UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
INFORMATIONProxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. )
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¨ Soliciting Material Pursuant to Section240.14a-12 WISCONSIN POWER & LIGHT COMPANY ----------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) ----------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant)(S) 240.14a-11(c) or (S) 240.14a-12Wisconsin Power and Light Company
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SEC 1913 (3-99)
Y O U R V O T E I S I M P O R T A N T
Wisconsin
Power and Light
Company
NOTICEOF 2004 ANNUAL MEETING
PROXY STATEMENTAND
2003 ANNUAL REPORT
WISCONSIN POWER AND LIGHT COMPANY
Proxy Statement Notice of 2001 Annual Meeting and 2000 Annual ReportWISCONSIN POWER AND LIGHT COMPANYANNUAL MEETING OF SHAREOWNERS
DATE: MAY 30, 2001Wednesday, June 2, 2004
TIME: 1:3:00
PM, CENTRAL DAYLIGHT SAVINGS TIMEp.m., Central Daylight TimeLOCATION: WISCONSIN POWER AND LIGHT COMPANY ROOM 1A 222 WEST WASHINGTON AVENUE MADISON, WISCONSINWisconsin Power and Light Company
Nile Conference Room
4902 North Biltmore Lane
Madison, Wis.
SHAREOWNER INFORMATION NUMBERS
LOCAL CALLS (MADISON, WI AREA) ............ 608-252-3110 TOLL FREE NUMBER .......................... 800-356-5343Wisconsin Power and Light Company 222 West Washington Avenue P. O. Box 2568 Madison, WI 53701-2568 Phone: 608-252-3110
LOCAL CALLS (Madison, Wis. Area)
608-458-3110 TOLL FREE NUMBER 800-356-5343
Wisconsin Power and Light Company 4902 North Biltmore Lane P. O. Box 2568 Madison, WI 53701-2568 Phone: 608.458.3110 NOTICE OF ANNUAL MEETING AND PROXY STATEMENT
Dear Wisconsin Power and Light Company Shareowner:
On Wednesday,
May 30, 2001,June 2, 2004, Wisconsin Power and Light Company (the"Company"“Company”) will hold its20012004 Annual Meeting of Shareowners at theofficeoffices ofthe Company, 222 West Washington Avenue,Alliant Energy Corporation, 4902 North Biltmore Lane, Nile Meeting Room,1A,Madison,Wisconsin.Wis. The meeting will begin at1:3:00 p.m. Central DaylightSavingsTime.Only the sole common
stockshareowner, Alliant Energy Corporation, and preferred shareowners who owned stock at the close of business on April3, 200113, 2004, may vote at this meeting. All shareowners are requested to be present at the meeting in person or by proxy so that a quorum may beassured.ensured. At the meeting, theCompany'sCompany’s shareowners will:1. Elect four directors for terms expiring at the 2004 Annual Meeting of Shareowners; and 2. Attend to any other business properly presented at the meeting.
1. Elect one director for a term expiring at the 2006 Annual Meeting of Shareowners and four directors for terms expiring at the 2007 Annual Meeting of Shareowners; and
2. Attend to any other business properly presented at the meeting. The Board of Directors of the Company presently knows of no other business to come before the meeting.
Please sign and return the enclosed proxy card as soon as possible.
The
2000Company’s 2003 Annual Reportof the Companyappears as AppendixAB to thisProxy Statement.proxy statement. TheProxy Statementproxy statement and Annual Report have been combined into a single document to improve the effectiveness of our financial communication and to reduce costs, although the Annual Report does not constitute a part of theProxy Statement.proxy statement.Any Wisconsin Power and Light Company preferred shareowner who desires to receive a copy of the Alliant Energy Corporation
20002003 Annual Report to Shareowners may do so by calling the Shareowner Services Department at the Shareowner InformationNumberNumbers shown at the front of this proxy statement or writing to the Company at the address shown above.By Order of the Board of Directors /s/ Edward M. Gleason EDWARD M. GLEASON Vice President--Treasurer and Corporate Secretary
By Order of the Board of Directors, F. J. Buri Corporate Secretary Dated and mailed on or about April
10, 200116, 2004 2
1. Q: WHY AMWhy am I RECEIVING THESE MATERIALS? Areceiving these materials?
A: The Board of Directors of Wisconsin Power and Light Company (the "Company"“Company”) is providing these proxy materials to you in connection with theCompany'sCompany’s Annual Meeting of Shareowners (the"Annual Meeting"“Annual Meeting”), which will take place on Wednesday,May 30, 2001.June 2, 2004. As a shareowner, you are invited to attend the Annual Meeting and are entitled to and requested to vote on theproposalproposals described in this proxy statement.
2. Q: WHAT IS WISCONSIN POWER AND LIGHT COMPANY AND HOW DOES IT RELATE TO ALLIANT ENERGY CORPORATION?What is Wisconsin Power and Light Company and how does it relate to Alliant Energy Corporation?
A: The Company is a subsidiary of Alliant Energy Corporation ("AEC"(“AEC”), a public utility holding company whose other primary first tier subsidiaries includeIES Utilities Inc. ("IES"),Interstate Power and Light Company("IPC"(“IP&L”), Alliant Energy Resources, Inc.("AER"(“AER”) and Alliant Energy Corporate Services, Inc.("(“Alliant Energy CorporateServices"Services”).
3. Q: WHO IS ENTITLED TO VOTE AT THE ANNUAL MEETING?Who is entitled to vote at the Annual Meeting?
A: Only shareowners of record at the close of business on April 3, 200113, 2004, are entitled to vote at the Annual Meeting. As of the record date, 13,236,601 shares of common stock (owned solely by AEC) and 1,049,225 shares of preferred stock, in seven series (representing 599,630 votes), were issued and outstanding. Each share of Company common stockis entitled to one vote per share. Each share ofand Company preferred stock, with the exception of the 6.50% Series, is entitled to one vote per share. The 6.50%Seriesseries of Company preferred stock is entitled to1/4¼ vote per share.
4. Q: WHAT MAYWhat may I VOTE ON AT THE ANNUAL MEETING?vote on at the Annual Meeting?
A: You may vote on the election of fourfive nominees to serve on theCompany'sCompany’s Board of Directors, one nominee for a term expiring at the 2006 Annual Meeting of Shareowners and four nominees for terms expiring at the 2007 Annual Meeting ofShareowners inShareowners.
5. Q: How does the year 2004. 5. Q: HOW DOES THE BOARD OF DIRECTORS RECOMMENDBoard of Directors recommend IVOTE?vote?
A: The Board of Directors recommends that you vote your shares FOR each of the listed director nominees.
6. Q: HOW CANHow can I VOTE MY SHARES?vote my shares?
A: You may vote either in person at the Annual Meeting or by appointing a proxy. If you desire to appoint a proxy, then sign and date each proxy card you receive and return it in the envelope provided. Appointing a proxy will not affect your right to vote your shares if you attend the Annual Meeting and desire to vote in person.
7. Q: HOW ARE VOTES COUNTED?How are votes counted?
A: In the election of directors, you may vote FOR all of the director nominees or your vote may be WITHHELD with respect to one or more nominees. If you return your signed proxy card but do not mark the boxes showing how you wish to vote, your shares will be voted FOR all listed director nominees.
8. Q: CANCan I CHANGE MY VOTE?change my vote?
A: You have the right to revoke your proxy at any time before the Annual Meeting by: - poviding written notice to the Corporate Secretary of the Company and voting in person at the Annual Meeting; or - appointingProviding written notice to the Corporate Secretary of the Company and voting in person at the Annual Meeting; orAppointing a new proxy prior to the start of the Annual Meeting.Attendance at the Annual Meeting will not cause your previously appointed proxy to be revoked unless you specifically so request in writing.
9. Q: What does it mean if I get more than one proxy prior to the start of the Annual Meeting. Attendance at the Annual Meeting will not cause your previously appointed proxy to be revoked unless you specifically so request in writing.card?3
9. Q: WHAT SHARES ARE INCLUDED ON THE PROXY CARD(S)?A: Your proxy card(s) covers all of your shares of the Company's preferred stock. 10. Q: WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY CARD? A:If your shares are registered differently and are in more than one account, then you will receive more than one proxy card. Be sure to vote all of your accounts to ensure that all of your shares are voted. The Company encourages you to have all accounts registered in the same name and address (whenever possible). You can accomplish this by contacting the Company'sCompany’s Shareowner Services Department at the Shareowner Information Numbers shown at the front of this proxy statement.11.
10. Q: WHO MAY ATTEND THE ANNUAL MEETING?Who may attend the Annual Meeting?
A: All shareowners who owned shares of the Company'sCompany’s common and preferred stock on April3, 200113, 2004, may attend the Annual Meeting.You may indicate
11. Q: How will voting on the reservation portion of the enclosed proxy card your intention to attend the Annual Meeting and return it with your signed proxy. 12. Q: HOW WILL VOTING ON ANY OTHER BUSINESS BE CONDUCTED?any other business be conducted?
A: The Board of Directors of the Company does not know of any business to be considered at the 2001Annual Meeting other than the election offourdirectors. If any other business is properly presented at the Annual Meeting, yoursignedproxycardgivesauthority to William D. Harvey,Barbara J. Swan, theCompany'sCompany’s President, andEdward M. Gleason,F. J. Buri, theCompany's Vice President-Treasurer andCompany’s Corporate Secretary, authority to vote on such mattersinat their discretion.13.
12. Q: WHERE AND WHEN WILLWhere and when will I BE ABLE TO FIND THE RESULTS OF THE VOTING?be able to find the results of the voting?
A: The results of the voting will be announced at the Annual Meeting. You may also call ourthe Company’s Shareowner Services Department at the Shareowner Information Numbers shown at the front of this proxy statement for the results. The Company will also publish the final results in itsQuar- terlyQuarterly Report on Form 10-Q for the second quarter of20012004 to be filed with the Securities and ExchangeCommission. 14.Commission (“SEC”).
13. Q: WHEN ARE SHAREOWNER PROPOSALS FOR THE 2002 ANNUAL MEETING DUE?When are shareowner proposals for the 2005 Annual Meeting due?
A: All shareowner proposals to be considered for inclusion in the Company'sCompany’s proxy statement for the20022005 Annual Meeting must be received at the principal office of the Company byDecember 11, 2001.Dec. 18, 2004. In addition, any shareowner who intends to present a proposal from the floor at the20022005 Annual Meeting must submit the proposal in writing to the Corporate Secretary of the Company no later thanFebruary 24, 2002. 15.March 2, 2005.
14. Q: WHO ARE THE INDEPENDENT AUDITORS OF THE COMPANY AND HOW ARE THEY APPOINTED? A: The Board of Directors has appointed Arthur Andersen LLP asWho are the Company'sindependent auditorsfor 2001. Arthur Andersenof the Company and how are they appointed?
A: Deloitte & Touche LLP acted as independent auditorsaudited the financial statements of the Company for theCompany in 2000.year ended Dec. 31, 2003. Representatives ofArthur AndersenDeloitte & Touche LLP are not expected to be present at the meeting.16.The Audit Committee of the Board of Directors expects to appoint the Company’s independent auditors for 2004 later in the year.
On June 12, 2002, the Board of Directors of the Company, upon the recommendation of the Audit Committee, dismissed Arthur Andersen LLP as the Company’s independent auditors and contracted with Deloitte & Touche LLP to serve as its independent auditors for 2002. Arthur Andersen’s reports on the Company’s consolidated financial statements for the year ended Dec. 31, 2001 did not contain an adverse opinion, disclaimer of opinion or qualification or modification as to uncertainty, audit scope or accounting principles. During the year ended Dec. 31, 2001 and the subsequent interim period, there were no disagreements between the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of the accounting firm, would have caused it to make a reference to the subject matter of such disagreements in connection with its reports.
15. Q: WHO WILL BEAR THE COST OF SOLICITING PROXIES FOR THE ANNUAL MEETING? A.Who will bear the cost of soliciting proxies for the Annual Meeting and how will these proxies be solicited?
A: The Company will pay the cost of preparing, assembling, printing, mailing and distributing these proxy materials. In addition to the mailing of these proxy materials, the solicitation of proxies or votes may be made in person, by telephone or by electronic communication by the Company'sCompany’s officers and employees who will not receive any additional compensation for these solicitation activities. The Company will paytobanks, brokers, nominees and other fiduciariestheirreasonable charges and expenses incurred in forwarding the proxy materials to their principals.17. Q: HOW CAN
16. Q. How can I OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORMobtain a copy of the Company’s Annual Report on Form 10-K?
A: The Company will furnish without charge, to each shareowner who is entitled to vote at the Annual Meeting and who makes a written request, a copy of the Company'sCompany’s Annual Report on Form 10-K (without exhibits) as filed with theSecurities and Exchange Commission.SEC. Written requests for the Form 10-K should be mailed to the Corporate Secretary of the Company at the address on the first page of this proxy statement.4
17. Q: If more than one shareowner lives in my household, how can I obtain an extra copy of the Company’s 2003 Annual Report and this proxy statement?
A: Pursuant to the rules of the SEC, services that deliver the Company’s communications to shareowners that hold their stock through a bank, broker or other holder of record may deliver to multiple shareowners sharing the same address a single copy of the Company’s 2003 Annual Report and proxy statement. Upon written or oral request, the Company will mail a separate copy of the 2003 Annual Report and/or proxy statement to any shareowner at a shared address to which a single copy of each document was delivered. You may notify the Company of your request by calling or writing the Company’s Shareowner Services Department at the Shareowner Information Numbers shown at the front of this proxy statement or at the address of the Company shown on the first page of this proxy statement. At the Annual Meeting, one director will be elected for a term expiring in 2006 and four directors will be elected
this yearfor terms expiring in2004.2007. The nominees for election asselectedrecommended by the Nominating and Governance Committeeofand selected by theCompany'sBoard of Directors are: Ann K. Newhall, for a term expiring in 2006; and Michael L. Bennett, Jack B. Evans,Joyce L. Hanes,David A. Perdue and Judith D.Pyle.Pyle for terms expiring in 2007. Each of the nominees is currently serving as a director of the Company. Each person elected as a director will serve until the Annual Meeting of Shareowners of the Company in20042006 or 2007, as the case may be, or until his or her successor has been duly elected and qualified.Directors will be elected by a plurality of the votes cast at the meeting (assuming a quorum is present). Consequently,any shares not voted at the meeting
whether by abstention or otherwise,will have no effect on the election of directors. The proxies solicited may be voted for a substitute nominee or nominees if any of the nominees are unable to serve, or for good reason will not serve, a contingency not now anticipated.Brief biographies of the director nominees and continuing directors follow. These biographies include their age (as of
DecemberDec. 31,2000)2003), an account of their business experience and the names ofpublicly-heldpublicly held and certain other corporations of which they are also directors. Except as otherwise indicated, each nominee and continuing director has been engaged in his or her present occupation for at least the past five years.NOMINEES
JACK B. EVANSANN K. NEWHALL Director Since [PHOTO] 20002003Age 52 Nominated Term Expires in 20042006Ms. Newhall is Executive Vice President, Chief Operating Officer, Secretary and a Director of Rural Cellular Corporation, a cellular communications corporation, located in Alexandria, Minn. She has served as Executive Vice President and Chief Operating Officer since August 2000, as Secretary since February 2000 and as a Director since August 1999. Prior to assuming her current positions, she served as Senior Vice President and General Counsel from 1999 to 2000. She was previously a shareholder and President of the Moss & Barnett law firm in Minneapolis, Minn. Ms. Newhall has served as a Director of AEC, IP&L and AER since August 2003. She was originally recommended as a nominee in 2003 by a third-party search firm acting on behalf of the Nominating and Governance Committee.
MICHAEL L. BENNETT Director Since 2003 Age 50 Nominated Term Expires in 2007 Mr. Bennett has served as President and Chief Executive Officer of Terra Industries Inc., an international producer of nitrogen products and methanol ingredients headquartered in Sioux City, Iowa, since April 2001. From 1997 to 2001, he was Executive Vice President and Chief Operating Officer of Terra Industries Inc. He also serves as Chairman of the Board for Terra Nitrogen Corp., a subsidiary of Terra Industries Inc. Mr. Bennett has served as a Director of AEC, IP&L and AER since August 2003. He was originally recommended as a nominee in 2003 by a third-party search firm acting on behalf of the Nominating and Governance Committee.
JACK B. EVANS Director Since 2000 Age 55 Nominated Term Expires in 2007 Mr. Evans is a
directorDirector and since 1996 has served as President of The Hall-Perrine Foundation, a private philanthropic corporation in Cedar Rapids, Iowa. Previously, Mr. Evans was President and Chief Operating Officer of SCI Financial Group, Inc., a regional financial services firm. Mr. Evans is adirectorDirector of Gazette Communications,the Federal Reserve Bank of Chicago andNuveen Institutional Advisory Corp., and Vice Chairman and adirectorDirector of United Fire and Casualty Company. Mr. Evans has served as adirectorDirector of AEC,IES, IPCIP&L (or predecessor companies) and AER since 2000. Mr. Evans is Chairperson of the Audit Committee.JOYCE L. HANES
DAVID A. PERDUE Director Since [PHOTO] 19982001Age 6854Nominated Term Expires in 2004 Ms. Hanes has been a director of Midwest Wholesale, Inc., a products wholesaler in Mason City, Iowa, since 1970 and2007Mr. Perdue is Chairman of the Board
since December 1997, having previouslyand Chief Executive Officer of Dollar General Corporation, a retail sales organization headquartered in Goodlettsville, Tenn. He was elected Chief Executive Officer and a Director in April 2003 and elected Chairman of the Board in June 2003. From July 2002 to March 2003, he was Chairman and Chief Executive Officer of Pillowtex Corporation, a textile manufacturing company located in Kannapolis, N.C. From 1998 to 2002, he was employed by Reebok International Limited, where he served asChairmanPresident of the Reebok Brand from19862000 to1988. She is a director of Iowa Student Loan Liquidity Corp. Ms. Hanes2002. Mr. Perdue has served as adirector of IPC since 1982 andDirector of AEC,IESIP&L (or predecessor companies) and AER since1998. DAVID A. PERDUE2001.
JUDITH D. PYLE Director Since [PHOTO] 20011994Age 5160Nominated Term Expires in 2004 Mr. Perdue2007Ms. Pyle is President of
the Reebok brand for Reebok International Limited,Judith Dion Pyle and Associates, adesigner, distributor and marketer of footwear, apparel and sports equipment,financial services company located inCanton, Massachusetts.Middleton, Wis. Prior tojoining Reebokassuming her current position in1998, Mr. Perdue was Senior Vice President of Operations at Haggar, Inc. He was appointed to serve2003, she served asa director of the Company, AEC, IES, IPC and AER as of February 15, 2001.5
JUDITH D. PYLE Director Since [PHOTO] 1994 Age 57 Nominated Term Expires in 2004 Ms. Pyle isVice Chair of The Pyle Group, a financial services company located in Madison,Wisconsin. Prior to assuming her current position, Ms. PyleWis. She previously served as Vice Chairman and Senior Vice President of Corporate Marketing of Rayovac Corporation,(aa battery and lighting productsmanufacturer),manufacturer located in Madison,Wisconsin.Wis. In addition, Ms. Pyle is Vice Chairman of Georgette Klinger, Inc., and adirectorDirector of Uniek, Inc. Ms. Pyle has served as adirectorDirector of AEC and AER since 1992 and ofIES and IPCIP&L (or predecessor companies) since 1998. Ms. Pyle istheChairperson of the Compensation and Personnel Committee.THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTEThe Board of Directors unanimously recommends a vote FOR
ALL NOMINEES FOR ELECTION AS DIRECTORS.all nominees for election as directors.CONTINUING DIRECTORS
ALAN B. ARENDS Director Since [PHOTO] 1998 Age 67 Term Expires in 2002 Mr. Arends is Chairman of the Board of Directors of Alliance Benefit Group Financial Services Corp., Albert Lea, Minnesota, an employee benefits company that he founded in 1983. He has served as a director of IPC since 1993 and of AEC, IES and AER since 1998.ERROLL B. DAVIS, JR. Director Since [PHOTO]1984Age 5659Term Expires in 2003 Mr. Davis has been President of AEC since January 1990 and was elected President and Chief Executive Officer of AEC in July 1990. He was elected Chairman of the Board of AEC in April 2000.2006Mr. Davis joined the Company in
August1978 andwas electedserved as President of the Companyin July 1987.from 1987 until 1998. He was electedPresident andChief Executive Officer of the Company inAugust1988. Mr. Davis has served as Chairman of the Board of the Company and AEC since 2000 and as Chief Executive Officer of AEC since 1990. He also served as President of AEC from 1990 through 2003. He has also served as Chief Executive Officer of AERIESandIPCIP&L (or predecessor companies) since 1998. He is a member of the Boards of Directors of BPAmocop.l.c.,; PPG Industries, Inc.,; Electric Power ResearchInstituteInstitute; and the Edison Electric Institute. Mr. Davis has served as adirectorDirector of AEC since 1982, of AER since 1988 and ofIES and IPC since 1998. LEE LIU Director Since [PHOTO] 1998 Age 67 Term Expires in 2003 Mr. Liu served as Chairman of the Board of the Company and AEC from April 1998 until April 2000 in accordance with the terms of his employment agreement. He was Chairman of the Board and Chief Executive Officer of IES Industries Inc. (a predecessor to AEC) and Chairman of the Board and Chief Executive Officer of IES prior to 1998. Mr. Liu held a number of professional, management and executive positions after joining Iowa Electric Light and Power Company (later known as IES) in 1957. He is a director of Principal Financial Group and Eastman Chemical Company. Mr. Liu has served as a director of IESIP&L (or predecessor companies) since1981 and of AEC, IPC and AER since1998.6
KATHARINE C. LYALL Director Since [PHOTO]1986Age 5962Term Expires in 20022005Ms. Lyall is President of the University of Wisconsin System in Madison,
Wisconsin.Wis. In addition to her administrative position, she is a professor of economics at theUniversity.University of Wisconsin-Madison. Ms. Lyall has announced that she will retire as President of the University of Wisconsin System no later than Aug. 31, 2004. She serves on the Boards of Directors ofthe Kemper National Insurance Companies,M&I Corporation and the Carnegie Foundation for the Advancement of Teaching. Ms. Lyall has served as adirectorDirector of AEC and AER since 1994 and ofIES and IPCIP&L (or predecessor companies) since 1998.ROBERT W. SCHLUTZ
SINGLETON B. McALLISTER Director Since 1998 [PHOTO]2001Age 6451Term Expires in 20032005Ms. McAllister has been a partner in the public law and policy strategies group of the Washington, D.C. law firm office of Sonnenschein, Nath & Rosenthal, LLP, since 2003. She previously was a partner at Patton Boggs LLP, a Washington, D.C. law firm, from 2001 to 2003. From 1996 until 2001, Ms. McAllister was General Counsel for the United States Agency for International Development. She was also a partner at Reed, Smith, Shaw and McClay where she specialized in government relations and corporate law. Ms. McAllister has served as a Director of AEC, IP&L (or predecessor companies) and AER since 2001.
ROBERT W. SCHLUTZ Director Since 1998 Age 67 Term Expires in 2006 Mr. Schlutz is President of Schlutz Enterprises, a diversified farming and retailing business in Columbus Junction, Iowa. Mr. Schlutz has served as a
directorDirector ofIESIP&L (or predecessor companies) since 1989 and of AECIPCand AER since 1998. Mr. Schlutz istheChairperson of the Environmental, Nuclear, Health and Safety Committee.WAYNE H. STOPPELMOOR
ANTHONY R. WEILER Director Since 1998 [PHOTO]Age 6667Term Expires in 2003 Mr. Stoppelmoor served as Vice Chairman of the Board of the Company and AEC from April 1998 until April 2000 in accordance with the terms of his consulting agreement. Prior to 1998, he was Chairman, President and Chief Executive Officer of IPC. He retired as President of IPC in 1996 and as Chief Executive Officer in 1997. Mr. Stoppelmoor has served as a director of IPC since 1986 and of AEC, IES and AER since 1998. ANTHONY R. WEILER Director Since 1998 [PHOTO] Age 64 Term Expires in 20022005Mr. Weiler is Chairman and President of A. R. Weiler Co. LLC, a
consultantconsulting firm forseveralhome furnishings organizations.Prior to assuming his current position Mr. Weiler had beenHe was previously a Senior Vice Presidentfor Heilig- Meyersof Heilig-Meyers Company, a national furniture retailer headquartered in Richmond,Virginia. Mr. WeilerVa. He is adirectorDirector of the Retail Home Furnishings Foundation. Mr. Weiler has served as adirectorDirector ofIESIP&L (or predecessor companies) since 1979 and of AECIPCand AER since 1998. Mr. Weiler istheChairperson of the Nominating and Governance Committee.RETIRING DIRECTORS Rockne G. Flowers will turn 70 years of age on April 6, 2001. Milton E. Neshek turned 70 years of age on October 26, 2000. Pursuant to the mandatory retirement provisions in the Company's Bylaws, Mr. Flowers and Mr. Neshek will retire as directors on the date of the Annual Meeting. In addition, Arnold M. Nemirow has indicated his intent, as a result of his other time commitments, to resign as a director effective as of the Annual Meeting. The Company expresses its most sincere thanks and appreciation to Messrs. Flowers, Neshek and Nemirow for their many years of service to the Company and for their valued advice and guidance. 7MEETINGS AND COMMITTEES OF THE BOARD
The
fullBoard of Directorsof the Company considers all major decisions of the Company. However, the Boardhasestablishedstanding Audit; Compensation and Personnel; Environmental, Nuclear, Health and Safety; Nominating and Governance; and Capital Approval Committees. The Board of Directors has adopted formal written charters for each of the Audit, Compensation and Personnel, and Nominating and Governance Committees,so that certain important matters can be addressed in more depth than may be possible in a full Board meeting.which are available on the Company’s website atwww.alliantenergy.com/investors under the “Corporate Governance” caption. The following is a description of each of these committees:AUDIT COMMITTEEAudit Committee
The Audit Committee held
twoseven joint (the Company, AEC, IP&L and AER) meetings in2000.2003. The Committee currently consists of J. B. Evans (Chair), A. B. Arends,K. C. Lyall, J.M. L. Bennett, S. B. McAllister and D.PyleA. Perdue. Each of the members of the Committee is independent as defined by the New York Stock Exchange (“NYSE”) listing standards andM. E. Neshek.SEC rules. The Board of Directors has determined that Mr. Evans and two additional Audit Committee members qualify as “audit committee financial experts” as defined by SEC rules. The Audit Committeerecommends tois responsible for assisting Board oversight of: (1) theBoardintegrity of the Company’s financial statements; (2) the Company’s compliance with legal and regulatory requirements; (3) the independent auditors’ qualifications and independence; and (4) the performance of the Company’s internal audit function and independent auditors. The Audit Committee is also directly responsible for the appointment,of independent auditors; reviews the reportsretention, termination, compensation andcommentsoversight of the Company’s independentauditors; reviews the activitiesauditors.Compensation and
reports of the Company's internal audit staff; and, in response to the reports and comments of both the independent auditors and internal auditors, recommends to the Board any action which thePersonnel Committeeconsiders appropriate. COMPENSATION AND PERSONNEL COMMITTEEThe Compensation and Personnel Committee held three joint meetings in
2000.2003. The Committee currently consists of J. D. Pyle (Chair), A. B. Arends,J.M. L. Bennett, S. B.Evans, A. M. NemirowMcAllister and D. A. Perdue. Each of the members of the Committee is independent as defined by the NYSE listing standards. This Committeesetsreviews and approves corporate goals and objectives relevant to Chief Executive Officer (“CEO”) compensation, evaluates the CEO’s performance and determines and approves as a committee or together with the other independent directors the CEO’s compensation level based on the evaluation of the CEO’s performance. In addition, the Committee has responsibilities with respect to the Company’s executive compensationpolicy; administers the Company's Long-Term Equity Incentive Plan; reviews the performance ofandapproves salaries for officersincentive programs andcertain othermanagementpersonnel; reviews and recommends to the Board new or changed employee benefit plans; reviews major provisions of negotiated employment contracts; and reviews human resourcedevelopment programs.ENVIRONMENTAL, NUCLEAR, HEALTH AND SAFETY COMMITTEEEnvironmental, Nuclear, Health and Safety Committee
The Environmental, Nuclear, Health and Safety Committee held two joint meetings in
2000.2003. The Committee currently consists of R. W. Schlutz (Chair), K. C. Lyall, A. K. Newhall, J.L. Hanes, M. E. Neshek,D.A. PerduePyle and A. R. Weiler. TheCommittee'sCommittee’s responsibilities are to review environmental policy and planning issues of interest to the Company, including matters involving the Company before environmental regulatory agencies and compliance with air, water and waste regulations. In addition, the Committee reviews policies and operating issues related to theCompany'sCompany’s nuclear generating station investments, including planning and funding for decommissioning of the plants. The Committee also reviews health and safety related policies, activities and operational issues as they affect employees, customers and the general public.NOMINATING AND GOVERNANCE COMMITTEENominating and Governance Committee
The Nominating and Governance Committee held
threefour joint meetings in2000.2003. The Committee currently consists of A. R. Weiler (Chair),R. G. Flowers, J. L. Hanes,K. C. Lyall, A. K. Newhall and R. W. Schlutz.This Committee's responsibilities include recommending and nominating newEach of the members of theBoard; recommending committee assignmentsCommittee is independent as defined by the NYSE listing standards. This Committee’s responsibilities are to: (1) identify individuals qualified to become Board members, consistent with the criteria approved by the Board, andcommittee chairpersons; evaluating overallto recommend nominees for directorships to be filled by the Boardeffectiveness; preparing an annual reportor shareowners; (2) identify and recommend Board members qualified to serve onChief Executive Officer effectiveness;Board committees; (3) develop andconsideringrecommend to the Board a set of corporate governance principles; (4) oversee the evaluation of the Board anddevelopingthe Company’s management; and (5) advise the Board with respect to other matters relating to corporate governance of the Company.In making recommendations to the Company’s Board of Directors of nominees to serve as directors, the Nominating and Governance Committee will examine each director nominee on a case-by-case basis regardless of who recommended the nominee and take into account all factors it considers appropriate, which may include strength of character, mature judgment, career specialization, relevant technical skills or financial acumen, diversity of viewpoint and industry knowledge. However, the Committee believes that, to be recommended as a director nominee, each candidate must:
display the highest personal and professional ethics, integrity and values.have the ability to exercise sound business judgment.be highly accomplished in his or her respective field, with superior credentials and recognition and broad experience at the administrative and/or policy-making level in business, government, education, technology or public interest.have relevant expertise and experience, and be able to offer advice and guidance to the CEO based on that expertise and experience.be independent of any particular constituency, be able to represent all shareowners of the Company and be committed to enhancing long-term shareowner value; andhave sufficient time available to devote to activities of the Board of Directorsonand to enhance his or her knowledge of the Company’s business.The Committee also believes the following qualities or skills are necessary for one or more directors to possess:
At least one director should have the requisite experience and expertise to be designated as an “audit committee financial expert” as defined by the applicable rules of the SEC.Directors generally should be active or former senior executive officers of public companies or leaders of major and/or complex organizations, including commercial, governmental, educational and othercorporate governance issues. In nominating persons for election tonon-profit institutions.Directors should be selected so that the Boardtheof Directors is a diverse body, with diversity reflecting age, gender, race and political experience.The Nominating and Governance Committee will consider nominees recommended by
shareowners.shareowners in accordance with the Company’s Nominating and Governance Committee Charter and the Corporate Governance Principles.The Company and the Committee maintain a file of recommended potential director nominees which isreviewed at the time a search for a new director needs to be performed. To assist the Committee in its identification of qualified director candidates, the Committee may engage an outside search firm.
