otherwise reorganize all or any part of its direct and indirect
ownership interests in Non-Utility Subsidiaries, and the activities and
functions related to such investments. To effect any such consolidation or other
reorganization, Alliant Energy or AER may wish to either contribute the equity
securities of one Non-Utility Subsidiary to another Non-Utility Subsidiary
(including a newly formed Intermediate Subsidiary) or sell (or cause a
Non-Utility Subsidiary to sell) the equity securities or all or part of the
assets of one Non-Utility Subsidiary to another one. Such transactions may also
take the form of a Non-Utility Subsidiary selling or transferring the equity
securities of a subsidiary or all or part of such subsidiary's assets as a
dividend to an Intermediate Subsidiary or to another Non-Utility Subsidiary, and
the acquisition, directly or indirectly, of the equity securities or assets of
such subsidiary, either by purchase or by receipt of a dividend. The purchasing
Non-Utility Subsidiary in any transaction structured as an intrasystem sale of
equity securities or assets may execute and deliver its promissory note
evidencing all or a portion of the consideration given. Each transaction would
be carried out in compliance with all applicable U.S. or foreign laws and
------------------------
15 The Commission has previously authorized substantially similar
proposals. See 1999 Financing Order; see also New Century Energies, Inc., et
--- -------------------- -------- ------------------------------
al., Holding Co. Act Release No. 27000 (April 7, 1999); and Ameren Corp., et
--- ------------
al., Holding Co. Act Release No. 27053 (July 23, 1999).
16 Sections 12(c), 32(g), 33(c)(1) and 34(d) and Rules 43(b), 45(b), 46(a)
and 58, as applicable, may exempt many of the transactions described in this
paragraph.
-14-
accounting requirements, and any transaction structured as a sale would be
carried out for a consideration equal to the book value of the equity securities
being sold.17
1.11 Additional Investments in Energy Assets. AER and other
---------------------------------------
Non-Utility Subsidiaries request authority to make additional investments in
non-utility energy assets in the United States and Canada, including, without
limitation, natural gas production, gathering, processing, storage and
transportation facilities and equipment, liquid oil reserves and storage
facilities, and associated facilities (collectively, "Energy Assets"), that are
incidental to the ongoing oil and gas exploration and production and energy
marketing, brokering and trading operations of AER's subsidiaries. AER requests
authorization to invest up to $800 million (the "Investment Limitation") at any
one time outstanding during the Authorization Period in such Energy Assets or in
the equity securities of existing or new companies substantially all of whose
physical properties consist or will consist of such Energy Assets.18 Such
Energy Assets (or equity securities of companies owning Energy Assets) may be
acquired for cash or in exchange for Common Stock or other securities of Alliant
Energy, AER, or other Non-Utility Subsidiary of AER, or any combination of the
foregoing. If Common Stock of Alliant Energy is used as consideration in
connection with any such acquisition, the market value thereof on the date of
issuance will be counted against the proposed Investment Limitation. The stated
amount or principal amount of any other securities issued as consideration in
any such transaction will also be counted against the Investment Limitation.
Under no circumstances will AER or any oil or gas production or energy marketing
subsidiary acquire, directly or indirectly, any assets or properties the
ownership or operation of which would cause such companies to be considered an
"electric utility company" or "gas utility company" as defined under the Act.
It is the intention of AER to add to the existing base of Energy Assets
held by its subsidiaries as and when market conditions warrant, whether through
acquisitions of specific assets or groups of assets that are offered for sale,
or by acquiring existing companies that own significant physical assets in the
areas of gas production, processing, storage, and transportation. Ultimately, it
is AER's objective to control a substantial portfolio of Energy Assets that
would provide the Alliant Energy system with the flexibility and capacity to
compete for sales in all major markets in the United States and Canada.
1.12 Sales of Services and Goods Among AER and Other Non-Utility
-----------------------------------------------------------
Subsidiaries of Alliant Energy. AER and other Non-Utility Subsidiaries propose
------------------------------
to provide services and sell goods to each other at fair market prices
determined without regard to cost, and therefore request an exemption (to the
extent that Rule 90(d) does not apply) pursuant to Section 13(b) from the cost
------------------------
17 The Commission has previously authorized substantially similar
proposals. See Columbia Energy Group, Inc., Holding Co. Act Release No. 27099
--- ---------------------------
(Nov. 5, 1999), Entergy Corporation, et al., Holding Co. Act Release No. 27039
---------------------------
(June 22, 1999), and NiSource Inc., Holding Co. Act Release No. 27265 (Nov. 1,
-------------
2000).
18 Companies whose physical properties consist of Energy Assets may also be
currently engaged in energy (gas or electric or both) marketing activities. To
the extent necessary, Applicants request authorization to continue such
activities in the event they acquire such companies.
-15-
standards of Rules 90 and 91 as applicable to such transactions, in any case in
which the Non-Utility Subsidiary purchasing such goods or services is:
(i) A FUCO or foreign EWG that derives no part of its income, directly or
indirectly, from the generation, transmission, or distribution of
electric energy for sale within the United States;
(ii) An EWG that sells electricity at market-based rates which have been
approved by the Federal Energy Regulatory Commission ("FERC"),
provided that the purchaser is not one of the Utility Subsidiaries;
(iii) A "qualifying facility" ("QF") within the meaning of the Public
Utility Regulatory Policies Act of 1978, as amended ("PURPA") that
sells electricity exclusively (a) at rates negotiated at arms'-length
to one or more industrial or commercial customers purchasing such
electricity for their own use and not for resale, and/or (ii) to an
electric utility company (other than one of the Utility Subsidiaries)
at the purchaser's "avoided cost" as determined in accordance with the
regulations under PURPA;
(iv) A domestic EWG or QF that sells electricity at rates based upon its
cost of service, as approved by FERC or any state public utility
commission having jurisdiction, provided that the purchaser thereof is
not one of the Utility Subsidiaries; or
(v) A Rule 58 Company or any other Non-Utility Subsidiary that (a) is
partially-owned, provided that the ultimate purchaser of such goods or
services is not a Utility Subsidiary or Alliant Services (or any other
entity within the Alliant Energy system whose activities and
operations are primarily related to the provision of goods and
services to the Utility Subsidiaries, (b) is engaged solely in the
business of developing, owning, operating and/or providing services or
goods to Non-Utility Subsidiaries described in clauses (i) through
(iv) immediately above, or (c) does not derive, directly or
indirectly, any material part of its income from sources within the
United States and is not a public-utility company operating within the
United States.19
1.13 Activities of Rule 58 Companies Outside the United States. The
---------------------------------------------------------
Applicants, on behalf of any current or future Rule 58 Companies, request
authority to engage in business activities permitted by Rule 58 both within and
outside the United States. Such activities include:
------------------------
19 The Commission has previously authorized substantially similar
proposals. See 1999 Financing Order; also see Entergy Corporation, et al.,
--- -------------------- -------- ---------------------------
Holding Co. Act Release No. 27039 (June 22, 1999) and NiSource Inc, Holding Co.
------------
Act Release No. 27265 (Nov. 1, 2000).
-16-
(i) the brokering and marketing of electricity, natural gas and other
energy commodities ("Energy Marketing");
(ii) energy management services ("Energy Management Services"), including
the marketing, sale, installation, operation and maintenance of
various products and services related to energy management and
demand-side management, including energy and efficiency audits;
facility design and process control and enhancements; construction,
installation, testing, sales and maintenance of (and training client
personnel to operate) energy conservation equipment; design,
implementation, monitoring and evaluation of energy conservation
programs; development and review of architectural, structural and
engineering drawings for energy efficiencies, design and specification
of energy consuming equipment; and general advice on programs; the
design, construction, installation, testing, sales and maintenance of
new and retrofit heating, ventilating, and air conditioning ("HVAC"),
electrical and power systems, alarm and warning systems, motors,
pumps, lighting, water, water-purification and plumbing systems, and
related structures, in connection with energy-related needs; and the
provision of services and products designed to prevent, control, or
mitigate adverse effects of power disturbances on a customer's
electrical systems; and
(iii) engineering, consulting and other technical support services
("Consulting Services") with respect to energy-related businesses, as
well as for individuals. Such Consulting Services would include
technology assessments, power factor correction and harmonics
mitigation analysis, meter reading and repair, rate schedule design
and analysis, environmental services, engineering services, billing
services (including consolidation billing and bill disaggregation
tools), risk management services, communications systems, information
systems/data processing, system planning, strategic planning, finance,
feasibility studies, and other similar services.
The Applicants request that the Commission (i) authorize Rule 58 Companies
to engage in Energy Marketing activities in Canada and reserve jurisdiction over
Energy Marketing activities outside the United States and Canada pending
completion of the record in this proceeding,20 (ii) authorize Rule 58 Companies
to provide Energy Management Services and Consulting Services anywhere outside
the United States,21 and (iii) reserve jurisdiction over other activities of
Rule 58 Companies outside the United States, pending completion of the record.
------------------------
20 The Commission has previously authorized substantially similar
proposals. See 1999 Financing Order; also see Southern Energy, Inc., Holding Co.
--- -------------------- -------- ---------------------
Act Rel. No. 27020 (May 13, 1999) (supplemental order amending prior order to
permit registered holding company subsidiary to engage in power and gas
marketing activities in Canada and reserving jurisdiction over such activities
outside the United States and Canada).
21 The Commission has previously authorized substantially similar
proposals. See 1999 Financing Order; also see Columbia Energy Group, et al.,
--- -------------------- -------- -----------------------------
Holding Co. Act Release No. 26498 (March 25, 1996); and Cinergy Corp., Holding
-------------
Co. Act Release No. 26662 (February 7, 1997).
-17-
1.14 Payment of Dividends Out of Capital and Unearned Surplus and
------------------------------------------------------------
Acquisition, Retirement or Redemption of Securities. AER also proposes, on
---------------------------------------------------
behalf of itself and each of its current and future non-exempt Non-Utility
Subsidiaries that such companies be permitted to pay dividends out of capital
and unearned surplus (including revaluation reserve) and/or acquire, retire, or
redeem securities that AER or any Non-Utility Subsidiary has issued to any
associate company, to the extent permitted under applicable corporate law and
the terms of any applicable credit or security agreements.
AER anticipates that there will be situations in which it or one or more
Non-Utility Subsidiaries will have unrestricted cash available for distribution
in excess of any such company's current and retained earnings. In such
situations, the declaration and payment of a dividend would have to be charged,
in whole or in part, to capital or unearned surplus. As an example, if AER
(directly or indirectly through an Intermediate Subsidiary) purchases all of the
stock of an EWG or FUCO, and following such acquisition, the EWG or FUCO incurs
non-recourse borrowings some or all of the proceeds of which are distributed to
the Intermediate Subsidiary as a reduction in the amount invested in the EWG or
FUCO (i.e., return of capital), the Intermediate Subsidiary (assuming it has no
earnings) could not, without the Commission's approval, in turn distribute such
cash to AER for possible distribution to Alliant Energy.
Similarly, using the same example, if an Intermediate Subsidiary, following
its acquisition of all of the stock of an EWG or FUCO, were to sell part of that
stock to a third party for cash, the Intermediate Subsidiary would again have
substantial unrestricted cash available for distribution, but (assuming no
profit on the sale of the stock) would not have current earnings and therefore
could not, without the Commission's approval, declare and pay a dividend to its
parent out of such cash proceeds.
Further, there may be periods during which unrestricted cash available for
distribution by AER or another Non-Utility Subsidiary exceeds current and
retained earnings due to the difference between accelerated depreciation allowed
for tax purposes, which may generate significant amounts of distributable cash,
and depreciation methods required to be used in determining book income.
Finally, even under circumstances in which a Non-Utility Subsidiary has
sufficient earnings, and therefore may declare and pay a dividend to its
immediate parent, such immediate parent may have negative retained earnings,
even after receipt of the dividend, due to losses from other operations. In this
instance, cash would be trapped at a subsidiary level where there is no current
need for it.