Any shareowner wishing to make a recommendation should write to the Corporate Secretary of the Company
whoand include appropriate biographical information concerning each proposed nominee. The Corporate Secretary will forward all recommendations to the Committee. TheCompany'sCompany’s Bylaws alsoprovideset forth certain requirements forshareowner nominations ofshareowners wishing to nominate director candidates directly forelection as directors.consideration by shareowners. These provisions require such nominations to be made pursuant to timely notice (as specified in the Bylaws) in writing to the Corporate Secretary of the Company.CAPITAL APPROVAL COMMITTEECapital Approval Committee
The Capital Approval Committee held
notwo meetings in2000.2003. The Committee currently8consists of M. L. Bennett, J. B. Evans J. D. Pyleand A. R. Weiler. Mr. Davis is the Chair and a non-voting member of this Committee. The purpose of this Committee isthe evaluation ofto evaluate certain investment proposals where(i)(1) an iterative bidding process is required, and/or(ii)(2) the required timelines for such a proposal would not permit the proposal to be brought before a regular meeting of the Board of Directors and/or a special meeting of the full Board of Directors is not practical or merited.The Board of Directors held
sevensix joint meetings during2000.2003. Each director attended at least80%75% of the aggregate number of meetings of the Board and Board committees on which he or she served.The Board and each committee
conductsconduct performance evaluations annually to determineitstheir effectiveness andsuggestssuggest improvements for consideration and implementation. In addition, the Compensation and Personnel Committee evaluates Mr.Davis'Davis’ performance asChiefCEO on an annual basis.Board members are not expected to attend the Company’s Annual Meeting of Shareowners. In 2003, none of the Company’s directors attended the Annual Meeting of Shareowners.
Corporate Governance Principles
The Board of Directors has adopted Corporate Governance Principles that, in conjunction with the Board committee charters, establish processes and procedures to help ensure effective and responsive governance by the Board. The Corporate Governance Principles are available on the Company’s website atwww.alliantenergy.com/investors under the “Corporate Governance” caption.
The Board of Directors has adopted certain categorical standards of independence to assist it in making determinations of director independence under the NYSE listing standards. These categorical standards appear as Appendix A of the Corporate Governance Principles. Based on these standards, the Board of Directors has affirmatively determined by resolution that each of the Company’s directors (other than Mr. Davis, the Company’s Chairman and CEO) has no material relationship with the Company and, therefore, is independent in accordance with the NYSE listing standards. The Board of Directors will regularly review the continuing independence of the directors.
The Corporate Governance Principles provide that at least 75% of the members of the Board of Directors must be independent directors under the NYSE listing standards. The Audit, Nominating and Governance and Compensation and Personnel Committees must consist of all independent directors.
Lead Independent Director; Executive
OfficerSessionsThe Corporate Governance Principles provide that the chairperson of the Nominating and Governance Committee shall be the designated “Lead Independent Director” or“Presiding Independent Director” and will preside as the chair at meetings or executive sessions of the independent directors. As the Chairperson of the Nominating and Governance Committee, Mr. Weiler is
also evaluated bycurrently designated as the Lead Independent Director. At every regular joint meeting of the Board of Directors, the independent directors meet in executive session with no member of Company management present.Communication with Directors
Shareowners and other interested parties may communicate with the full Board, non-management directors as a group or individual directors, including the Presiding Independent Director, by providing such communication in writing to the Company’s Corporate Secretary, who will post such communications directly to the Company’s Board of Directors’ website.
Ethical and Legal Compliance Policy
The Company has adopted a Code of Ethics that applies to all employees, including its CEO, Chief Operating Officer, Chief Financial Officer and Chief Accounting Officer, as well as its Board of Directors. The Company makes its Code of Ethics available free of charge on
an annual basis. 9the Company’s website, atwww.alliantenergy.com/investors, under the “Corporate Governance” caption and such Code of Ethics is available in print to any shareowner who requests it from the Company’s Corporate Secretary. The Company intends to satisfy the disclosure requirements under Item 10 of Form 8-K regarding amendments to, or waivers from, the Code of Ethics by posting such information on its website address stated above under the Corporate Governance caption. No retainer fees are paid to
Messrs.Mr. Davisand Stoppelmoorfortheirhis service on theCompany'sCompany’s Board of Directors. In2000,2003, all other directors (the"non-employee directors"“non-employee directors”), each of whomserveserved on the Boards of the Company, AEC,IES, IPCIP&L and AER, received an annual retainerof $45,000for service on allfivefour Boards consisting of$25,000$47,137 in cash. Of this cashand $20,000 inamount, each Director voluntarily elected to use $17,137 to purchase 1,000 shares of AEC commonstock.stock pursuant to AEC’s Shareowner Direct Plan or to defer such amount through the Company Stock account in the AEC Director’s Deferred Compensation Plan. Travel expenses are paid for each meeting day attended.Beginning in 2001,In 2004, the
annualnon-employee directors will each receive a cash retainerfor each non-employee director has been changedof $70,000. The Directors are encouraged to$25,000 inmake a voluntary election to use not less than 50% of this cashand 1,000retainer to purchase shares of AEC common stockfor service on all five Boards. The directors have the optionpursuant toreceive each amount outright (in cash and stock), to have each amount deposited to theirAEC’s Shareowner Direct Planaccountor toa director'sdefer through the AEC Stock account in AEC’s Director’s Deferred CompensationAccount or any combination thereof. Effective April 21, 2001, Mr. Stoppelmoor's existing consulting contractPlan. In 2004, the Chairperson of the Audit Committee willexpirereceive an additional $7,500 cash retainer andhethe Chairpersons of the Nominating and Governance; Compensation and Personnel; and Environmental, Nuclear, Health, and Safety Committees willbe eligible toreceivecompensation as a non-employee director on a prorated basis for 2001. DIRECTOR'S DEFERRED COMPENSATION PLANan additional $5,000 cash retainer.Director’s Deferred Compensation Plan
Under the
Director'sAEC Director’s Deferred Compensation Plan, directors may elect to defer all or part of their retainer fee. Amounts deposited to a Deferred Compensation Interest Account receive an annual return based on the A-Utility Bond Rate with a minimum return no less than the prime interest rate published inTHE WALL STREET JOURNAL.Thebalance credited to a director's Deferred Compensation Interest Account as of any date willWall Street Journal, provided that the return may not bethe accumulated deferred cash compensation and interest that are credited to such account as of such date.greater than 12% or less than 6%. Amounts deposited to an AEC Stock Accountwhether the cash portion or the stock portion of the director's compensation,are treated as though invested in the common stock of AEC and will be credited with dividends,and those dividendswhich will be treated as if reinvested.Annually, theThe director may elect that the AEC Deferred Compensation Accountwillbe paid in a lump sum or in annual installments for up toten10 yearseitherbeginning ina designatedthe year of oruponone, two or three tax years after retirement or resignation from the Board.DIRECTOR'S CHARITABLE AWARD PROGRAMDirector’s Charitable Award Program
AEC maintains a
Director'sDirector’s Charitable Award Program for the members of its Board of Directors beginning afterthree yearsthreeyears of service. The purpose of the Program is to recognize the interest of the Company and its directors in supporting worthy institutions and to enhance theCompany'sCompany’s director benefit program so that the Company is able to continue to attract and retain directors of the highest caliber. Under the Program, when a director dies, the Company and/or AEC will donate a total of $500,000 to one qualified charitable organization or divide that amount among a maximum offourfive qualified charitable organizations selected by the individual director. The individual director derives no financial benefit from the Program. All deductions for charitable contributions are taken by the Company or AEC, and the donations are funded by the Company or AEC through life insurance policies on the directors. Over the life of the Program, all costs of donations and premiums on the life insurance policies, including a return of theCompany'sCompany’s or AEC’s cost of funds, will be recovered through life insurance proceeds on the directors. The Program, over its life, will not result in any material cost to the Company or AEC.DIRECTOR'S LIFE INSURANCE PROGRAMDirector’s Life Insurance Program
AEC maintains a split-dollar
Director'sDirector’s Life Insurance Program for non-employee directors, beginning after three years of service, which provides a maximum death benefit of $500,000 to each eligible director. Under the split-dollar arrangement, directors are provided a death benefit only and do not have any interest in the cash value of the policies. The Life Insurance Program is structured to pay a portion of the total death benefit to AEC to reimburse AEC for all costs of the program, including a return on its funds. The Life Insurance Program, over its life, will not result in any material cost to AEC. The imputed income allocations reported for each director in20002003 under theDirector'sDirector’s Life Insurance Program were as follows: A. B.Arends--$50, R. G. Flowers--Arends—$50, J.L. Hanes--B. Evans—$50,2, K. C.Lyall--Lyall—$389, A. M. Nemirow--$50, 10M. E. Neshek--$975,488, J. D.Pyle--Pyle—$50,24, W. H. Stoppelmoor—$987 and A. R.Weiler--Weiler—$50.PENSION ARRANGEMENTS Prior to April 1998, Mr. Liu participated in the IES Industries Inc. retirement plan, which plan has been transferred to Alliant Energy Corporate Services. Mr. Liu's benefits under the plan have been "grandfathered" to reflect the benefit plan formula in effect in April 1998. See "Retirement and Employee Benefit Plans--IES Industries Pension Plan." Alliant Energy Corporate Services also maintains a non-qualified Supplemental Retirement Plan ("SRP") for eligible former officers of IES Industries Inc. Mr. Liu participates in the SRP. The SRP generally provides for payment of supplemental retirement benefits equal to 75% of the officer's base salary in effect at the date of retirement, reduced by benefits receivable under the qualified retirement plan, for a period not to exceed 15 years following the date of retirement. The SRP also provides for certain death benefits to be paid to the officer's designated beneficiary and benefits if an officer becomes disabled under the terms of the qualified retirement plan. CERTAIN AGREEMENTS Mr. Liu had an employment agreement with AEC, pursuant to which Mr. Liu served as Chairman ofIn November 2003, the Board of
AEC until April 2000. At that time, Mr. Liu retired as ChairmanDirectors terminated this insurance benefit for any director not already having the required vesting period ofthe Boardthree years ofAEC, although he continues to serve as a director. Mr. Liu's employment agreement provided that he receive an annual base salary of not less than $400,000, supplemental retirement benefitsservice andthe opportunity to earn short-term and long-term incentive compensation (including stock options, restricted stock and other long-term incentive compensation). Mr. Stoppelmoor entered into a three-year consulting arrangement with AEC in April 1998. Under the terms of his consulting arrangement, Mr. Stoppelmoor received an annual fee of $324,500 during each of the first two years and is currently receiving a fee of $200,000forthe third year of the consulting period. Mr. Stoppelmoor is also entitled to participate in compensation plans equivalent to those provided AEC's Chairman of the Board and Chief Executive Officer during the consulting period, subject to approval by the Compensation and Personnel Committee of the Board. Mr. Stoppelmoor is eligible to participate in the Director's Charitable Award Program and the Director's Life Insurance Program. His consulting arrangement provides that he will not be eligible to receive any other compensation otherwise payable to directors of AEC until the end of the three-year term on April 21, 2001. At that time, Mr. Stoppelmoor will be eligible to receive the annual director's compensation. 11all new directors. OWNERSHIP OF VOTING SECURITIES
All of the common stock of the Company is held by AEC. None of the directors or officers of the Company own any shares of the Company’s preferred stock. Listed in the following table are the number of shares of
AEC'sAEC’s common stock beneficially owned by (1) the executive officers listed in the Summary Compensation Table,and(2) all director nominees and directors ofAEC andthe Company,as well as the number of shares owned byand(3) all director nominees, directors and executive officers as a group as ofMarch 1, 2001.Feb. 27, 2004. The directors and executive officers of AEC and the Company as a group ownedless than one percent1.4% of the outstanding shares of AEC common stock on that date.ToNo individual director or officer owned more than 1% of theCompany's knowledge, no shareowner beneficially owned five percent or moreoutstanding shares ofAEC's outstandingAEC common stockas of December 31, 2000.on that date.
SHARES BENEFICIALLYNAME OF BENEFICIAL OWNER
OWNED(1) - ------------------------ --------------EXECUTIVES(2)SHARES
BENEFICIALLY
OWNED(1)Executives(2) William D.
Harvey......................................... 75,815(3)Harvey167,236 (3) Eliot G.
Protsch.......................................... 77,715(3)Protsch173,717 (3) Barbara J. Swan
125,590 (3) Pamela J. Wegner
124,470 (3) Thomas M.
Walker.......................................... 36,893(3) Pamela J. Wegner.......................................... 47,573(3) DIRECTOR NOMINEESWalker1,478 (5) Director Nominees Ann K. Newhall
4,116 (3) Michael L. Bennett
1,803 (3) Jack B.
Evans............................................. 32,402(3) Joyce L. Hanes............................................ 6,250(3)Evans39,028 (3) David A.
Perdue........................................... 1,556(3)Perdue5,558 (3) Judith D.
Pyle............................................ 9,440 DIRECTORSPyle13,605 Directors Alan B.
Arends............................................ 4,629(3)Arends10,867 (3)(4) Erroll B. Davis,
Jr....................................... 202,015(3) Rockne G. Flowers......................................... 16,423(4) Lee Liu................................................... 192,773(3)Jr.556,063 (3) Katharine C.
Lyall........................................ 11,706 Arnold M. Nemirow......................................... 14,564(3)(4) Milton E. Neshek.......................................... 14,742(3)(4)Lyall15,941 Singleton B. McAllister
4,251 (3) Robert W.
Schlutz......................................... 6,729(3)Schlutz.18,990 (3) Wayne H.
Stoppelmoor...................................... 128,162(3)Stoppelmoor14,851 (4) Anthony R.
Weiler......................................... 6,962(3)Weiler17,022 (3) All Executives and Directors as a Group
3421 people, including those listed
above................... 1,263,893(3)above.1,572,716 (3) (1)
(1) Total shares of AEC common stock outstanding as of Feb. 27, 2004, were 111,274,686.
(2) Stock ownership of Mr. Davis is shown with the directors.
(3) Included in the beneficially owned shares shown are indirect ownership interests with shared voting and investment powers: Mr. Davis—8,981, Mr. Evans—2,000, Mr. Weiler—1,389, Mr. Harvey—2,717, and Mr. Protsch—820; shares of common stock held in deferred compensation plans: Mr. Arends—5,605, Mr. Bennett—1,415, Mr. Davis—48,303, Mr. Evans—7,028, Ms. McAllister—1,415, Ms. Newhall—2,829, Mr. Perdue—5,558, Mr. Schlutz—7,959, Mr. Weiler—5,841, Mr. Harvey—27,716, Mr. Protsch—33,879, Ms. Swan—20,698 and Ms. Wegner—18,767 (all executive officers and directors as a group—210,729); and stock options exercisable on or within 60 days of Feb. 27, 2004: Mr. Davis—451,687, Mr. Harvey—112,431, Mr. Protsch—112,431, Ms. Swan—94,633 and Ms. Wegner—89,419 (all executive officers and directors as a group—1,094,060).
(4) Messrs. Arends and Stoppelmoor will retire as directors of the Company at AEC’s Annual Meeting on May 21, 2004.
(5) Mr. Walker resigned from the Company effective Nov. 15, 2003. To the Company’s knowledge, no shareowner beneficially owned 5% or more of any class of the Company’s preferred stock as of
DecemberDec. 31,2000 were 79,010,114. (2) Stock ownership of Mr. Davis is shown with the directors. (3) Included in the beneficially owned shares shown are indirect ownership interests with shared voting and investment powers: Mr. Harvey -- 2,210, Mr. Protsch -- 667, Mr. Davis -- 7,028, Ms. Hanes -- 514, Mr. Liu -- 9,755 and Mr. Weiler -- 1,148; shares of common stock held in deferred 12compensation plans: Mr. Arends -- 1,862, Mr. Evans -- 2,402, Ms. Hanes -- 174, Mr. Nemirow -- 830, Mr. Neshek -- 1,261, Mr. Perdue -- 1,556, Mr. Schlutz -- 1,370, Mr. Weiler -- 1,862, Mr. Davis -- 6,187, Mr. Protsch -- 7,232, Mr. Harvey -- 4,069, Mr. Walker -- 5,166, Ms. Wegner -- 10 (all executive officers and directors as a group -- 35,072); and stock options exercisable on or within 60 days of March 1, 2001: Mr. Davis -- 165,327, Mr. Liu -- 148,849, Mr. Stoppelmoor -- 119,201, Mr. Harvey -- 44,258, Mr. Protsch -- 44,258, Mr. Walker -- 29,097 and Ms. Wegner -- 32,319 (all executive officers and directors as a group -- 865,376). (4) Messrs. Flowers, Nemirow and Neshek will retire as directors at the Annual Meeting. None of the directors or officers of the Company own any shares of the Company's preferred stock.2003. The following table sets forthcertaininformation, as of Dec. 31, 2003, regardingthebeneficial ownershipofby theCompany's preferred stock by eachonly person known tothe CompanyAEC to ownmore than five percentmorethan 5% ofany class of the Company's preferred stock as of December 31, 2000.
SHARES OF 6.2% PREFERRED STOCK PERCENT OF NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS - ------------------------------------------------------------ -------------------- ----------Wellington Management Company, LLP 75 State Street 18,500(1) 12.33% Boston, Massachusetts 02109(1) AsAEC’s common stock. The beneficial ownership set forth below has been reportedtoon a Schedule 13G with the Securities and ExchangeCommission. 13Commission by the beneficial owner.
Amount and Nature of Beneficial Ownership Voting Power Investment Power Aggregate Percent
of Class
Name and Address of Beneficial Owner
Sole Shared Sole Shared Franklin Resources, Inc.
(and certain affiliates)
One Franklin Parkway
San Mateo, CA 944036,451,800 0 6,451,800 0 6,451,800 5.8 % COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth the total compensation paid by
AEC,the Company, AEC andAEC'sAEC’s other subsidiariesfor all services rendered during 2000, 1999 and 1998to the Chief Executive Officer andthe fourcertain othermost highly compensatedexecutive officers of theCompany.Company for all services rendered during 2003, 2002 and 2001.SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------- ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------------------------------------------------------------------- AWARDS PAYOUTS ------------------------------------ SECURITIES RESTRICTED UNDERLYING NAME AND OTHER ANNUAL STOCK OPTIONSName and Principal Position Year Annual Compensation Long-Term Compensation All Other
Compensation(5)
Base
Salary
Bonus Other
Annual
Compensation(1)Awards Payouts Securities
UnderlyingOptions
(Shares)(2)
LTIP
PRINCIPAL POSITION YEAR BASE SALARY BONUS(1) COMPENSATION(2) AWARDS(3) (SHARES)(4) PAYOUTS - ----------------------------------------------------------------------------------------------------------------------Payouts
Erroll B. Davis, Jr.
2000 $637,692 $895,200 $11,875 -- 111,912 $196,711Chairman and Chief
1999 580,000 440,220 12,526 -- 77,657 84,870Executive Officer1998 540,000 -- 13,045 -- 36,752 -- - ----------------------------------------------------------------------------------------------------------------------2003
2002
2001$ 685,000
685,000
683,269$ 0
0
489,364$ 14,949
17,582
11,265151,687
151,687
108,592$ 0
0
359,605$ 45,253
45,485
50,284William D. Harvey
2000 264,615 206,541 4,234 -- 21,063 47,474Chief Operating Officer
2003
2002
2001290,000
282,500
274,6160
0
161,2335,954
7,707
4,06126,642
26,642
21,7980
0
92,20915,562
17,599
42,944Barbara J. Swan
President
1999 254,423 116,535 4,565 $255,004 17,071 31,365 1998 233,846 -- 4,699 -- 11,406 -- - ----------------------------------------------------------------------------------------------------------------------2003
2002
2001265,000
260,000
254,6160
0
134,2580
6,716
3,45924,705
24,705
20,2120
0
84,98514,536
16,356
36,172Eliot G. Protsch
2000 264,615 214,942 1,423 -- 21,063 47,474Chief Financial Officer
2003
2002
2001290,000
282,500
274,6160
0
143,6884,825
6,131
89326,642
26,642
21,7980
0
92,20915,605
16,318
38,372Pamela J. Wegner
Executive Vice
1999 254,423 152,898 1,909 255,004 17,071 31,365President1998 233,846 -- 2,443 -- 11,406 -- - ----------------------------------------------------------------------------------------------------------------------(3)2003
2002
2001275,000
270,000
264,6150
0
124,3127,282
9,263
2,26725,673
25,673
21,0050
0
88,59719,641
19,178
35,371Thomas M. Walker
2000 254,616 190,026 -- -- 20,268 47,474(4)2003
2002
2001267,692
277,500
264,615680,000
0
133,85213,895
17,543
025,673
25,673
21,0050
0
88,59727,669
27,297
6,207
(1) Other Annual Compensation consists of income tax gross-ups for reverse split-dollar life insurance.
(2) Awards made in 2003 were in addition to performance share awards as described in the table entitled “Long-Term Incentive Awards in 2003.”
(3) As of Jan. 28, 2004, Ms. Wegner is no longer an executive officer of the Company but remains an executive officer of AEC.
(4) Mr. Walker, the Company’s former Executive Vice 1999 244,808 148,960 -- -- 16,402 --President1998 229,846 -- 814 -- 11,406 -- &and Chief Financial Officer,- ---------------------------------------------------------------------------------------------------------------------- Pamela J. Wegner 2000 254,608 180,285 2,416 245,017 20,268 27,563 Executive Vice 1999 244,615 145,187 2,569 -- 16,402 19,373 President 1998 193,001 -- 2,689 -- 6,178 -- - ----------------------------------------------------------------------------------------------------------------------- ---------------------- ---------------- NAME AND ALL OTHER PRINCIPAL POSITION COMPENSATION(5) - ---------------------- ----------------Erroll B. Davis, Jr. $52,619 Chairmanresigned from the Company effective Nov. 15, 2003. In connection with such resignation, Mr. Walker entered into a Severance Agreement andChief 53,188 Executive Officer 50,996 - --------------------------------------------------------- William D. Harvey 42,230 President 37,005 21,642 - -------------------------------------------------------------------------- Eliot G. Protsch 38,058 Executive Vice 32,941 President 18,065 - ------------------------------------------------------------------------------------------- Thomas M. Walker 6,166 Executive Vice 6,531 President 15,026 & Chief Financial Officer - ------------------------------------------------------------------------------------------------------------ Pamela J. Wegner 34,377 Executive Vice 29,122 President 17,959 - ----------------------------------------------------------------------------------------------------------------------Release with AEC, pursuant to which he was paid $680,000, which is reflected in the “Bonus” column above. See “Certain Agreements.”(1) No bonuses were paid for 1998. The 1999 bonuses were earned in 1999 and paid in 2000. The 2000 bonuses were earned in 2000 and paid in 2001. (2) Other Annual Compensation for 2000 consists of income tax gross-ups for reverse split-dollar life insurance. (3) In 1999, restricted stock was awarded under the Alliant Energy Corporation Long-Term Equity Incentive Plan as follows: Mr. Harvey--9,294 shares, Mr. Protsch--9,294 shares and Ms. Wegner--8,930 shares. Dividends on shares of restricted stock granted under the Long-Term Equity Incentive Plan are held in escrow and reinvested in shares of common stock pending vesting of the underlying restricted stock. If such restricted stock vests, then the participant is also entitled to receive the common stock into which the dividends on the restricted stock were reinvested. The amounts shown in the table above represent the market value of the restricted stock on the date of grant. The number of shares of restricted stock held by the officers identified in the table and the market value of such shares as of December 31, 2000 were as follows: Mr. Harvey--9,294 shares ($296,293), Mr. Protsch--9,294 shares ($296,293) and Ms. Wegner--8,930 shares ($284,688). 14(4) Awards made in 2000 were in combination with performance share awards as described in the table entitled "Long-Term Incentive Awards in 2000". (5) The table below shows the components of the compensation reflected under this column for 2000:
- ------------------------------------------------------------------------------------------------------------------------------ ERROLL(5) The table below shows the components of the compensation reflected under this column for 2003:
Erroll B. Davis, Jr. William D. Harvey Barbara J. Swan Eliot G. Protsch Pamela J. Wegner Thomas M. Walker A. $ 20,550 $ 6,000 $ 6,000 $ 7,450 $ 7,375 $ 6,000 B. 19,656 8,497 7,576 7,104 10,393 19,830 C. 5,047 1,065 960 1,051 1,873 1,839 Total $ 45,253 $ 15,562 $ 14,536 $ 15,605 $ 19,641 $ 27,669
A. Matching contributions to the AEC 401(k) Savings Plan and Deferred Compensation Plan
B. DAVIS, JR. WILLIAM D. HARVEY ELIOT G. PROTSCH THOMAS M. WALKER PAMELA J. WEGNER - ------------------------------------------------------------------------------------------------------------------------------A. $19,131 $ 7,938 $ 7,938 $ 5,250 $6,373 - ------------------------------------------------------------------------------------------------------------------------------ B. 18,952 8,524 7,956 0 5,332 - ------------------------------------------------------------------------------------------------------------------------------Reverse split-dollar life insurance
C. 12,969 5,345 1,852 0 3,050 - ------------------------------------------------------------------------------------------------------------------------------ D. 1,567 320 209 916 306 - ------------------------------------------------------------------------------------------------------------------------------ E. 0 20,103 19,770 0 19,316 - ------------------------------------------------------------------------------------------------------------------------------ Total $52,619 $42,230 $38,058 $ 6,166 $34,377 - ------------------------------------------------------------------------------------------------------------------------------Life insurance coverage in excess of $50,000 A. Matching contributions to 401(k) Plan and Deferred Compensation Plan B. Split-dollar life insurance reportable income (the split-dollar insurance premiums are calculated using the "foregone interest" method) C. Reverse split-dollar life insurance D. Life insurance coverage in excess of $50,000 E. Dividends on restricted stock 15The following table sets forth certain information concerning
stock options granted during 2000 to the executives named below: STOCK OPTION GRANTS IN 2000
- ------------------------------------------------------------------------------------------------------------------------------ POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM(2) ------------------------------------------------------------- % OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO UNDERLYING EMPLOYEES EXERCISE OR OPTIONS IN FISCAL BASE PRICE EXPIRATION NAME GRANTED(1) YEAR ($/SHARE) DATE 5% 10% - ------------------------------------------------------------------------------------------------------------------------------Erroll B. Davis, Jr. 111,912 12.4% $28.5938 1/18/10 $5,212,861 $8,300,513 - ------------------------------------------------------------------------------------------------------------------------------ William D. Harvey 21,063 2.3% 28.5938 1/18/10 981,115 1,562,243 - ------------------------------------------------------------------------------------------------------------------------------ Eliot G. Protsch 21,063 2.3% 28.5938 1/18/10 981,115 1,562,243 - ------------------------------------------------------------------------------------------------------------------------------ Thomas M. Walker 20,268 2.3% 28.5938 1/18/10 944,083 1,503,278 - ------------------------------------------------------------------------------------------------------------------------------ Pamela J. Wegner 20,268 2.3% 28.5938 1/18/10 944,083 1,503,278 - ------------------------------------------------------------------------------------------------------------------------------(1) Consists of non-qualified stockoptions to purchase shares of AEC common stock grantedpursuantduring 2003 toAEC's Long-Term Equity Incentive Plan. Options were granted on January 19, 2000 and will have a three year vesting schedule with one-third becoming exercisable on January 2, 2001, one-third becoming exercisable on January 2, 2002 andthefinal one-third becoming exercisable on January 2, 2003. Upon a "change in control" of AEC as defined in the Plan or upon retirement, disability or death of the option holder, the options will become immediately exercisable. (2) The hypothetical potential appreciation shown for theexecutives namedexecutives is required by rules of the Securities and Exchange Commission ("SEC"). The amounts shown do not represent the historical or expected future performance of AEC's common stock. In order for the named executives to realize the potential values set forth in the 5% and 10% columns in the table above, the price per share of AEC's common stock would be $46.58 and $74.17, respectively, as of the expiration date of the options. 16below: STOCK OPTION GRANTS IN 2003
Name
Individual Grants Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term(2)Number of
SecuritiesUnderlying
Options
Granted(1)% of Total
Options
Granted to
Employees
in Fiscal
YearExercise
or Base
Price($/Share)
Expiration
Date
5% 10% Erroll B. Davis, Jr.
151,687 15.8 % $ 16.82 1/21/13 $ 1,604,848 $ 4,066,728 William D. Harvey
26,642 2.8 % 16.82 1/21/13 281,872 714,272 Barbara J. Swan
24,705 2.6 % 16.82 1/21/13 261,379 662,341 Eliot G. Protsch
26,642 2.8 % 16.82 1/21/13 281,272 714,272 Pamela J. Wegner
25,673 2.7 % 16.82 1/21/13 271,620 688,293 Thomas M. Walker(3)
25,673 2.7 % 16.82 11/15/03 0 0
(1) Consists of non-qualified stock options to purchase shares of AEC common stock granted pursuant to the AEC Equity Incentive Plan. Options were granted on Jan. 21, 2003 and have a three-year vesting schedule pursuant to which one-third of the options will become exercisable on each of Jan. 2, 2004, Jan. 2, 2005, and Jan. 2, 2006. Upon a “change in control” of AEC as defined in the Plan or upon retirement, disability or death of the option holder, the options will become immediately exercisable.
(2) The hypothetical potential appreciation shown for the named executives is required by rules of the Securities and Exchange Commission (“SEC”). The amounts shown do not represent the historical or expected future performance of AEC’s common stock. In order for the named executives to realize the potential values set forth in the 5% and 10% columns in the table above, the price per share of AEC’s common stock would be $27.40 and $43.63, respectively, as of the expiration date of the options.
(3) Pursuant to his Severance Agreement and Release, Mr. Walker’s stock options were cancelled in November 2003. See “Certain Agreements.” The following table provides information for the executives named below regarding the number and value of exercisable and unexercised options. None of the executives exercised options in fiscal
2000.2003.OPTION VALUES AT
DECEMBERDEC. 31,20002003
Name Number of Securities Underlying
Unexercised Options at Fiscal Year EndValue of Unexercised
In-the-Money Options at Year End(1)
Exercisable Unexercisable Exercisable Unexercisable Erroll B. Davis, Jr.
388,778 289,009 $ 0 $ 1,225,631 William D. Harvey
87,403 51,669 0 215,267 Barbara J. Swan
71,426 47,912 0 199,616 Eliot G. Protsch
87,403 51,669 0 215,267 Pamela J. Wegner
73,859 49,790 0 207,438 Thomas M. Walker
0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------ NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS UNEXERCISED OPTIONS AT FISCAL YEAR END AT YEAR END(1) --------------------------------------------------------------------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------------------------------------------------------------------------------------Erroll B. Davis, Jr. 165,327 100,494 $363,360 $297,362 - ------------------------------------------------------------------------------------------------------------------------------ William D. Harvey 44,258 19,732 95,168 57,607 - ------------------------------------------------------------------------------------------------------------------------------ Eliot G. Protsch 44,258 19,732 95,168 57,607 - ------------------------------------------------------------------------------------------------------------------------------ Thomas M. Walker 29,097 18,979 47,773 55,416 - ------------------------------------------------------------------------------------------------------------------------------ Pamela J. Wegner 32,319 18,979 73,099 55,416 - ------------------------------------------------------------------------------------------------------------------------------(1) Based on the closing per share price of AEC’s common stock on Dec. 31, 2003 of $24.90. (1) Based on the closing per share price of AEC common stock on December 31, 2000 of $31.88. 17The following table provides information concerning long-term incentive awards made to the executives named below in
2000.2003.LONG-TERM INCENTIVE AWARDS IN
20002003
Name Number of
Shares,
Units or
Other Rights
(#)(1)Performance
or Other
Period Until
Maturation
or PayoutEstimated Future Payouts Under
Non-Stock Price-Based PlansThreshold
(#)
Target
(#)
Maximum
(#)
Erroll B. Davis, Jr.
57,135 1/01/06 28,568 57,135 114,270 William D. Harvey
12,108 1/01/06 6,054 12,108 24,216 Barbara J. Swan
11,007 1/01/06 5,504 11,007 22,014 Eliot G. Protsch
12,108 1/01/06 6,054 12,108 24,216 Pamela J. Wegner
11,416 1/01/06 5,708 11,416 22,832 Thomas M. Walker(2)
12,263 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------- ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS PERFORMANCE OR ------------------------------------------------------ NUMBER OF OTHER PERIOD SHARES, UNITS UNTIL OR OTHER RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM NAME (#)(1) PAYOUT (#) (#) (#) - -----------------------------------------------------------------------------------------------------------------------------Erroll B. Davis, Jr. 19,025 1/1/03 9,513 19,025 38,050 - ----------------------------------------------------------------------------------------------------------------------------- William D. Harvey 3,707 1/1/03 1,854 3,707 7,414 - ----------------------------------------------------------------------------------------------------------------------------- Eliot G. Protsch 3,707 1/1/03 1,854 3,707 7,414 - ----------------------------------------------------------------------------------------------------------------------------- Thomas M. Walker 3,567 1/1/03 1,784 3,567 7,134 - ----------------------------------------------------------------------------------------------------------------------------- Pamela J. Wegner 3,567 1/1/03 1,784 3,567 7,134 - -----------------------------------------------------------------------------------------------------------------------------Consists of performance shares awarded under AEC’s Long-Term Equity Incentive Plan. The payout from the performance shares is based on AEC’s three-year Total Shareowner Return (TSR) relative to an investor-owned utility peer group during the three-year performance cycle ending Dec. 31, 2005. Payouts are subject to modification pursuant to a performance multiplier that ranges from 0 to 2.00, and will be made in shares of AEC common stock or a combination of AEC common stock and cash. (1) Consists of performance shares awarded under the AEC's Long-Term Equity Incentive Plan. The payout from the performance shares is based on two equally-weighted performance components: AEC's three-year Total Shareholder Return (TSR) relative to an investor-owned utility peer group, and annualized earnings per share growth versus internally set performance hurdles contained in the Alliant Energy Strategic Plan during the performance cycle ending December 31, 2002. Payouts are subject to modification pursuant to a performance multiplier that ranges from 0 to 2.00, and will be made in shares of AEC common stock or a combination of common stock and cash. 18
(2) Pursuant to his Severance Agreement and Release, Mr. Walker’s awards were cancelled in November 2003. See “Certain Agreements.” CERTAIN AGREEMENTS
AND TRANSACTIONSMr. Davis currently has an employment agreement with AEC, pursuant to which
Mr. Davishe will serve as the Chairman of AEC until the expiration of the term of the agreement on the date of AEC’s 2006 annual meeting of shareowners, but no later than May 30, 2006. In addition, he will serve as the Chief Executive Officer of AECuntil April 21, 2003.during the term of the agreement unless otherwise determined by the Board of Directors. Mr. Davis will alsobegan servingserve as theChairman of AEC effective April 21, 2000. Following the expiration of the initial term of Mr. Davis' employment agreement, his agreement will automatically renew for successive one-year terms, unless either Mr. Davis or AEC gives prior written notice of his or its intent to terminate the agreement. Mr. Davis also serves asChief Executive Officer of the Company and each subsidiary of AEC,andincluding the Company, asa director of such companies duringlong as he holds theterm of his employment agreement.same position for AEC. Pursuant toMr. Davis'the employment agreement,he isMr. Davis will be paid an annual base salary of not less than$450,000. Mr. Davis' current salary under his employment agreement is $685,000.$750,000. Mr. Davis alsohaswill have the opportunity to earn short-term and long-term incentive compensation (including stock options, restricted stock and other long-term incentive compensation) at least equal to other executive officers and receive supplemental retirement benefits (including continued participation in theCompanyAEC Executive Tenure Compensation Plan) and life insurance providing a death benefit of three times his annual salary. For purposes of AEC’s Supplemental Executive Retirement Plan described in detail under “Retirement and Employee Benefit Plans,” (i) Mr. Davis will be deemed to have been paid an annual bonus for 2003 of $595,539 (the amount that he would have received had he been eligible for such a bonus for such year); (ii) if Mr. Davis ceases to be the Chief Executive Officer while remaining the Chairman in 2005 and if the annual bonus for 2005 payable in 2006 is less than the target award for Mr. Davis for 2005, Mr. Davis will be deemed to have earned the target award; (iii) a special calculation will apply to protect the dollar amount that Mr. Davis could have been paid on May 1, 2003 if he had retired on April 30, 2003; and (iv) upon termination of employment Mr. Davis generally will be deemed to be a retiree not subject to the early commencement reduction factors that would otherwise apply. For purposes of AEC’s Executive Tenure Compensation Plan, the Board of Directors has determined to treat Mr. Davis as an eligible retiree at his future termination of employment, regardless of the circumstances other than death. If, prior to the end of the term of the agreement, the employment of Mr. Davis is terminated by AEC without cause (as defined in the employment agreement), or if Mr. Davis terminates his employment for good reason (as defined in the employment agreement), or if the employment of Mr. Davis is terminated as a result of the mutual agreement of Mr. Davis and the Board of Directors, AEC or its affiliates will continue to provide the compensation and benefits called for by the employment agreement through theendlater of theend of the term of the agreement or one year after such termination of employmentagreement(with incentive compensation based on the maximum potential awards and with any stock compensation paid in cash), and all unvested stock compensation will vest immediately. If Mr. Davis dies orbecomes disabled, orterminates his employment without good reasonduringprior to the end of the term ofhis respective employmentthe agreement, AEC or its affiliates will pay to Mr. Davis or his beneficiaries or estate all compensation earned through the date of deathdisabilityor such termination (including previously deferred compensation and pro rata incentive compensation based upon the maximum potential awards). If Mr. Davis’ employment is terminated by reason of his disability, he will be entitled to such benefits as may be provided by AEC’s current disability program. If Mr. Davis is terminated for cause, AEC or its affiliates will pay his base salary through the date of termination plus any previously deferred compensation. In any such case, Mr. Davis shall also be eligible for the benefits he has accrued under the applicable retirement plans, including the benefits under the Supplemental Executive Retirement Plan and the Executive Tenure Compensation Plan. UnderMr. Davis'the employment agreement, if any payments thereunder constitute an excess parachute payment under theInternal RevenueCode,(the "Code"),then AEC will pay to Mr. Davis the amount necessary to offset the excise tax and any applicable taxes on this additional payment.AEC currently has in effect key executive employment and
severenceseverance agreements (the"KEESAs"“KEESAs”) with certain executive officers and key employees of AEC (including Messrs. Davis, Harvey and ProtschWalkerandMs.Mses. Swan and Wegner). The KEESAs provide that each executive officer who is a party thereto is entitled to benefits if, withinfivea period of up to three years (depending on which executive is involved) after a change in control of AEC (as defined in the KEESAs) (the “Employment Period”), theofficer'sofficer’s employment is ended through(i)(a) termination by AEC, other than by reason of death or disability or for cause (as defined in the KEESAs),; or(ii)(b) termination by the officer due to a breach of the agreement by AEC or a significant change in theofficer's responsibilities,officer’s responsibilities; or(iii)(c) in the case of Mr.Davis'Davis’ agreement, termination by Mr. Davis following the first anniversary of the change of control. The benefits provided are(i)(a) a cash termination payment oftwo orup to three times (depending on which executive is involved) the sum of theofficer'sofficer’s annual salary and his or her average annual bonus during the three years before theterminationtermination; and(ii)(b) continuation for up tofive yearsthe end of the Employment Period of equivalent hospital, medical, dental, accidentdisabilityandlife insurance coverage as in effect at the time of termination. Each KEESA for executive officers below the level of Executive Vice President of AEC provides that if any portion of the benefits under the KEESA or under any other agreement for the officer would constitute an excess parachute payment for purposes of the Code, benefits will be reduced so that the officer will be entitled to receive $1 less than the maximum amount which he or she could receive without becoming subject to the 20% excise tax imposed by the Code on certain excess parachute payments, or which AEC may pay
19without loss of deduction under the Code. The KEESAs for the Chief Executive Officer, President, Senior Executive Vice President and the Executive Vice Presidents of AEC (including Messrs. Davis, Harvey and Protsch WalkerandMs.Mses. Swan and Wegner) provide that if any payments thereunder or otherwise constitute an excess parachute payment, AEC will pay to the appropriate officer the amount necessary to offset the excise tax and any additional taxes on this additional payment. Mr.Davis'Davis’ employment agreement as described above limits benefits paid thereunder to the extent that duplicate payments would be provided to him under his KEESA.20AEC entered into a Severance Agreement and Release with Mr. Walker in connection with the conclusion of his employment with AEC as of November 15, 2003. AEC (a) paid Mr. Walker $680,000, (b) paid $10,000 towards his legal fees associated with the agreement and (c) agreed to provide him with up to $20,000 for either outplacement services or tuition reimbursement. Mr. Walker ceased to be eligible to participate under any of AEC’s stock option, bonus, equity, incentive compensation, non-qualified supplemental retirement plan, medical, dental, life insurance, retirement, pension and other compensation or benefit plans upon his termination of employment, except that he retained vested rights under AEC’s qualified retirement plans and his rights under AEC’s Key Employee Deferred Compensation Plan, and he is eligible for COBRA continuation for his medical and dental plans. If Mr. Walker elects COBRA continuation, AEC will pay for this coverage for up to 18 months. Under the agreement, Mr. Walker agreed to a two-year covenant not to compete and agreed to keep Company information confidential. In connection with the agreement, Mr. Walker provided AEC and its affiliates, including the Company, a general liability release.
RETIREMENT AND EMPLOYEE BENEFIT PLANS
ALLIANT ENERGY CORPORATE SERVICES RETIREMENT PLANSAlliant Energy Cash Balance Pension Plan
Salaried employees (including officers) of the Company are eligible to participate in
a Retirementthe Alliant Energy Cash Balance Pension Plan (the “Pension Plan”) maintained by Alliant Energy Corporate Services.In 1998, the Retirement Plan was amended to implement a cash balance format, thereby changing the benefit calculation formulas and adding a lump sum distribution option for eligible participants.TheAlliant Energy Cash BalancePension Plan bases aparticipant'sparticipant’s defined benefit pension on the value of a hypothetical account balance. For individuals participating in the Pension Plan as ofAugustAug. 1, 1998, a starting account balance was created equal to the present value of the benefit accrued as ofDecemberDec. 31, 1997, under thePlan'sapplicable prior benefitformula prior to the change to a cash balance approach. That formula provided a retirement income based on years of credited service and final average compensation for the 36 highest consecutive months, with a reduction for a Social Security offset.formula. In addition, such individualsparticipating in the Plan as of August 1, 1998received a special one-time transition credit amount equal to a specified percentage varying with age multiplied by credited service andbasepay. For 1998 and thereafter, a participant receives annual credits to the account equal to 5% of base pay (including certain incentive payments, pre-tax deferrals and other items), plus an interest credit on all prior accruals equal to 4%, plus a potential share of the gain on the investment return on assets in the trust investment for the year.The life annuity payable under the Pension Plan is determined by converting the hypothetical account balance credits into annuity form. Individuals who were participants in the Pension Plan on
AugustAug. 1, 1998, are in no event to receive any less than what would have been provided under the prior formula that was applicable to them, had it continued, if they terminate on orbefore AugustbeforeAug. 1, 2008, and do not elect to commence benefits before the age of 55.All of the individuals listed in the Summary Compensation Table
whoparticipate in the Pension Plan(Messrs. Davis, Protsch HarveyandMs. Wegner)are"grandfathered"“grandfathered” under the applicable prior plan benefit formula.SinceBecause their estimated benefits underthatthe applicable prior plan benefit formula are higher than under the Pension Plan formula, utilizing current assumptions, their benefits would currently be determined by the applicable prior plan benefit formula. At the time of his resignation from the Company in November 2003, Mr. Walker had a vested balance of $68,056 in the Pension Plan. The following table illustrates the estimated annual benefits payable upon retirement at age 65 under the applicable prior plan formula based on average annual compensation and years of service. To the extent benefits under the Plan are limited by tax law, any excess will be paid under the Unfunded Excess Plan described below.21RETIREMENT PLAN TABLE
AVERAGE ANNUAL BENEFIT AFTER SPECIFIED YEARS IN PLAN ANNUAL --------------------------------------------- COMPENSATION 15 20 25 30+ -------------- --------- --------- --------- ---------$ 200,000 $ 55,000 $ 73,300 $ 91,700 $110,000 300,000 82,500 110,000 137,500 165,000 400,000 110,000 146,700 183,300 220,000 500,000 137,500 183,300 229,100 275,000 600,000 165,000 220,000 275,000 330,000 700,000 192,500 256,700 320,800 385,000 800,000 220,000 293,300 366,700 440,000 900,000 247,000 330,000 412,500 495,000 1,000,000 275,000 366,700 458,300 550,000 1,100,000 302,500 403,300 504,100 605,000Company Plan A Prior Formula.
One of the applicable prior plan formulas provided retirement income based on years of credited service and final average compensation for the 36 highest consecutive months, with a reduction for Social Security offset. The individuals listed in the Summary Compensation Table covered by this formula are Messrs. Davis, Protsch and Harvey and Mses. Swan and Wegner. The benefits would be as follows:
Company Plan A Prior Plan Formula Table
Average
Annual
Compensation
Annual Benefit After Specified Years in Plan 15 20 25 30+ $ 200,000 $ 55,000 $ 73,333 $ 91,667 $ 110,000 300,000 82,500 110,000 137,500 165,000 400,000 110,000 146,667 183,333 220,000 500,000 137,500 183,333 229,167 275,000 600,000 165,000 220,000 275,000 330,000 700,000 192,500 256,667 320,833 385,000 800,000 220,000 293,333 366,667 440,000 900,000 247,500 330,000 412,500 495,000 1,000,000 275,000 366,667 458,333 550,000 1,100,000 302,500 403,333 504,167 605,000 For purposes of the Pension Plan, compensation means payment for services rendered, including vacation and sick pay, and is substantially equivalent to the salary amounts reported in the
foregoingSummary Compensation Table.PlanPensionPlan benefits depend upon length of Pension Plan service (up to a maximum of 30 years), age at retirement and amount of compensation (determined in accordance with the Pension Plan) and are reduced by up to 50% of SocialSecurity benefits. The estimated benefits in the table above do not reflect the Social Security offset. The estimated benefits are computed on a straight-life annuity basis. Benefits will be adjusted if the employee receives one of the optional forms of payment. Credited years of service under the Pension Plan for covered persons named in the
foregoingSummary Compensation Table are as follows: Erroll B. Davis, Jr.,2124 years; Eliot G. Protsch,2124 years; William D. Harvey,1316 years; Barbara J. Swan, 15 years; and Pamela J. Wegner,69 years.IES INDUSTRIES PENSION PLAN Prior to April 1998, Mr. Walker participated in the IES Industries retirement plan (which plan has been transferred to Alliant Energy Corporate Services). Plan benefits payable to Mr. Walker have been "grandfathered" to reflect the benefit plan formula in effect at that time. Since his estimated benefits under that formula are higher than under the Plan formula, utilizing current assumptions, his benefits would currently be determined by the prior plan benefit formula. The following table illustrates the estimated annual benefits payable upon retirement at age 65 under the prior formula for the average annual compensation and years of service. To the extent benefits under the Plan are limited by tax law, any excess will be paid under theUnfunded Excess Plan
described below. PENSION PLAN TABLE
AVERAGE ANNUAL BENEFIT AFTER SPECIFIED YEARS IN PLAN ANNUAL --------------------------------------------------------- COMPENSATION 15 20 25 30 35 -------------- --------- --------- --------- --------- ---------$200,000 $ 43,868 $ 58,490 $ 73,113 $ 87,735 $102,358 300,000 67,118 89,490 111,863 134,235 156,608 400,000 90,367 120,490 150,612 180,735 210,857 500,000 113,618 151,490 189,363 227,235 265,108 600,000 136,868 182,490 228,113 273,735 319,358For purposes of the Plan, compensation means payment for services rendered, including vacation and sick pay, and is substantially equivalent to the salary amounts reported in the 22foregoing Summary Compensation Table. Plan benefits depend upon length of Plan service (up to a maximum of 35 years), age at retirement and amount of compensation (determined in accordance with the Plan). The estimated benefits are computed on a straight-life annuity basis. Benefits will be adjusted if the employee receives one of the optional forms of payment. Mr. Walker has four years of credited service under this plan. UNFUNDED EXCESS PLAN--AlliantAlliant Energy Corporate Services maintains an Unfunded Excess Plan that provides funds for payment of retirement benefits above the limitations on payments from qualified pension plans in those cases where an
employee'semployee’s retirement benefits exceed the qualified plan limits. The Unfunded Excess Plan provides an amount equal to the difference between the actual pension benefit payable under thepension planPension Plan and what such pension benefit would be if calculated without regard to any limitation imposed by the Code on pension benefits or covered compensation.UNFUNDED EXECUTIVE TENURE COMPENSATION PLAN--AlliantUnfunded Executive Tenure Compensation Plan
Alliant Energy Corporate Services maintains an Unfunded Executive Tenure Compensation Plan to provide incentive for selected key executives to remain in the service of
the CompanyAEC by providing additional compensationwhichthat is payable only if the executive remains withthe CompanyAEC until retirement (or other termination if approved by the Board of Directors).In the case of the Chief Executive Officer only,Any participant in theevent that the Chief Executive Officer (1) is terminated under his employment agreement with AEC as described above other than for cause, death or disability (as those terms are defined in the employment agreement), (2) terminates his employment under the employment agreement for good reason (as such term is defined in the employment agreement), or (3) is terminated as a result of a failure of the employment agreement to be renewed automatically pursuant to its terms (regardless of the reason for such non-renewal), then for purposes of the plan, the Chief Executive Officer shall be deemed to have retired at age 65 and shall be entitled to benefits under the plan. Participants in the planPlan must bedesignatedapproved by theChief Executive Officer of the Company and approved by itsBoard of Directors. Mr. Davis was the only active participant in theplanPlan as ofDecemberDec. 31,2000.2003. TheplanPlan provides for monthly payments to a participant after retirement (at or after age 65, or with Board approval, prior to age 65) for 120 months. The payments will be equal to 25% of theparticipant'sparticipant’s highest average salary for any consecutive 36-month period. If a participant dies prior to retirement or before 120 payments have been made, theparticipant'sparticipant’s beneficiary will receive monthly payments equal to 50% of such amount for 120 months in the case of death before retirement or, if the participant dies after retirement, 50% of such amount for the balance of the 120 months. Annual benefits of$160,000$171,250 would be payable to Mr. Davis upon retirement, assuming he continues inAlliant Energythe service of AlliantEnergy CorporateServices' serviceServices until retirement at the same salary as was in effect onDecemberDec. 31,2000. ALLIANT ENERGY CORPORATE SERVICES SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company2003.Supplemental Executive Retirement Plan
AEC maintains an unfunded Supplemental Executive Retirement Plan (“SERP”) to provide incentive for key executives to remain in the service of the Company by providing additional compensation
whichthat is payable only if the executive remains withthe CompanyAEC until retirement, disability or death. While the SERP provides different levels of benefits depending on the executive covered, this summary reflects the terms applicable to all of the individuals listed in the Summary Compensation Table. Participants in theplanSERP must be approved by the Compensation and Personnel Committee of the Board. TheplanSERP provides for payments of 60% of theparticipant'sparticipant’s average annual earnings (base salary and bonus) for the highest paid three years out of the lastten10 years of theparticipant'sparticipant’s employment reduced by the sum of benefits payable to the officer from theofficer'sofficer’s defined benefit plan and the Unfunded Excess Plan. The normal retirement date under theplanSERP is age 62 with at leastten10 years of service and early retirement is at age 55 with at least ten years of service. If a participant retires prior to age 62, the 60% payment under theplanSERP is reduced by 3% per year for each year theparticipant'sparticipant’s retirement date precedes his/her normal retirement date. The actuarial reduction factor will be waived forsenior officersparticipants who have attained age 55 and have a minimum often10 years of service in a senior executive position with AEC after April 21, 1998. At theCompany. Benefit paymentstimely election of the participant, benefits under theplanSERP will be made in a lump sum, in installments over a period of up to 10 years, or for the lifetime of thesenior officer, with a minimum ofparticipant. If the lifetime benefit is selected and the participant dies prior to receiving 12 years of payments,ifpayments continue to any surviving spouse or dependent children of a deceased participant who dies while still employed by theparticipant dies after retirement.Company, payable for a maximum of 12 years. A23postretirementpost-retirement death benefit of one times thesenior executive officer'sparticipant’s final average earnings at the time of retirement will be paid to the designated beneficiary. Messrs. Davis, Harvey and ProtschWalkerandMs.Mses. Swan and Wegner are participants inthis plan.the SERP. The following table shows the amount of retirement payments under theplan,SERP, assuming a minimum often10 years of service at retirementage. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE
AVERAGE ANNUAL BENEFIT AFTER SPECIFIED YEARS IN PLAN ANNUAL --------------------------------------------- COMPENSATION< 10 YEARS >10 YEARS* -------------- -------------------- ----------------------$ 200,000 0 $120,000 300,000 0 180,000 400,000 0 240,000 500,000 0 300,000 600,000 0 360,000 700,000 0 420,000 800,000 0 480,000 900,000 0 540,000 1,000,000 0 600,000 1,100,000 0 660,000- ------------age and payment in the annuity form.Supplemental Executive Retirement Plan Table
Average
Annual
Compensation
Annual Benefit After Specified Years in Plan < 10 Years >10 Years* $ 200,000 0 $ 120,000 300,000 0 180,000 400,000 0 240,000 500,000 0 300,000 600,000 0 360,000 700,000 0 420,000 800,000 0 480,000 900,000 0 540,000 1,000,000 0 600,000 1,100,000 0 660,000 * Reduced by the sum of the benefit payable from the applicable
retirement ordefined benefit pension plan and the Unfunded Excess Plan.KEY EMPLOYEE DEFERRED COMPENSATION PLAN--The CompanyKey Employee Deferred Compensation Plan
AEC maintains an unfunded Key Employee Deferred Compensation Plan under which participants may defer up to 100% of base salary,
orincentivecompensation.compensation and eligible SERP payments. Participants who have made the maximum allowed contribution to theCompany-sponsoredAEC-sponsored 401(k) Savings Plan may receive an additional credit to the Deferred Compensation Plan. The credit will be equal to 50% of the lesser of(i)(a) the amount contributed to the 401(k) Savings Plan plus the amount deferred under thisPlan,Plan; or(ii)(b) 6% of base salary, reduced by the amount of any matching contributions in the 401(k) Savings Plan. The employee may elect to have his or her deferrals credited to an Interest Account or an AEC Stock Account. Deferrals and matching contributions to the Interest Account receivean annual return based on the A-Utility Bond Rate with a minimum return no less than the prime interest rate published inTHE WALL STREET JOURNAL.The Wall Street Journal, provided that the return may not be greater than 12% or less than 6%. Deferrals and matching contributions credited to theCommonAEC Stock Account are treated as though invested intheAEC common stockof AECand will be credited with dividends,and those dividendswhich will be treated as if reinvested. The shares of common stock identified as obligations under theplan as of December 31, 2000Plan are held in a rabbitrust established in 2000.trust. Payments from theplanPlan may be made in a lump sum or in annual installments for up toten10 years at the election of the participant. Participants are selected by the Chief Executive Officer of Alliant Energy Corporate Services. Messrs. Davis, Harvey and ProtschWalkerandMs.Mses. Swan and Wegnerparticipateare participants in theplan. 24Plan. REPORT OF THE COMPENSATION AND PERSONNEL
COMMITTEE ON EXECUTIVE COMPENSATION
TO OUR SHAREOWNERS:To Our Shareowners:
The Compensation and Personnel Committee (the
"Committee"“Committee”) of the Board of Directors of the Company is currently comprised offour non-employeefive independent directors (the same directors that comprise the AEC Compensation and Personnel Committee). The following is a report prepared by these directors with respect to compensation paid by AEC, the Company andAEC'sAEC’s other subsidiaries.The Committee assesses the effectiveness and competitiveness of, approves the design of and administers executive compensation programs within a consistent total compensation framework for the Company. The Committee also reviews and approves all salary arrangements and other remuneration for executives, evaluates executive performance, and considers related matters. It also makes recommendations to the Nominating and Governance Committee regarding Director compensation. To support
the Committeeit in carrying out its mission, the Committee engages an independent consultantis engagedto provideassistance to the Committee.assistance.The Committee is committed to implementing an overall compensation program for executives that furthers the
Company'sCompany’s mission. Therefore, the Committee adheres to the following compensation policies, which are intended to facilitate the achievement of theCompany'sCompany’s business strategies:-Executive management compensation (and particularly, long-term incentive compensation) should be closely and strongly aligned with the long-term interests of AEC’s shareowners.Total compensation should enhance theCompany'sCompany’s ability to attract, retain and encourage the development of exceptionally knowledgeable and experienced executives, upon whom, in large part, the successful operation and management of the Company depends.- Base salary levels should be targeted at a competitive market range paid to executives of comparable companies. Specifically, the Committee targets the median (50th percentile) of base salaries paid by a selected group of utility and general industry companies. -
• Base salary levels should be targeted at a competitive market range of base salaries paid to executives of comparable companies. Specifically, the Committee targets the median (50th percentile) of base salaries paid by companies within the utility and general industries. Incentive compensation programs should strengthen the relationship between pay and performance by emphasizing variable, at-risk compensation that is consistent with meeting predetermined Company, subsidiary, business unit and individual performance goals. In addition, the Committee targets incentive levelsare targetedat the median (50th percentile) of incentive compensation paid bya selected group ofsimilarly sized companies within the utility and generalindustry companies. COMPONENTS OF COMPENSATIONindustries.Components of Compensation
The major elements of
the Company'sAEC’s executive compensation program are base salary, short-term (annual) incentives and long-term (equity) incentives. These elements are addressed separately below. In setting the level for each major component of compensation, the Committee considers all elements of anexecutive'sexecutive’s total compensation package, including employee benefit and perquisite programs. TheCommittee'sCommittee’s goal is to provide an overall compensation package for each executive officer that is competitive to the packages offered other similarly situated executives. The Committee has determined that total executive compensation at target levels, including that for Mr. Davis, is in line with competitive compensation ofthe comparison group ofcomparative companies.BASE SALARIESBase Salaries
The Committee annually reviews each
executive'sexecutive’s base salary. Base salaries are targeted at a competitive market range (i.e., at the median level) when comparing both utility and non-utility (general industry) data.BaseThe Committee annually adjusts base salariesare adjusted annually by the Committeeto recognize changes in the market, varying levels of responsibility, prior experience and breadth of knowledge. Increases to base salaries are driven primarily by market adjustments for a particular salary level, which generallylimitlimits across-the-board increases.IndividualThe Committee considers individual performance factorsare not considered by the Committeein setting base salaries. The Committee reviewed executive salaries for market comparability using utility and general industry data contained in compensation surveys published by the Edison Electric Institute, the American Gas Association and several compensation consulting firms.Based onIn consideration of industry conditions and Company performance, the
foregoing,Committee did not increase the25annual salary for Mr. Davis was fixed at $640,000 for the 2000 fiscal year. SHORT-TERM INCENTIVES The goalbase salaries of theCompany'sChief Executive Officer and the Executive Vice Presidents in 2003.Short-Term Incentives
AEC’s short-term (annual) incentive
programs is to promoteprogram promotes theCommittee'sCommittee’s pay-for-performance philosophy by providing executives with direct financial incentives in the form of annual cashor stock basedbonusesbased ontied to the achievement of corporate, subsidiary, business unit and individual performance goals. Annual bonus opportunities allow the Committee to communicate specific goals that are of primary importance during the coming year and motivate executives to achieve these goals. The Committee on an annual basis reviews and approves theprograms'program’s performance goals,andthe relative weight assigned to each goalas well asand the targeted and maximum award levels. A description of the short-term incentive programs available during20002003 to executive officers follows.ALLIANT ENERGY CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN--Alliant Energy Corporation Management Incentive Compensation Plan—In
2000,2003, the Alliant Energy Corporation Management Incentive Compensation Plan (the"MICP"“MICP”) covered executives and was based on achieving annual targets in corporate performance that included earnings per share("EPS"(“EPS”), cash flow, safety, diversity and environmental targets for the utility businesses, and business unit (including customer service and reliability) and individual performance goals. Target and maximum bonus awards under the MICP in20002003 were set at the median of the utility and general industry market levels.Targets wereThe Committee consideredby the Committeethese targets to be achievable, butrequiredto require above-average performance from each of the executives. The level of performance achieved in each category determines actual payment of bonuses, as a percentage of annual salary. Weighting factors are applied to the percentage achievement under each category to determine overall performance. If a pre-determined EPS target is not met, there is no bonus payment associated with the MICP. If the threshold performance for any other performance target is not reached, there is no bonus payment associated with that particular category. Once the designated maximum performance is reached, there is no additional payment for performance above the maximum level. The actual percentage of salary paid as a bonus, within the allowable range, is equal to the weighted average percent achievement for all the performance categories. Potential MICP awards range from 0% to90%150% of annual salary foreligible executives other than Mr. Davis. The amounts paid under the MICP to eligible officers included in the Summary Compensation Table are reflected in that table. In 2000,Mr. Daviswas covered by the MICP. Awards for Mr. Davis under the MICP in 2000 were based on corporateandstrategic goal achievement in relation to predetermined goals. For each plan year, the Committee determines the performance apportionment for Mr. Davis. In 2000, that apportionment was 70% for corporate performance and 30% for strategic goal performance. Corporate performance is measured based on Company-wide EPS and environmental and safety targets established at the beginning of the year. Strategic goals are measured based on the achievement of certain specific goals, which included strategy development and implementation, established for Mr. Davis by the Committee. The 2000 MICP award range for Mr. Davis wasfrom 0% to150%100% of annualsalary. The award earned by Mr. Davis undersalary for other eligible executives.Due to industry and market conditions, the Committee determined that the Chief Executive Officer and Executive Vice Presidents were not eligible to receive MICP awards for
2000 is set forth in the Summary Compensation Table under the heading "Bonus". LONG-TERM INCENTIVES2003 plan year performance.Long-Term Incentives
The Committee strongly believes compensation for executives should include long-term, at-risk pay
to strengthentostrengthen the alignment of the interests of the shareowners and management. In this regard,the Alliant Energy Corporation Long-Term Equity Incentive Plan permitsAEC maintains plans that permit grants of stock options, restricted stock and performanceunit/units/shares with respect toAEC'sAEC’s common stock. TheLong-Term Equity Incentive Plan is administered by the AEC Compensation and Personnel Committee. TheCommittee believes that theLong-Term Equity Incentive Plan balancesincentive plans balance theCompany's existingCompany’s annual compensation programs by emphasizing compensation based on the long-term, successful performance of the Company from the perspectiveof the shareowners of AEC.AEC’s shareowners. A description of the long-term incentive programs available during20002003 to executive officersunder the Long-Term Equity Incentive Planis set forth below.ALLIANT ENERGY CORPORATION LONG-TERM INCENTIVE PROGRAM--TheAlliant Energy Corporation
26Long-Term Incentive Program— The Alliant Energy Corporation Long-Term Incentive Program covered executives and consisted of the following components in2000:2003: non-qualified stock options and performance shares.StockNon-qualified stock options provide a reward that is directly tied to the benefit shareownersof AECreceive from increases in the price ofAEC'sAEC’s common stock.TheUntil 2003, the payout from the performance sharesiswas based on two equally-weighted performance components:AEC'sAEC’s three-year total return to shareowners relative to an investor-owned utility peer group (“TSR”), and annualized EPS growth versus internally set performance hurdles contained in the Alliant Energy Strategic Plan. Beginning in 2003, TSR was used as the sole measure of the performance share plan. Thus, the two components of the Long-Term Incentive Program (i.e., stock options and performance shares) provide incentives for management to produce superior shareowner returns on both an absolute and relative basis. During2000,2003, theAEC Compensation and PersonnelCommittee made a grant of stock options and performance shares to various executive officers, including Messrs. Davis, Harvey and ProtschWalkerandMs.Mses. Swan and Wegner.All option grants had per share exercise prices equal to the fair market value of a share of AEC common stock on the day following the date the grants were approved. Options vest on a one-third basis at the beginning of each calendar year after grant and have aten-year10-year term from the date of the grant.Executives in the Alliant Energy Corporation Long-Term Equity Incentive ProgramSuch executives were also granted performance shares. Performance shares will be paid out insharesa combination ofAEC'sAEC common stockorand cash. The award will be modified by a performance multiplier, which ranges from 0 to 2.00 based onAECCompany performance.In determining actual award levels under the Alliant Energy Corporation Long-Term
EquityIncentive Program, theAEC Compensation and PersonnelCommittee was primarily concerned with providing a competitive total compensation opportunity level to officers. As such, award levels (including awards made to Mr. Davis) were based on a competitive analysis of similarly sized utility and general industry companies that took into consideration the market level of long-term incentives, as well as the competitiveness of the totalcompensation package.