Likewise, AER or any Non-Utility Subsidiary may also wish to utilize freely
distributable cash to acquire, retire or redeem any securities of which it is
the issuer that are held by any associate company. Such transactions, which are
not exempt under Rule 42, are a means to reduce the capitalization of a company
and serve essentially the same purpose as a dividend paid out of capital or
unearned surplus.
-18-
AER, on behalf of itself and each current and future non-exempt Non-Utility
Subsidiary represents that it will not declare or pay any dividend and/or
acquire, retire or redeem any securities of which any such company is the issuer
that are held by an associate company out of capital or unearned surplus in
contravention of any law restricting the payment of dividends or the terms of
any credit or security agreements.22
1.15 Investments in EWGs and FUCOs. Alliant Energy requests authority
-----------------------------
to use the proceeds of authorized financing and Alliant Energy Guarantees to
make investments in EWGs and FUCOs in an amount which, when added to Alliant
Energy's existing "aggregate investment," would not exceed $1.75 billion. Based
on Alliant Energy's "aggregate investment" as of March 31, 2001 (approximately
$355.9 million), this would enable Alliant Energy to make incremental
investments in EWGs and FUCOs of about $1.39 billion.
Alliant Energy believes that, at this stage of the restructuring of the
electric industry both in this country and abroad, it is critical that it have
greater flexibility to invest in EWGs and FUCOs in order to create maximum
shareholder value. In this country, many utilities are divesting generation
assets, creating expansion opportunities for Alliant Energy outside of the
Utility Subsidiaries' service territories. In this connection, Alliant Energy
made a strategic decision to seek to expand the scope and size of its commodity
services business.23
Alliant Energy anticipates using a significant portion of the additional
requested authority to invest in domestic EWGs. These projects have become
increasingly attractive and important to Alliant Energy's strategic operations
as a result of industry restructuring encouraged by the FERC, the implementation
of the Energy Policy Act of 1992 ("Energy Policy Act"), state legislatures, and
state regulatory authorities.
The achievement of this goal would be facilitated by Alliant Energy having
greater flexibility to purchase generating assets outside of the Utility
Subsidiaries' service territories. Because of the integration requirements of
the Act, the generating assets that Alliant Energy may seek to acquire would
likely need to be qualified as EWGs. Outside of the United States, investment
opportunities exist due to privatizations being pursued by various foreign
governments as well as an expanding need for new electricity generating
resources in emerging markets. Any "utility assets" that Alliant Energy seeks to
acquire outside of the United States would likely need to be qualified either as
EWGs or FUCOs.
All of Alliant Energy's present investments in FUCOs are structurally
segregated from the Utility Subsidiaries, a policy that would also apply to any
prospective investments in EWG's. No Utility Subsidiary has extended credit or
sold or pledged its assets directly or indirectly to any FUCO, and the
indebtedness of Alliant Energy's existing FUCO projects is not otherwise
recourse to any Utility Subsidiary. Alliant Energy will not seek recovery
through higher rates to the Utility Subsidiaries' utility customers in order to
------------------------
22 The Commission has previously authorized substantially similar
proposals. See 1999 Financing Order; also see NiSource Inc., Holding Co. Act
--- -------------------- -------- -------------
Release No. 27265 (Nov. 1, 2000).
23 Alliant Energy's commodity services business consists of both generation
assets and energy marketing operations.
-19-
compensate Alliant Energy for any possible losses that it may sustain on
investments in EWGs or FUCOs or for any inadequate returns on such investments.
Alliant Energy will obtain letters from each of the four public service
commissions that have jurisdiction over the rates and service of the Utility
Subsidiaries certifying that such commissions have the authority and resources
to protect ratepayers of the Utility Subsidiaries from the effects of Alliant
Energy's investments in EWGs and FUCOs, and that they intend to exercise such
authority. These letters, when obtained, will be filed herewith as Exhibits H-1,
H-2, H-3 and H-4.
Alliant Energy's request for a higher "aggregate investment" limit is
warranted for all of the following reasons:
o With the passage of the Energy Policy Act, Congress recognized that
investment in generation projects, apart from those owned or operated
by vertically-integrated public utilities, is consistent with the
efficient operation of a registered public-utility holding company
system such as Alliant Energy's. Congress created an exemption for
EWGs in order to promote such investment.
o Since the passage of the Energy Policy Act and the April 24, 1996
adoption of FERC Order 888, which provides for electric power
transmission service on a nondiscriminatory basis, "functionally
unbundled" from power generation, there has emerged a vigorous United
States (and North American) energy market where all domestic operating
generating plants have transmission access to wholesale and retail
markets.
o Since the passage of the Energy Policy Act, AER has developed an
energy trading and marketing joint venture called Cargill-Alliant LLC
("Cargill-Alliant") apart from its traditional pubic-utility
operations, which greatly lessens the risk of investment in EWGs.
o Since the passage of the Energy Policy Act, several states (including
Illinois) have effectively restructured electric power service in
order to provide for the generation and sale of electric power through
market competition rather than exclusively through vertically
integrated, rate-regulated, public-utility companies. This
restructuring has resulted in new opportunities for marketing electric
power generated by EWGs.
o A substantial demand exists for ownership and operation of generation
divested from public utility systems in many States.
o A substantial increase in the value assigned to reliability has
developed in the wake of recent and anticipated capacity shortages in
California and the Northeast, with impacts that extend well beyond
those regions.
o A substantial demand exists for new generating capacity both within
the United States and globally.
-20-
o Since the enactment of the Energy Policy Act, a substantial
international energy market has emerged. Effective participation
within this market requires substantial portfolio diversification
among types of projects and among countries and investment at levels
sufficient to secure the advantages of economies of scale.
o The additional authority sought herein will enable Alliant Energy to
pursue growth opportunities consistent with the Energy Policy Act and
Alliant Energy's goal of growing shareholder value at a faster growth
rate than would occur solely as a result of Alliant Energy's regulated
public-utility operations. Alliant Energy seeks thereby to minimize
its overall cost of capital.
o Alliant Energy's investments to date in FUCOs have been on a
diversified basis, and have given Alliant Energy experience in
operating in deregulated energy markets.
Thus, in view of the current limitations on financing capacity under the
Rule 53(a)(1), Alliant Energy requests that the Commission issue an order
pursuant to Rule 53(c) under the Act to waive the investment limitation
contained in Rule 53(a)(1), as applied to Alliant Energy, so that Alliant Energy
may utilize the proceeds of the authorized financings and guarantees authorized
by the Commission in this proceeding and in File Nos. 70-9317 to make
investments in EWGs and FUCOs up to the proposed EWG/FUCO Investment Limitation.
As demonstrated in Item 3, Alliant Energy satisfies the applicable standards
under Rule 53(c) for the relief requested herein.
1.15.1 Description of Current Portfolio of Projects. Alliant
--------------------------------------------
Energy, through subsidiaries of AER, currently holds interests in various
foreign electric generation and distribution utility companies that have been
certified as FUCOs. Alliant Energy does not hold an interest in any EWG at this
time, but is investigating several potential investments. The largest
concentration of Alliant Energy's foreign investments is in Brazil, followed by
New Zealand and Australia. Alliant Energy has also made relatively small
investments in China and Mexico. As indicated, at March 31, 2001, Alliant
Energy's "aggregate investment" in all of these entities was approximately
$355.9 million. A brief description of these projects, by country, follows:
(a) Brazil. In January 2000, AER acquired a non-controlling
------
interest in four Brazilian electric utilities that serve over 820,000 customers.
As part of this investment, AER acquired a 49.1% ownership interest in Companhia
Forca e Luz Cataguazes-Leopoldina ("Cataguazes"), which holds a majority
interest in another electric utility company, Companhia de Electricidade de Nova
Friburgo S.A. ("CENF"), and in an energy development company, Energisa S.A.
("Energisa"). As part of the same investment, AER also acquired a 45.6% interest
in Energisa itself, which holds majority stakes in two other regulated
utilities, Empresa Energetica de Sergipe S.A. ("Energipe") and Companhia
Energetica de Borborema S.A. ("CELB").
-21-
In January 2001, AER indirectly purchased a 49% interest in Sociadade
Anonima da Electrificiacao da Paraiba ("SAELPA"), which serves more than 760,000
customers in the state of Paraiba, Brazil, where one of the Cataguazes
distribution companies (CELB) is already located, surrounded by SAELPA. The
SAELPA acquisition had been an agreed-upon target of the Alliant Energy/
Cataguazes joint business plan and nearly doubled the Cataguazes customer base
to 1.6 million customers in the fastest-growing Northeastern region of the
country.24
Additionally, AER, through Alliant Energy International, Inc., has agreed
to participate with Cataguazes in developing two gas-fired generation plants in
Brazil. The first, Usina Termeletrica Juiz de Fora S.A., is an 82 MW simple
cycle plant that is scheduled to go in service in November 2001, and to be
upgraded to 103 MW as a combined cycle plant by December 2002.25 The second,
TermoSergipe S.A., is a 90 MW co-generation plant that is under development and
scheduled to go in service by January 2003.
(b) New Zealand.26 AER indirectly holds investments in two FUCOs
-----------
operating in New Zealand. AER owns 17.4% of the common stock of TrustPower
Limited, which serves approximately 220,000 electric customers throughout New
Zealand, supplying half of its load from its own hydroelectric and wind
generation assets. In addition, AER indirectly owns approximately 10.2% of the
common stock of Infrastructure & Utilities NZ Limited ("Infratil"), a New
Zealand utility and infrastructure company. Infratil owns 26% of TrustPower.
(c) Australia.27 AER indirectly owns 69.5% of Southern Hydro
---------
Partnership, which owns and operates hydroelectric generating assets in
Australia with an aggregate generating capacity of 479 MW. These assets
represent approximately 6% of the State of Victoria's total electricity
generation capacity.
(d) China. AER indirectly holds investments in seven different
-----
generating projects in China, of which four are in operation, as follows:
JIES Power and Heat Co. Ltd.28 - AER indirectly owns a 50% interest
---------------------------
in JIES Power and Heat Co. Ltd. ("JIES"), a Chinese limited liability company
that owns a co-generation plant consisting of three coal-fired 12 MW generating
units. JIES supplies electricity and steam to the local municipal government
which, in turn, sells and distributes the steam and power to various customers.
TIES Heat & Power Co. Ltd.29 - AER indirectly owns a 30% interest in
-------------------------
Tongxiang TIES Heat & Power Co. Ltd. ("TIES"), a Chinese limited liability
company that owns and operates a co-generation plant consisting of two
coal-fired 12 MW generating units. TIES supplies electricity and steam to the
------------------------
24 See Form U-57 filed by Alliant Energy on January 30, 2001 (File No.
073-00091).
25 See Form U-57 filed by Alliant Energy on January 30, 2001 (File No.
073-00091).
26 See Form U-57 filed by Alliant Energy on August 20, 1999 (File No.
073-00091).
27 See Form U-57 filed by Alliant Energy on October 13, 1999 (File No.
073-00091).
28 See Form U-57 filed by IES Industries, Inc. (now, Alliant Energy
Corporation) on January 3, 1997 (File No. 073-00053).
29 See Form U-57 filed by Alliant Energy on July 30, 1999 (File No.
073-00091).
-22-
local municipal government, which, in turn, sells and distributes the steam and
power to various customers.
Peak Pacific Investment Co. Ltd. and Subsidiaries - AER indirectly
---------------------------------------------
owns a 83% interest in Peak Pacific Investment Co. Ltd. ("Peak"), a Singapore
project development company focused upon the combined heat and power market in
China. Peak, in turn, holds interests in five generating subsidiaries, as
follows:
1. Jinan Yaqing Heat and Power Co. Ltd. Peak owns 66.5% of
-----------------------------------
Jinan Yaqing Heat and Power Co. Ltd. ("Jinan"), which owns a 6 MW coal-fired
generating unit and related steam production equipment. Jinan will sell
electricity to the Jinan City Power Supply Bureau. The steam produced will be
sold to the Jinan Development Zone Heat and Power Plant Industrial Company.
2. Shijiazhuang Chengfeng Heat and Power Co. Ltd. Peak owns
---------------------------------------------
a 70% interest in Shijiazhuang Chengfeng Heat and Power Co. Ltd. ("Zhengding"),
which is currently constructing a coal-fired cogeneration facility that will
produce and supply both electricity and thermal energy. The generating
facilities will consist of two 12 MW units. Completion of the facility is
scheduled in 2001. Zhengding will sell electricity to the Zhengding County
Sandianban. The steam produced will be sold to the Zhengding County Supply
Company.
3. Henan Yongfeng Electric Power Co. Ltd. Peak owns a 70%
-------------------------------------
interest in Henan Yongfeng Electric Power Co. Ltd. ("Gongyi I"), which owns a 50
MW generating unit, the output of which is sold to the Gongyi Power Supply
Company and the Henan YongAn Aluminum & Power Group Co. Ltd.
4. Henan Anfeng Electric Power Co. Ltd. Peak owns 70% of
-----------------------------------
Henan Anfeng Electric Power Co. Ltd. ("Gongyi II"), which owns a 50 MW
generating unit, the output of which will be sold to the Gongyi Power Supply
Company and the Henan YongAn Aluminum & Power Group Co. Ltd.
5. WuAn Peak Heat and Power Co. Ltd. Peak owns a 70%
--------------------------------
interest in WuAn Peak Heat and Power Co. Ltd. ("WuAn"), which owns three
coal-fired co-generation units having a combined 24 MW capacity, with an
additional 12 MW unit under construction. WuAn sells electricity to the Handan
Power Supply Company under a 20-year take-or-pay off-take agreement. Steam is
sold to WuAn City Heating Company.
Peak also has two additional projects in advanced stages of
development representing 104 MW of capacity. Additional projects in China are
under development which could represent $50-$100 million of additional
investment.
(e) Mexico. AER indirectly owns 100% of Alliant Energy Servicios
------
de Mexico, S. de R.L. de C.V. ("Servicios") and Alliant Energy Operaciones de
Mexico, S. de R.L. de C.V. ("Operaciones"), which are both organized in
-23-
Mexico.30 Servicios and Operaciones have entered into agreements to operate the
electrical distribution facilities of a non-affiliated company that serves a
resort community known as Laguna del Mar, located in Puerto Penasco, Sonora,
United Mexican States.
(f) Other Foreign Projects. Through a wholly-owned subsidiary,
----------------------
Alliant Energy has invested, together with other unaffiliated investors, in a
portfolio of small electricity generation projects fueled primarily from
renewable energy resources that are located in emerging foreign markets. These
projects will consist primarily of generating units in excess of 7 MW (net) and
may also include related energy conservation and efficiency equipment. These
projects will be developed in any of the emerging market nations eligible for
International Finance Corporation financing which sponsors the Renewable Energy
and Energy Efficiency Fund ("REEF"). The lead manager for the REEF is Energy
Investors Fund. AER has invested or committed to invest approximately $15
million in REEF.
1.15.2 Potential Investments in Additional Exempt Projects. Alliant
---------------------------------------------------
Energy intends to make substantial investments in EWGs (both domestic and
foreign) and FUCOs and other independent power projects in order to expand the
commodity services portion of its business, to augment uncertain growth in its
domestic utility business, to diversify its asset portfolio, and to gain greater
experience in operating in unregulated energy markets.
Alliant Energy has developed a strategy which requires it to expand the
commodity services portion of its business. The commodity services business
includes the generation and marketing of electricity. Alliant Energy has
concluded that, in order to remain competitive in the rapidly evolving electric
commodity markets, it must increase the size and scale of its commodity services
business in order to gain the economies to defray the necessary, but
significant, infrastructure costs. Moreover, Alliant Energy believes that this
focus on the commodity services business is consistent with its demonstrated
strengths in owning and operating electric generating plants on a low-cost
basis. In addition, in order to expand its electricity marketing business,
Alliant Energy believes that it will be necessary to acquire additional physical
assets outside of the Utility Subsidiaries' existing service territories to
support its marketing position. The assets that it acquires outside of the
service territories of the Utility Subsidiaries but within the United States may
need to be qualified as EWGs and, as such, will be subject to the Rule 53
investment limitations.
Investments in EWGs and FUCOs will enable Alliant Energy to continue to
expand its business despite uncertain growth prospects in the service
territories of the Utility Subsidiaries. Present projections indicate that the
Utility Subsidiaries will continue to fund their operations and their
construction expenditures primarily from internal sources of cash and sales of
senior securities. Thus, acquisitions of EWGs and FUCOs present Alliant Energy
with the opportunity to continue to grow through reinvestment of retained
earnings in an industry sector in which Alliant Energy has more than a century
of experience, while at the same time diversifying overall asset risk. In this
connection, Alliant Energy's recently announced plans to invest in expanded
------------------------
30 See Forms U-57 filed by Interstate Energy Corporation on May 17, 1999
(File No. 073-00091).
-24-
generation within its existing service territory (1,200 MWs in Iowa over the
next 10 years and 800 MWs in Wisconsin over a similar time frame, representing
up to $2.5 billion in capital expenditure) is also expected to be made through
EWG subsidiaries rather than through the Utility Subsidiaries.
Alliant Energy's intended portfolio will be diversified by region and
operating assets and, therefore, will have an increased potential for revenue
growth and be less susceptible to adverse effects from any one particular
market. Alliant Energy believes that its investments in EWGs and FUCOs will give
Alliant Energy a larger and more diversified base for raising equity capital for
future growth and expansion. Thus, investments in EWGs and FUCOs will help
Alliant Energy remain competitive as competition increases in the United States
electric utility industry. Such investments in EWGs and FUCOs will not have a
negative effect on Alliant Energy's ability to make any additional equity
investments in the Utility Subsidiaries that may be required in the future.
Outside of the United States, Alliant Energy has and will likely continue
to pursue investments in utility systems in regions such as South America,
China, Australia and New Zealand. Alliant Energy believes that the creation and
maintenance of value for its shareholders will depend on the Utility
Subsidiaries' ability to continue successfully to operate their core business in
the United States as that business becomes subject to increasing competition.
Alliant Energy believes the experience it develops in markets that are already
largely deregulated will ultimately help the long-term success of its core
business. Alliant Energy expects that the experience gained from conducting
business in these markets will provide Alliant Energy with greater insights into
the market structures that produce efficient and equitable results for consumers
and shareholders. These enhanced insights, in turn, will assist Alliant Energy
and the Utility Subsidiaries effectively to shape and respond to the
restructuring of the electric industry in the United States. Less obvious are
the opportunities to exchange generation and commodity marketing technology
across borders, whether distributed generation into markets where transmission
is at a premium (China, Australia), hydro generation construction and operation
know-how (including Brazilian small hydro plants and Australian large hydro
peaking systems) where these might be effectively deployed, and wholesale
electricity trading and hedging skills (including the Cargill-Alliant joint
venture and the Southern Hydro partnership).
Specific uses of the expanded investment authority cannot be determined at
this time. Although the potential opportunities for EWG and FUCO investment are
numerous, until the authority is received, firm commitments cannot be made to
acquire or develop any specific Project that requires Alliant Energy financing
or credit support. Importantly, even with a higher "aggregate investment" limit,
Alliant Energy will still have to be selective in its investment choices. At
this time, Alliant Energy is considering both domestic and foreign projects. As
noted above, selected projects will have been thoroughly evaluated using Alliant
Energy's Capital Control Process, which is described below in Item 3.3.1.
1.16 Certificates of Notification. Alliant Energy proposes to file
----------------------------
certificates of notification pursuant to Rule 24 that report each of the
transactions carried out in accordance with the terms and conditions of and for
the purposes represented in this Application or Declaration. Such certificates
would be filed within 60 days after the end of each of the first three calendar
-25-
quarters, and 90 days after the end of the last calendar quarter, in which
transactions occur, commencing with the report for the first quarter of 2002.
The Rule 24 certificates will contain the following information for the
reporting period:
(a) Any sales of any Common Stock by Alliant Energy, the
purchase price per share and the market price per share at the date of the
agreement of sale;
(b) The total number of shares of Common Stock issued or
issuable under options granted during the quarter under Alliant Energy's
benefit plans or otherwise;
(c) If Common Stock has been transferred to a seller of
securities of a company being acquired, the number of shares so issued, the
value per share and whether the shares are restricted to the acquiror;
(d) The amount and terms of any Preferred Stock, Long-term Debt
or other forms of preferred or equity-linked securities issued by Alliant
Energy, directly or indirectly through a Financing Subsidiary, during the
quarter;
(e) The amount of any Alliant Energy Guarantee or Non-Utility
Subsidiary Guarantee issued during the quarter, and the company on whose
behalf such guarantee was issued;
(f) The notional amount and principal terms of any Interest Rate
Hedge or Anticipatory Hedge entered into during the quarter and the
identity of the parties to such instruments;
(g) The name, parent company, and amount invested in any new
Intermediate Subsidiary or Financing Subsidiary during the quarter;
(h) The amount and a description of any Energy Assets acquired
during the quarter;
(i) A list of Form U-6B-2 statements filed with the Commission
during the quarter, including the name of the filing entity and the date of
the filing;
(j) Consolidated balance sheets as of the end of the quarter,
and separate balance sheets as of the end of the quarter for each company,
including Alliant Energy, that has engaged in financing transactions
authorized in this proceeding during the quarter.31
------------------------
31 Any of the information described in items (a) through (j) that is
provided under the 1933 Act or the 1934 Act may be incorporated by reference
into the Rule 24 certificate.
-26-
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
------------------------------
The fees, commissions and expenses incurred or to be incurred in connection
with the transactions proposed herein are estimated at $20,000. The above fees
do not include underwriting fees and other expenses that would be incurred in
consummating specific financings, credit support arrangements, asset or stock
acquisitions, or other transactions covered hereby, the amount of which cannot
be estimated at this time. The Applicants represent that such fees and expenses
will not exceed 5% of the proceeds of any financing or of the face amount of any
credit support arrangement or of the consideration paid in connection with any
acquisition.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
-------------------------------
3.1 General. Sections 6(a) and 7 of the Act are applicable to the
-------
issuance and sale of Common Stock, Preferred Stock, Long-term Debt and other
forms of preferred and equity-linked securities by Alliant Energy or a Financing
Subsidiary, and to Interest Rate Hedges, except to the extent that they may be
exempt under Rule 52, and to Anticipatory Hedges. Section 12(b) of the Act and
Rule 45(a) are applicable to the issuance of Alliant Energy Guarantees and
Non-Utility Subsidiary Guarantees, to the extent not exempt under Rules 45(b).
Sections 9(a)(1) and 10 of the Act are also applicable to Alliant Energy's or
any Non-Utility Subsidiary's acquisition of the equity securities of any
Financing Subsidiary or Intermediate Subsidiary, as well as to the acquisition
of Energy Assets or the securities of companies substantially all of whose
assets consist of Energy Assets, the acquisition, retirement or redemption
securities held by any associate company of the issuer, and the activities of
Rule 58 Companies outside the United States. Section 12(c) of the Act and Rule
46 are applicable to the payment of dividends from capital and unearned surplus
by any Non-Utility Subsidiary. Section 13(b) of the Act and Rules 80 - 92 are
applicable to the sale of services and goods among Non-Utility Subsidiaries.
Section 32 and Rules 53(c) are applicable to Alliant Energy's request for an
increase in the amount of financing proceeds that it may invest in EWGs and
FUCOs.
3.2 Compliance with Rules 53 and 54. The transactions proposed herein
-------------------------------
are also subject to Rules 53 and 54. Under Rule 53(a), the Commission shall not
make certain specified findings under Sections 7 and 12 in connection with a
proposal by a holding company to issue securities for the purpose of acquiring
the securities of or other interest in an EWG, or to guarantee the securities of
an EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) thereof
are met, provided that none of the conditions specified in paragraphs (b)(1)
through (b)(3) of Rule 53 exists. Rule 54 provides that the Commission shall not
consider the effect of the capitalization or earnings of subsidiaries of a
registered holding company that are EWGs or FUCOs in determining whether to
approve other transactions if Rule 53(a), (b) and (c) are satisfied. These
standards are met.