AwardThe Committee then established award rangesas well asand individual award levelswere then establishedbased on responsibility level and market competitiveness. No corporate or individual performance measures were reviewed in connection with the awards of options and performance shares. Award levels were targeted to the median of the range of such awards paid by comparable companies. TheAEC Compensation and PersonnelCommittee did not consider the amounts of options and performance shares already outstanding or previously granted when making awards for2000.2003. Mr.Davis'Davis’ awards in20002003 under the Long-Term Incentive Program are shown in theStocktables under “Stock Option Grants in2000 Table2003” and “Long-Term Incentive Awards in 2003.”Due to the EPS and TSR goals not being achieved, there was no payout for the performance share portion of the Long-Term Incentive
AwardsProgram’s three-year cycle that ended in2000 Table. POLICY WITH RESPECT TO THEDecember 2003.Policy with Respect to the $1
MILLION DEDUCTION LIMITMillion Deduction LimitSection 162(m) of the
Internal RevenueCode generally limits the corporate deduction for compensation paid to executive officers named in the proxy statement to $1 million unless such compensation is based upon performanceobjectives meetingobjectivesmeeting certain regulatory criteria or is otherwise excluded from the limitation. Based on theCommittee'sCommittee’s commitment to link compensation with performance as described in this report, the Committeecurrentlyintends to qualify future compensation paid to theCompany'sCompany’s executive officers for deductibility by the Company under Section 162(m) except in limited appropriate circumstances.CONCLUSIONConclusion
The Committee believes the existing executive compensation policies and programs provide
thean appropriate level of competitive compensation for theCompany'sCompany’s executives. In addition, the Committee believes that thelonglong- andshort termshort-term performance incentives effectively align the interests of executives and shareowners toward a successful future for the Company.COMPENSATION AND PERSONNEL
COMMITTEE* Arnold M. Nemirow (Chair) Alan B. ArendsCOMMITTEEJudith D. Pyle
Anthony R. Weiler * Members of the Compensation and Personnel Committee on December 31, 2000 who approved this Report. 27(Chairperson) Alan B. Arends
Michael L. Bennett
Singleton B. McAllister
David A. Perdue
To Our Shareowners:
The Audit Committee
(the "Committee")of the Board of Directors of the Company is composed of fiveindependentdirectors, each of whom is independentas defined inunder theAmerican Stock Exchange'sNYSE listing standards(the same directors that comprise the AEC Audit Committee).and SEC rules. The Committee operates under a written charter adopted by the Board ofDirectors, which is attached to this proxy statementDirectors. The Audit Committee charter, asExhibit I. The Committee recommends toamended by the Board of Directorsthe selection of the Company's independent auditors.on March 11, 2004, is attached as Appendix A to this proxy statement.The
Company'sCompany’s management("management")is responsible for theCompany'sCompany’s internal controls and the financial reporting process, including the system of internal controls. TheCompany'sindependent auditors are responsible for expressing an opinion on the conformity of theCompany'sCompany’s audited consolidated financial statements with accounting principles generally acceptedaccounting principles.in the United States of America. The Committee has reviewed and discussed the audited consolidated financial statements with management and the independent auditors. The Committee has discussed with the independent auditors matters required to be discussed by Statement on Auditing Standards No. 61 (Communication With Audit Committees).The
Company'sCompany’s independent auditors have provided to the Committee the written disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee discussed with the independent auditors their independence.The Committee
considered whetherhas adopted a policy that requires advance approval of all audit, audit-related, tax and other permitted services performed by the independentauditors'auditor. The policy provides for pre-approval by the Committee of specifically defined audit and non-audit services after the Committee is provided with the appropriate level of details regarding the specific services to be provided. The policy does not permit delegation of the Committee’s authority to management. In the event the need for specific services arises between Committee meetings, the Committee has delegated to the Chairperson of the Committee authority to approve permitted services provided that the Chairperson reports any decisions to the Committee at its next scheduled meeting.The independent auditor fees paid by AEC include those on behalf of the Company and certain other AEC subsidiaries for 2002 and 2003, and were as follows:
2002 2003 Audit Fees
$ 2,843,000 * $ 2,293,000 Audit-Related Fees
19,000 332,000 Tax Fees
1,125,000 435,000 All Other Fees
297,000 54,000 Audit-Related Fees consisted of the fees billed for Sarbanes-Oxley Section 404 planning in 2003, employee benefits plan audits, and attest services required by statute or regulations.
Tax Fees consisted of the fees billed for professional services rendered for tax compliance, tax advice and tax planning, including all services performed by the professional staff in the independent auditors’ tax division, except those rendered in connection with the audit.
All Other Fees consisted of license fees for tax and accounting research software products and, in 2002, fees for generation strategy consultation.
* Includes approximately $1.4 million for 2000 and 2001 re-audit fees The Audit Committee does not consider the provision of non-audit services
is compatible with maintaining the independent auditors' independence. The fees toby the independent auditorsfor 2000 for the Company and AEC were as follows:described above to be incompatible with maintaining auditor independence.
Audit Fees.................. $ 840,000 Financial Information Systems Design and Implementation Fees......... 0 All Other Fees.............. 1,145,000The Committee discussed with the
Company'sCompany’s internal and independent auditors the overall scopes and plans for their respective audits. The Committee meets with the internal and independent auditors, with and without management present, to discuss the results of their examinations, the evaluation of theCompany'sCompany’s internal controls and overall quality of theCompany'Company’s financial reporting.Based on the
Committee'sCommittee’s reviews and discussions with management, the internal auditors and the independent auditors referred to above, the Committee recommended to the Board of Directors that the audited consolidated financial statements be included in theCompany'sCompany’s Annual Report on Form 10-K for the year endedDecemberDec. 31,20002003, for filing with the SEC.AUDIT COMMITTEE
Jack B. Evans
(Chair)(Chairperson)Alan B. Arends
Katharine C. Lyall Milton E. Neshek Judith D. Pyle 28Michael L. Bennett
Singleton B. McAllister
David A. Perdue
SECTION
16(A)16(a) BENEFICIAL OWNERSHIPREPORTING COMPLIANCE
The
Company'sCompany’s directors and its executiveofficers and certain otherofficers are required to report their ownership ofAEC's common stock and subsidiary preferredthe Company’s Preferred stock and any changes in that ownershiptowith the SEC and theNew York Stock Exchange.NYSE. As a matter of practice, the Company’s Shareowner Services Department assists the Company’s reporting persons in preparing initial reports ofownership and reports of changes in ownership and files those reports on their behalf. To the best of theCompany'sCompany’s knowledge, all required filings in20002003 were properly made in a timely fashion. In making the above statements, the Company has relied on the representations of thepersonsparties involved and on copies of their reports filed with the SEC.By Order of the Board of Directors,
/s/ Edward M. Gleason Edward M. Gleason Vice President -- Treasurer andF. J. Buri
Corporate Secretary
29EXHIBIT IAPPENDIX A – AUDIT COMMITTEE CHARTER
Purposes and Role of Committee
The
Audit Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent directors in accordance with the requirements of the American Stock Exchange listing standards. All members of the Committee shall be financially literate and at least one member of the Committee shall have accounting or related financial management expertise. The Chair and the memberspurposes of the Audit Committeeshall be elected annually by a majority vote of the members(the “Committee”) of the Board ofDirectors. The Audit Committee shall meet atDirectors (the “Board”) of Wisconsin Power and Light Company (the “Company”) are to: (1) assist Board oversight of (a) thecall of any one of its members, but in no event shall it meet less than twice a year. Subsequent to each Audit Committee meeting, a reportintegrity of theactions taken byCompany’s financial statements, (b) theAudit Committee shall be made toCompany’s compliance with legal and regulatory requirements, (c) theBoard of Directors. The Audit Committee will reviewindependent auditors’ qualifications andupdate this Charter periodically, at least annually, as conditions dictate. The functionsindependence, andresponsibilities of the Audit Committee shall be to: 1. Evaluate(d) the performance of the Company’s internal audit function and independentauditorsauditors; andrecommend(2) prepare the report that Securities and Exchange Commission (“Commission”) rules require tothe Board of Directors the appointment of the independent auditors, who are ultimately accountable to the Audit Committee and the Board. Where appropriate, recommend that the Board of Directors replace the independent auditors. 2. Discuss with the independent auditors the scope of their audit. 3. Discuss with the independent auditors and management the Company's accounting principles, policies and practices and its reporting policies and practices. 4. Review and discuss with the independent auditors and Company management the Company's audited annual financial statements and the results of the annual audit. Determine whether to recommend to the Board of Directors that the audited consolidated financial statementsbe included in theCompany's Annual Report on Form 10-K. 5. Consider the independent auditors' judgements about the quality and appropriateness of the Company's accounting principles as applied in its financial reporting. 6. Discuss with the independent auditors and the Company's internal auditor the adequacy of the Company's or any of its subsidiaries accounting, financial and operational controls. 7. Discuss with the Company's internal auditor the scope and results of internal audits and initiate such accounting principles, policies and practices, and reporting policies and practices as it may deem necessary or proper. 8. Consider whether the independent auditors provision of non-audit services is compatible with maintaining the independent auditors independence. 9. Annually review and verify the effectiveness of the Company's Legal Compliance Program. 10. Annually review and verify the effectiveness of the Company's Risk Management Program including the use of financial derivative instruments. 3011. As a whole, or through the Audit Committee Chair, review with the independent auditors the Company's interim financial results included in the Quarterly Reports on Form 10-Q prior to filing with the Securities and Exchange Commission. 12. Submit appropriate reports required by the SEC to the shareowners in the Company'sCompany’s annual proxystatements and provide appropriate certification to the NYSE as required. 13. Ensure that the independent auditors submit periodic reports to the Audit Committee delineating all relationships between the independent auditor and the Company, consistent with Independence Standards Board Standard No. 1; discuss such reports with the independent auditors; and recommend that the Board of Directors take appropriate action to satisfy itself of the independence of the independent auditors. 14. Discuss with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61.statement. While theAuditCommittee has the responsibilities andfunctionspowers set forth in this Charter, it is not the duty of theAuditCommittee toplan orconduct audits ortodetermine that theCompany'sCompany’s financial statements and disclosures are complete and accurate and are in accordance with accounting principles generally acceptedaccounting principles. This isin theresponsibilityUnited States ofmanagementAmerica (“GAAP”) and applicable laws and regulations.Committee Membership
The Committee shall consist of three or more members of the Board, each of whom satisfies the requirements for independence and experience under Section 10A(m)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”), Commission rules and the
independent auditors. Nor is it the dutylisting standards of the New York Stock Exchange (the “NYSE”). The Board will endeavor to ensure that at least one Committee member shall qualify as an “audit committee financial expert” as defined by SEC rules. Committee members may not serve on audit committees of more than two other public companies without the prior consent of the Board to enable the Board to determine that such service would not impair the ability of such a member to effectively serve on the Audit Committee.Appointment and Removal of Committee Members
The Committee members shall be appointed by the Board annually or as necessary to
conduct investigations, to resolve disagreements, if any, between managementfill vacancies upon recommendation of the Company’s Nominating and Governance Committee. Each member shall serve until his or her successor is duly elected and qualified or until such member’s earlier resignation or removal. Any member of the Committee may be removed, with or without cause, by a majority vote of the Board upon recommendation of the Company’s Nominating and Governance Committee.Committee Structure and Operations
The Board shall designate one member of the Committee as its Chair. The Committee shall meet in formal session at least three times each year and, in addition, hold quarterly meetings with the independent auditors and management to discuss the annual audited financial statements and the quarterly financial statements and earnings releases. Additional meetings shall be held when deemed necessary or
to assure compliance with laws and regulations. 31APPENDIX A WISCONSIN POWER AND LIGHT COMPANY ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2000desirable at the request of the Chairperson of the Board, the Chief Executive Officer or any Committee member. The Committee will meet periodically in executive session without management present.Committee Responsibilities
The responsibilities of the Committee are to:
CONTENTS PAGE - -------- ----1. Be directly responsible for the appointment, compensation, retention, termination and oversight of the Company’s independent auditors (including resolution of disagreements between management and the independent auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The Company................................................. A-3 Selected Financial Data..................................... A-3 Management'sindependent auditors must report directly to the Committee.
2. Pre-approve all audit services and permitted non-audit services to be performed by the independent auditors, subject to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Committee prior to the completion of the audit. Such pre-approval may be pursuant to pre-approval policies and procedures established by the Committee provided such policies and procedures are detailed as to the particular service to be provided, require the Committee to be informed about each such service prior to making pre-approval decisions and do not include delegation of the Committee’s responsibilities to management. The Committee may delegate authority to grant pre-approvals of audit services and permitted non-audit services to subcommittees consisting of one or more of its members, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Committee at its next scheduled meeting.
3. Review with the independent auditors the scope of the prospective audit, the estimated fees therefore and such other matters pertaining to such audit as the Committee may deem appropriate. Receive copies of the annual comments from the independent auditors on accounting procedures and systems of control.
4. Review and discuss with management and the independent auditors, before filing with the Commission, the annual audited financial statements and quarterly financial statements, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations................................. A-4Operations,” and recommend to the Board whether the audited financial statements should be included in the Company’s Form 10-K.
5. Review and discuss with management and the independent auditors the Company’s earnings press releases (including the use of “pro forma” or “adjusted” non-GAAP information), as well as financial information and earnings guidance provided to analysts and rating agencies; provided that the discussion of financial information and earnings guidance provided to analysts and ratings agencies may be done generally (e.g. discussion of the types of information to be disclosed and the type of presentation to be made) and need not occur in advance of each instance in which the Company may provide such information or guidance.
6. Review and discuss with management, the internal auditing department and the independent auditors: (1) major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; (2) analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; (3) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company.
7. Review and discuss quarterly reports from the independent auditors on: all critical accounting policies and practices to be used; all alternative treatments of financial information within GAAP that have been discussed with management, ramifications of the use of such alternative disclosures and treatments and the preferred treatment by the independent auditors; other material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.
8. Review and discuss with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit, including any audit problems or difficulties and management’s response, any restrictions on the scope of activities or access to requested information, and any significant disagreements with management. The review shall include a discussion of the responsibilities, budget and staffing of the Company’s internal audit function.
9. Review the action taken by management on the internal auditors’ and independent auditors’ recommendations.
10. Review with the senior internal audit executive the annual internal audit plan and scope of internal audits.
11. Make or cause to be made, from time to time, such other examinations or reviews as the Committee may deem advisable with respect to the adequacy of the systems of internal controls and accounting practices of the Company and its subsidiaries and with respect to current accounting trends and developments, and take such action with respect thereto as may be deemed appropriate.
12. Review the appointment, reassignment and replacement of the senior internal audit executive.
13. Set clear policies for hiring by the Company of employees or former employees of the independent auditors.
14. Meet in separate private sessions, on a periodic basis, with each of the independent auditors, the internal auditors and members of management as appropriate.
15. Review disclosures made to the Committee by the Company’s Chief Executive Officer and Chief Financial Officer during their certification process for the Form 10-K and Form 10-Q about any significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting or any fraud, whether or not material, involving management or other employees who have a significant role in the Company’s internal control over financial reporting.
16. As and when required by Commission rules, obtain, on a quarterly basis, reports from management regarding its evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting.
17. As and when required by Commission rules, obtain, on an annual basis, the independent auditors’ attestation report on management’s assessment of the Company’s internal control over financial reporting.
18. Review with management, the independent auditors and the senior internal audit executive the adequacy of, and any significant changes in, the internal controls; the accounting policies, procedures or practices of the Company and its subsidiaries; and compliance with corporate policies, directives and applicable laws.
19. Annually receive from and discuss with the independent auditors a written statement delineating all relationships between the auditors and the Company that may have a bearing on the auditors’ independence.
20. Obtain and review, at least annually, a report by the independent auditors describing: the independent auditors’ internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the firm, Public Company Accounting Oversight Board inspection, or by any inquiry or investigation by governmental or professional authorities (including any material litigation), within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (to assess the auditors’ independence) all relationships between the independent auditors and the Company. Evaluate the qualifications, performance and independence of the independent auditors taking into account the opinions of management and the internal auditors. The Committee shall present its conclusions with respect to the independent auditors to the Board.
21. Review and evaluate the lead partner of the independent auditors.
22. Ensure the rotation of lead and concurring audit partners as required by Commission rules. Consider whether, in order to ensure continuing auditor independence, there should be regular rotation of the audit firm itself.
23. Establish procedures for the receipt and handling of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and the confidential, anonymous submission by employees of the Company and its affiliates of concerns regarding questionable accounting, internal control or auditing matters.
24. Review the status of compliance with laws, regulations, and internal procedures, contingent liabilities and risks that may be material to the Company, the scope and status of systems designed to ensure Company compliance with laws, regulations and internal procedures.
25. Discuss with management the Company’s policies with respect to risk assessment and risk management, the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.
26. Conduct or authorize investigations into any matters within the Committee’s scope of responsibility, consistent with procedures to be adopted by the Committee.
27. As appropriate, obtain advice and assistance from outside legal, accounting or other advisors. Committee Reports
1. Report to the Board on a regular basis on the activities of the Committee (i) following meetings of the Committee, (ii) with respect to such other matters as are relevant to the Committee’s discharge of its responsibilities and (iii) with respect to such recommendations as the Committee may deem appropriate. This report shall include a review of any issues that arise with respect to the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements, the performance and independence of the Company’s independent auditors, or the performance of the internal audit function. The report to the Board may take the form of an oral report by the Committee’s Chair or any other member of the Committee designated by the Committee to make such report.
2. Annually produce a report on matters required by the rules of the Commission for inclusion in the Company’s annual proxy statement.
3. Maintain minutes or other records of meetings and activities of the Committee Annual Performance Evaluation
Conduct an annual performance evaluation of the Committee, which shall assess the performance of the Committee with respect to the duties and responsibilities of the Committee as set forth in this charter. In addition, the Committee shall review and reassess, at least annually, the adequacy of this charter and recommend to the Board any improvements to this charter that the Committee considers necessary or appropriate. The Committee shall conduct such evaluations and reviews in such manner as it deems appropriate.
Resources and Authority of the Committee
The Committee shall have the authority, as it deems necessary to carry out its duties, to retain, discharge and approve fees and other terms for retention of its own independent experts in accounting and auditing, legal counsel and other independent experts or advisors. The Company shall provide for appropriate funding, as determined by the Committee, for payment of compensation to the independent auditors for the purpose of rendering or issuing an audit report or related work and to any experts or advisors employed by the Committee. The Committee may direct any officer or employee of the Company or request any employee of the Company’s independent auditors, outside legal counsel or other consultants or advisors to attend a Committee meeting or meet with any Committee members.
(As Amended March 11, 2004)
APPENDIX B – WISCONSIN POWER AND LIGHT COMPANY
ANNUAL REPORT
For the Year Ended December 31, 2003
A-1Certain abbreviations or acronyms used in the text and notes of this report are defined below:
Abbreviation or Acronym
Definition
- ----------------------- ----------AFUDC
Allowance for Funds Used During Construction Alliant Energy
Alliant Energy Corporation APB Accounting Principles Board OpinionATC
American Transmission Company LLC ARO
Asset Retirement Obligation CAA
Clean Air Act Corporate Services
Alliant Energy Corporate Services, Inc. DNR
Department of Natural Resources Dth
Dekatherm EDS Electronic Data Systems Corporation EITF Emerging Issues Task ForceEPA
United StatesU.S. Environmental Protection Agency FAC Fuel Adjustment ClauseFASB
Financial Accounting Standards Board FERC
Federal Energy Regulatory Commission FIN
FASB Interpretation No. FIN 46
Consolidation of Variable Interest Entities GAAP
Accounting Principles Generally Accepted in the U.S. ICC
Illinois Commerce Commission IES IES Industries Inc. IESU IES Utilities Inc. IPCIP&L
Interstate Power and Light Company ISO Independent System OperatorKewaunee
Kewaunee Nuclear Power Plant KWh
Kilowatt-hour MD&A
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
MGP
Manufactured Gas Plants Moody’s
Moody’s Investors Service MW
Megawatt MWh
Megawatt-HourMegawatt-hour N/A
Not Applicable NEPA
National Energy Policy Act of 1992 NOx
Nitrogen Oxides NRC
Nuclear Regulatory Commission PGA Purchased Gas Adjustment PRP Potentially Responsible PartyPSCW
Public Service Commission of Wisconsin PUHCA
Public Utility Holding Company Act of 1935 Resources
Alliant Energy Resources, Inc. SEC
Securities and Exchange Commission SFAS
Statement of Financial Accounting Standards SFAS 71
Accounting for the Effects of Certain Types of Regulation SFAS 109
Accounting for Income Taxes SFAS 115
Accounting for Certain Investments in Debt and Equity Securities SFAS 133
Accounting for Derivative Instruments and Hedging Activities SFAS 143
Accounting for Asset Retirement Obligations SFAS 149
Amendment of SFAS 133 on Derivative Instruments and Hedging Activities South Beloit
South Beloit Water, Gas and Electric Company STB Surface Transportation BoardStandard & Poor’s
Standard & Poor’s Rating Services TBD
To Be Determined U.S.
United States WDNR Wisconsin DepartmentofNatural Resources WNRB Wisconsin Natural Resources BoardAmericaVEBA
Voluntary Employees’ Beneficiary Association WP&L
Wisconsin Power and Light Company WPLH WPL Holdings, Inc.WRPC
Wisconsin River Power Company A-2WP&L filed a combined Form 10-K for
20002003 with the SEC; such document included the filings of WP&L's&L’s parent, Alliant Energy,IESUIP&L and WP&L. Certain portions of MD&A and the Notes to Consolidated Financial Statements included in this WP&L Proxy Statement represent excerpts from the combined Form 10-K. As a result, the disclosure included in this WP&L Proxy Statement at times includes information relating to Alliant Energy,IESU, IPC,IP&L, Resources and/or Corporate Services. All required disclosures for WP&L are included in this proxy statement thus such additional disclosures represent supplemental information.THE COMPANY
In April 1998, WPLH, IES and IPC completed a merger resulting in Alliant Energy.The primary first tier subsidiaries of Alliant Energy include: WP&L,
IESU, IPC,IP&L, Resources and Corporate Services. WP&L was incorporated in 1917 in Wisconsinin 1917astheEastern Wisconsin ElectricCompany andCompany. WP&L is a public utility engaged principally in the generation,transmission,distribution and sale of electric energy; and the purchase, distribution, transportation and sale of naturalgas; and the provision of water servicesgas in selective markets. Nearly all of WP&L's&L’s customers are located in south and central Wisconsin. WP&L operates in municipalities pursuant to permits of indefinite duration, which are regulated by Wisconsin law. AtDecemberDec. 31,2000,2003, WP&L supplied electric and gas service toapproximately 414,000436,976 and165,000172,615 (excluding transportation and other) customers, respectively. WP&L alsohad approximately 19,000provides watercustomers.services in select markets and various other energy-related products and services including construction management services for wind farms. In2000, 19992003, 2002 and1998,2001, WP&L had no single customer for which electric, gas, water and/orgasother sales accounted for 10% or more of WP&L's&L’s consolidated revenues. WPL Transco LLCwas formed in Wisconsin in 2000 andisthe wholly- owneda wholly-owned subsidiary of WP&Lwhichand holdstheWP&L’s investment in ATC. WP&L also owns all of the outstanding capital stock of South Beloit, a public utility supplying electric, gas and water service, principally in Winnebago County, Illinois, which was incorporated in 1908. WP&L also owns varying interests in several other subsidiaries and investmentswhichthat are not material to WP&L's&L’s operations.ELECTRIC OPERATIONS--AsWP&L is subject to regulation by the PSCW regarding retail utility rates and service, accounts, issuance and use of
Decemberproceeds of securities, certain additions and extensions to facilities and in other respects. WP&L is required to file a rate case with the PSCW at least every two years based on a forward-looking test year period.Electric Operations - As of Dec. 31,
2000,2003, WP&L provided retail electric service toapproximately 414,000 electric retail434,941 customers,600601 communities and2830 wholesale customers.WP&L's2003 electric utility operations accounted for80%75% of operating revenues and90%85% of operatingincome for the year ended December 31, 2000.income. Electric sales are seasonal to some extent with the annual peak normally occurring in the summer months. In2000,2003, the maximum peak hour demand for WP&L was2,5082,782 MW and occurred onAugustAug. 20, 2003.Gas Operations - As of Dec. 31,
2000. GAS OPERATIONS--As of December 31, 2000,2003, WP&L provided retail natural gas service toapproximately 165,000 gas172,615 (excluding transportation and other) customers in233232 communities.WP&L's2003 gas utility operations accounted for19%22% of operating revenues and9%13% of operating income,for the year ended December 31, 2000.which included providing gas services to retail and transportation customers. WP&L's&L’s gas sales follow a seasonal pattern. There is an annual base load of gas used for cooking, heating and other purposes, with a large heating peak occurring during the winter season.