Rule 53(a)(1): Currently, Alliant Energy's "aggregate investment" in EWGs
and FUCOs is approximately $355.9, or approximately 32.6% of Alliant Energy's
"consolidated retained earnings" for the four quarters ended March 31, 2001,
including accumulated other comprehensive income ($1.093 billion).
-27-
Rule 53(a)(2): Alliant Energy will maintain books and records enabling it
to identify investments in and earnings from each EWG and FUCO in which it
directly or indirectly acquires and holds an interest. Alliant Energy will cause
each domestic EWG in which it acquires and holds an interest, and each foreign
EWG and FUCO that is a majority-owned subsidiary, to maintain its books and
records and prepare its financial statements in conformity with U.S. GAAP. All
of such books and records and financial statements will be made available to the
Commission, in English, upon request.
Rule 53(a)(3): No more than 2% of the employees of the Utility Subsidiaries
will, at any one time, directly or indirectly, render services to EWGs and
FUCOs.
Rule 53(a)(4): Alliant Energy will submit a copy of the Application or
Declaration in this proceeding and each amendment thereto, and will submit
copies of any Rule 24 certificates required hereunder, as well as a copy of
Alliant Energy's Form U5S, to each of the public service commissions having
jurisdiction over the retail rates of the Utility Subsidiaries.
In addition, Alliant Energy states that the provisions of Rule 53(a) are
not made inapplicable to the authorization herein requested by reason of the
occurrence or continuance of any of the circumstances specified in Rule 53(b).
3.3 Standards of Rule 53(c). Rule 53(c) provides that, in connection
-----------------------
with a proposal to issue and sell securities to finance an investment in any
EWG, or to guarantee the securities of any EWG, a registered holding company
that is unable to satisfy the requirements of paragraph (a) or (b) of Rule 53
must "affirmatively demonstrate" that such proposal:
will not have a substantial adverse impact upon the financial
integrity of the registered holding company system; and
will not have an adverse impact on any utility subsidiary of the
registered holding company, or its customers, or on the ability of
State commissions to protect such subsidiary or customers.
The Commission has held that these same tests apply to a registered holding
company when it seeks authorization to finance FUCO acquisitions.
As demonstrated below, the issuance of securities by Alliant Energy to
finance investments in EWGs and FUCOs in an amount up to the proposed EWG/FUCO
Investment Limitation will not result in any such adverse impacts, for all of
the following reasons:
o Alliant Energy subjects potential investments in EWGs and FUCOs to a
series of project review screens designed to identify risks before any
funds are committed. Once funds have been invested, Alliant Energy
closely monitors project performance and uses a variety of techniques
to mitigate specific risks. More generally, Alliant Energy's portfolio
diversification approach serves to mitigate the risks presented by any
single project.
-28-
o Wherever practicable, Alliant Energy finances project investments with
non-recourse debt and available cash, including cash that has been
raised by Alliant Energy on the basis of the unrealized appreciation
in the value of its significant minority ownership position in
McLeodUSA Incorporated ("McLeod"), an ETC, which has enabled Alliant
Energy to fund its investments in the Brazilian electricity sector.
o Alliant Energy has a successful track record in developing foreign
projects.
o Credit ratings and other indicators attest that Alliant Energy and the
Utility Subsidiaries are in sound financial condition. Importantly,
the Utility Subsidiaries are not expected to need any funds from
Alliant Energy in order to finance their capital requirements through
at least 2005. In fact, Alliant Energy projects that new investment in
generating assets in its four-state area will be made primarily
through EWGs, and not the Utility Subsidiaries.
o Just as with its existing investments, Alliant Energy will prudently
finance new investments in a manner that will preserve the financial
integrity of Alliant Energy and the Utility Subsidiaries. Alliant
Energy has developed a comprehensive financial model addressing the
expected financing and likely impacts of the proposed new investments,
the results of which indicate that the financial performance of
Alliant Energy will be enhanced without undermining the financial
integrity of the Utility Subsidiaries. In this connection, Alliant
Energy asked Merrill Lynch to perform a credit analysis focusing on
the impact of financing by Alliant Energy on a recourse basis of
additional investments in EWGs and FUCOs in the next five years. On
the basis of and subject to the matters set forth or referred to in
its letter dated April 5, 2001, Merrill Lynch was of the view that, as
of such date, the credit ratings of Alliant Energy and the Utility
Subsidiaries would not be expected to fall below investment grade due
to the increased investments contemplated in this Application or
Declaration. Finally, Alliant Energy has represented that it will
maintain a rating for all Long-term Debt that is at least investment
grade.
o The Utility Subsidiaries and their customers will remain insulated
from the direct effects of Alliant Energy's project investments. In
the first place, the Utility Subsidiaries will continue to have no
involvement in financing the acquisition of any EWG or FUCO, except
potentially in connection with the transfer of existing generating
facilities owned by them to EWG affiliates in accordance with state
restructuring requirements. Second, any transfer of such assets to EWG
status will conform to the requirements of Section 32 of the Act,
including the requirement in Section 32(c) for specific findings from
Alliant Energy's state commissions. And third, Alliant Energy has
represented that it will not seek recovery through higher rates to the
Utility Subsidiaries' customers for any losses or inadequate returns
from project investments.
o Alliant Energy will meet with the commissioners and staff of the
Wisconsin, Iowa, Minnesota and Illinois commissions, and obtain
letters from such commissions stating that, based on the commitments
-29-
of Alliant Energy and subject to the qualifications referred to or
stated therein, Alliant Energy's request for increased "aggregate
investment" limit will not have an adverse impact on their ability to
protect the Utility Subsidiaries or their retail customers.
3.3.1 Project Review Procedures/Risk Mitigation Techniques.
----------------------------------------------------
Alliant Energy has adopted a comprehensive Capital Control Process to evaluate
all new business opportunities, including potential investments in EWGs and
FUCOs. Investments in EWGs and other independent power production facilities,
particularly foreign EWGs and FUCOs, involve a variety of risks that
historically have not been present in the traditional, regulated, electric
utility industry in this country. Alliant Energy's Capital Control Process,
which reflects pre-Merger best practices, identifies and addresses (i.e., limits
and/or mitigates) these risks as they relate to both domestic and, more
significantly, foreign projects. Following is a discussion of these procedures
and risks.
(a) The Project Review Process. Every potential EWG (both
--------------------------
domestic and foreign) and FUCO investment opportunity (a "Project") considered
by Alliant Energy is subjected to several stages of formal review to ensure both
the alignment of the Project with Alliant Energy's strategic objectives and the
appropriate assessment of the risks and rewards for the Project. This process is
documented in Alliant Energy's Capital Control Process, which applies to the
review of all new business opportunities, not solely to Projects. The Capital
Control Process includes a detailed framework by which each phase of a Project's
development cycle is analyzed. This process has been reviewed and approved by
Alliant Energy's executive management and has been reviewed by Alliant Energy's
Board of Directors.
Initially, at the conceptual stage in the assessment of a proposed Project,
Alliant Energy, in conjunction with the Capital Control Process staff, must make
a preliminary determination as to whether the Project is consistent with Alliant
Energy's strategic objectives and whether the Project's risk to rewards ratio
will be acceptable. If deemed to be consistent with Alliant Energy's strategic
objectives and the results of the initial evaluation of the Project's risks to
rewards ratio are acceptable, then the same parties are responsible for the
preparation of a business concept document for the Project. The business concept
document must address, at a minimum, a description of the business, the
strategic fit with Alliant Energy's objectives, a preliminary market assessment,
a description of the Project's competition, an initial financial analysis,
critical success factors, risks, and exit strategies. Upon the completion of the
business concept document, the Business Unit Management Team, comprised of top
executives of Alliant Energy, must review it and make a determination that the
Project is consistent with Alliant Energy's corporate strategic objectives, and,
given the identified risks, has the requisite earnings potential to merit
further review and development of a business case.
After Business Unit Management Team approval of the business concept,
Alliant Energy, with the assistance of the applicable AER business unit staff,
will develop a comprehensive business case for the Project. This business case,
along with the results of the due diligence and risk assessment process
performed in connection with the development of the business case, is to form
the basis upon which the Alliant Energy Executive Review Committee and the
Alliant Energy Board of Directors will consider the approval of the proposed
investment in the Project. The business case is to be a comprehensive
-30-
identification and analysis of the strategic, market, operational, and financial
components of the Project. In addition to an assessment of the Project, it will
also include the identification of an exit strategy and identify initial Project
implementation steps. Its scope will be driven by the size, complexity, and risk
associated with the Project.
As noted above, during the business case development phase of the Project
review process, Alliant Energy will perform detailed Project due diligence and
risk assessment using cross-functional Project Teams to identify and assess the
major technical, financial, commercial, legal/regulatory and political risks
associated with a particular Project, as well as potential mitigating factors.
Those on the Project Team are responsible for conducting or assuring the
adequacy of due diligence for a Project; they will work in conjunction with
appropriate advisors, e.g., engineers, accountants, attorneys, investment
bankers, in evaluating a Project. The Project Teams will be comprised of Alliant
Energy personnel and other supporting personnel. Such supporting personnel may
include outside consultants.
Upon completion of the business case, a summary of the findings as well as
a recommendation on whether, and if so, how, to proceed will be presented to the
Alliant Energy Executive Review Committee. Upon approval by the Alliant Energy
Executive Review Committee, the investment will be assessed against pre-approved
Board investment criteria to determine the level of additional approvals, if
any, that may be required. Depending on the magnitude of the investment in a
Project, full Board approval may be necessary.
The above process applies to all new Alliant Energy businesses including
both foreign and domestic Projects. Due to the special risks associated with
foreign Projects, additional factors are considered. Before Alliant Energy makes
any investment in a foreign country, the business case must include an analysis
of country risk, which will be presented to and reviewed by the Alliant Energy
Board of Directors. The analysis includes a review of the political and economic
stability of the particular country, the government's commitment to private
power, the extent to which there is a free market economy, the extent to which
there is a developed local banking system, the legal and regulatory framework
for private investment in electric or gas facilities, the local business support
for long-term investment of private capital, currency conversion and
repatriation, and the potential for future partial sales of the investment
interest to other investors.32
------------------------
32 It should be noted that Alliant Energy's Capital Control Process may, in
many cases, be replicated by the lenders who agree to provide construction or
permanent debt financing on a non-recourse basis for a Project, since repayment
of that debt will depend solely upon the success of a Project. Project debt
maturities are commonly long-term, meaning that the lenders' exposure to the
risks of a Project extends for many years after closing or completion of
construction. Project debt instruments customarily contain a requirement for the
establishment of plant overhaul or utility system maintenance, debt service and
other funded reserves, all of which are designed to preserve the asset and
protect the financial performance of the Project against interruptions in
revenues and other contingencies.
-31-
(b) Risk Mitigation Measures. For all Projects, Alliant Energy
------------------------
will carefully and systematically evaluate the potential risks of a Project in
connection with the development of the business case before Alliant Energy funds
are committed. The risks evaluated include those discussed below. At the outset,
Alliant Energy would note that the various risks identified below relating to
Projects, generally, and foreign Projects, in particular, can be mitigated in
appropriate cases through partnering with other entities. Moreover, partnering
may enable Alliant Energy to spread development costs as well as risks, and to
draw upon the resources and experience of others, in determining what Projects
to pursue.
(1) Operating Risks. Alliant Energy limits Project development
---------------
efforts to technologies and industries with which it has existing competencies
such as electric generation and the transmission and distribution of electricity
and gas. Due diligence review of operating assumptions relating to a Project,
including those relating to fuel supply and environmental effects, will be
carried out by Alliant Energy personnel with experience in the technology being
evaluated, supplemented as appropriate by the use of outside technical
consultants. Where possible, the risk of changes in the price of fuel will be
passed through to the purchaser of electricity under the negotiated terms of a
long-term power sales agreement. Other operating risks may, as appropriate, be
mitigated by equipment warranties and by casualty, business interruption and
other forms of insurance. Further, operating risk may be mitigated in some
instances by Alliant Energy's direct participation in the administration and
operation of a Project; such direct involvement may enhance Alliant Energy's
ability to identify and address developing and existing problems on a timely
basis.
(2) Construction Risks. As discussed below, in the foreign
------------------
sector, Alliant Energy expects to focus on existing Projects as opposed to
so-called "greenfield" projects. As a consequence, construction risks will not
be a significant issue for most foreign Projects that Alliant Energy pursues. To
the extent issues regarding construction risks arise, such risks are commonly
mitigated by fixed-price contracts with milestones and performance guarantees
(e.g., guaranteed heat rates and availability factors), backed by appropriate
levels of liquidated damages. The creditworthiness and track record of the
construction contractor is an important consideration in this regard. In those
cases where Alliant Energy may serve as its own general construction contractor,
it will look to pre-negotiated cost and damage provisions from sub-contractors,
including, without limitation, equipment vendors, to protect against performance
shortfalls, cost overruns and schedule delays.
(3) Commercial Risks. In competitive power markets electricity
----------------
prices are determined by the economic laws of supply and demand. Accordingly,
Alliant Energy will conduct extensive investigations of the electricity markets
in which Projects operate, either foreign or domestic. With respect to an EWG,
Alliant Energy will seek to ensure that the EWG will be capable of providing
electricity at competitive rates in a non-regulated environment. Alliant Energy
will also assess the underlying economic parameters in specific markets to
assure that there will be sufficient demand for the output of the EWG. In the
past, most independent power projects have relied on or have had the ability to
arrange a power purchase sales agreement for the entire output of a facility
with a single power purchaser, normally the local utility company. Such
commitments minimize the risk of variation in revenues, assuming that a facility
meets expected operations. However, in the future it will likely not be possible
-32-
to rely heavily on these types of agreements. Moreover, even where there is or
where it is possible to arrange such a commitment, Alliant Energy may make an
assessment of the creditworthiness of the power purchaser over the life of the
Project and may seek to have a contingency plan in the event of defaults.
Moreover, Alliant Energy will analyze the commitment to determine how it may be
affected by operations, changes in regulatory law or other legal requirements,
or other factors.
(4) Financial Risks. Alliant Energy will seek to mitigate the
---------------
financial risks of Projects in a variety of ways. Generally, it will seek to
secure the maximum amount of permanent debt financing for Projects that is
available at reasonable cost and that is, by its express terms, non-recourse to
Alliant Energy. Non-recourse debt of a Project that is secured solely by its
assets and revenues, and creditors have no ability to seek repayment upon
default from Alliant Energy. This method of financing ensures that Alliant
Energy's exposure to any Project is limited to the amount of its equity
commitment, and that the Utility Subsidiaries would bear no risk of a Project's
failure or financial distress.33 In addition to the expected non-recourse
nature of most Project debt financing, Project debt is carefully structured to
meet, or match, the characteristics of the particular Project. For example, when
the value of a Project depends on a long-term, fixed-price, power purchase
agreement, the Project debt may be designed to be of a similar term, with
scheduled debt payments covered by fixed charges (usually the capacity payment
component in the contract). On the other hand, where there is no long-term,
fixed source of revenue, the percentage of non-recourse debt financing should be
smaller, so that financial risk is not increased by excessive debt levels.
(5) Interest Rate Risk. A specific financing risk is the
------------------
potential variability of interest rates. Interest rate variability can be
addressed, in part, by borrowing on a fixed-rate basis or by purchasing
financial instruments that fix or cap variable interest rates. The effects of
interest rate volatility can be mitigated principally through two strategies:
hedging and diversifying. Hedging techniques that Alliant Energy may utilize
would limit the impact that rising interest rates have on floating rate debt
instruments. Diversification implies that liabilities will be spread among
short- and long-term debt instruments, as well as fixed and floating interest
obligations.
(6) Foreign Currency Exchange Risk. There are several ways in
------------------------------
which Alliant Energy may address the foreign currency exchange risk element,
depending on the status of the target country. Initially, Alliant Energy will
seek to develop or acquire Projects where there is free convertibility of the
local currency into U.S. dollars. In countries that do not have a history of
stability in the management of their exchange policy, Alliant Energy may require
that part or all of the revenue from a Project be payable in or indexed to hard
currency (almost invariably, U.S. dollars). Back-up guarantees or other
undertakings by the central government may be available to ensure that the U.S.
dollar payments due under a power purchase agreement are actually made available
by the central bank or ministry of finance. In other cases, some or all of the
non-recourse Project debt may be borrowed in the same currency as the Project's
revenues, thereby ensuring a match between debt service obligations and
------------------------
33 However, from time to time in the future, Alliant Energy may agree to
provide guarantees in connection with Project financings.
-33-
operating income. Where available, long-term currency swaps would provide a
further hedging option for the equity component of the investment.
(7) Legal Risks. Legal risks will be addressed by careful review
-----------
of any investment by legal counsel, including local and international counsel
where foreign Projects are concerned. Such legal reviews address regulatory and
permitting risks, environmental risks, the adequacy and enforceability of
guarantees or other contractual undertakings of third parties, the status of
title to utility property, and the obligations inherent in the financing
arrangements.
(8) Country Risks. Foreign investment can entail
-------------
country-specific risks related to political or economic performance. As
indicated above, Alliant Energy thoroughly evaluates country risk before
committing to invest in any foreign Project, and attempts to mitigate this risk
through a number of measures. Most important, the country review process
described above ensures that the political and economic stability of any country
has been reviewed at several levels up to and, depending on the level of
investment, including Alliant Energy's Board of Directors before any investment
occurs. The country analysis also focuses specifically on the country's energy
sector and on the government's support for private ownership in that sector.
In order to mitigate risk, Alliant Energy, as a strategy, will partner with
local entities that are experienced in doing business in the host country.
Strong local partners can, in some situations, reduce the risk of future
expropriation or unfair regulatory treatment. Another mitigating factor is the
participation of official or multilateral agencies in a Project. When funds for
the Project are supplied by government-sponsored export credit agencies or other
governments, or by supranational institutions such as the World Bank, acting
through its International Finance Corporation affiliate, the host country has
strong incentives not to take actions which would harm the Project's viability.
Alliant Energy is currently negotiating three financings with such agencies to
meet requirements in Brazil and China.
Political risk may be addressed through political risk insurance obtained
from the Overseas Private Investment Corporation, a United States agency, or the
Multilateral Investment Guaranty Agency, a World Bank affiliate, or in the
commercial insurance market. Political risk insurance is available to insure the
project debt or the return of an investor's equity. One can also insure against
outright expropriation, acts of civil violence, or even "creeping"
nationalization brought about by punitive regulation. Alliant Energy will
analyze the perceived risk and its costs and compare that with the cost of
obtaining such insurance and, when such costs associated with such risks exceed
the costs of insurance coverage, Alliant Energy will attempt to procure such
insurance.
(9) Portfolio Diversification. Alliant Energy recognizes that
-------------------------
the risk inherent in any investment cannot be eliminated entirely, even by the
most careful approach to project development. However, Alliant Energy believes
that diversification of both the type and location of projects can mitigate
risk. Accordingly, Alliant Energy will evaluate opportunities across countries
and regions of the world. On the other hand, Alliant Energy may balance its
diversification strategy with another goal, i.e., to develop regional expertise.
-34-
In the foreign sector, while it is possible that Alliant Energy may invest
in "greenfield" Projects, Alliant Energy expects to target acquisitions of
generating projects that are already in operation, either from existing private
owners or through privatizations. These acquisitions reduce the risk of Alliant
Energy's overall business by producing near-term earnings without significant
development or construction risk. Moreover, Alliant Energy believes that it can,
through the expertise and resources of AER, its subsidiaries and other system
companies, improve the operations of many existing generating projects that are
available.
3.3.2 Financial Results and other Benefits of Existing Projects.
---------------------------------------------------------
The majority of the FUCO investments show operational profitability. This
profitability, however, is more than offset at the aggregate level by
non-operating expense, notably the cost of debt. The interest expense for 2000
totaled $39.9 million for AER's Project portfolio as a whole, as detailed below.
The relative youth of AER's FUCO portfolio accounts for this pattern. The newer
projects under development, or that have recently started operations, are not
yet at full potential in generating revenues. In addition, the interest expenses
associated with funding these start-ups drags on the profitability of the
portfolio as a whole. The newer acquisitions are in the process of being
integrated into a larger, better-run operation in which economies of scale and
other synergies are only beginning to be achieved. At year-end 2000, just over
60% of the portfolio could be categorized in this fashion.
AER's portfolio of FUCO investments is relatively new and relatively small.
AER expects that the newer acquisitions and projects will mature and will
contribute increasingly to the funding of the FUCO portfolio. After allocation
of non-operating expenses, both New Zealand and China showed positive earnings
($2.7 million and $7.9 million, respectively), while Brazil and Australia showed
losses ($0.5 million and $0.5 million, respectively). AER anticipates growing
profitability and cash flow generation to result from the maturing of the FUCO
portfolio. Retained profits from the New Zealand and the older Chinese
investments have already been re-deployed in funding our growth overseas.
Reduction of the financial leverage associated with this increase in internally
generated funds, together with local financing, should assist in reducing the
need for financing with recourse to Alliant Energy. Expansion and maturity will
also help lower costs and risks, through economies of scale, synergies and
collective experience.
-35-
The following are the 2000 earnings/(losses) associated with AER's FUCO
investments (expressed in U.S. $ millions):34
Total AER share
----- ---------
Brazil Catleo 0.03 0.02
CENF 2.88 0.83
CELB 1.23 0.63
Cataguazes 40.35 19.81
Energipe 6.42 4.40
New Zealand Infratil NZ 15.50 1.58
TrustPower 13.39 2.69
Australia Southern Hydro 2.66 1.86
China Anfeng 2.07 0.97
Yonfeng 2.67 1.26
JIES 1.39 0.70
Jinan (0.14) (0.07)
Shijazhuang (0.81) (0.38)
TIES 1.55 0.47
Net Operating Contribution 34.77
Interest Costs 39.85
Foreign Currency Transaction Losses, net 0.64
Other Expenses / Adjustments (1.63)
Income Tax Expense 13.65
Net Earnings / Losses (17.73)
AER's subsidiary, Alliant Energy International, generated a net loss of
$17.7 million in 2000 from investments in FUCOs. Foreign exchange transaction
losses in 2000 were mostly associated with our Australian operation ($1.2
million).
The logic AER's international expansion plans includes the opportunity to
grow at a faster pace than can be expected in Alliant Energy's traditional
utility service territories. The rates of growth, both in units and in
utilization rates, exceed our projected domestic utility expansion rates. AER
------------------------
34 Source: Alliant Energy's Annual Report on Form U5S for the year ended
December 31, 2001.
-36-
has selected carefully which countries, and which market sectors within those
countries, are best suited to its objectives. As indicated, as a matter of
policy, AER partners with strong local entities in order to mitigate risks,
improve access to local financing, better identify new opportunities and
negotiate better terms with local counterparties. The cross-border benefits also
include the first-hand experience of working in deregulated environments,
particularly in the case of New Zealand and Australia, the better to prepare for
possible deregulation in Alliant Energy's domestic markets. Insights into the
combined operation of peaking plants and wholesale market trading, afforded by
Southern Hydro, are also valuable in preparing for Alliant Energy's domestic EWG
expansion. There are also opportunities to share and exchange technical and
operational know-how among the various FUCOs and Alliant Energy's domestic
operations, particularly in hydroelectric and combined cycle generation.
3.3.3 Current Financial Condition of Alliant Energy and the
-----------------------------------------------------
Utility Subsidiaries. Alliant Energy and the Utility Subsidiaries are in sound
--------------------
financial condition, as demonstrated by various financial indicators and other
market factors.