2003(1) 2002(1) 2001(1) 2000 1999 (in thousands) Operating revenues
$1,216,981 $989,525 $993,716 $862,381 $752,505 Earnings available for common stock
111,564 77,614 70,180 68,126 67,520 Cash dividends declared on common stock
70,580 59,645 60,449 -- 58,353 Cash flows from operating activities
138,495 223,750 135,886 174,060 163,228 Total assets
2,469,277 2,335,138 2,217,457 2,160,554 2,025,709 Long-term obligations, net
453,509 523,308 523,183 569,309 471,648
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (IN THOUSANDS)Operating revenues........................... $ 862,381 $ 752,505 $ 731,448 $ 794,717 $ 759,275 Earnings available(1) Refer to “Results of Operations” in MD&A for common stock.......... 68,126 67,520 32,264 67,924 79,175 Cash dividends declared on common stock...... -- 58,353 58,341 58,343 66,087 Total assets................................. 1,857,024 1,766,135 1,685,150 1,664,604 1,677,814 Long-term obligations, net................... 569,309 471,648 471,554 420,414 370,634a discussion of the 2003, 2002 and 2001 results of operations.The 1998 financial results reflectAlliant Energy is the
recordingsole common shareowner of$17 millionall 13,236,601 shares ofpre-tax merger-related charges. A-3MANAGEMENT'SWP&L’s common stock outstanding. As such, earnings per share data is not disclosed herein.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained in this report
(including MD&A)that are not of historical fact are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include: weather effects on sales and revenues;generaleconomic and political conditions in WP&L's&L’s service territories; federal and state regulatory orgovernmentgovernmental actions, includingissues associated withthederegulationimpact ofthe domestic utility industrypotential energy-related legislation in Congress and thesetting of ratesability to obtain adequate and timely rate relief to allow for, among other things, the recovery ofcosts;operating costs and the earning of reasonable rates of return, as well as the payment of expected levels of dividends; unanticipated construction and acquisition expenditures; unanticipated issues in connection with WP&L’s construction of new generating facilities; issues related tostrandedpurchased electric supplies and price thereof, including the ability to recover purchased-power and fuel costsand the recovery thereof; unanticipatedthrough rates; issues related tothe supplyelectric transmission, including recovery ofpurchased electricitycosts incurred, andprice thereof; unexpected issuesfederal legislation and regulation affecting such transmission; risks related to the operations of and unanticipated issues relating to the sale of WP&L’s interest in Kewaunee;unanticipatedcosts associated withcertainWP&L’s environmental remediation effortsbeing undertaken byand with environmental compliance generally; developments that adversely impact WP&L;&L’s ability to implement its strategic plan; no material permanent declines in the fair market value of, or expected cash flows from, WP&L’s investments; WP&L’s ability to continue cost controls and operational efficiencies; WP&L’s ability to identify and successfully complete proposed acquisitions and development projects; access to technological developments; employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages; continued access to the capital markets; the ability to successfully complete ongoing tax audits andchangesappeals with no material impact on WP&L’s earnings or cash flows; inflation rates; and factors listed in “Other Matters—Other Future Considerations.” WP&L assumes no obligation, and disclaims any duty, to update the forward-looking statements in this report.STRATEGIC OVERVIEW
November 2002 Plan - In 2003, Alliant Energy (including WP&L) completed the plan it (including WP&L) outlined in November 2002 to strengthen its (including WP&L’s) financial profile. A summary of the strategic actions completed under the plan that directly impact WP&L is as follows:
Asset sales - in 2003, WP&L sold its water utility serving the Beloit area. WP&L continues to pursue the sale of its water utilities serving the Ripon and South Beloit areas.Common equity offering - in July 2003, Alliant Energy sold 17.25 million shares (net proceeds of $318 million) of its common stock in a public offering and infused $200 million into WP&L in support of its utility generation and reliability initiatives.Cost control - Alliant Energy (including WP&L) has implemented a comprehensive Lean Six Sigma program, which it expects to help reduce its operating costs and improve the efficiency of its operations.Updated Strategic Plan - Alliant Energy’s domestic utility business (including WP&L) is its core business and the sole growth platform within its updated strategic plan. As a result, Alliant Energy views its domestic utility business as the area of its business that is expected to provide the larger share of its long-term earnings growth. It will also be the area of the business that Alliant Energy will invest the bulk of its capital in during 2004 and 2005. In addition, Alliant Energy’s Non-regulated Generation business has refined its focus to support the development, financing and construction of generation to meet the needs of Alliant Energy’s domestic utility business.
Alliant Energy’s updated strategy reflects the fact that it has investment opportunities in its domestic utility business that did not exist several years ago. Wisconsin enacted legislation with the goal of assuring reliable
electric energy for Wisconsin, which allows the construction of merchant power plants in the
ratestate and streamlines the regulatory approval process for building new generation and transmission facilities. More recently, the PSCW approved a plan proposed by another Wisconsin utility which provides a similar level ofinflation. UTILITY INDUSTRY OUTLOOK OVERVIEW--Asinvestment certainty by leasing generation from an affiliate. These changes have enabled WP&L to pursue additional generation investments to serve its customers and to provide Alliant Energy with greater certainty regarding the returns on these investments.In December 2003, Alliant Energy announced its updated domestic utility generation plan, which is expected to add a diversified portfolio of nameplate generation between 2004 and 2010 for WP&L as follows (in MW):
Natural gas-fired generation
300 Wind (purchased-power and/or generation)
100 Coal
200 Other
15 Total
615 WP&L intends to add this new generation to meet increasing customer demand, reduce reliance on purchased-power agreements and mitigate the impacts of potential future plant retirements. WP&L will continue to purchase energy and capacity in the market and intends to remain a net purchaser of both, but at a reduced level assuming the successful completion of these generation projects. WP&L expects that 300 MW of the natural gas-fired generation will be installed as combustion turbines for peaking generation. The plan also reflects continued commitments to WP&L’s energy efficiency and environmental protection programs. WP&L’s capital expenditures associated with this plan are expected to be approximately $360 million over the seven-year period of 2004 to 2010.
In January 2004, Alliant Energy announced that Resources’ Non-regulated Generation business has assumed an option to purchase a site for a 300 MW natural gas-fired power plant outside Sheboygan Falls, Wisconsin. Subject to PSCW approval, Resources’ Non-regulated Generation business would construct and own the approximately $150 million plant (of which $75 million has been expended as of Dec. 31, 2003 to purchase two gas turbines) and lease the facility to WP&L. WP&L will operate the plant and utilize the plant’s output. With the appropriate timely regulatory approvals, Alliant Energy currently intends to have this facility placed in-service in 2005. In addition, Calpine Corporation is currently constructing a 600 MW natural gas-fired combined cycle power plant in Wisconsin at WP&L’s Rock River plant (Riverside). WP&L has entered into a purchased-power agreement for 453 MW of this plant’s output and the plant is expected to be placed in-service prior to the 2004 summer peak demand.
RATES AND REGULATORY MATTERS
Overview - WP&L, which has one utility subsidiary, South Beloit, is currently subject to federal regulation by FERC and state regulation in Wisconsin and Illinois. Such regulatory oversight covers not only current facilities and operations, but also WP&L’s plans for construction and financing of new generation facilities and related activities.
As a public utility company with significant utility assets, WP&L
competesconducts its utility operations in an ever-changingutility industry.business environment. Electric energy generation, transmission and distribution areinfacing a period of fundamental change resulting from potential legislative, regulatory, economic and technological changes. These changes could impact competition in the electric wholesale and retail marketsasin the event customers of electric utilities arebeingoffered alternative suppliers. Such competitive pressures could result in electric utilities losing customers and incurring stranded costs (i.e., assets and other costs rendered unrecoverable as the result of competitive pricing), which would be borne by security holders if the costs cannot be recovered from customers.WP&L is currently subject to regulation by FERC, and state regulation in Wisconsin and Illinois.FERC regulates competition in the electric wholesale power generation market and each state regulates whetherto permit retail competition, the terms
of such retail competitionthat would apply and the recovery of any portion of stranded costs that are ultimately determined to have resulted from retail competition. WP&L cannot predict the timing of a restructured electric industry or the impact on its financial condition or results ofoperations but does believe it is well positioned to compete in a deregulated competitive market. Although WP&L ultimately believes that the electric industry will be deregulated, theoperations. The pace ofderegulationrestructuring in itsWisconsinprimary retail electric service territorieswill likelyhas been delayed (and may continue to be delayed for a long period of time) due torecent eventsuncertainty and developments in the industry.Certain Recent Developments - Details of WP&L’s rate cases impacting its results of operations since 2001 are as follows (dollars in millions):
Case
Utility
TypeFiling
Date
Increase
RequestedInterim
Increase
Granted (1)Interim
Effective
DateFinal
Increase
Granted (1)Final
Effective
Date
Expected
Final
Effective
Date
Return
on
Common
EquityNotes 2002 retail
E/G/W 8/01 $104 $49 4/02 $82 9/02 N/A 12.3% 2003 retail
E/G/W 5/02 123 -- N/A 81 4/03 N/A 12% (2 ) 2004 retail
E/G/W 3/03 87 -- N/A 14 1/04 N/A 12% (3 ) Wholesale
E 2/02 6 6 4/02 3 1/03 N/A N/A (4 ) Wholesale
E 3/03 5 5 7/03 5 2/04 N/A N/A South Beloit
retail - IL
G/W 10/03 1 N/A N/A TBD TBD 9/04 TBD 2004 retail
(fuel-only)
E 2/04 16 TBD TBD TBD TBD 8/04 N/A
(1) Interim rate relief is implemented, subject to refund, pending determination of final rates. The final rate relief granted replaces the amount of interim rate relief granted.
(2) A party representing selected commercial and industrial electric customers had appealed the rate case to a court, seeking remand back to the PSCW for further consideration on issues of revenue increase amount and rate design. In December 2003, the court denied the request for remand and affirmed the PSCW’s earlier decision.
(3) A number of factors contributed to the final rate relief being set lower than the original request, including lower projected fuel and purchased-power costs, reduced operation and maintenance costs, lower purchased-power incentive costs and reduced capital expenditures.
(4) Since the final increase was lower than the interim relief granted, a refund to customers was made in 2003. A significant portion of the rate increases included in the previous table reflect the recovery of increased costs incurred by WP&L, or costs it expects to incur, thus the total increase in revenues related to
California's restructured electric utility industry. In 1999, Wisconsin enacted "Reliability 2000" legislation which included, among other items, the formation of a Wisconsin transmission company (American Transmission Company,these rate increases have not orATC) for those Wisconsin utility holding companies who elected to take advantage of the modified asset cap law and others who elected to join. ATC received all necessary regulatory approvals and began operations on January 1, 2001. WP&L, including South Beloit, transferred its transmission assets (approximate net book value of $177 million) to ATC on January 1, 2001. WP&L will receive cash of $88 million in 2001 and currently has an $89 million equity investment in ATC, resulting in no gain or loss for WP&L. WP&L doesare notexpect this transferexpected to result in asignificant impact on its financial condition or results of operations because it believes FERC will allow WP&L to earn a return on the contributed assets A-4MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) comparable to the return currently allowed by the PSCW and FERC. In addition to transferring its transmission assets, WP&L also transferred ownership of its System Operations Center to ATC. WP&L's ownership percentagecorresponding increase inATC is approximately 26 percent and its investment is accounted for under the equity method. Although no assurance can be given, it is currently anticipated that ATC's dividend policy will support a return of a significant portion of these earnings to the equity holders. ATC is expected to realize its revenues from the provision of transmission services to both participants in ATC as well as nonparticipants. ATC's current rates are subject to refund pending final approval by FERC. ATC is a transmission-owning member of the Midwest ISO and the Mid-America Interconnected Network, Inc. Regional Reliability Council.net income.WP
&L's transfer of its transmission assets to ATC and its participation in the Midwest ISO are expected to comply with the provisions of a FERC order requiring utilities to turn over voluntarily the operational control of their transmission systems to a regional entity by the end of 2001. RATES AND REGULATORY MATTERS--As part of its merger approval, FERC accepted a proposal by WP&L which provides for a four-year freeze on wholesale electric prices beginning with the effective date of the April 1998 merger forming Alliant Energy. WP&L also agreed with the PSCW to provide customers a four-year retail electric and gas price freeze (the ICC granted South Beloit a three-year rate freeze), excluding the electric FAC and PGA clause, which commenced on the effective date of the April 1998 merger. In Wisconsin, a re-opening of an investigation into WP&L's rates during the rate freeze period, for both cost increases and decreases, may occur only for single events that are not merger-related and have a revenue requirement impact of $4.5 million or more. Assuming capture of the merger-related synergies and no significant legislative or regulatory changes negatively affecting its utility subsidiaries, WP&L does not expect the merger-related electric and gas price freezes to have a material adverse effect on its financial condition or results of operations. In connection with a statewide docket to investigate compliance issues associated with the EPA's NOx emission reductions, in March 1999, the PSCW authorized deferral of all incremental NOx compliance costs excluding internal labor and replacement purchased-power costs. In March 2000, the PSCW issued an order approving WP&L's NOx compliance plans, including additional investments at several WP&L generating units. The order also approved a 10-year straight-line depreciation method for NOx compliance investments. Such depreciation is also being deferred and WP&L anticipates recovery of all deferred NOx compliance costs beginning with the first rate changes after the rate freeze expires. The depreciation lives will be reviewed every two years. Refer to "Liquidity and Capital Resources--Environmental" for further discussion of the NOx issue. WP&L's&L’s retail electric rates are basedin parton annual forecasted fuel and purchased-power costs. Under PSCW rules, WP&L can seekemergencyrate increases if it experiences an extraordinary increase in the cost of fuel or if the annualfuel and purchased-powercosts are more than3 percent3% higher than the estimated costs used to establish rates.If WP&L's earnings exceed its authorized return on equity, the incremental revenues collected causing the excessive return are subject to refund. In December 2000,Such rules were revised effective for 2003 for WP&Lrequested a $73 million (revisedand significantly reduce the regulatory lag for Wisconsin utilities and customers related to$64 million) annual retail electric rate increase fromthePSCW to cover increasestiming of changes inWP&L's 2001rates for increased or decreased fuel and purchased-power costs. The revised rules require that an interim increase/decrease in rates subject to increased/decreased fuel costs,dueif determined tothe continued increasesbe justified, be approved within 21 days of notice to customers. Any such change innatural gas prices which impact WP&L's generationrates would be effective prospectively, would require a refund with interest if final rates are determined to be lower than interim rates approved, and would not include a provision for collection of retroactive fuel cost variances. The revised rules also include a process whereby Wisconsin utilities can seek deferral treatment of emergency changes in fuel costs between fuel-only or base rate cases. Such deferrals would be subject to review, approval andthe increased costs of purchased-power. The PSCW approved a $46 million interim retail electricrecovery in future fuel-only or base rateincrease effective February 9, 2001. A decision on a permanent rate increasecases.Energy-related legislation is
expectedcurrently pending in thesecond quarter of 2001. The PSCW also grantedU.S. Congress that, among other proposals, would repeal PUHCA. However, it is uncertain when or whether such legislation will be enacted or what impact it would have on WP&L annual retail electric rate increases of $14.8 million, $14.5 million and A-5MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND&L.RESULTS OF OPERATIONS
(CONTINUED) $16.5 million in July 1998, March 1999 and May 2000, respectively, due to higher fuel and purchased-power costs, some of which have been caused by the transmission constraints and electric reliability concerns in the Midwest.Overview - WP
&L does not believe any revenues collected to date are subject to refund. In November 1999, the PSCW allowed WP&L rate recovery of $6.3 million of its Year 2000 (Y2K) program expenditures, but it denied rate recovery of the first $4.5 million. These costs were expensed in 1999. The PSCW's decision to allow rate recovery was appealed by certain intervenors in Dane County, Wisconsin district court. In April 2000, the intervenors withdrew their appeal. WP&L began recovering such costs in May 2000 and is amortizing the deferred costs as the amounts are recovered in rates. In February 2000, the PSCW issued an order allowing WP&L to defer certain incremental costs it incurred after February 16, 2000 relating to the development of ATC. In December 2000, the PSCW issued an order allowing WP&L to defer incremental operating costs associated with ATC. Recovery of such costs will be addressed in WP&L's next retail rate case. In 2000, the NRC raised several areas of concern with Kewaunee's operations. The concerns raised by the NRC are estimated to result in additional operating costs to WP&L in 2001 of approximately $5 million. Additional operating costs to WP&L over the period of 2002 through 2005 are estimated to be approximately $20 million and will be included in a future rate request. WP&L submitted a request to the PSCW for deferral of incremental costs associated with this issue. The NRC has acknowledged the safety record of Kewaunee and its ability to continue operations. WP&L is in the process of pursuing a rate complaint against Union Pacific Railroad with the STB. WP&L believes Union Pacific Railroad is charging an excessive rate for transporting low-sulfur coal from the Powder River Basin to the Edgewater Generating Station located in Sheboygan, Wisconsin. To contest the rate, WP&L filed a rate case with the STB and upon the expiration of the existing contract, began moving coal under a tariff rate beginning January 1, 2000. Final briefs were filed in December 2000 and the STB has until September 2001 to issue a final decision. If the STB rules in WP&L's favor, a refund to WP&L's customers will need to be considered in conjunction with the electric FAC in Wisconsin. WP&L complies with the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 provides that rate-regulated public utilities record certain costs and credits allowed in the rate making process in different periods than for non-regulated entities. These are deferred as regulatory assets or accrued as regulatory liabilities and are recognized in the Consolidated Statements of Income at the time they are reflected in rates. If a portion of WP&L's operations no longer complies with SFAS 71, a write-down of related regulatory assets and possibly other charges would be required, unless some form of transition cost recovery is established by the appropriate regulatory body that meets the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. In addition, WP&L would be required to determine any impairment of other assets and write-down any impaired assets to their fair value. WP&L believes it currently meets the requirements of SFAS 71. RESULTS OF OPERATIONS OVERVIEW--WP&L's&L’s earnings available for common stock increased$0.6$34.0 million and$35.3$7.4 million in20002003 and1999, respectively. The 2000 increase was2002, respectively, primarily due to higher electricmarginsanda reduced effective income tax rate, largely offset by increased operation and maintenance, depreciation and amortization and interest expenses. The 1999 increase was primarily due to the nonrecurrence of $17.3 million of merger-related expenses in 1998, higher electric and naturalgas margins,reduced other A-6MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) operation and maintenance expenses and income realized from weather hedges. Such increases werepartially offset by increaseddepreciation and amortization expense (excluding hedge losses in WP&L's nuclear decommissioning trust fund) and higher interest expense. ELECTRIC UTILITY OPERATIONS--Electricoperating expenses.Electric Margins - Electric margins and MWh sales for WP&L
for 2000, 1999 and 1998were asfollows:follows (in thousands):
Revenues and Costs MWhs Sold 2003 2002 * 2001 ** 2003 2002 * 2001 ** Residential
$ 316,893 $ 271,875 17% $ 248,128 10% 3,410 3,432 (1% ) 3,318 3% Commercial
170,342 146,726 16% 138,269 6% 2,167 2,150 1% 2,122 1% Industrial
243,770 211,310 15% 207,791 2% 4,595 4,454 3% 4,538 (2% ) Total from retail customers
731,005 629,911 16% 594,188 6% 10,172 10,036 1% 9,978 1% Sales for resale
155,573 125,822 24% 131,187 (4% ) 4,196 3,654 15% 3,524 4% Other
23,508 31,947 (26% ) 28,075 14% 82 94 (13% ) 61 54% Total revenues/sales
910,086 787,680 16% 753,450 5% 14,450 13,784 5% 13,563 2% Electric production
fuel and purchased- power expense
409,742 352,539 16% 338,028 4% Margin
$ 500,344 $ 435,141 15% $ 415,422 5%
REVENUES AND COSTS (IN THOUSANDS) MWHS SOLD (IN THOUSANDS) -------------------------------------- -------------------------------- 2000 1999* 1998 ** 2000 1999 * 1998 ** -------- -------- --- -------- --- ------ ------ --- ------ ---Residential................. $229,668 $213,496 8% $198,770 7% 3,151 3,111 1% 2,964 5% Commercial.................. 127,199 116,947 9% 108,724 8% 2,031 1,980 3% 1,898 4% Industrial.................. 190,085 171,118 11% 162,771 5% 4,688 4,570 3% 4,493 2% -------- -------- -------- ------ ------ ------ TotalReflects the % change from ultimate customers............... 546,952 501,561 9% 470,265 7% 9,870 9,661 2% 9,355 3% Sales for resale............ 115,715 102,751 13% 128,536 (20%) 3,228 3,252 (1%) 4,492 (28%) Other....................... 29,524 22,295 32% 15,903 40% 63 54 17% 59 (8%) -------- -------- -------- ------ ------ ------ Total revenues/sales...... 692,191 626,607 10% 614,704 2% 13,161 12,967 1% 13,906 (7%) ====== ====== ====== Electric production fuels expense................... 113,208 110,521 2% 120,485 (8%) Purchased power expense..... 146,939 107,598 37% 113,936 (6%) -------- -------- -------- Margin.................... $432,044 $408,488 6% $380,283 7% ======== ======== ========2002 to 2003.* Reflects the % change from 1999 to 2000. ** Reflects the % change from 1998 to 1999.
** Reflects the % change from 2001 to 2002. Electric margin increased
$23.6$65.2 million, or6%15%, and$28.2$19.7 million, or7%5%,during 2000for 2003 and1999, respectively. The 2000 increase was2002, respectively, primarily due to the implementation of rate increases during 2003 and 2002, including increased revenues to recover a significant portion of WP&L’s increased operating expenses and increased sales from continued modest retail customer growth. Also contributing toretail customers duethe 2003 increase were the impact of WP&L implementing seasonal rates in 2003 for the first time, lower purchased-power and fuel costs impacting margin and higher sales tocontinued economic growth in WP&L's service territory, a favorable $10 million change in estimate of utility services rendered but unbilled at month-end and increased energy conservation revenues.non-retail customers. These items were partially offset by lower energy conservation revenues and the impact of milder weather conditions in20002003 compared to1999 and higher purchased-power and fuel expenses. The 19992002. Also contributing to the 2002 increasewas primarily due to separate $15 million annual rate adjustments implemented at WP&L in July 1998 and March 1999 to recover higher purchased-power and transmission costs. An increase in retail sales of 3% due towere more favorable weather conditions in 2002 compared to 2001, partially offset by the sluggish economy.In April 2003, WP&L implemented seasonal electric rates that are designed to result in higher rates for the peak demand period from June 1 through Sept. 30 and
economic growth within WP&L's service territory also contributedlower rates in all other periods during each calendar year. As a result, total annual revenues are not expected to be impacted significantly. However, given the seasonal rates were not implemented in 2003 until April, the impact of seasonal rates increased electric margins by approximately $6 million in 2003 compared to 2002 when no seasonal rates were in effect. As a result, the first quarter of 2004 margins are expected to be negatively impacted in comparison to theincrease. Partially offsetting2003 margin for the1999 increase were lower sales to off-system and wholesale customers due to transmission constraints and decreased contractual commitments and $3.2 million of revenues collected in 1998 forsame period by asurcharge related to Kewaunee. Refer to "Utility Industry Outlook--Rates and Regulatory Matters" for information on a WP&L FAC filing in December 2000. A-7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GAS UTILITY OPERATIONS--Gassimilar amount.Gas Margins - Gas margins and Dth sales for WP&L
for 2000, 1999 and 1998were asfollows:follows (in thousands):
Revenues and Costs Dths Sold 2003 2002 * 2001 ** 2003 2002 * 2001 ** Residential
$137,060 $94,509 45% $107,673 (12% ) 12,797 12,863 (1% ) 11,754 9% Commercial
74,594 50,121 49% 58,658 (15% ) 8,539 8,574 -- 7,572 13% Industrial
9,606 6,980 38% 8,907 (22% ) 1,182 1,303 (9% ) 1,197 9% Transportation/other
51,117 27,481 86% 31,625 (13% ) 19,796 18,572 7% 16,866 10% Total revenues/sales
272,377 179,091 52% 206,863 (13% ) 42,314 41,312 2% 37,389 10% Cost of gas sold
186,285 110,119 69% 153,823 (28% ) Margin
$86,092 $68,972 25% $53,040 30%
REVENUES AND COSTS (IN THOUSANDS) DTHS SOLD (IN THOUSANDS) -------------------------------------- -------------------------------- 2000 1999* 1998 ** 2000 1999Reflects the % change from 2002 to 2003.
* 1998 ** -------- -------- --- -------- --- ------ ------ --- ------ ---Residential................. $ 96,204 $ 69,662 38% $ 65,173 7% 12,769 12,070 6% 10,936 10% Commercial.................. 54,512 35,570 53% 33,898 5% 8,595 7,771 11% 7,285 7% Industrial.................. 8,581 6,077 41% 5,896 3% 1,476 1,520 (3%) 1,422 7% Transportation/other........ 5,855 9,461 (38%) 6,770 40% 13,680 13,237 3% 12,948 2% -------- -------- -------- ------ ------ ------ Total revenues/sales...... 165,152 120,770 37% 111,737 8% 36,520 34,598 6% 32,591 6% ====== ====== ====== Cost of gas sold............ 107,131 64,073 67% 61,409 4% -------- -------- -------- Margin.................... $ 58,021 $ 56,697 2% $ 50,328 13% ======== ======== ========*Reflects the % change from 2001 to 2002. * Reflects the % change from 1999Gas revenues and cost of gas sold were higher in 2003 and 2001 as compared to
2000. ** Reflects the % change from 19982002 due to1999.increased natural gas prices. These increases alone had little impact on WP&L’s gas margin given its rate recovery mechanism for gas costs. Gas margin increased$1.3$17.1 million, or2%25%, and$6.4$15.9 million, or13%30%, for 2003 and 2002, respectively, primarily due to the impact of rate increases implemented during20002003 and1999,2002, improved performance of $3 million from WP&L’s performance-based commodity cost recovery program (benefits are shared by ratepayers and shareowners), and continued modest customer growth. The 2002 increase was also due to the negative impact high gas prices in early 2001 had on gas consumption during that period.Refer to Note 1(h) of the “Notes to Consolidated Financial Statements” for information relating to utility fuel and natural gas cost recovery.
Other Revenues - Other revenues increased $11.8 million and decreased $10.6 million for 2003 and 2002, respectively. The
20002003 increase was primarily due to increased revenues from WindConnect™. The 2002 decrease was primarily due to decreased non-commodity products and services revenues. These 2003 and 2002 variances were largely offset by variances in other operation and maintenance expenses.Other Operating Expenses - Other operation and maintenance expenses increased $52.9 million and $28.7 million for 2003 and 2002, respectively. The 2003 increase was largely due to
more favorable weather conditionsincreases in the2000 heating season compared to 1999, partially offset by reduced energy conservation revenues. Due to WP&L's rate recovery mechanisms for gasamortization of deferred coststhe significant increasethat are now being recovered inWP&L's cost of gas sold during 2000 had no adverse impact on gas margin.rates, employee and retiree benefits (primarily compensation, medical and pension costs), WindConnect™ and nuclear expenses. The1999 increase was due toincreasedsales resultingnuclear expenses resulted primarily fromcustomer growth of approximately 2% and more favorable weather conditions in 1999. Refer to "Interest Expense and Other" for discussion of income realized from gas weather hedges in 2000 and 1999 and Note 1(i) of the "Notes to Consolidated Financial Statements" for discussion of a gas cost adjustment mechanism in place at WP&L. OTHER OPERATING EXPENSES--Other operation and maintenance expenses increased $16.8 million and decreased $21.4 million for 2000 and 1999, respectively. The 2000 increase was primarily due toa planned refueling outage at Kewauneehigher expensesinthe energy delivery business unit, increased energy conservation expense and increased maintenance expenses. The 2000 increases2003. There was no refueling outage in 2002. These items were partially offset byexpenses incurred in 1999 relating to WP&L's Y2K program.lower fossil generation expenses. The1999 decrease2002 increase wasprimarilylargely due tothe nonrecurrence of $11.2 million of merger-related expenses in 1998 forhigher fossil generation, employeeretirements, separationsandrelocations, reduced expenses in theretiree benefits, energydeliveryconservation, andgeneration business units, reduced insurance-related expenses, lower nucleartransmission and distribution expenses, andlower costs due to merger-related operating efficiencies. The 1999 decreases werehigher regulatory amortization, partially offset byincreased costs for energy conservation, employee incentive compensation, expenses incurred in 1999 relating todecreased non-commodity products and services expenses. A significant portion of these cost increases are being recovered as a result of theY2K programrate increases implemented during 2003 andemployee benefits expenses.2002.Depreciation and amortization expense
increased $26.9decreased $3.8 million anddecreased $6.2$12.3 million for20002003 and1999,2002, respectively. The2000 increase was primarily due to increased earnings in the nuclear decommissioning trust fund of approximately $20 million, property additions and higher amortization expense. The 1999 decrease was due to reduced earnings in the nuclear decommissioning trust fund and the nonrecurrence of the $3.2 million Kewaunee surcharge in 1998. The 1999 decrease was partially offset by the impact of property additions. The accounting for earnings on the nuclear decommissioning A-8MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) trust funds results in no net income impact. Miscellaneous, net income is increased for earnings on the trust fund, which is offset in depreciation expense. INTEREST EXPENSE AND OTHER--Interest expense increased $3.7 million and $4.4 million in 2000 and 1999, respectively. The 2000 increase was primarily due to higher interest rates and borrowings outstanding in 2000. The 1999 increase was primarily due to higher short-term borrowings. Miscellaneous, net income increased $18.4 million and decreased $3.0 million in 2000 and 1999, respectively. The 2000 increase was primarily due to increased earnings in the nuclear decommissioning trust fund of approximately $20 million, partially offset by reduced income of $2 million realized from gas weather hedges. The 19992003 decrease was primarily due to lowerearnings on the nuclear decommissioning trust fund,software amortizations, partially offset by property additions. The 2002 decrease was largely due to lower decommissioning expense based on reduced retail funding levels, partially offset by higher software amortizations.Interest Expense and Other - Interest expense decreased $2.3 million and $3.3 million for 2003 and 2002, respectively. The 2003 decrease was largely due to lower average borrowings outstanding. The 2002 decrease was largely due to lower average interest rates on the
nonrecurrence of $6.1outstanding borrowings. Equity income from unconsolidated investments increased $3.7 millionof merger-related expenses in 1998for 2003 due to higher earnings at WRPC and$5 million recognized in 1999 associated with the settlement of gas weather hedges. Refer to Note 10(b) of the "Notes to Consolidated Financial Statements" for additional information relating to the gas weather hedges. INCOME TAXES--TheATC.Income Taxes - The effective income tax rates were
37.5%36.4%,39.2%35.6% and41.0%35.9% in2000, 19992003, 2002 and1998,2001, respectively. Refer to Note 5 of the"Notes“Notes to Consolidated FinancialStatements"Statements” for additional information.LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW--GivenOverview - Based on expected operating cash flows, coupled with actions Alliant Energy (including WP
&L's financing flexibility, including access&L) has taken and expects toboth the debttake to strengthen its andequity securities markets, managementWP&L’s balance sheet, WP&L believes it will be able to secure the capital it requires to implement its updated strategic plan. WP&L believes its ability to secure additional capital has been significantly enhanced by thenecessary financing capabilitiessuccessful execution of the strategic actions Alliant Energy announced inplaceNovember 2002. Refer toadequately finance its capital requirements“Strategic Overview - November 2002 Plan” forthe foreseeable future.further discussion.WP
&L's&L’s capital requirements are primarily attributable toits utilityconstructionand acquisitionprograms and its debt maturities. WP&L expects&L’s cash flows are expected tomeet its future capital requirements with cash generated from operations and external financing. The level of cash generated from operations is partially dependent on economic conditions, legislative activities, environmental matters and timely regulatory recovery of utility costs. Liquiditycover dividends and capitalresources will be affected by costsexpenditures related to infrastructure and reliability investments. WP&L’s capital expenditures associated withenvironmentalbuilding additional generation are expected to total $360 million through 2010 andregulatory issues. Changes inare expected to be financed largely through external financings, supplemented by internally generated funds.Cash Flows - Selected information from the
utility industry could also impactConsolidated Statements of Cash Flows was as follows (in thousands):
Cash flows from (used for): 2003 2002 2001 Operating activities
$138,495 $223,750 $135,886 Financing activities
(11,595 ) (27,685 ) (19,176 ) Investing activities
(108,402 ) (187,795 ) (116,832 ) In 2003, WP
&L's liquidity and capital resources, as discussed in "Utility Industry Outlook." CASH FLOWS--In 2000, WP&L's cash flows used for financing activities increased $20 million due to the reduction of short-term debt outstanding and a capital contribution of $30 million in 1999 from Alliant Energy, partially offset by the issuance of $100 million of senior unsecured debentures in 2000 and no common stock dividends declared in 2000 due to management of its capital structure. In 1999, WP&L's&L’s cash flows from operating activities decreased$14$85 million primarily due to changes in working capital, partially offset by higher netincome primarily due to merger-related expenses in 1998; cashincome. Cash flows used for financing activities decreased$34$16 million primarily due toincreased short-term borrowings in 1999 and the $30 milliona higher capital contribution from Alliant Energy in 2003 compared to 2002, partially offset by changes in theissuanceamount of$60debt issued and retired. Cash flows used for investing activities decreased $79 million primarily due to proceeds from the sale ofdebenturesWP&L’s water utility serving the Beloit area and lower contributions to its nuclear decommissioning trust fund. In 2002, WP&L’s cash flows from operating activities increased $88 million due to changes in1998;working capital and cash flows used for investing activities increased$17$71 million primarily due toincreased construction expenditures. ENVIRONMENTAL--WP&L's pollution abatement programs are subjectproceeds received from the transfer of WP&L’s transmission assets tocontinuing review and are periodically revised due to changesATC inenvironmental regulations, construction plans and escalation of construction costs. While management cannot precisely forecast the effect of future environmental regulations on operations, it has taken steps to anticipate the future while also meeting the requirements of current environmental regulations. A-9MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Wisconsin is subject to the Clean Air Act due to its non-attainment status with respect to the one-hour ozone standard in the Lake Michigan region. The WDNR has developed a rule that contains a plan for the state to meet the one-hour ozone attainment standard. The plan focuses on rate of progress requirements that are specified2001.State Regulatory Approvals - At Dec. 31, 2003, WP&L was authorized by the
Clean Air Act for the years 2002, 2005 and 2007. The rule requires NOx reductions in counties that are currently in non-attainmentappropriate state regulatory agencies to issue short-term debt ofthe one-hour ozone standard$240 million, which includesWP&L's Edgewater power plant.$85 million for general corporate purposes, an additional $100 million should WP&Lis currently evaluating various alternativesno longer sell its utility receivables and an additional $55 million should WP&L need toachieve the proposed reductionsrepurchase its variable rate bonds.Cash and
to reduce the emission levels at various power plants. Based on existing technology, preliminary estimates indicate that capital investments in the rangeTemporary Cash Investments - As of$30 to $40Dec. 31, 2003, WP&L had approximately $27 millioncould be required. Revisions to the Wisconsin Administrative Code have been proposed that could have a significant impact on WP&L's operationofthe Rock River Generating Station in Beloit, Wisconsin. The proposed revisions will affect the amountcash and temporary cash investments.Sale of
heat that the generating station can discharge into the Rock River. WP&L cannot presently predict the final outcome of the rule, but believes that, as the rule is currently proposed, the capital investments and/or modifications required to meet the proposed discharge limits could be significant. In 1998, the EPA issued the final report to Congress on the Study of Hazardous Air Pollutant Emissions (HAPs) from Electric Utility Steam Generating Units regarding hazardous air pollutant emissions from electric utilities, which concluded that mercury emissions from coal-fired generating plants were a concern. The EPA is developing regulations that are expected to be in place by 2004. In December 2000, the EPA made a regulatory determination in favor of controlling HAPs (including mercury) from electric utilities, which is being challenged by utility industry groups in two lawsuits filed in February 2001. Although the control of mercury emissions from generating plants is uncertain at this time, WP&L believes that the capital investments and/or modifications that may be required to control mercury emissions could be significant. Also in December 2000, the WNRB voted to allow the WDNR to proceed with mercury rulemaking. WP&L and the other Wisconsin Utility Association members have recommended to WNRB a workable mercury program that protects reliability and does not disadvantage Wisconsin when federal mercury rules are developed. The WDNR has indicated its desire to have the proposed rule written by the Spring of 2001. WP&L cannot presently predict the final outcome of the regulation, but believes that capital investments and/or modifications required could be significant. WP&L has been notified by the EPA that it is a PRP with respect to the MIG/DeWane Landfill Superfund Site. WP&L is participating in the initiation of an alternate dispute resolution process to allocate liability associated with the investigation and remediation of the site. Management believes that any likely action resulting from this matter will not have a material adverse effect on WP&L's financial condition or results of operations. In 2000, WP&L was notified by Monroe County, Wisconsin that it does not have liability for costs associated with the Monroe County Interim Landfill in Sparta, Wisconsin. Monroe County has decided that it will pay for the investigation and cleanup of the landfill through community-wide funding. In December 2000 and February 2001, the EPA requested certain information relating to the historical operation of WP&L's major coal-fired generating units in Wisconsin. WP&L has responded to the December 2000 request and is in the process of preparing its response to the February 2001 request. In some cases involving similar EPA requests from other electric generating facilities, penalties and capital A-10- Refer to Note MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) expenditures have resulted. WP&L cannot presently predict what impact, if any, the EPA's request may have on its financial condition or results of operations. However, any required remedial action resulting from this matter could be significant. A global treaty has been negotiated that could require reductions of greenhouse gas emissions from utility plants. In 1998, the U.S. signed the treaty and agreed with other countries to resolve all remaining issues by the end of 2000. That deadline has not been met and significant differences remain between the U.S. and other countries. At this time, management is unable to predict whether the U.S. Congress will ratify the treaty. Given the uncertainty of the treaty ratification and the ultimate terms of the final regulations, management cannot currently estimate the impact the implementation of the treaty would have on WP&L's operations.Accounts Receivable11(e)4 of the"Notes“Notes to Consolidated FinancialStatements"Statements” forfurther discussioninformation on WP&L’s sale ofWP&L's environmental matters. LONG-TERM DEBT--In March 2000,accounts receivable program.Short-term Debt - In September 2003, WP&L
issued $100completed the syndication of a 364-day revolving credit facility totaling $200 million,of senior unsecured debentures at a fixed interest rate of 7 5/8%, due 2010. The net proceeds were primarily usedavailable for direct borrowing or torepay short-term debt.support commercial paper. WP&L has$150 millionthe option to convert the facility into a one-year term loan. It is expected that WP&L will be able to renew or replace the facility on favorable terms when it matures in 2004. The credit facility agreement contains various covenants, including a requirement to maintain a debt-to-capital ratio oflong-termless than 58%. At Dec. 31, 2003, WP&L’s debt-to-capital ratio was 29.9%. The debtthat will mature prior to December 31, 2005. Depending on market conditions, it is anticipated that a majoritycomponent of thematuringcapital ratio includes long- and short-term debtwill be refinanced with the issuance(excludingnon-recourse debt and trade payables), capital lease obligations, letters of
long-term securities. Refer to Note 8(b)credit and guarantees of the"Notes to Consolidated Financial Statements" for additional information on long-term debt. SHORT-TERM DEBT--Inforegoing and unfunded vested benefits under qualified pension plans. The equity component excludes accumulated other comprehensive income (loss).In addition to funding working capital needs, the availability of short-term financing provides WP&L flexibility in the issuance of long-term securities. The level of short-term borrowing fluctuates based on seasonal corporate needs, the timing of long-term
financingfinancings and capital market conditions.At DecemberWP&L did not have any commercial paper outstanding at Dec. 31,2000, WP&L2003 and information regarding commercial paper during 2003 wasauthorized by the applicable federal or state regulatory agency to issue short-term debtas follows (in millions):
Available capacity at Dec. 31, 2003
$ 200.0 Average daily amount outstanding during 2003
29.8 Maximum daily amount outstanding during 2003
84.5 WP&L’s credit facility contains a negative pledge provision, which generally prohibits placing liens on any of
$128 million.WP&L, IESU and IPC participate in a utility money pool that is funded, as needed, through&L’s property with certain exceptions, including among others, for the issuance ofcommercial paper bysecured debt under WP&L’s first mortgage bond indentures, non-recourse project financing and purchase money liens.WP&L’s credit facility contains a material adverse change (MAC) clause. Before each extension of credit (each borrowing under the facility), WP&L must represent and warrant that no MAC has occurred since Dec. 31, 2002. A MAC is defined as a change that would create: (1) a MAC in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the borrower or the borrower and its subsidiaries taken as a whole; (2) a material impairment of the ability of the borrower to perform its obligations under a credit facility agreement to which it is a party; or (3) a MAC upon the legality, validity, binding effect or enforceability against the borrower of any credit agreement to which it is a party.
WP&L’s credit facility contains a provision that requires, during the term of the facility, any proceeds from asset sales, with certain exclusions, in excess of 5% of WP&L’s consolidated assets in any 12-month period be used to reduce commitments under its facility. Exclusions include, among others, certain intercompany sales and certain sale and lease-back transactions.
Long-term Debt - In September 2003, WP&L retired $70 million of its 8.6% first mortgage bonds due 2027 largely from proceeds of a capital contribution from Alliant Energy.
Interest expense and other fees are allocated based on borrowing amounts. The PSCW has restrictedRefer to “Contractual Obligations” for the timing of WP
&L from lending money to non-utility affiliates and non-Wisconsin utilities. As&L’s long-term debt maturities. Depending upon market conditions, it is currently anticipated that aresult, WP&L can only borrow money frommajority of theutility money pool. WP&L anticipates that short-termmaturing debt willcontinue tobeavailable at reasonable costs due to current ratings by independent utility analysts and credit rating services.refinanced with the issuance of long-term securities. Refer to Note8(a)8 of the"Notes“Notes to Consolidated FinancialStatements"Statements” for additional information onshort-termshort- and long-term debt.SALE OF ACCOUNTS RECEIVABLE--ToCredit Ratings and Balance Sheet - Access to the capital and credit markets, and costs of obtaining external financing, are dependent on creditworthiness. WP&L is committed to taking the necessary steps required to maintain
flexibilityinvestment-grade credit ratings and a strong balance sheet. Refer to “Strategic Overview - November 2002 Plan” for discussion of specific actions taken in this regard. Although WP&L believes the actions taken in 2003 to strengthen its balance sheet will enable it to maintain investment-grade credit ratings, no assurance can be given that it will be able to maintain its existing credit ratings. If WP&L’s credit ratings are downgraded in the future, then WP&L’s borrowing costs may increase and its access to capitalstructuremarkets may be limited. If access to capital markets becomes significantly constrained, then WP&L’s results of operations and financial condition could be materially adversely affected. WP&L’s current credit ratings and outlook that were affirmed in January 2004 by both Standard & Poor’s and Moody’s are as follows (long-term debt ratings only apply totake advantagesenior debt):
Standard & Poor’s Moody’s Secured long-term debt
A A1 Unsecured long-term debt
BBB+ A2 Commercial paper
A-2 P-1 Corporate/issuer
A- A2 Outlook
Negative Stable Ratings Triggers - The long-term debt of WP&L is not subject to any repayment requirements as a result of explicit credit rating downgrades or so-called “ratings triggers.” Pre-existing ratings triggers in certain lease agreements were eliminated during 2003. However, WP&L is party to various agreements, including purchased-power agreements, fuel contracts and accounts receivable sale contracts that are dependent on maintaining investment-grade credit ratings. In the event of a downgrade below investment-grade, WP&L may need to provide credit support, such as letters of credit or cash collateral equal to the amount of the exposure, or may need to unwind the contract or pay the underlying obligation. WP&L is party to an accounts receivable sale agreement that provides that a downgrade below investment-grade causes WP&L to become ineligible to sell receivables under the program. In the event of downgrades below investment-grade, management believes the credit facility at WP&L provides sufficient liquidity to cover counterparty credit support or collateral requirements under the various purchased-power, fuel and receivables sales agreements.
Off-Balance Sheet Arrangements - WP&L utilizes off-balance sheet synthetic operating leases to finance certain utility railcars and a utility radio dispatch system. Synthetic leases provide favorable
short-termfinancing rates to WP&L while allowing it to maintain operating control of its leased assets. Refer to Note 3 of the “Notes to Consolidated Financial Statements” for future minimum lease payments under, and residual value guarantees by WP&L, of these synthetic leases. WP&L’s credit facility agreement prohibits it from entering into any additional synthetic leases. WP&L uses special purpose entities for its limited recourse utility sale of accounts receivable program whereby WP&L uses proceeds from the sale of the accounts receivable and unbilled revenues to maintain flexibility in its capital structure, take advantage of favorable short-term interest rates and finance a portion of its long-term cash needs.WP&L has filed applications with the SEC and state regulatory agenciesThe sale of accounts receivables generates a significant amount of short-term financing forapproval of a combined accounts receivable sale program wherebyWP&L, IESU and IPC will sell their respective receivables through wholly-owned special purpose entities to an affiliated financing entity, which in turn will sell the receivables to an outside investor. The new program would replace the existing program for WP&L, and would be substantially similar to the prior program. All necessary approvals are expected by mid-2001. FINANCIAL COMMITMENTS--Refer&L. Refer to Note11(d)4 of the"Notes“Notes to Consolidated FinancialStatements"Statements” forinformation. A-11MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONSTRUCTION AND ACQUISITION EXPENDITURES--Capital expenditureaggregate proceeds from the sale of accounts receivable. While WP&L does not have any reason to believe this program would be discontinued, if this financing alternative were not available, WP&L anticipates it would have enough short-term borrowing capacity to compensate. Refer to “Ratings Triggers” for the impact of certain credit rating downgrades on WP&L related to the accounts receivable sales program. WP&L has reviewed these entities during its implementation of FIN 46, for those entities that are considered to be special-purpose entities, andinvestmentdetermined that consolidation of these entities is not required. WP&L continues to evaluate non-special purpose entities that may require consolidation as of March 31, 2004.Sales of Non-strategic Assets - WP&L is currently pursuing the sales in 2004 of its interest in its Kewaunee facility and its water utilities serving the Ripon and South Beloit areas. The proceeds realized from these asset sales are expected to be available for debt reduction and other general corporate purposes.
Credit Risk - WP&L has limited credit exposure from electric and natural gas sales and non-performance of contractual obligations by its counterparties. WP&L maintains credit risk oversight and sets limits and policies with regards to its counterparties, which management believes minimizes its overall credit risk exposure. However, there is no assurance that such policies will protect WP&L against all losses from non-performance by counterparties.
Construction and Acquisition Expenditures - Capital expenditures, investments and financing plans are continually reviewed, approved and updated as part of WP&L’s ongoing strategic planning and budgeting processes. In addition, material capital expenditures and investments are subject to
change asa rigorous cross-functional review prior to approval. Changes in WP&L’s anticipated construction and acquisition expenditures may result from a number ofmany considerations, including: changes inreasons including economicconditions; variations in actual sales and load growth compared to forecasts;conditions, regulatory requirements,of environmental, nuclear and other regulatory authorities; acquisition and business combination opportunities; the availability of alternate energy and purchased-power sources; theability to obtain adequate and timely raterelief; escalationsrelief, the level of WP&L’s profitability, WP&L’s desire to maintain investment-grade credit ratings and reasonable capitalization ratios, variations inconstruction costs;sales, changing market conditions andconservation and energy efficiency programs.new opportunities. WP&L believes its capital control processes adequately reduce the risks associated with large capital expenditures and investments.WP&L currently anticipates
financingits construction and acquisition expenditures for utility infrastructure and reliability investments to be $228 million in 2004 and $248 million in 2005. WP&L has not yet entered into contractualcommitments relating to the majority of its anticipated capital expenditures. As a result, WP&L does have discretion with regard to the level of capital expenditures eventually incurred and it closely monitors and updates such estimates on an ongoing basis based on numerous economic and other factors. Refer to “Strategic Overview - Updated Strategic Plan” for further discussion of Alliant Energy’s domestic generation plan.
Contractual Obligations - - WP&L’s long-term contractual cash obligations as of Dec. 31, 2003 were as follows (in millions):
2004 2005 2006 2007 2008 Thereafter Total Long-term debt (Note 8(b))
$62 $88 $-- $105 $60 $139 $454 Operating leases (Note 3)
63 79 80 80 68 259 629 Purchase obligations (Note 11(b)):
Purchased-power and fuel commitments
67 31 30 28 21 76 253 Other
6 -- -- -- -- -- 6 $198 $198 $110 $213 $149 $474 $1,342 At Dec. 31, 2003, long-term debt as noted in the previous table was included on the Consolidated Balance Sheet and excludes reductions related to unamortized debt discounts. Purchased-power and fuel commitments represent normal business contracts used to ensure adequate purchased-power, coal and natural gas supplies and to minimize exposure to market price fluctuations. Other purchase obligations represent individual commitments incurred during the normal course of business which exceeded $1 million at Dec. 31, 2003. Alliant Energy has entered into various coal and purchased-power commitments that have not yet been directly assigned to WP&L and IP&L. Such commitments are not included in WP&L’s purchase obligations. In connection with its construction
expenditures during 2001-2005 through internally generated funds supplemented, when required, by outside financing.and acquisition program, WP&L also enters into commitments related to such programs on an ongoing basis; these amounts are not reflected in the previous table. Refer to “Construction and Acquisition Expenditures” for additional information. In addition, at Dec. 31, 2003, there were various other long-term liabilities and deferred credits included on the Consolidated Balance Sheet that, due to the nature of the liabilities, the timing of payments cannot be estimated and are therefore excluded from the table. Refer to Note11(a)6 of the"Notes“Notes to Consolidated FinancialStatements"Statements” forinformationanticipated 2004 pension and other postretirement benefit funding amounts, which are not included in the previous table.Environmental - WP&L’s pollution abatement programs are subject to continuing review and are periodically revised due to changes in environmental regulations, construction plans and escalation of construction costs. WP&L continually evaluates the impact of potential future federal, state and local environmental rulemakings on its operations. While the final outcome of these rule makings cannot be predicted, WP&L believes that required capital investments and/or modifications resulting from them could be significant, but expects that prudent expenses incurred by WP&L likely would be recovered in rates from its customers. The environmental rulemaking process continually evolves and the following are major emerging issues that could potentially have a significant impact on WP
&L's&L’s operations.Air Quality - With regard to current environmental rules, WP&L’s Edgewater facility spent $21 million from 1999 to 2003 to improve its combustion performance. This facility now meets the 2008 Wisconsin DNR NOx compliance goal.
WP&L also has responded to multiple data requests from the EPA, related to the historical operation and associated air permitting for certain major Wisconsin coal-fired generating units. Similar requests have been precursor to penalties and capital expenditures requiring installation of air pollution controls at other utilities. However, WP&L has received no response in this regard from the EPA related to information submitted.
The 1990 CAA Amendments mandate preservation of air quality through existing regulations and periodic reviews to ensure adequacy of these provisions based on scientific data. In 1997, the EPA revised National
Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter. In December 2003, the EPA proposed an Interstate Air Quality Rule related to transport of these emissions that would require significant upgrades to power plants. This rule would reduce the current level of nationwide sulfur dioxide emissions approximately 40% by 2010 and 70% by 2015, and NOx emission levels 50% by 2015. Additional reduction requirements may also be imposed at the state level for those areas that are in non-attainment with NAAQS.
In 2000, the EPA determined that regulation of hazardous air pollutant emissions from coal-fired and oil-fired electric utility steam generating units was necessary. Under an existing settlement agreement, Maximum Achievable Control Technology requirements or alternative regulations must be implemented by Dec. 15, 2004. Accordingly, the EPA has published rules for comment requiring control of mercury from coal-fired and nickel from oil-fired generating units. The impact of these regulations on WP&L’s generating facilities is subject to the control level mandated in the final rules. In 2001, the Wisconsin DNR also independently developed proposed mercury emission control rules that could require reductions from Wisconsin generating facilities of 40% by 2010 and 80% by 2015. These rules have been sent back to the Wisconsin DNR for revision by the Wisconsin legislature due to the pending federal mercury regulations.
WP&L is also currently monitoring various other potential federal, state and local environmental rulemakings and activities, including, but not limited to: litigation of federal New Source Review Reforms; Regional Haze evaluations for Best Available Retrofit Technology; and several other legislative and regulatory proposals regarding the control of emissions of air pollutants and greenhouse gases from a variety of sources, including generating facilities.
Water Quality - In 2002, the EPA published a proposed regulation under the Clean Water Act referred to as “316(b)” that is anticipated to be finalized in 2004. This rule would require existing large power plants with cooling water intake structures to ensure that the location, design, construction, and
acquisition expenditures.capacity of cooling water intake structures reflect the best technology available for minimizing adverse environmental impacts to fish and other aquatic life. WP&L is also currently evaluating proposed revisions to the Wisconsin Administrative Code concerning the amount of heat that WP&L’s generating stations can discharge into Wisconsin waters.Land and Solid Waste - WP&L is monitoring possible significant land and solid waste regulatory changes. This includes a potential EPA regulation for management of coal combustion product in landfills and surface impoundments that could require installation of monitoring wells at some facilities and an ongoing expanded groundwater monitoring program. Compliance with the polychlorinated biphenols (PCB) Fix-it Rule/Persistent Organic Pollutants Treaty could possibly require replacement of all electrical equipment containing PCB insulating fluid which is a substance known to be harmful to human health. The Wisconsin Department of Commerce is proposing new rules related to flammable, combustible and hazardous liquids stored in above-ground storage tanks in which the main financial impact would be from a secondary containment requirement for all hazardous materials tanks and for hazardous material unloading areas. In addition, in December 2003, at the request of the Wisconsin DNR, WP&L submitted a written plan for facility closure of the Rock River Generating Station landfill and clean-up of the support ponds and all areas where coal combustion waste is present.
Refer to Note 11(e) of the “Notes to Consolidated Financial Statements” for further discussion of environmental matters.
OTHER MATTERS
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONSMarket Risk Sensitive Instruments and Positions - WP
&L's&L’s primary market risk exposures are associated with interest rates and commoditypricesand equity prices. WP&L has risk management policies to monitor and assist in controlling these market risks and uses derivative instruments to manage some of the exposures.INTEREST RATE RISK--WPInterest Rate Risk - WP&L is exposed to risk resulting from changes in interest rates as a result of its issuance of variable-rate
debt.debt, utility customer accounts receivable sale program and variable-rate leasing agreements.WP&L manages its interest rate risk by limiting its variable interest rate exposure and by continuously monitoring the effects of market changes
inon interest rates. WP&Lhasalsohistorically usedperiodically uses interest rate swap and interest rate forward agreements to assist in the management of its interest exposure. In the event of significant interest rate fluctuations, management would take actions to minimize the effect of such changes on WP&L's&L’s results ofoperations.operations and financial condition. Assuming no change in WP&L's&L’s consolidated financial structure, if variable interest rates were to average1 percent100 basis points higher (lower) in2001 compared to 2000, and2004 than in2000 compared to 1999,2003, interest expenseand pre-tax earningswould increase (decrease) by approximately$0.6 million for both time periods. These amounts were$1.2 million. This amount was determined by considering the impact of a hypothetical1 percent100 basis point increase (decrease) in interest rates ontheWP&L’s consolidated variable-rate debt held,bythe amount outstanding under the utility customer accounts receivable sale program and variable-rate lease balances at Dec. 31, 2003.Commodity Risk - Non-trading - WP
&L as of December 31, 2000 and 1999. COMMODITY RISK--NON-TRADING--WP&L is exposed to the impact of market fluctuations in the commodity price and transportation costs ofelectricityelectric and natural gas products it markets. WP&L employs established policies and procedures to manage its risks associated with these market fluctuations including the use of various commodity derivatives. WP&L's&L’s exposure to commodity price risks is significantly mitigated by the current rate making structures in place for the recovery of its electric fuel and purchased energy costs as well as its cost of natural gas purchased for resale. Refer to Note1(i)1(h) of the"Notes“Notes to Consolidated FinancialStatements"Statements” for further discussion.WP&L periodically utilizes
gascommodityswap arrangementsderivative instruments to reduce the impact of price fluctuations on electric fuel and purchased energy costs needed to meet its power supply requirements. Under PSCW rules, WP&L can also seek rate increases if it experiences an extraordinary increase in the cost of electric fuel and purchased energy costs or if the annual costs are more than 3% higher than the estimated costs used to establish rates. Such rules were revised effective for 2003 for WP&L and significantly reduce the regulatory lag for Wisconsin utilities and customers related to the timing of changes in rates for increased or decreased fuel and purchased energy costs. Based on these revised rules, WP&L does not anticipate any significant earnings exposure related to fuel and purchased energy costs.WP&L periodically utilizes natural gas commodity derivative instruments to reduce the impact of price fluctuations on natural gas purchased and injected into storage during the summer months and withdrawn and sold at current market prices during the winter months. The natural gas commodity swaps in place approximate the forecasted storage withdrawal plan during this period. Therefore, market price fluctuations that result in an increase or decrease in the value of the physical commodity are substantially offset by changes in the value of the natural gas commodity swaps. A 10% increase (decrease) in the price of natural gas would not have a significant impact on the combined fair market value of the natural gas in storage and related swap arrangements in place at Dec. 31, 2003. To the extent actual storage withdrawals vary from forecasted withdrawals, WP&L has physical
commoditygas price exposure.A 10 percent increase (decrease) in the price of gas would have an insignificant impact on the combined fair market value of the gas in storage and related swap arrangements in place as of December 31, 2000 and 1999. A-12MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITY PRICE RISK--WPEquity Price Risk - WP&L maintains a trust
fundsfund to fund its anticipated nuclear decommissioning costs.As of DecemberAt Dec. 31,20002003 and1999, these funds were2002, this fund was invested primarily in domestic equity and debt instruments. Fluctuations in equity prices or interest rateswilldo not affect WP&L's&L’s consolidated results ofoperations as such fluctuations are recorded in equally offsetting amounts of investment income and depreciation expense when they are realized.operations. InFebruary2001, WP&L entered into a four-year hedge on equity assets in its nuclear decommissioning trust fund. In January 2004, WP&L liquidated all of its qualified decommissioning trust fund assets into money market funds as a result of the pending Kewaunee sale. Refer to Notes1(l)10(c) and 15 of the “Notes to Consolidated Financial Statements” for further discussion.Refer to Notes 1(j) and 10 of the
"Notes“Notes to Consolidated FinancialStatements"Statements” for further discussion of WP&L's&L’s derivative financial instruments.A-13Accounting Pronouncements - In January 2003, the FASB issued FIN 46 which addresses consolidation by business enterprises of variable interest entities. FIN 46 requires consolidation where there is a controlling financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity
at risk to finance its activities without additional subordinated financial support from other parties. WP&L adopted FIN 46, related to those entities that are considered to be special-purpose entities, on Dec. 31, 2003 with no material impact on its financial condition or results of operations. WP&L continues to evaluate tolling arrangements, renewable energy entities and any other non-special purpose entities, to determine if they require consolidation under the revised FIN 46 guidance issued by the FASB in December 2003. WP&L will apply the provisions of the revised guidance as of March 31, 2004.
WP&L adopted SFAS 143 on Jan. 1, 2003, which provides accounting and disclosure requirements for retirement obligations associated with long-lived assets (AROs). Refer to Note 16 of the “Notes to Consolidated Financial Statements” for additional information.
WP&L adopted SFAS 149 for contracts entered into or modified after June 30, 2003, except for certain implementation issues and certain provisions of forward purchase and sale contracts and for hedging relationships designated after June 30, 2003. Refer to Note 10(a) of the “Notes to Consolidated Financial Statements” for additional information.
In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which requires an issuer to classify outstanding free-standing financial instruments within its scope as a liability on its balance sheet even though the instruments have characteristics of equity. WP&L adopted SFAS 150 on July 1, 2003 with no material impact on its financial condition or results of operations. WP&L continues to evaluate the implications of FSP No. FAS 150-3, “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” issued in November 2003, which defers the effective date for applying the provisions of SFAS 150 for certain mandatorily redeemable non-controlling interests.
In December 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans, that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted by FSP No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” WP&L has elected to defer reflecting the effect of the Act on postretirement net periodic benefit cost and the accumulated postretirement benefit obligation in the Consolidated Financial Statements, since specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require WP&L to change previously reported information. WP&L is currently evaluating the effect of the Act on its other postretirement benefits expense.
WP&L does not expect the various other new accounting pronouncements not mentioned above that were effective in 2003 to have a material impact on its results of operations or financial condition.
Critical Accounting Policies - Based on historical experience and various other factors, WP&L believes the policies identified below are critical to its business and the understanding of its results of operations as they require critical estimates be made based on the assumptions and judgment of management. The preparation of consolidated financial statements requires management to make various estimates and assumptions that affect revenues, expenses, assets, liabilities and the disclosure of contingencies. The results of these estimates and judgments form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and judgments. WP&L’s management has discussed these critical accounting policies with the Audit Committee of its Board of Directors. Refer to Note 1 of the “Notes to Consolidated Financial Statements” for a discussion of WP&L’s accounting policies and the estimates and assumptions used in the preparation of the consolidated financial statements.
Regulatory Assets and Liabilities - WP&L is regulated by various federal and state regulatory agencies. As a result, it qualifies for the application of SFAS 71, which recognizes that the actions of a regulator can provide reasonable assurance of the existence of an asset or liability. Regulatory assets or liabilities arise as a result of a difference between GAAP and the accounting principles imposed by the regulatory agencies. Regulatory assets generally represent incurred costs that have been deferred as they are probable of recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for various reasons.
WP&L recognizes regulatory assets and liabilities in accordance with the rulings of its federal and state regulators and future regulatory rulings may impact the carrying value and accounting treatment of WP&L’s regulatory assets and liabilities. WP&L periodically assesses whether the regulatory assets are probable of future recovery by considering factors such as regulatory environment changes, recent rate orders issued by the applicable regulatory agencies and the status of any pending or potential deregulation legislation. The assumptions and judgments used by regulatory authorities continue to have an impact on the recovery of costs, the rate of return on invested capital and the timing and amount of assets to be recovered by rates. A change in these assumptions may result in a material impact on WP&L’s results of operations. Refer to Note 1(c) of the “Notes to Consolidated Financial Statements” for further discussion.
Derivative Financial Instruments - WP&L uses derivative financial instruments to hedge exposures to fluctuations in certain commodity prices, volatility in a portion of natural gas sales volumes due to weather and to mitigate the equity price volatility associated with certain investments in equity securities. WP&L does not use such instruments for speculative purposes. To account for these derivative instruments in accordance with the applicable accounting rules, WP&L must determine the fair value of its derivatives. In accordance with SFAS 133, the fair value of all derivative instruments are recognized as either assets or liabilities in the balance sheet with the changes in their value generally recorded as regulatory assets or liabilities. If an established, quoted market exists for the underlying commodity of the derivative instrument, WP&L uses the quoted market price to value the derivative instrument. For other derivatives, WP&L estimates the value based upon other quoted prices or acceptable valuation methods. WP&L also reviews the nature of its contracts for the purchase and sale of non-financial assets to assess whether the contracts meet the definition of a derivative and the requirements to follow hedge accounting as allowed by the applicable accounting rules. The determination of derivative status and valuations involves considerable judgment.
SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. Although SFAS 149 is expected to result in more energy contracts at WP&L qualifying as derivatives, changes in the fair value of these derivatives are generally reported as changes in regulatory assets and liabilities rather than being reported currently in earnings, based on the regulatory treatment. Additionally, WP&L has some commodity purchase and sales contracts that have been designated, and qualify for, the normal purchase and sale exception. Based on this designation, these contracts are not accounted for as derivative instruments.
A number of WP&L’s derivative transactions are based on the fuel and natural gas cost recovery mechanisms in place, as well as other specific regulatory authorizations. As a result, changes in fair market values of such derivatives generally have no impact on WP&L’s results of operations.
Unbilled Revenues - Energy sales to individual customers are based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding estimated unbilled revenue is recorded. The unbilled revenue estimate is based on daily system demand volumes, estimated customer usage by class, weather impacts, line losses and the most recent customer rates. Such process involves the use of various estimates, thus significant changes in the estimates could have a material impact on WP&L’s results of operations.
Accounting for Pensions and Other Postretirement Benefits - WP&L accounts for pensions and other postretirement benefits under SFAS 87, “Employers’ Accounting for Pensions” and SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” respectively. Under these rules, certain assumptions are made which represent significant estimates. There are many factors involved in determining an entity’s pension and other postretirement liabilities and costs each period including assumptions regarding employee demographics (including age, life expectancies, and compensation levels), discount rates, assumed rate of returns and funding. Changes made to the plan provisions may also impact current and future pension and other postretirement costs. WP&L’s assumptions are supported by historical data and reasonable projections and are reviewed annually with an outside actuary firm and an investment consulting firm. As of Dec. 31, 2003, WP&L was using a 6% discount rate to calculate benefit obligations and a 9% annual rate of return on investments. In selecting an assumed discount rate, WP&L reviews various corporate Aa bond indices. The 9% annual rate of return is consistent with WP&L’s historical returns and is based on projected long-term equity and bond returns, maturities and asset allocations. Refer to Note 6 of the “Notes to Consolidated Financial Statements” for discussion of the impact of a change in the medical trend rates.
INDEPENDENT AUDITORS’ REPORT
OF INDEPENDENT PUBLIC ACCOUNTANTSTo the Board of Directors and Shareowners of Wisconsin Power and Light Company:
We have audited the accompanying consolidated balance sheets and statements of capitalization of Wisconsin Power and Light Company
(a Wisconsin corporation)and subsidiaries (the “Company”) as of December 31,20002003 and1999,2002, andtherelated consolidated statements of income, cash flows and changes in common equity for each of the three years in the period ended December 31,2000.2003. These financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United
States.States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion,
thesuch consolidated financial statementsreferred to abovepresent fairly, in all material respects, the financial position ofWisconsin Power and Lightthe Companyand subsidiariesas of December 31,20002003 and1999,2002, and the results oftheirits operations andtheirits cash flows for each of the three years in the period ended December 31,2000,2003 in conformity with accounting principles generally accepted in the UnitedStates. ARTHUR ANDERSENStates of America.As discussed in Note 16 to the consolidated financial statements, on January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.”
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 29, 2001 A-14March 3, 2004
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2000 1999 1998 --------- --------- --------- (IN THOUSANDS)OPERATING REVENUES: Electric utility.......................................... $692,191 $626,607 $614,704 Gas utility............................................... 165,152 120,770 111,737 Water..................................................... 5,038 5,128 5,007 -------- -------- -------- 862,381 752,505 731,448 -------- -------- -------- OPERATING EXPENSES: Electric production fuels................................. 113,208 110,521 120,485 Purchased power........................................... 146,939 107,598 113,936 Cost of gas sold.......................................... 107,131 64,073 61,409 Other operation and maintenance........................... 188,967 172,131 193,578 Depreciation and amortization............................. 139,911 113,037 119,221 Taxes other than income taxes............................. 29,163 30,240 30,169 -------- -------- -------- 725,319 597,600 638,798 -------- -------- -------- OPERATING INCOME............................................ 137,062 154,905 92,650 -------- -------- -------- INTEREST EXPENSE AND OTHER: Interest expense.......................................... 44,644 40,992 36,584 Allowance for funds used during construction.............. (5,365) (4,511) (3,049) Miscellaneous, net........................................ (16,536) 1,836 (1,129) -------- -------- -------- 22,743 38,317 32,406 -------- -------- -------- INCOME BEFORE INCOME TAXES.................................. 114,319 116,588 60,244 -------- -------- -------- INCOME TAXES................................................ 42,918 45,758 24,670 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX..................................... 71,401 70,830 35,574 -------- -------- -------- CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX.................................................... 35 -- -- -------- -------- -------- NET INCOME.................................................. 71,436 70,830 35,574 -------- -------- -------- PREFERRED DIVIDEND REQUIREMENTS............................. 3,310 3,310 3,310 -------- -------- -------- EARNINGS AVAILABLE FOR COMMON STOCK......................... $ 68,126 $ 67,520 $ 32,264 ======== ======== ======== - -----------------------------------------------------------------------------------------------THE ACCOMPANYING NOTES TO
Year Ended December 31, 2003 2002 2001 (in thousands) Operating revenues:
Electric utility
$910,086 $787,680 $753,450 Gas utility
272,377 179,091 206,863 Other
34,518 22,754 33,403 1,216,981 989,525 993,716 Operating expenses:
Electric production fuel and purchased power
409,742 352,539 338,028 Cost of gas sold
186,285 110,119 153,823 Other operation and maintenance
292,554 239,679 211,006 Depreciation and amortization
104,896 108,740 121,059 Taxes other than income taxes
31,872 32,874 32,504 1,025,349 843,951 856,420 Operating income
191,632 145,574 137,296 Interest expense and other:
Interest expense
37,873 40,202 43,483 Equity income from unconsolidated investments
(20,725 ) (17,022 ) (15,535 ) Allowance for funds used during construction
(4,024 ) (2,639 ) (4,753 ) Interest income and other
(2,209 ) (615 ) (627 ) 10,915 19,926 22,568 Income before income taxes
180,717 125,648 114,728 Income taxes
65,843 44,724 41,238 Net income
114,874 80,924 73,490 Preferred dividend requirements
3,310 3,310 3,310 Earnings available for common stock
$111,564 $77,614 $70,180 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED
FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. A-15BALANCE SHEETS
December 31, ASSETS
2003 2002 (in thousands) Property, plant and equipment:
Electric plant in service
$2,002,006 $1,843,834 Gas plant in service
301,201 286,652 Other plant in service
275,637 275,391 Accumulated depreciation
(1,139,599 ) (1,047,715 ) Net plant
1,439,245 1,358,162 Construction work in progress
67,200 96,746 Other, less accumulated depreciaton of $301 and $240
15,717 17,811 1,522,162 1,472,719 Current assets:
Cash and temporary cash investments
27,075 8,577 Accounts receivable:
Customer, less allowance for doubtful accounts of $2,662 and $1,770
78,934 7,977 Associated companies
- 1,172 Other, less allowance for doubtful accounts of $422 and $458
24,374 18,191 Income tax refunds receivable
16,795 - Accumulated deferred income taxes
6,594 8,532 Production fuel, at average cost
17,655 18,980 Materials and supplies, at average cost
22,922 22,133 Gas stored underground, at average cost
24,277 16,679 Regulatory assets
24,225 27,999 Prepaid gross receipts tax
28,341 27,388 Other
7,997 8,599 279,189 166,227 Investments:
Nuclear decommissioning trust funds
233,665 223,734 Investment in ATC and other
144,075 133,043 377,740 356,777 Other assets:
Regulatory assets
95,944 102,674 Deferred charges and other
194,242 236,741 290,186 339,415 Total assets
$2,469,277 $2,335,138 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 1999 ASSETS -------------- -------------- (IN THOUSANDS)PROPERTY, PLANT AND EQUIPMENT: Utility -- Plant in service -- Electric.............................................. $ 2,007,974 $ 1,921,624 Gas................................................... 273,457 258,132 Water................................................. 29,869 27,770 Common................................................ 223,921 218,607 -------------- -------------- 2,535,221 2,426,133 Less -- Accumulated depreciation........................ 1,380,723 1,266,366 -------------- -------------- 1,154,498 1,159,767 Construction work in progress........................... 59,133 66,784 Nuclear fuel, net of amortization....................... 16,099 15,079 -------------- -------------- 1,229,730 1,241,630 Other property, plant and equipment, net of accumulated depreciation and amortization of $195 and $169, respectively............................................ 369 608 -------------- -------------- 1,230,099 1,242,238 -------------- -------------- CURRENT ASSETS: Cash and temporary cash investments....................... 2,584 3,555 Accounts receivable: Customer................................................ 51,769 22,061 Associated companies.................................... 2,211 5,067 Other................................................... 13,865 10,984 Production fuel, at average cost.......................... 17,811 20,663 Materials and supplies, at average cost................... 21,639 20,439 Gas stored underground, at average cost................... 13,876 8,624 Prepaid gross receipts tax................................ 23,088 20,864 Other..................................................... 6,397 9,275 -------------- -------------- 153,240 121,532 -------------- -------------- INVESTMENTS: Nuclear decommissioning trust funds....................... 195,768 166,202 Other..................................................... 14,362 15,272 -------------- -------------- 210,130 181,474 -------------- -------------- OTHER ASSETS: Regulatory assets......................................... 88,721 82,161 Deferred charges and other................................ 174,834 138,730 -------------- -------------- 263,555 220,891 -------------- -------------- TOTAL ASSETS................................................ $ 1,857,024 $ 1,766,135 ============== ============== - ---------------------------------------------------------------------------------------------THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. A-16CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2000 1999 CAPITALIZATION AND LIABILITIES --------------- --------------- (IN THOUSANDS)CAPITALIZATION (SEE CONSOLIDATED STATEMENTS OF CAPITALIZATION): Common stock.............................................. $ 66,183 $ 66,183 Additional paid-in capital................................ 229,516 229,438 Retained earnings......................................... 371,602 303,476 Accumulated other comprehensive loss...................... (4,708) -- --------------- --------------- Total common equity..................................... 662,593 599,097 --------------- --------------- Cumulative preferred stock................................ 59,963 59,963 Long-term debt (excluding current portion)................ 514,209 414,673 --------------- --------------- 1,236,765 1,073,733 --------------- --------------- CURRENT LIABILITIES: Current maturities........................................ -- 1,875 Variable rate demand bonds................................ 55,100 55,100 Notes payable to associated companies..................... 29,244 125,749 Accounts payable.......................................... 120,155 88,245 Accounts payable to associated companies.................. 32,442 25,306 Other..................................................... 36,266 30,283 --------------- --------------- 273,207 326,558 --------------- --------------- OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS: Accumulated deferred income taxes......................... 222,819 235,838 Accumulated deferred investment tax credits............... 29,472 31,311 Customer advances......................................... 34,815 34,643 Environmental liabilities................................. 7,564 10,861 Other..................................................... 52,382 53,191 --------------- --------------- 347,052 365,844 --------------- --------------- COMMITMENTS AND CONTINGENCIES (NOTE 11) TOTAL CAPITALIZATION AND LIABILITIES........................ $ 1,857,024 $ 1,766,135 =============== =============== - -----------------------------------------------------------------------------------------------THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. A-17(Continued)
December 31, CAPITALIZATION AND LIABILITIES
2003 2002 (in thousands, except
share amounts)Capitalization (See Consolidated Statements of Capitalization):
Common stock - $5 par value - authorized 18,000,000 shares;
13,236,601 shares outstanding$66,183 $66,183 Additional paid-in capital
525,603 325,603 Retained earnings
440,286 399,302 Accumulated other comprehensive loss
(20,235 ) (24,108 ) Total common equity
1,011,837 766,980 Cumulative preferred stock
59,963 59,963 Long-term debt (excluding current portion)
336,409 468,208 1,408,209 1,295,151 Current liabilities:
Current maturities
62,000 - Variable rate demand bonds
55,100 55,100 Commercial paper
- 60,000 Accounts payable
80,051 90,869 Accounts payable to associated companies
22,615 22,964 Accrued taxes
6,284 19,353 Regulatory liabilities
13,874 16,938 Other
27,196 29,064 267,120 294,288 Other long-term liabilities and deferred credits:
Accumulated deferred income taxes
213,652 200,426 Accumulated deferred investment tax credits
21,471 23,241 Regulatory liabilities
227,956 15,305 Asset retirement obligations
187,358 - Pension and other benefit obligations
59,042 58,921 Customer advances
34,895 36,555 Cost of removal obligations
- 362,321 Other
49,574 48,930 793,948 745,699 Commitments and contingencies (Note 11)
Total capitalization and liabilities
$2,469,277 $2,335,138 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000 1999 1998 --------------- --------------- --------------- (IN THOUSANDS)CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................ $ 71,436 $ 70,830 $ 35,574 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Depreciation and amortization.................... 139,911 113,037 119,221 Amortization of nuclear fuel..................... 5,066 6,094 5,356 Deferred taxes and investment tax credits........ (12,077) (12,618) (7,529) Other............................................ (16,003) 2,432 (2,089) OTHER CHANGES IN ASSETS AND LIABILITIES: Accounts receivable.............................. (29,733) (13,423) 12,845 Accounts payable................................. 39,046 8,482 19,452 Benefit obligations and other.................... (21,797) (11,854) (5,509) --------------- --------------- --------------- Net cash flows from operating activities....... 175,849 162,980 177,321 --------------- --------------- --------------- CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES: Common stock dividends........................... -- (58,353) (58,341) Preferred stock dividends........................ (3,310) (3,310) (3,310) Proceeds from issuance of long-term debt......... 100,000 -- 60,000 Reductions in long-term debt..................... (1,875) -- (8,899) Net change in short-term borrowings.............. (96,505) 48,950 (4,201) Capital contribution from parent................. -- 30,000 -- Other............................................ (1,242) -- (1,966) --------------- --------------- --------------- Net cash flows from (used for) financing activities................................... (2,932) 17,287 (16,717) --------------- --------------- --------------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Utility construction expenditures................ (131,640) (131,915) (117,143) Nuclear decommissioning trust funds.............. (16,092) (16,092) (14,297) Other............................................ (26,156) (30,516) (29,845) --------------- --------------- --------------- Net cash flows used for investing activities... (173,888) (178,523) (161,285) --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS...................................... (971) 1,744 (681) --------------- --------------- --------------- CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD........................................... 3,555 1,811 2,492 --------------- --------------- --------------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD........................................... $ 2,584 $ 3,555 $ 1,811 =============== =============== =============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest......................................... $ 40,455 $ 38,330 $ 33,368 =============== =============== =============== Income taxes..................................... $ 54,676 $ 47,164 $ 31,951 =============== =============== =============== - --------------------------------------------------------------------------------------------------------THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. A-18
Year Ended December 31, 2003 2002 2001 (in thousands) Cash flows from operating activities:
Net income
$114,874 $80,924 $73,490 Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization
104,896 108,740 121,059 Amortization of nuclear fuel
5,691 6,486 4,554 Amortization of deferred energy efficiency expenditures
43,825 21,179 14,361 Deferred tax expense (benefit) and investment tax credits
21,785 (5,562 ) (6,791 ) Equity income from unconsolidated investments, net
(20,725 ) (17,022 ) (15,535 ) Distributions from equity method investments
14,021 13,199 8,450 Other
(461 ) (1,175 ) (3,033 ) Other changes in assets and liabilities:
Accounts receivable
(9,968 ) (1,902 ) 20,408 Sale of accounts receivable
(66,000 ) 28,000 (6,000 ) Income tax refunds receivable
(16,795 ) - - Accounts payable
(2,647 ) (20,540 ) (23,653 ) Accrued taxes
(13,069 ) 17,296 (1,225 ) Other
(36,932 ) (5,873 ) (50,199 ) Net cash flows from operating activities
138,495 223,750 135,886 Cash flows used for financing activities:
Common stock dividends
(70,580 ) (59,645 ) (60,449 ) Preferred stock dividends
(3,310 ) (3,310 ) (3,310 ) Capital contribution from parent
200,000 61,000 35,000 Reductions in long-term debt
(70,000 ) - (47,000 ) Net change in short-term borrowings
(60,000 ) (30,816 ) 61,572 Other
(7,705 ) 5,086 (4,989 ) Net cash flows used for financing activities
(11,595 ) (27,685 ) (19,176 ) Cash flows used for investing activities:
Utility construction expenditures
(151,635 ) (156,921 ) (147,032 ) Nuclear decommissioning trust funds
(2,876 ) (16,092 ) (16,092 ) Proceeds from asset sales
21,337 - 75,600 Other
24,772 (14,782 ) (29,308 ) Net cash flows used for investing activities
(108,402 ) (187,795 ) (116,832 ) Net increase (decrease) in cash and temporary cash investments
18,498 8,270 (122 ) Cash and temporary cash investments at beginning of period
8,577 307 429 Cash and temporary cash investments at end of period
$27,075 $8,577 $307 Supplemental cash flows information:
Cash paid during the period for:
Interest
$39,588 $39,540 $43,237 Income taxes, net of refunds
$84,256 $35,875 $54,161 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
DECEMBER 31, 2000 1999 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AMOUNTS)COMMON EQUITY: Common stock -- $5.00 par value -- authorized 18,000,000 shares; 13,236,601 shares outstanding................... $ 66,183 $ 66,183 Additional paid-in capital................................ 229,516 229,438 Retained earnings......................................... 371,602 303,476 Accumulated other comprehensive loss...................... (4,708) -- ---------- ---------- 662,593 599,097 ---------- ---------- CUMULATIVE PREFERRED STOCK: Cumulative, without par value, not mandatorily redeemable -- authorized 3,750,000 shares, maximum aggregate stated value $150,000,000: $100 stated value -- 4.50% series, 99,970 shares outstanding.......................................... 9,997 9,997 $100 stated value -- 4.80% series, 74,912 shares outstanding.......................................... 7,491 7,491 $100 stated value -- 4.96% series, 64,979 shares outstanding.......................................... 6,498 6,498 $100 stated value -- 4.40% series, 29,957 shares outstanding.......................................... 2,996 2,996 $100 stated value -- 4.76% series, 29,947 shares outstanding.......................................... 2,995 2,995 $100 stated value -- 6.20% series, 150,000 shares outstanding.......................................... 15,000 15,000 $ 25 stated value -- 6.50% series, 599,460 shares outstanding.......................................... 14,986 14,986 ---------- ---------- 59,963 59,963 ---------- ---------- LONG-TERM DEBT: First Mortgage Bonds: 1984 Series A, variable rate (5% at December 31, 2000), due 2014............................................... 8,500 8,500 1988 Series A, variable rate (5.15% at December 31, 2000), due 2015........................................ 14,600 14,600 1990 Series V, 9.3%, due 2025........................... 27,000 27,000 1991 Series A, variable rate (4.85% at December 31, 2000), due 2015........................................ 16,000 16,000 1991 Series B, variable rate (4.85% at December 31, 2000), due 2005........................................ 16,000 16,000 1991 Series C, retired in 2000.......................... -- 1,000 1991 Series D, retired in 2000.......................... -- 875 1992 Series W, 8.6%, due 2027........................... 90,000 90,000 1992 Series X, 7.75%, due 2004.......................... 62,000 62,000 1992 Series Y, 7.6%, due 2005........................... 72,000 72,000 ---------- ---------- 306,100 307,975 Debentures, 7%, due 2007.................................. 105,000 105,000 Debentures, 5.7%, due 2008................................ 60,000 60,000 Debentures, 7 5/8%, due 2010.............................. 100,000 -- ---------- ---------- 571,100 472,975 ---------- ---------- Less: Current maturities...................................... -- (1,875) Variable rate demand bonds.............................. (55,100) (55,100) Unamortized debt premium and (discount), net............ (1,791) (1,327) ---------- ---------- 514,209 414,673 ---------- ---------- TOTAL CAPITALIZATION........................................ $1,236,765 $1,073,733 ========== ========== - -----------------------------------------------------------------------------------------THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. A-19
December 31, 2003 2002 (in thousands, except
share amounts)Common equity (See Consolidated Balance Sheets)
$1,011,837 $766,980 Cumulative preferred stock:
Cumulative, without par value, not mandatorily redeemable - authorized 3,750,000 shares, maximum aggregate stated value $150,000,000:
$100 stated value - 4.50% series, 99,970 shares outstanding
9,997 9,997 $100 stated value - 4.80% series, 74,912 shares outstanding
7,491 7,491 $100 stated value - 4.96% series, 64,979 shares outstanding
6,498 6,498 $100 stated value - 4.40% series, 29,957 shares outstanding
2,996 2,996 $100 stated value - 4.76% series, 29,947 shares outstanding
2,995 2,995 $100 stated value - 6.20% series, 150,000 shares outstanding
15,000 15,000 $25 stated value - 6.50% series, 599,460 shares outstanding
14,986 14,986 59,963 59,963 Long-term debt:
First Mortgage Bonds:
1992 Series X, 7.75%, due 2004
62,000 62,000 1992 Series Y, 7.6%, due 2005
72,000 72,000 1991 Series B, variable rate (1.73% at Dec. 31, 2003), due 2005
16,000 16,000 1984 Series A, variable rate (1.37% at Dec. 31, 2003), due 2014
8,500 8,500 1988 Series A, variable rate (1.29% at Dec. 31, 2003), due 2015
14,600 14,600 1991 Series A, variable rate (1.73% at Dec. 31, 2003), due 2015
16,000 16,000 1992 Series W, 8.6%, retired in 2003
- 70,000 189,100 259,100 Debentures, 7%, due 2007
105,000 105,000 Debentures, 5.7%, due 2008
60,000 60,000 Debentures, 7-5/8%, due 2010
100,000 100,000 454,100 524,100 Less:
Current maturities
(62,000 ) - Variable rate demand bonds
(55,100 ) (55,100 ) Unamortized debt discount, net
(591 ) (792 ) 336,409 468,208 Total capitalization
$1,408,209 $1,295,151 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON EQUITY
Common
StockAdditional
Paid-In
CapitalRetained
EarningsAccumulated
Other
Comprehensive
LossTotal
Common
Equity(in thousands) 2001:
Beginning balance (a)
$66,183 $229,516 $371,602 ($4,708 ) $662,593 Earnings available for common stock
70,180 70,180 Minimum pension liability adjustment, net of tax of ($9,552)
(14,248 ) (14,248 ) Unrealized holding gains on derivatives, net of tax of $3,932
5,952 5,952 Less: reclassification adjustment for losses included in earnings available for common stock, net of tax of ($1,676)
(2,837 ) (2,837 ) Net unrealized gains on qualifying derivatives
8,789 8,789 Total comprehensive income
64,721 Common stock dividends
(60,449 ) (60,449 ) Capital contribution from parent
35,000 35,000 Stock options exercised
87 87 Ending balance
66,183 264,603 381,333 (10,167 ) 701,952 2002:
Earnings available for common stock
77,614 77,614 Minimum pension liability adjustment, net of tax of ($6,823)
(10,177 ) (10,177 ) Unrealized holding losses on derivatives, net of tax of ($92)
(137 ) (137 ) Less: reclassification adjustment for gains included in earnings available for common stock, net of tax of $2,432
3,627 3,627 Net unrealized losses on qualifying derivatives
(3,764 ) (3,764 ) Total comprehensive income
63,673 Common stock dividends
(59,645 ) (59,645 ) Capital contribution from parent
61,000 61,000 Ending balance
66,183 325,603 399,302 (24,108 ) 766,980 2003:
Earnings available for common stock
111,564 111,564 Minimum pension liability adjustment, net of tax of $2,809
4,190 4,190 Unrealized holding losses on derivatives, net of tax of ($3,543)
(5,914 ) (5,914 ) Less: reclassification adjustment for losses included in earnings available for common stock, net of tax of ($3,752)
(5,597 ) (5,597 ) Net unrealized losses on qualifying derivatives
(317 ) (317 ) Total comprehensive income
115,437 Common stock dividends
(70,580 ) (70,580 ) Capital contribution from parent
200,000 200,000 Ending balance
$66,183 $525,603 $440,286 ($20,235 ) $1,011,837
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE COMMON STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY -------- ---------- --------- ------------- --------- (IN THOUSANDS)1998: Beginning balance............................ $66,183 $199,170 $320,386 $ -- $585,739 Earnings available for common stock........ 32,264 32,264 Common stock dividends..................... (58,341) (58,341) Common stock issued........................ 268 268 ------- -------- -------- ------- -------- Ending balance............................... 66,183 199,438 294,309 -- 559,930 1999: Earnings available for common stock........ 67,520 67,520 Common stock dividends..................... (58,353) (58,353) Capital contribution from parent........... 30,000 30,000 ------- -------- -------- ------- -------- Ending balance............................... 66,183 229,438 303,476 -- 599,097 2000: Comprehensive income: Earnings available for common stock...... 68,126 68,126 Other(a) Accumulated other comprehensive income (loss): Unrealized losses on derivatives qualified as hedges: Unrealized holding losses arising during period due to cumulative effectloss at January 1, 2001 consisted entirely ofa change in accounting principle,netof tax of ($430)........................... (642) (642) Other unrealized holding losses arising during period, net of tax of ($3,634)...................... (5,151) (5,151) Less: reclassification adjustment for losses included in net income, net of tax of ($769)..... (1,085) (1,085) ------- -------- Netunrealized losses on qualifyingderivatives......................... (4,708) (4,708) ------- -------- Total comprehensive income............... 63,418 Common stock issued........................ 78 78 ------- -------- -------- ------- -------- Ending balance............................... $66,183 $229,516 $371,602 ($4,708) $662,593 ======= ======== ======== ======= ======== - ------------------------------------------------------------------------------------------------------------derivatives.THE ACCOMPANYINGThe accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS. A-20NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL--The(a) General- The consolidated financial statements include the accounts of WP&L and its principal consolidated
subsidiaries.subsidiaries WPL Transco LLC and South Beloit. WP&L is a direct subsidiary of Alliant Energy and is engaged principally in the generation,transmission,distribution and sale of electric energy; the purchase, distribution, transportation and sale of natural gas; and the provision of waterservices.and various other energy-related services including construction management services for wind farms. Nearly all of WP&L's&L’s retail customers are located in south and central Wisconsin.WP&L's principalThe consolidated financial statements reflect investments in controlled subsidiaries
are WPL Transco LLCon a consolidated basis. FIN 46, issued by the FASB in January 2003, requires consolidation where there is a controlling financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity risk to finance its activities without additional subordinated financial support from other parties. All significant intercompany balances andSouth Beloit.transactions have been eliminated from the consolidated financial statements. The consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the U.S.,GAAP, which give recognition to the rate making and accounting practices of FERC and state commissions having regulatory jurisdiction. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect: a) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and b) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified on a basis consistent with the current year presentation. The most significant reclassifications relate to the reporting of accumulated costs of removal which are non-legal retirement obligations and accumulated decommissioning costs accrued prior to January 1, 2003. Previously, these costs were included as components of “Accumulated Depreciation” but in accordance with recent SEC guidance are now shown in “Cost of removal obligations” on the Consolidated Balance Sheet at Dec. 31, 2002.Unconsolidated investments for which WP&L
has at least a 20 percent non-controllingdoes not control, but does have the ability to exercise significant influence over operating and financial policies (generally, 20% to 50% votinginterestinterest), aregenerallyaccounted for under the equity method of accounting. These investments are stated at acquisition cost, increased or decreased for WP&L's&L’s equity in net income or loss, which is included in"Miscellaneous, net"“Equity income from unconsolidated investments” in the Consolidated Statements of Income and decreased for any dividends received. Investments that do not meet the criteria for consolidation or the equity method of accounting are accounted for under the cost method.(B) REGULATION--WP(b) Regulation - WP&L is
a public utility companysubject to regulationbyunder PUHCA, FERC, the PSCW and the ICC.(C) REGULATORY ASSETS--WP(c) Regulatory Assets and Liabilities - WP&L is subject to the provisions of SFAS 71,
"Accounting for the Effects of Certain Types of Regulation,"which provides that rate-regulated public utilities record certain costs and credits allowed in the rate making process in different periods than for non-regulated entities. These are deferred as regulatory assets or accrued as regulatory liabilities and are recognized in the Consolidated Statements of Income at the time they are reflected in rates.At DecemberAs of Dec. 31,20002003 and1999,2002, WP&L had $7 million and $6 million, respectively, of regulatory assetsof $92.4 millionthat were not earning returns. At Dec. 31, 2003 and$85.9 million, respectively,2002, regulatory assets and liabilities were comprised of the following items (in millions):
2000 1999 -------- --------Tax-related (Note 1(d))..................................... $37.6 $43.4 Energy efficiency program costs............................. 19.8 7.0 Environmental liabilities (Note 11(e))...................... 16.6 19.1 Other....................................................... 18.4 16.4 ----- ----- $92.4 $85.9 ===== =====
Regulatory
Assets
Regulatory
Liabilities
2003 2002 2003 2002 Tax-related (Note 1(d))
$23.4 $25.0 $17.9 $ 14.6 Energy efficiency program costs
22.9 38.6 -- -- Environmental-related (Note 11(e))
16.2 19.0 1.0 0.6 Asset retirement obligations (Note 16)
8.3 -- -- -- Cost of removal obligations
-- -- 209.9 -- Other
49.4 48.1 13.0 17.0 $ 120.2 $ 130.7 $ 241.8 $ 32.2 WP&L believes it is probable that any differences between expenses for legal AROs calculated under SFAS 143 and expenses recovered currently in rates will be recoverable in future rates, and is deferring the difference of $8.3 million as a regulatory asset. WP&L also collects in rates future removal costs for many assets that do not have an associated legal ARO. WP&L records a liability for the estimated amounts it has collected in rates for these future removal costs less amounts spent on removal activities. At Dec. 31, 2003 and 2002, non-legal removal obligations of $209.9 million and $199.1 million were recorded in “Regulatory liabilities” and “Cost of removal obligations,” respectively, on the Consolidated Balance Sheets.
If a portion of WP
&L's&L’s operations becomes no longer subject to the provisions of SFAS 71 as a result of competitive restructuring or otherwise, a write-down of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body that would meet the requirements undergenerally accepted accounting principlesGAAP for continued accounting as regulatory assets during such recovery period. In addition, WP&L would be required to determine any impairment of other assets and write-down such assets to their fair value.A-21(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (D) INCOME TAXES--WP(d) Income Taxes - WP&L is subject to the provisions of SFAS 109 and follows the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax assets and liabilities, as appropriate, for
alltemporary differences between the tax basis of assets and liabilities and the amounts reported in the consolidated financial statements. Deferred taxes are recorded using currently enacted tax rates.Except as noted below, income tax expense includes provisions for deferred taxes to reflect the tax effects of temporary differences between the time when certain costs are recorded in the accounts and when they are deducted for tax return purposes. As temporary differences reverse, the related accumulated deferred income taxes are reversed to income. Investment tax credits have been deferred and are subsequently credited to income over the average lives of the related property. Other tax credits reduce income tax expense in the year claimed and are generally related to research and development.