(a) Alliant Energy. Alliant Energy's excellent financial
--------------
condition is indicated by such factors as consolidated debt/equity ratio, growth
in retained earnings, earnings per share, debt ratings, price/earnings ratio,
and dividend pay-out ratio.
(1) Consolidated Capitalization. Alliant Energy's consolidated
---------------------------
capitalization and interest coverage ratios for 1998, 1999 and 2000 are within
industry ranges set by independent debt rating agencies for A+ rated companies,
as shown below:
ALLIANT ENERGY CONSOLIDATED DEBT TO CAPITALIZATION AND INTEREST
COVERAGE RATIOS (EXCLUDING NON-RECOURSE PROJECT DEBT) FOR THE YEARS
ENDED DECEMBER 31, 1998, 1999 and 2000 35
------------------------------------------- ------------------- ------------------- -------------------
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1999 December 31, 2000
------------------------------------------- ------------------- ------------------- -------------------
Total Debt/Capital 51.2% 47.6% 54.2%
------------------------------------------- ------------------- ------------------- -------------------
Pre-Tax Interest Coverage 2.17 x 3.27 x 4.56 x
------------------------------------------- ------------------- ------------------- -------------------
Funds From Operations Interest Coverage 3.92 x 4.43 x 3.49 x
------------------------------------------- ------------------- ------------------- -------------------
------------------------
35 Consistent with rating agency treatment, mandatorily redeemable
preferred securities are not included in debt and related interest coverage
ratios.
-37-
1998 - 2000 AVERAGE INDUSTRY RATIOS FOR A+ RATED INVESTOR-OWNED ELECTRIC
UTILITIES 36
-------------------------------------------------------------------------------
12/31/1998 12/31/1999 2000
-------------------------------------------------------------------------------
Total Debt/Capital 47.9% 50.3% 50.3%
-------------------------------------------------------------------------------
Pre-Tax Interest 3.73 x 3.80 x 3.73 x
Coverage
-------------------------------------------------------------------------------
Funds From Operations 4.63 x 4.70 x 4.69 x
Interest Coverage
-------------------------------------------------------------------------------
Alliant Energy's pro forma consolidated capitalization ratios as of December 31,
2000, were 45.8% equity (including mandatorily redeemable preferred securities,
common shares and preferred shares) and 54.2% debt (including approximately
$499.8 million of short-term debt).
(2) Growth in Retained Earnings. Alliant Energy's consolidated
---------------------------
retained earnings have increased on average almost 11.9% per year over the
previous three years. Consolidated retained earnings decreased by $44.0 million
during 1998, an 7.6% decrease; increased by $40.1 million in 1999, a 7.5%
increase; and increased by $240.1 million in 2000, a 41.7% increase. The
decrease in 1998 can be attributed mainly to merger related charges of $54.0
million. Over the previous five years, Alliant Energy's consolidated retained
earnings have increased an average of 7.5% per year.
(3) Earnings Per Share. Alliant Energy's earnings per share and
------------------
return on equity were $1.90 and 8.9%, respectively, for the year ended 1997;
$1.26 and 6.0%, respectively, for the year ended 1998; $2.51 and 10.45%,
respectively, for the year ended 1999; and $2.46 and 19.6% for the year ended
2000. The earnings per share and return on equity in 1997 and 1998 was affected
by merger related charges of $54.0 million, or $0.45 per share in 1998 and $2.4
million or $0.03 per share in 1997. The earnings per share in 2000 have been
adjusted to exclude a gain on the reclassification of certain investments of
$2.59 per share. The current industry average return on equity for electric
utilities is approximately 13.7%.37
(4) Debt Ratings. Alliant Energy's short term commercial paper
------------
credit rating is currently A-1 by Standard & Poor's, P-1 by Moody's and F-1 by
Fitch's. Alliant Energy has applied for and received a long term debt rating
from Standard & Poor's of A+.
------------------------
36 Standard & Poor's Utility Financial Statistics (Dec. 31, 1998 and Dec.
31, 1999). 2000 data was taken from the Standard and Poor's Balance Sheet, Cash
Flow Statement and Income Statement Statistics published July 7, 2000.
37 Standard and Poor's Utility Financial Statistics (Dec. 31, 1999). 2000
industry average ROE information was obtained from the April 2001 C.A. Turner
Utility Reports
-38-
(5) Price - Earnings Ratio. The market's assessment of Alliant
----------------------
Energy's future growth and earnings also compares favorably to other electric
utility issuers. This can be shown by comparison of Alliant Energy's
price-earnings ratio, as compared to industry averages. These measurers indicate
investor confidence in Alliant Energy.
------------------------------------- ----------- ----------- -----------
P/E Ratio 1998 1999 2000
--------- ---- ---- ----
------------------------------------- ----------- ----------- -----------
Alliant Energy 25.10 10.96 13.00
------------------------------------- ----------- ----------- -----------
Electric Industry 38 21.85 12.28 13.60
------------------------------------- ----------- ----------- -----------
Peer Group (SO, GPU, CIN, AEP, NCE) 17.06 10.35 16.04
------------------------------------- ----------- ----------- -----------
An average to above-average price/earnings ratio was noted as an indicator
of favorable market assessments in all of the Commission's prior orders
approving increases in "aggregate investment" levels. Alliant Energy's
price/earnings ratio compares favorably with the electric industry as a whole.
(6) Dividend Pay-out Ratio. Alliant Energy's indicated dividend
----------------------
rate at December 31, 1998 was $2.00 per share. When calculated against Alliant
Energy's pro forma earnings per share of $1.26 for 1998, the payout ratio is
above the electric utility average. At December 31, 1999, the dividend rate was
$2.00 per share on earnings per share of $2.51. At December 31, 2000, the
dividend rate was $2.00 per share on adjusted earnings per share of $2.46.
------------------------------------- ----------- ----------- -----------
1998 1999 2000
---- ---- ----
------------------------------------- ----------- ----------- -----------
Alliant Energy Payout Ratio 159.0% 79.7% 81.3%
------------------------------------- ----------- ----------- -----------
Electric Industry 39 96.3% 74.9% 63.0%
------------------------------------- ----------- ----------- -----------
Peer Group 86.4% 75.6% 81.5%
------------------------------------- ----------- ----------- -----------
(b) Utility Subsidiaries. The Utility Subsidiaries are also in
--------------------
excellent financial health, as indicated by such factors as debt/equity ratios
of the Utility Subsidiaries, earnings coverages, and security ratings.
(1) Debt/Equity Ratios. Debt (including short-term debt) ratios
------------------
of IES and IPC, two of the three (3) major Utility Subsidiaries are consistent
with the industry range for A+-rated electric utilities. The current industry
average for A+-rated electric utilities is approximately 50.3%.40
------------------------
38 1998 and 1999 industry averages taken from Edison Electric Institute
(EEI). 2000 industry average information was obtained from the April 2001 C.A.
Turner Utility Reports.
39 Id.
40 Id.
-39-
----------------- ----------- ----------- ----------- ----------- -----------
DEBT AS % OF 1996 1997 1998 1999 2000
CAPITALIZATION
----------------- ----------- ----------- ----------- ----------- -----------
IES Utilities 57.7% 57.6% 55.5% 55.5% 49.9%
----------------- ----------- ----------- ----------- ----------- -----------
IPC 52.8% 49.8% 43.6% 46.0% 39.2%
----------------- ----------- ----------- ----------- ----------- -----------
Debt ratios of WPL, the third major Utility Subsidiary, are consistent with
the industry range for AA- rated electric utilities. The current industry
average for AA- rated utilities is approximately 50.8%.
----------------- ----------- ----------- ----------- ----------- -----------
DEBT AS % OF 1996 1997 1998 1999 2000
CAPITALIZATION
----------------- ----------- ----------- ----------- ----------- -----------
WPL 43.6% 50.0% 52.2% 49.0% 44.1%
----------------- ----------- ----------- ----------- ----------- -----------
(2) Earnings Coverages. The major Utility Subsidiaries' ability
------------------
to issue debt and equity securities in the future depends upon their financial
strength at the time such securities are issued. To the degree they issue senior
secured debt, they must comply with certain coverage requirements designated in
their mortgage bond indentures. Under the more restrictive terms of their
respective indentures, WPL, IES Utilities and IPC could have issued at least
$548 million, $362 million and $264 million of long term debt, respectively, at
December 31, 2000. December 31, 2000 indenture earnings coverage ratios for the
Utility Subsidiaries were approximately 4.33x for WPL, 3.23x for IES Utilities
and 3.57x for IPC, in each case well above the required coverages of 2.0x for
WPL and 2.0x for IPC. IES Utilities does not have a minimum required coverage
ratio. Accordingly, the Utility Subsidiaries should have more than adequate
earnings coverages to permit the issuance of securities to third parties in
amounts that will satisfy their external finance requirements in the foreseeable
future.
-40-
(3) Security Ratings. The Utility Subsidiaries' ratings have
----------------
generally been within the AA- and A+ ranges set by the major rating agencies in
recent years. The Utility Subsidiaries continue to show adequate financial
statistics as measured by the rating agencies.
DEBT RATINGS
(as of 12/31)
-------------------------------- ---------------------
S&P RATINGS: 1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
WPL Secured Long-Term Debt AA AA AA AA AA
Unsecured Long-Term Debt N/A A+ A+ A+ A+
Corporate Credit Rating 41 AA AA- AA- AA- AA-
Business Profile 41 2 4 4 4 4
Outlook 41 wtch/neg wtch/neg Stable Stable Negative
IES Utilities Secured Long-Term Debt A A A+ A+ A+
Unsecured Long-Term Debt A A A A A
Subordinated Debt N/A N?A A- A- A-
Corporate Credit Rating 41 A A A+ A+ A+
Business Profile 41 4 5 5 5 5
Outlook 41 wtch/pos wtch/pos Stable Stable Negative
IPC Secured Long-Term Debt A+ A+ A+ A+ A+
Unsecured Long-Term Debt A A A A A
Corporate Credit Rating 41 A+ A+ A+ A+ A+
Business Profile 41 4 5 5 5 5
Outlook 41 Stable Stable Stable Stable Negative
Alliant Energy N/A N/A N/A A+ A+
DEBT RATINGS
(as of 12/31)
-------------------------------- ---------------------
MOODY'S RATINGS: 1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
WPL Secured Long-Term Debt Aa2 Aa2 Aa2 Aa2 Aa2
Unsecured Long-Term Debt N/A Aa3 Aa3 Aa3 Aa3
Issuer Rating 42 Aa3 Aa3 Aa3 Aa3 Aa3
IES Utilities Secured Long-Term Debt A2 A2 A2 A2 A2
Unsecured Long-Term Debt A3 A3 A3 A3 A2
Junior Subordinated Debt Baa1 Baa1 Baa1 Baa1 Baa1
Issuer Rating 42 A3 A3 A3 A3 A3
IPC Secured Long-Term Debt A1 A1 A1 A1 A1
Unsecured Long-Term Debt A2 A2 A2 not rated NR
Issuer Rating 42 A2 A2 A2 A2 A2
In addition, the rating agencies consider the Utility Subsidiaries as
having relatively favorable competitive positions.
As of December 31, 2000, Standard & Poor's ranked the preferred stock of
------------------------
41 Given by Standard & Poor's only.
42 Given by Moody's Investors Service only.
-41-
WPL "A," IES Utilities "A-" and IPC "A-." As of the same date, Moody's ranked
the preferred stock of WPL "aa3," and IPC "a2." IES Utilities' preferred stock
is not rated by Moody's.
(6) Ability to Finance Capital Needs. It is projected that
--------------------------------
the Utility Subsidiaries will have the ability to fund their operations and
their construction expenditures primarily from internal sources of cash and from
sales of senior securities for at least the next five years, and therefore, will
not be dependent upon Alliant Energy for any material amounts of additional
equity capital. Moreover, there is ongoing evidence that the Utility
Subsidiaries can access capital markets as needed.
Utility Subsidiaries - Construction Expenditures: actual (1998-2000)
expenditures and projected 2001-2002 expenditures, including allowance for funds
used during construction ($ million):
1998 Actual 1999 Actual 2000 Actual 2001 Estimate 2002 Estimate
----------- ----------- ----------- ------------- -------------
Construction Expenditures
(including AFDUC)
--------------------------------
IES $115,371 $107,342 $121,116 $127,000 $117,000
IPC 36,619 45,363 50,634 61,000 56,000
WPL 117,143 131,915 131,640 166,000 181,000
-------- -------- -------- -------- --------
Total $269,133 $284,620 $303,390 $354,000 $354,000
======== ======== ======== ======== ========
Cash Flow from Operations
--------------------------------
IES $206,113 161,703 $210,988 $181,978 $171,612
IPC 63,006 65,660 56,758 77,782 74,760
WPL 177,321 162,980 175,849 176,754 195,140
-------- -------- -------- -------- --------
Total $446,440 $390,343 $443,595 436,514 441,512
======== ======== ======== ======== ========
Percent Internally Generated 43
--------------------------------
IES 179% 151% 174% 143% 147%
IPC 172 145% 112% 128% 134%
WPL 151 124% 134% 107% 108%
---- ---- ---- ---- ----
Total 166% 137% 146% 123% 125%
3.3.4 Financing Plan for New Investments; Merrill Lynch Letter.
--------------------------------------------------------
The additional investments in new EWG and FUCO projects are necessary for
Alliant Energy to successfully grow and are expected to create significant value
for Alliant Energy and its shareholders.
Alliant Energy has developed an extensive financial model addressing the
manner in which Alliant Energy expects to finance the additional investments and
their likely impacts on the company. Alliant Energy expects to finance the
additional investments through a combination of internal cash returns generated
from the investments and external capital sources such as unsecured debt and
long-term debt and Common Stock. The model's results indicate that the
investments will enhance Alliant Energy's financial performance without
adversely affecting the Utility Subsidiaries' financial integrity.
------------------------
43 Cash Flow from operations divided by construction expenditures.
-42-
Alliant Energy's model necessarily incorporates various operating
assumptions. Among the most important are that: (i) appropriate investment
opportunities exist for Alliant Energy to make additional investments in amounts
up to the proposed EWG/FUCO Investment Limitation over the next five years; (ii)
the incremental investments are consistent with Alliant Energy's corporate
strategy and current risk tolerance levels; (iii) the expected investment
returns are reasonable; (iv) Alliant Energy is able to obtain debt and equity
financing at acceptable rates and terms; and (v) Alliant Energy will finance the
additional investments on an aggregate basis (including through growth in
retained earnings) such that the consolidated capital structure would be
comprised of 40 percent debt and 60 percent equity. A copy of the assumptions
and financial forecasts comprising Alliant Energy's financing plan for the
incremental investments, on which Merrill Lynch based its credit review
discussed below, is submitted as an exhibit to this application.
Alliant Energy asked Merrill Lynch to review its financing plan and
assumptions and undertake an analysis of the expected credit impacts resulting
from new recourse investments in EWGs and FUCOs in an amount covered by the
proposed EWG/FUCO Investment Limit. On April 5, 2001, Merrill Lynch delivered a
letter to Alliant Energy expressing its view to the effect that, as of such
date, and based upon the assumptions made, matters considered and limits of
review set forth in such letter, the credit ratings of Alliant Energy and its
Rated Subsidiaries (as defined below), would not be expected to fall below
investment grade due to investments in EWGs and FUCOs covered by the proposed
EWG/FUCO Investment Limit over the next five years, as outlined in this
Application or Declaration .
A copy of the Merrill Lynch letter, which sets forth the assumptions made,
matters considered and certain limitations on the scope of review undertaken by
Merrill Lynch, is included as Exhibit I to this Application or Declaration . The
Merrill Lynch letter was intended for the use and benefit of Alliant Energy's
board of directors and senior management team, was directed only to the expected
credit ratings impact of the financing of the additional investments in EWGs and
FUCOs covered by the proposed EWG/FUCO Investment Limit from a financial point
of view to Alliant Energy, did not address the merits of the underlying decision
by Alliant Energy to make any such additional investments and, therefore, does
not constitute a recommendation to make such investments. The summary of the
Merrill Lynch letter set forth herein is qualified in its entirety by reference
to the full text of the Merrill Lynch letter, which is submitted herewith.
Alliant Energy requested that Merrill Lynch advise it as to the expected
impact of the financing of an incremental $1.5 billion in EWGs and FUCOs over
and above its "aggregate investment" as of December 31, 2000, considered from a
financial point of view, on the credit ratings of Alliant Energy and of WP&L,
IPC and IES (the "Rated Subsidiaries").44 In arriving at the conclusions set
------------------------
44 Alliant Energy's "aggregate investment" as of December 31, 2000, was
approximately $254 million. The EWG/FUCO Investment Limitation proposed herein
($1.75 billion) is approximately equal to the sum of Alliant Energy's "aggregate
investment" as of December 31, 2000, plus $1.5 billion.
-43-
forth below, and in the performance of the requested credit analysis, Merrill
Lynch has, among other things:
1. Reviewed certain publicly available business and financial information
relating to the Company and the Rated Subsidiaries that Merrill Lynch
deemed to be relevant;
2. Reviewed certain information, including financial forecasts, provided
by the Company to Merrill Lynch as representative of the proposed
incremental $1.5 billion of EWG and FUCO investments;
3. Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and
prospects of Alliant Energy and the Rated Subsidiaries;
4. Reviewed certain information, including Alliant Energy's financial
forecasts, relating to the business, earnings, cash flow, capital
expenditures, financing plan, timing and sources and uses of funds in
each case associated with the proposed ..incremental $1.5 billion of
EWG and FUCO investments;
5. Conducted discussions with members of senior management of Alliant
Energy concerning the matters described in clauses 1 through 4 above,
as well as the business and prospects of the company before and after
giving effect to the implementation, if any, of the proposed
incremental $1.5 billion of EWG and FUCO investments;
6. Reviewed credit ratios of Alliant Energy in five distinct scenarios or
"Cases" (as defined below) and compared them with financial targets
for utility companies as published by Standard & Poor's; and
7. Reviewed such other financial studies and analyses and took into
account such other matters as Merrill Lynch deemed necessary,
including Merrill Lynch's assessment of general economic, market and
monetary conditions.
In arriving at the conclusions set forth below, Merrill Lynch assumed and
relied on the accuracy and completeness of all information supplied or otherwise
made available to Merrill Lynch, discussed with or reviewed by or for Merrill
Lynch. Merrill Lynch was supplied with all of the information regarding the
incremental $1.5 billion of EWG and FUCO investments by Alliant Energy; it is
Merrill Lynch's understanding that the incremental $1.5 billion of EWG and FUCO
investments have not been identified and that the company expects the financial
information, including financial forecasts, to be representative of the actual
incremental $1.5 billion of EWG and FUCO investments. Merrill Lynch does not
assume any responsibility for independently verifying any information provided
by Alliant Energy or for undertaking an independent evaluation or appraisal of
any of the assets or liabilities of Alliant Energy and was not furnished with
any such evaluation or appraisal. In addition, Merrill Lynch did not assume any
obligation to conduct any physical inspection of the properties or facilities of
-44-
Alliant Energy or its subsidiaries. With respect to the financial forecast
information furnished to or discussed with Merrill Lynch by Alliant Energy and
regarding the incremental $1.5 billion of EWG and FUCO investments, Merrill
Lynch assumed that they were reasonably prepared and reflected the best
currently available estimates and judgments of Alliant Energy.
Merrill Lynch's view was necessarily based upon market, economic and other
conditions as they exist and can be evaluated on, and the information made
available to Merrill Lynch as of the date hereof, including the assumptions
contained in Alliant Energy's financial forecasts provided to Merrill Lynch and
outlined in this application.
On the basis of this information and the assumptions outlined above,
Merrill Lynch reviewed integrated financial models provided by Alliant Energy
and performed analyses on the financial information derived from such models in
a manner that Merrill Lynch believes is consistent with the sensitivity analyses
performed by statistical rating agencies. In this connection, Merrill Lynch
reviewed the following key credit ratios for Alliant Energy and its consolidated
subsidiaries for the years 2000 to 2005, which Merrill Lynch understands to be
those commonly reviewed by credit rating agencies: (i) funds from operations to
net interest coverage; (ii) funds from operations to average total debt; (iii)
pre-tax interest coverage; (iv) total debt to total capitalization; and (v)
return on common equity. The foregoing credit ratios were calculated under five
distinct scenarios: (i) the Base Case, where Alliant Energy makes non-regulated
investments from 2000 - 2005, consistent with the company's previous expansion
plans; (ii) the Base Case + China Case, where the company makes additional
non-regulated investments in China over a five-yea period; (iii) the Base Case +
Brazil Case, where the company makes additional non-regulated investments in
Brazil over a five-year period; (iv) the Base Case + Genco Case, in which the
company makes additional non-regulated investments in merchant and other
wholesale generation projects over a five-year period; and (v) the Growth Case,
which assumes that the company makes all of the non-regulated investments
reflected in prior three cases (Base Case + China Case, Base Case + Brazil Case,
and Base Case + Genco Case).
The matters set forth above do not purport to be a complete description of
the analyses performed by Merrill Lynch in preparing its letter. The preparation
of a credit analysis is a complex process and is not necessarily susceptible to
partial or summary description. Merrill Lynch believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all such factors and analyses,
could create a misleading view of the process underlying the analyses set forth
in Merrill Lynch's letter. The matters considered by Merrill Lynch in its
analyses were based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond Alliant Energy's and
Merrill Lynch's control and involve the application of complex methodologies and
educated judgment. Any estimates contained in Merrill Lynch's analyses are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. There can be no
assurance that Alliant Energy's non-regulated investments will actually realize
the returns contemplated by such assumptions or that market conditions will
-45-
accommodate the company's strategy. This is not a prediction as to what an
independent rating agency may do under any particular circumstances.
On the basis of and subject to the foregoing, and considering the results
of the credit ratio analysis outlined above, Merrill Lynch was of the view, as
of April 5, 2001, that the credit ratings of Alliant Energy and its Rated
Subsidiaries would not be expected to fall below investment grade due to the
non-regulated investments being made as outlined in this Application or
Declaration.
3.3.5 Protection of Utility Subsidiaries; State Commission Letters.
------------------------------------------------------------
Alliant Energy's request for an increase in its "aggregate investment" limit in
EWG's and FUCOs will not have an "adverse impact" on any of the Utility
Subsidiaries, their respective customers, or the ability of the four State
commissions having jurisdiction over the Utility Subsidiaries to protect such
Utility Subsidiaries or such customers.
The conclusion that the Utility Subsidiaries and their customers will not
be adversely impacted by increased levels of investment by Alliant Energy in
Projects is well supported by (i) the insulation of the Utility Subsidiaries and
their customers from potential direct adverse effects of investments in EWGs and
FUCOs; (ii) analyses of the Utility Subsidiaries' financial integrity (including
ability of the Utility Subsidiaries to issue senior securities); and (iii) the
proven effectiveness of state commission oversight together with the affirmation
by the State commissions of Iowa, Illinois, Minnesota and Wisconsin that they
have authority and resources, and will exercise such authority, to protect
ratepayers in their respective states from any adverse impact.
(a) Insulation From Risk. All of Alliant Energy's investments in
--------------------
EWGs and FUCOs are, and in the future will remain, segregated from the Utility
Subsidiaries. Thus, the Utility Subsidiaries are, and are currently expected in
the future to remain, insulated from the direct effects of investments by
Alliant Energy in EWGs and FUCOs. Specifically, no Utility Subsidiary has
extended credit or sold or pledged its assets, directly or indirectly, to any
EWG or FUCO. Further, any losses that may be incurred by such EWGs and FUCOs
would have no effect on domestic rates of any Utility Subsidiary. In this
regard, Alliant Energy represents that it will not seek recovery through higher
rates to the Utility Subsidiaries' utility customers in order to compensate
Alliant Energy for any possible losses that it or the Utility Subsidiaries may
sustain on investments in EWGs and FUCOs or for any inadequate returns on such
investments.
Moreover, to the extent that there may be indirect impacts on the Utility
Subsidiaries from EWG and FUCO investments through effects on Alliant Energy's
capital costs, the state commissions regulating the Utility Subsidiaries can set
the cost of capital for electric utilities by comparison with selected groups of
domestic utilities, which may exclude any utilities with adverse impacts due to
EWGs and FUCOs. Therefore, the states have the authority and the means available
to prevent any adverse effects on the cost of capital due to investments in EWGs
and FUCOs from being passed on to ratepayers.
Alliant Energy has complied and will continue to comply with the
requirements of Rule 53(a)(3) regarding the limitation on the use of Utility
Subsidiary employees in connection with providing services to EWGs and FUCOs.
Increased levels of investment in EWGs and FUCOs are not anticipated to have any
-46-
impact on utilization of Utility Subsidiary employees. The Utility Subsidiaries
have not and will not increase staffing levels to support the operations of EWGs
and FUCOs. Alliant Energy and the Utility Subsidiaries expect that project
development, management, and home office support functions for EWGs and FUCOs
will largely be performed by AER and certain of its subsidiaries, and by outside
consultants (e.g., engineers, investment advisors, accountants, and attorneys)
engaged by AER. Accordingly, need for the support of personnel provided by the
Utility Subsidiaries has been, and is expected to continue to be, modest.
Finally, Alliant Energy has complied and will continue to comply with the
other conditions of Rule 53(a) providing specific protections to customers of
the Utility Subsidiaries and their state commissions, in particular, the
requirements of Rule 53(a)(1) regarding the preparation and making available of
books and records and financial reports regarding EWGs and FUCOs, and the
requirements of Rule 53(a)(4) regarding filing of copies of applications and
reports with other regulatory commissions.
(b) State Utility Commission Letters. In the opinion of Alliant
--------------------------------
Energy and the Utility Subsidiaries, the four state commissions having
jurisdiction over the Utility Subsidiaries, namely, Wisconsin, Iowa, Illinois
and Minnesota (collectively, "State Commissions") are able to protect utility
customers within their respective states. The State Commissions have not raised
objections to Alliant Energy's current investments in EWGs or FUCOs.45 To
provide the commission with added assurances, representatives of Alliant Energy
and the applicable Utility Subsidiary intend to meet with each of the State
Commissions and request each to provide the Commission with a letter certifying
that such State Commission has the authority and resources necessary to protect
ratepayers from any adverse effect or costs that might result from Alliant
Energy's investments in EWGs and FUCOs. These letters will be filed by an
amendment.
3.3.6 Alliant Energy's Request is Supported by Other Commission
---------------------------------------------------------
Orders under Rule 53(c). In the past, the Commission has routinely issued orders
-----------------------
under Rule 53(c) permitting other registered holding companies to finance
investments in EWGs and FUCOs in amounts up to 100% of "consolidated retained
earnings."46 Moreover, in a series of recent orders, the Commission has
authorized "aggregate investment" limits that are well above 100% of
"consolidated retained earnings." National Grid Group, plc, for example, was
authorized in early 2000 as part of its acquisition of New England Electric
System to make additional investments in EWGs and FUCOs that would increase its
------------------------
45 Section 33(c)(2) provides that the State commission may make
recommendations to the Commission regarding a registered holding company's
relationship to FUCOs, and that the Commission shall "reasonably and fully
consider" such recommendations.
46 See The Southern Company, Holding Co. Act Release No. 26501 (Apr. 1,
--- --------------------
1996), Central and South West Corporation, Holding Co. Act Release No. 26653
----------------------------------
(Jan. 24, 1997), GPU, Inc., Holding Co. Act Release No. 26779 (Nov. 17, 1997),
---------
Cinergy Corporation, Holding Co. Act Release No. 26848 (Mar. 23, 1998), American
------------------- --------
Electric Power Company, Inc., Holding Co. Act Release No. 26864 (Apr. 27, 1998),
----------------------------
New Century Energies, Inc., Holding Co. Act Release No. 26892 (Feb. 26, 1999),
--------------------------
and Entergy Corporation, Holding Co. Act Release No. 27184 (Mar. 15, 2000).
-------------------
-47-
"aggregate investment" to approximately 252% of its pro forma "consolidated
retained earnings."47 That was followed by an order issued to Cinergy Corp.
that authorized an increase in Cinergy's "aggregate investment" limit to an
amount that is equal to the sum of its "aggregate investment" in EWGs and FUCOs
at that time plus $1 billion, or about 154% of Cinergy's "consolidated retained
earnings."48 Cinergy has pending an application which, if granted, would permit
Cinergy to have an "aggregate investment" equal to 100% of its "consolidated
retained earnings" plus $2 billion, or an amount that would equal about 274% of
Cinergy's current "consolidated retained earnings." Exelon Corp., which has no
history of investments in EWGs or FUCOs, was authorized in November 2000 to
invest up to $2 billion in EWGs and FUCOs, which was equivalent to about 264% of
Exelon's "reclassified" pro forma "consolidated retained earnings," an amount
that was subsequently increased to $4 billion.49 Dominion Resources has filed
an application requesting approval for an "aggregate investment" limit equal to
100% of "consolidated retained earnings" plus $8 billion, which appears to be
several times higher than Dominion's consolidated retained earnings.50
In each of these cases, the applicants compared the amount of the proposed
"aggregate investment" limit to other relevant financial statistics, such as
consolidated capitalization, consolidated net utility plant, total consolidated
capitalization and the total market value of the applicant's common stock.
An "aggregate investment" in EWGs and FUCOs in an amount equal to $1.75
billion would be equal to about 160% of Alliant Energy's average "consolidated
retained earnings" as of March 31, 2001 ($1.093 billion), which is a
substantially lower percentage than was found acceptable in National Grid and
-------------
the first Exelon decision, and about the same percentage found acceptable in
------
Cinergy. Moreover, that level of "aggregate investment" would represent a
-------
prudent commitment of capital for a company the size of Alliant Energy, based on
various key financial ratios at December 31, 2000. For example, this level of
"aggregate investment" would be equal to only 37.7% of Alliant Energy's total
consolidated capitalization (including short-term debt and current maturities of
long-term debt ($4.654 billion), 55.7% of consolidated net utility plant ($3.148
billion), 26.0% of total consolidated assets ($6.734 billion), and 69.6% of the
market value of Alliant Energy's outstanding common stock ($2.519 billion) as of
December 31, 2000. The following table shows how these percentages would compare
to the same percentages given by Exelon in its application and to the
percentages for Cinergy and Dominion, as reflected in each company's pending
------------------------
47 See The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar.
--- ---------------------------
15, 2000).
48 See Cinergy Corporation, Holding Co. Act Release No. 27190 (June 23,
--- -------------------
2000).
49 See Exelon Corporation, Holding Co. Act Release No. 27266 (Nov. 2, 2000)
--- ------------------
(authorizing aggregate investment limit of $2 billion); and Exelon Corporation,
------------------
Holding Co. Act Release No. 27296 (Dec. 8, 2000) (authorizing aggregate
investment limit of $4 billion).
50 File No. 70-9555. Dominion explains in its application that, due to the
application of purchase method accounting in connection with its acquisition of
Consolidated Natural Gas Company, its consolidated retained earnings do not
reflect the retained earnings of Consolidated before the acquisition.
-48-
Rule 53(c) application and/or as calculated based on financial information
available for the year ended December 31, 2000.
Proposed Investments in EWGs and FUCOs
as a percentage of:
---------------- ----------------- ------------------- ---------------------------
Consolidated Consolidated Net Total Consolidated Market Value of Outstanding
Company Capitalization Utility Plant Assets Common Stock
------------------------ ---------------- ----------------- ------------------- ---------------------------
Exelon Corp. 18.9% 23.3% 11.1% 28.2%
Cinergy Corp. (pending) 46% 47.5% 25.6% 56%
Dominion (pending) 42.0% 60.8% 30.7% 54.6%
Alliant Energy 37.7% 55.7% 26.0% 69.6%
ITEM 4. REGULATORY APPROVALS.
--------------------
No state commission, and no federal commission, other than the Commission,
has jurisdiction over the proposed transactions.
ITEM 5. PROCEDURE.
---------
The Commission is requested to publish a notice under Rule 23 with respect
to the filing of this Application or Declaration as soon as practicable. The
Applicants request that the Commission's Order be issued as soon as the rules
allow, and in any event not later than December 15, 2001, and that there should
not be a 30-day waiting period between issuance of the Commission's order and
the date on which the order is to become effective. The Applicants hereby waive
a recommended decision by a hearing officer or any other responsible officer of
the Commission and consents that the Division of Investment Management may
assist in the preparation of the Commission's decision and/or order, unless the
Division opposes the matters proposed herein.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
A. EXHIBITS.
--------
A None.
B None.
C-1 Registration Statement of Alliant Energy on Form S-8 (Long-Term
Equity Incentive Plan), as filed December 15, 1999, in File No.
333-92783. (Incorporated herein by reference).
C-2 Registration Statement of Interstate Energy Corporation (now
Alliant Energy) on Form S-8 (401(k) Savings Plan), as filed
February 23, 1998, in File No. 333-46735. (Incorporated herein by
reference).
-49-
C-3 Registration Statement of WPL Holdings, Inc. (now Alliant Energy)
on Form S-3, as filed May 7, 1997, in File No. 333-26627.
(Incorporated herein by reference).
D None.
E None.
F Opinion of Counsel. (To be filed by amendment).
G Proposed Form of Federal Register Notice.
H-1 Letter to the Commission from the Public Service Commission of
Wisconsin. (To be filed by amendment).
H-2 Letter to the Commission from the Iowa Utilities Board. (To be
filed by amendment).
H-3 Letter to the Commission from the Minnesota Public Utilities
Commission. (To be filed by amendment).
H-4 Letter to the Commission from the Illinois Commerce Commission.
(To be filed by amendment).
I Merrill Lynch Letter. (To be filed by amendment).
B. FINANCIAL STATEMENTS.
--------------------
1.1 Balance Sheet of Alliant Energy and consolidated subsidiaries, as
of December 31, 2000 (incorporated by reference to the Annual
Report on Form 10-K of Alliant Energy for the year ended December
31, 2000) (File No. 1-9894).
1.2 Statements of Income of Alliant Energy and consolidated
subsidiaries for the twelve months ended December 31, 2000
(incorporated by reference to the Annual Report on Form 10-K of
Alliant Energy for the period ended December 31, 2000) (File No.
1-9894).
1.3 Balance Sheet of Alliant Energy and consolidated subsidiaries, as
of March 31, 2001 (incorporated by reference to the Quarterly
Report on Form 10-Q of Alliant Energy for the year ended March
31, 2001) (File No. 1-9894).
1.4 Statements of Income of Alliant Energy and consolidated
subsidiaries for the three months ended March 31, 2001
(incorporated by reference to the Quarterly Report on Form 10-Q
-50-
of Alliant Energy for the period ended March 31, 2001) (File No.
1-9894).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
None of the matters that are the subject of this Application or Declaration
involve a "major federal action" nor do they "significantly affect the quality
of the human environment" as those terms are used in section 102(2)(C) of the
National Environmental Policy Act. The transaction that is the subject of this
Application or Declaration will not result in changes in the operation of the
Applicants that will have an impact on the environment. The Applicants are not
aware of any federal agency that has prepared or is preparing an environmental
impact statement with respect to the transactions that are the subject of this
Application or Declaration.
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, as amended, the undersigned companies have duly caused this Application or
Declaration filed herein to be signed on their behalf by the undersigned
thereunto duly authorized.
ALLIANT ENERGY CORPORATION
ALLIANT ENERGY RESOURCES, INC.
By: /s/ Edward M. Gleason
---------------------
Name: Edward M. Gleason .
Title: Vice President - Treasurer
and Corporate Secretary
Date: May 18, 2001
-51-