The PSCW has allowed rate recovery of deferred taxes on all temporary differences since August 1991. WP&L established a regulatory asset associated with those temporary differences occurring prior to August 1991 that will be recovered in future
rates. Alliant Energy files a consolidated federal income tax return. Under the terms of an agreement between Alliant Energy and WP&L, WP&L calculates its federal income tax provisions and makes payments to or receives payments from Alliant Energy as if it were a separate taxable entity. (E) TEMPORARY CASH INVESTMENTS--Temporaryrates through 2007.(e) Temporary Cash Investments - Temporary cash investments are stated at cost, which approximates market value, and are considered cash equivalents for the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows. These investments consist of short-term liquid investments that have maturities of less than 90
days fromdays.(f) Property, Plant and Equipment - Utility plant is recorded at original cost, which includes overhead, administrative costs and AFUDC. WP&L’s aggregate AFUDC recovery rates for 2003, 2002 and 2001, computed in accordance with the
date of acquisition. (F) DEPRECIATION OF UTILITY PROPERTY, PLANT AND EQUIPMENT--WPprescribed regulatory formula, were 9.5%, 2.6% and 7.9%, respectively.WP&L uses
thea combination of remaining life, straight-line and sum-of-the-years-digits depreciationmethodmethods as approved by the PSCW and the ICC. The remaining depreciable life of Kewaunee, of which WP&L is a co-owner, is based on the PSCW approved revised end-of-life of 2010. Depreciation expense related to the decommissioning of Kewaunee is discussed in Note 11(f). The average rates of depreciation for electric and gas properties,of WP&L,consistent with current rate making practices, were as follows:
2000 1999 1998 -------- -------- --------Electric.................................................... 3.6% 3.6% 3.6% Gas......................................................... 4.1% 3.9% 3.8%(G) PROPERTY, PLANT AND EQUIPMENT--Utility plant
2003 2002 2001 Electric
3.7% 3.6% 3.7% Gas
4.0% 4.1% 4.1% Nuclear fuel for Kewaunee is recorded at its original cost
which includes overheadandadministrativeis amortized to expense based upon the quantity of heat produced for electric generation. This accumulated amortization assumes spent nuclear fuel will have no residual value. Estimated future disposal costsand AFUDC. WP&L's aggregate gross AFUDC recovery rates used for 2000, 1999 and 1998, computed in accordance with the prescribed regulatory formula, were 10.8%, 5.4% and 5.2%, respectively.of such fuel are expensed based on KWhs generated.Other property, plant and equipment is recorded at
original cost.cost, the majority of which is depreciated using the straight-line method. Upon retirement or sale ofotherproperty and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in"Miscellaneous, net" inthe Consolidated Statements of Income. Ordinary retirements of utility plantincluding removal costs lessand salvage value are netted and charged to accumulated depreciation upon removal from utility plant accounts and no gain or loss is recognized.(H) OPERATING REVENUES--WPRemoval costs reduce the regulatory liability previously established.(g) Operating Revenues - Revenues from WP&L are primarily from electric and natural gas sales and deliveries and are recorded under the accrual method of accounting and recognized upon delivery. WP&L accrues revenues for services rendered but unbilled at month-end.
In 2000,WP&Lrecorded an increaseserves as a collection agent for sales or various other taxes and record revenues on a net basis. The revenues do not include the collection of$10 million intheestimate of utility services rendered but unbilled at month-end due to the implementation of a refined estimation process. A-22(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (I) UTILITY FUEL COST RECOVERY--WP&L'saforementioned taxes.(h) Utility Fuel Cost Recovery - WP&L’s retail electric rates are based
in parton annual forecasted fuel and purchased-power costs. Under PSCW rules, WP&L can seekemergencyrate increases if it experiences an extraordinary increase in these costs or if the annual costs are more than3 percent3% higher than the estimated costs used to establish rates. WP&L has a gas performance incentive which includes a sharing mechanism whereby40 percent50% of all gains and losses relative to current commodity prices, as well as other benchmarks, are retained by WP&L, with the remainder refunded to or recovered from customers.(J) NUCLEAR REFUELING OUTAGE COSTS--Operating(i) Generating Facility Outages - Operating expenses incurred during refueling outages at Kewaunee and the maintenance costs incurred during outages for WP&L’s various other generating facilities are expensed
by WP&Las incurred. Thenext scheduledtiming of the Kewaunee refuelingoutage at Kewaunee isoutages during 2001-2003 and anticipatedto commence in Fall 2001. (K) NUCLEAR FUEL--Nuclear fuelrefueling outages forKewaunee is recorded at its original cost and is amortized to expense based upon the quantity of heat produced for the generation of electricity. This accumulated amortization assumes spent nuclear fuel will have no residual value. Estimated future disposal costs of such fuel2004-2006 areexpensed based on kilowatt-hours generated. (L) DERIVATIVE FINANCIAL INSTRUMENTS--WPas follows:
2001
2002
2003
2004
2005
2006
Fall
None Spring Fall None Spring (j) Derivative Financial Instruments - WP&L uses derivative financial instruments to hedge exposures to fluctuations in
interest rates,certain commodity prices and volatility in a portion of natural gas sales volumes due to weather. WP&L also utilizes derivatives to mitigate the equity price volatility associated with certain investments in equity securities. WP&L does not use such instruments for speculative purposes.In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment of SFAS 133," theThe fair value of all derivatives are recorded as assets or liabilities on the Consolidated Balance Sheets and gains and losses related to derivatives that are designated as, and qualify as hedges, are recognized in earnings when the underlying hedged item or physical transaction is recognized in income. Gains and losses related to derivatives that do not qualify for, or are not designated in hedge relationships, are recognized in earnings immediately. Based on the fuel and natural gas cost recovery mechanisms in place, as well as other specific regulatory authorizations, changes in fair market values of WP&L’s derivatives generally have no impact on its results of operations. WP&L hasa number ofsome commodity purchase and sales contractsfor both capacity and energythat have been designated, and qualify for, the normal purchase and sale exceptionin SFAS 138. Basedand based on this designation, these contracts are not accounted for as derivative instruments.WP&L is exposed to losses related to financial instruments in the event of counterparties’ non-performance. WP&L has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate its exposure to counterparty credit risk. WP&L is not aware of any material exposure to counterparty credit risk related to its derivative financial instruments. Refer to Note 10 for further discussion of WP
&L's&L’s derivative financial instruments.(2) MERGER In April 1998, WPLH, IES(k) Pension Plan - For the defined benefit pension plan sponsored by Corporate Services, Alliant Energy allocates pension costs and
IPC completed a merger resultingcontributions to WP&L based on labor costs of plan participants and any additional minimum pension liability based on the funded status of the WP&L group.(l) Asset Valuations - Long-lived assets, excluding regulatory assets, are reviewed for possible impairment whenever events or changes in
Alliant Energy.circumstances indicate the carrying value of the assets may not be recoverable.Impairment is indicated if the carrying value of an asset exceeds its undiscounted future cash flows. An impairment charge is recognized equal to the amount the carrying value exceeds the asset’s fair value. The
merger wasfair value is determined by the use of quoted market prices, appraisals, or the use of other valuation techniques such as expected discounted future cash flows. The estimated fair value, less cost to sell assets held for sale, is compared each reporting period to their carrying values. Impairment charges are recorded for assets held for sale if the carrying value of such asset exceeds the estimated fair value less cost to sell.If events or circumstances indicate the carrying value of investments accounted for under the equity method of accounting may not be recoverable, potential impairment is assessed by comparing the future anticipated cash flows from these investments to their carrying values. If an impairment is indicated, a charge is recognized equal to the amount the carrying value exceeds the investment’s fair value.
(2) UTILITY RATE MATTERS
In February 2004, WP&L received approval from the PSCW to refund $5.3 million to its natural gas customers as relates to its annual performance under the gas performance incentive. The PSCW has not yet audited the refund calculation, but agreed with WP&L’s request to refund approximately 80% of the total refund amount at this time. This refund was completed in February 2004 and the remainder of the refund will be completed after the PSCW completes their audit and issues a
poolingruling. At Dec. 31, 2003, WP&L had reserves for all amounts related to these refunds. Refer to Note 1(h) for further discussion ofinterests. A-23WP&L’s fuel cost recovery. (3) LEASES
WP
&L's&L’s operating lease rental expenses, which include certain purchased-power agreements, for2000, 19992003, 2002 and19982001 were$7.9$25.9 million,$7.7$24.5 million and$6.4$23.4 million, respectively. The purchased-power agreements total below includes $464 million and $69 million related to the Riverside and RockGen plants, respectively, in Wisconsin. Riverside is expected to be placed in service in 2004. WP&L's&L continues to evaluate Riverside, RockGen and other tolling arrangements, renewable energy entities and any other non-special purpose entities, to determine if they require consolidation under the revised FIN 46 guidance issued by the FASB in December 2003. WP&L will apply the provisions of the revised guidance as of March 31, 2004. The synthetic leases relate to the financing of utility railcars and a utility radio dispatch system. These leases do not meet the consolidation requirements per FIN 46 and were not included on the Consolidated Balance Sheets. WP&L has guaranteed the residual value of its synthetic leases totaling $13 million in the aggregate. The guarantees extend through the maturity of each respective underlying lease with remaining terms up to 12 years. Residual value guarantees have been included in the future minimum lease paymentsby year are as followsnoted in the following table (in millions):
OPERATING YEAR LEASES - ---- ---------2001........................................................ $ 14.0 2002........................................................ 16.5 2003........................................................ 15.5 2004........................................................ 15.1 2005........................................................ 15.2 Thereafter.................................................. 64.2 ------ $140.5 ======
2004 2005 2006 2007 2008 Thereafter Total Certain purchased-power agreements
$ 52.6 $ 69.5 $ 70.9 $ 72.2 $ 64.8 $ 235.0 $ 565.0 Synthetic leases
7.9 7.9 7.8 6.8 2.6 22.8 55.8 Other
2.1 1.7 1.3 1.1 1.0 1.4 8.6 $ 62.6 $ 79.1 $ 80.0 $ 80.1 $ 68.4 $ 259.2 $ 629.4 (4)
UTILITYSALE OF ACCOUNTS RECEIVABLEUtility customer accounts receivable, including unbilled revenues, arise primarily from
the sale of electricityelectric and naturalgas.gas sales. AtDecemberDec. 31,20002003 and1999,2002, WP&L was serving a diversified base of residential, commercial and industrial customers and did not have any significant concentrations of credit risk.AnWP&L participates in a combined utility customer accounts receivable
financing arrangement exists through 2001 forsale program whereby WP&Lin which itand IP&L may sell up to a combined maximum amount of$150$250 million (there are no individual subsidiary limits) of their respective accounts receivable to a third-party financial institution on a limited recoursebasis. Accounts receivable sold include receivables arising from sales to customersbasis through wholly-owned andto other public, municipalconsolidated special purpose entities. Corporate Services acts as a collection agent for the buyer andcooperative utilities, as well as from billings to the co-owners of the jointly-owned electric generating plants operated by WP&L. WP&Lreceives a fee forbillingcollection services. The agreement expires in April 2006 andcollection functions, whichis subject to annual renewal or renegotiation for a longer period thereafter. Under terms of the agreement, the third-party financial institutionpurchases the receivables initially for the face amount. On a monthly basis, this sales price is adjusted, resulting in payments to the third-party financial institution of an amount that varies based on interest rates and length of time the sold receivables remain outstanding. Collections on sold receivables are used to purchase additional receivables from WP
&L's responsibility, that approximates fair value.&L and IP&L.At Dec. 31, 2003 and 2002, WP&L had sold $50 million and $116 million of receivables, respectively. In
2000, 19992003, 2002 and1998,2001, WP&L receivedapproximately $0.9$0.8 billion,$0.9$1.2 billion and$1.0$1.1 billion, respectively, in aggregate proceeds fromthis facility.the sale of accounts receivable. WP&L uses proceeds from the sale of accounts receivable and unbilled revenues to maintain flexibility in its capital structure, take advantage of favorable short-term rates and finance a portion of its long-term cash needs.Included inWP&L's Consolidated Statements of Income for 2000, 1999 and 1998, were&L paid fees associated with these sales of$5.0$1.2 million, $2.2 million and $4.0 million in 2003, 2002 and$4.9 million,2001, respectively.WP&L accounts for the sale of accounts receivable to the third-party financial institution as sales under SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which do not require consolidation per the guidelines of FIN 46. Retained receivables are available to the third-party financial institution to pay any fees or expenses due it, and to absorb all credit losses incurred on any of the sold receivables.
(5) INCOME TAXES
The components of
federal and stateincome taxes for WP&Lfor the years ended December 31were as follows (in millions):
2000 1999 1998 -------- -------- --------Current tax expense......................................... $55.0 $ 58.4 $32.2 Deferred tax expense........................................ (10.2) (10.7) (5.6) Amortization of investment tax credits...................... (1.9) (1.9) (1.9) ----- ------ ----- $42.9 $ 45.8 $24.7 ===== ====== =====A-24(5) INCOME TAXES (CONTINUED)
2003 2002 2001 Current tax expense:
Federal
$ 29.0 $ 42.8 $ 36.8 State
15.7 9.7 11.2 Deferred tax expense (benefit):
Federal
22.8 (5.0 ) (4.6 ) State
0.6 1.2 (0.4 ) Amortization of investment tax credits
(1.6 ) (1.8 ) (1.8 ) Research and development tax credits
(0.7 ) (2.2 ) -- $ 65.8 $ 44.7 $ 41.2 Alliant Energy files a consolidated federal income tax return. Under the terms of an agreement between Alliant Energy and its subsidiaries, including WP&L, the subsidiaries calculate their respective federal income tax provisions and make payments to or receive payments from Alliant Energy as if they were separate taxable entities. Separate return amounts are adjusted to reflect state apportionment benefits net of federal tax and the fact that PUHCA prohibits the retention of tax benefits at the parent level. Any difference between the separate return methodology and the actual consolidated return is allocated as prescribed in Alliant Energy’s tax allocation agreement. WP&L realized net benefits of $2.9 million, $0 and $0 related to state apportionment and allocation of parent tax benefits in 2003, 2002 and 2001, respectively.
The overall effective income tax rates shown
below forin theyears ended December 31following table were computed by dividing total income tax expense by income before income taxes.
2000 1999 1998 -------- -------- --------STATUTORY FEDERAL INCOME TAX RATE........................... 35.0% 35.0% 35.0% State income taxes, net of federal benefits............... 6.0 6.3 7.8 Amortization of investment tax credits.................... (1.6) (1.6) (3.1) Adjustment of prior period taxes.......................... (0.8) (0.3) -- Merger expenses........................................... -- -- 2.5 Amortization of excess deferred taxes..................... (1.3) (1.3) (2.5) Other items, net.......................................... 0.2 1.1 1.3 ----- ------ ----- OVERALL EFFECTIVE INCOME TAX RATE........................... 37.5% 39.2% 41.0% ===== ====== =====
2003 2002 2001 Statutory federal income tax rate
35.0 % 35.0 % 35.0 % State income taxes, net of federal benefits
5.8 6.1 6.4 Research and development tax credits
(0.3 ) (1.8 ) -- Amortization of excess deferred taxes
(0.5 ) (1.4 ) (1.5 ) Adjustment of prior period taxes
(0.8 ) (1.1 ) (2.8 ) Amortization of investment tax credits
(0.9 ) (1.4 ) (1.6 ) Other items, net
(1.9 ) 0.2 0.4 Overall effective income tax rate
36.4 % 35.6 % 35.9 % The accumulated deferred income tax (assets) and liabilities included on the Consolidated Balance Sheets at
DecemberDec. 31 arise from the following temporary differences (in millions):
2000 1999 -------- --------Property related............................................ $260.5 $271.9 Investment tax credit related............................... (19.7) (21.0) Other....................................................... (18.0) (15.1) ------ ------ $222.8 $235.8 ====== ======
2003 2002 Deferred
Tax
AssetsDeferred
Tax
LiabilitiesNet Deferred
Tax
AssetsDeferred
Tax
LiabilitiesNet Property related
($14.3 ) $216.0 $201.7 ($15.6 ) $216.8 $201.2 Minimum pension liability
(13.6 ) -- (13.6 ) (16.4 ) -- (16.4 ) Decommissioning
(22.2 ) -- (22.2 ) (25.2 ) -- (25.2 ) Other
(6.6 ) 47.8 41.2 (8.5 ) 40.8 32.3 Total
($56.7 ) $263.8 $207.1 ($65.7 ) $257.6 $191.9 2003 2002 Current assets - Accumulated deferred income taxes
($6.6 ) ($8.5 ) Other long-term liabilities and deferred credits - Accumulated deferred income taxes
213.7 200.4 Total deferred tax (assets) and liabilities
$207.1 $191.9 (6) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Substantially all of WP
&L has two&L’s employees are covered by several non-contributory defined benefit pensionplans that cover substantially all of its employees.plans. Benefits are based on theemployees'employees’ years of service and compensation. WP&L also provides certain postretirement health care and life benefits to eligible retirees. In general, the health care plans are contributory withparticipants'participants’ contributions adjustedannuallyregularly and the life insurance plans are non-contributory. Theweighted-averageweighted average assumptionsas ofat the measurement date ofSeptemberSept. 30arewere as follows:
QUALIFIED PENSION OTHER POSTRETIREMENT BENEFITS BENEFITS ------------------------------ ------------------------------ 2000 1999 1998 2000 1999 1998 -------- -------- -------- -------- -------- --------Discount rate................................... 8.00% 7.75% 6.75% 8.00% 7.75% 6.75% Expected return on plan assets.................. 9% 9% 9% 9% 9% 9% Rate of compensation increase................... 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Medical cost trend on covered charges: Initial trend range........................... N/A N/A N/A 9% 7% 8% Ultimate trend range.......................... N/A N/A N/A 5% 5% 5%A-25(6) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Qualified
Pension Benefits
Other
Postretirement Benefits
2003 2002 2001 2003 2002 2001 Discount rate for benefit obligations
6% 6.75% 7.25% 6% 6.75% 7.25% Discount rate for net periodic cost
6.75% 7.25% 8% 6.75% 7.25% 8% Expected return on plan assets
9% 9% 9% 9% 9% 9% Rate of compensation increase
3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Medical cost trend on covered charges:
Initial trend rate
N/A N/A N/A 9.5% 10.8% 12% Ultimate trend rate
N/A N/A N/A 5% 5% 5% The expected return on plan assets was determined by analysis of historical and forecasted asset class returns as well as actual returns for the plan over the past 10 years. An adjustment to the returns to account for active management is also made in the analysis. The obligations are viewed as long-term commitments and a long-term approach is used when determining the expected rate of return on assets, which is reviewed on an annual basis.
The components of WP
&L's&L’s qualified pension benefits and other postretirement benefits costsarewere as follows (in millions):
OTHER POSTRETIREMENT QUALIFIED PENSION BENEFITS BENEFITS ------------------------------------ ------------------------------------ 2000 1999 1998 2000 1999 1998 -------- -------- -------- -------- -------- --------Service cost..................................... $ 3.0 $ 3.8 $ 3.2 $ 1.4 $ 1.6 $ 1.7 Interest cost.................................... 8.9 8.9 8.5 3.3 2.7 2.6 Expected return on plan assets................... (12.9) (12.9) (12.8) (1.6) (1.5) (1.5) Amortization of: Transition obligation (asset).................. (2.1) (2.1) (2.1) 1.2 1.2 1.3 Prior service cost............................. 0.4 0.4 0.5 -- -- -- Actuarial loss (gain).......................... -- 0.2 -- (0.8) (0.9) (1.1) ------ ------ ------ ----- ----- ----- Total ($ 2.7) ($ 1.7) ($ 2.7) $ 3.5 $ 3.1 $ 3.0 ====== ====== ====== ===== ===== =====During 1998, WP&L recognized an additional $0.6 million of costs in accordance with SFAS 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," for severance and early retirement programs. In addition, during 1998, WP&L recognized $3.6 million of curtailment charges relating to WP&L's other postretirement benefits.
Qualified
Pension Benefits
Other
Postretirement Benefits
2003 2002 2001 2003 2002 2001 Service cost
$ 4.0 $ 3.6 $2.8 $ 3.4 $ 2.4 $ 1.6 Interest cost
10.6 10.1 9.2 5.2 4.4 3.6 Expected return on plan assets
(13.5 ) (12.2 ) (13.7 ) (1.4 ) (1.6 ) (1.7 ) Amortization of:
Transition obligation (asset)
-- (1.7 ) (2.1 ) 1.1 1.1 1.2 Prior service cost
0.4 0.4 0.5 -- -- -- Actuarial loss (gain)
3.5 1.5 -- 0.8 0.1 (0.6 ) $ 5.0 $ 1.7 ($ 3.3 ) $ 9.1 $ 6.4 $ 4.1 The pension
benefit costbenefits costs shownabovepreviously (and in the following tables)representsrepresent only the pensionbenefit costbenefits costs for bargaining unit employees of WP&L covered under the bargaining unit pension plan that is sponsored by WP&L. The benefit obligations and assets associated with WP&L’s non-bargaining employees who are participants in other Alliant Energy plans are reported in Alliant Energy’s Consolidated Financial Statements and are not reported previously. The pensionbenefit costbenefits (income) costs for WP&L's&L’s non-bargaining employees who are now participants in other Alliant Energy planswas ($1.3)were $1.9 million,($1.8)$0.3 million and$3.0($1.5) million for2000, 19992003, 2002 and1998, respectively, including a special charge of $3.6 million in 1998 for severance and early retirement window programs.2001, respectively. In addition, Corporate Services provides services to WP&L. The allocated pensionbenefitbenefits costs associated with these serviceswaswere $2.0 million, $1.7 million and $1.3 million$1.2 millionfor 2003, 2002 and$0.6 million for 2000, 1999 and 1998,2001, respectively. The other postretirementbenefit costbenefits costs shownabovepreviously for each period (and in the following tables)representsrepresent the other postretirementbenefit costbenefits costs for all WP&L employees. The allocated other postretirementbenefit costbenefits costs associated with Corporate Services for WP&Lwaswere $0.9 million, $0.5 million and $0.3 million$0.4 millionfor 2003, 2002 and$0.2 million for 2000, 1999 and 1998,2001, respectively.The assumed medical trend rates are critical assumptions in determining the service and interest cost and accumulated postretirement benefit obligation related to postretirement
benefitbenefits costs. Aone percent1% change in the medical trend rates for2000,2003, holding all other assumptions constant, would have the following effects (in millions):
1 PERCENT INCREASE 1 PERCENT DECREASE ------------------ ------------------Effect on total of service and interest cost components........................................ $0.4 ($0.4) Effect on postretirement benefit obligation......... $3.0 ($2.9)A-26(6) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
1% Increase 1% Decrease Effect on total of service and interest cost components
$ 0.9 ($ 0.8 ) Effect on postretirement benefit obligation
9.4 (8.3 ) A reconciliation of the funded status of WP
&L's&L’s plans to the amounts recognized onWP&L'sthe Consolidated Balance Sheets atDecemberDec. 31is presented belowwas as follows (in millions):
OTHER QUALIFIED PENSION POSTRETIREMENT BENEFITS BENEFITS ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- --------Change in benefit obligation: Net benefit obligation at beginning of year............... $117.2 $132.3 $42.4 $40.3 Service cost.............................................. 3.0 3.8 1.4 1.6 Interest cost............................................. 8.9 8.9 3.3 2.7 Plan participants' contributions.......................... -- -- 1.2 1.2 Actuarial loss (gain)..................................... (6.2) (20.8) (1.3) 0.8 Gross benefits paid....................................... (7.0) (7.0) (4.7) (4.2) ------ ------ ------ ------ Net benefit obligation at end of year................... 115.9 117.2 42.3 42.4 ------ ------ ------ ------ Change in plan assets: Fair value of plan assets at beginning of year............ 147.6 137.5 17.9 15.1 Actual return on plan assets.............................. 15.7 17.1 1.5 1.8 Employer contributions.................................... -- -- 3.5 4.0 Plan participants' contributions.......................... -- -- 1.2 1.2 Gross benefits paid....................................... (7.0) (7.0) (4.7) (4.2) ------ ------ ------ ------ Fair value of plan assets at end of year................ 156.3 147.6 19.4 17.9 ------ ------ ------ ------ Funded status at end of year................................ 40.4 30.4 (22.9) (24.5) Unrecognized net actuarial loss (gain)...................... (8.2) 0.8 (15.0) (14.5) Unrecognized prior service cost............................. 4.3 4.7 (0.2) (0.2) Unrecognized net transition obligation (asset).............. (3.7) (5.8) 13.8 14.9 ------ ------ ------ ------ Net amount recognized at end of year.................... $ 32.8 $ 30.1 ($24.3) ($24.3) ====== ====== ====== ====== Amounts recognized on the Consolidated Balance Sheets consist of: Prepaid benefit cost.................................... $ 32.8 $ 30.1 $ 0.9 $ 0.6 Accrued benefit cost.................................... -- -- (25.2) (24.9) ------ ------ ------ ------ Net amount recognized at measurement date............... 32.8 30.1 (24.3) (24.3) ------ ------ ------ ------ Contributions paid after September 30 and prior to December 31............................................... -- -- 0.6 1.0 ------ ------ ------ ------ Net amount recognized at December 31.................... $ 32.8 $ 30.1 ($23.7) ($23.3) ====== ====== ====== ======A-27(6) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The
Qualified
Pension
BenefitsOther
Postretirement
Benefits2003 2002 2003 2002 Change in projected benefit obligation:
Net projected benefit obligation at beginning of year
$ 156.0 $ 139.2 $76.6 $60.5 Service cost
4.0 3.6 3.4 2.4 Interest cost
10.6 10.1 5.2 4.4 Plan participants’ contributions
-- -- 1.5 1.5 Actuarial loss
17.8 10.3 11.7 13.2 Gross benefits paid
(7.4 ) (7.2 ) (5.3 ) (5.4 ) Net projected benefit obligation at end of year
181.0 156.0 93.1 76.6 Change in plan assets:
Fair value of plan assets at beginning of year
153.5 138.8 16.7 17.8 Actual return on plan assets
28.9 (8.1 ) 2.2 (1.4 ) Employer contributions
-- 30.0 4.4 4.2 Plan participants’ contributions
-- -- 1.5 1.5 Gross benefits paid
(7.4 ) (7.2 ) (5.3 ) (5.4 ) Fair value of plan assets at end of year
175.0 153.5 19.5 16.7 Funded status at end of year
(6.0 ) (2.5 ) (73.6 ) (59.9 ) Unrecognized net actuarial loss
62.4 63.5 30.5 20.4 Unrecognized prior service cost
3.0 3.4 (0.1 ) (0.1 ) Unrecognized net transition obligation
-- -- 10.3 11.5 Net amount recognized at end of year
$59.4 $64.4 ($32.9 ) ($28.1 ) Amounts recognized on the Consolidated Balance Sheets consist of:
Prepaid benefit cost
$59.4 $64.4 $1.5 $1.5 Accrued benefit cost
-- -- (34.4 ) (29.6 ) Net amount recognized at measurement date
59.4 64.4 (32.9 ) (28.1 ) Contributions paid after 9/30 and prior to 12/31
-- -- 0.4 1.0 Net amount recognized at 12/31
$59.4 $64.4 ($32.5 ) ($27.1 ) At Dec. 31, 2003 and 2002, Corporate Services allocated an additional minimum liability of $34.2 million and $41.3 million, respectively. Included in the following table are WP&L’s accumulated benefit
obligationobligations, amounts applicable to qualified pension andfair value of plan assets for theother postretirementwelfare plansbenefits with accumulated benefit obligations in excess of plan assets,were $37.1 million and $9.5 millionas well as qualified pension plans with projected benefit obligations in excess of plan assets as ofSeptemberthe measurement date of Sept. 302000(in millions):
Qualified
Pension
BenefitsOther
Postretirement
Benefits2003 2002 2003 2002 Accumulated benefit obligation
$ 165.7 $ 143.1 $ 93.1 $ 76.6 Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation
-- -- 91.5 74.7 Fair value of plan assets
-- -- 16.3 13.7 Plans with projected benefit obligations in excess of plan assets:
Projected benefit obligations
181.0 156.0 N/A N/A Fair value of plan assets
175.0 153.5 N/A N/A WP&L’s net periodic benefit cost is primarily included in “Other operation and
$36.5maintenance” in the Consolidated Statements of Income. WP&L calculates the fair value of plan assets by using the straight market value of assets approach.Postretirement benefit plans are funded via specific assets within certain retirement plans (401(h) assets) as well as a VEBA trust. The asset allocation of the 401(h) assets mirror the qualified pension plan assets and the asset allocation of the VEBA trust are reflected in the following table under “Other Postretirement Plans.” The asset allocation for WP&L’s qualified pension and other postretirement benefit plans at Sept. 30, 2003 and 2002, and the qualified pension plan target allocation for 2003 were as follows:
Qualified Pension Plans Other Postretirement Plans Target
Allocation
Percentage of Plan
Assets
at Sept. 30Percentage of Plan
Assets
at Sept. 30
Asset Category
2003 2003 2002 2003 2002 Equity securities
50-65% 61% 55% 15% 16% Debt securities
25-40% 33% 35% 33% 27% Other
0-5% 6% 10% 52% 57% 100% 100% 100% 100% WP&L’s plan assets are managed by outside investment managers. WP&L’s investment strategy and its policies employed with respect to pension and postretirement assets is to combine both preservation of principal, and prudent and reasonable risk-taking to protect the integrity of the assets in meeting the obligations to the participants while achieving the optimal return possible over the long-term. It is recognized that risk and volatility are present to some degree with all types of investments; however, high levels of risk are minimized at the total fund level. This is accomplished through diversification by asset class, number of investments, and sector and industry limits when applicable.
For the pension plans, the mix among asset classes is controlled by long-term asset allocation targets. The assets are viewed as long-term with moderate liquidity needs. Historical performance results and future expectations suggest that equity securities will provide higher total investment returns than debt securities over a long-term investment horizon. Consistent with the goals to maximize returns and minimize risk over the long-term, the pension plans have a long-term investment posture more heavily weighted towards equity holdings. The asset allocation mix is monitored quarterly and appropriate action is taken as needed to rebalance the assets within the prescribed range. Assets related to postretirement plans are viewed as long-term. A balanced mix of both equity and debt securities are utilized to maximize returns and minimize risk over the long-term.
Prohibited investment vehicles related to the pension and postretirement plans include, but may not be limited to, direct ownership of real estate, real estate investment trusts, private placements, unregistered or restricted stock, options and futures unless specifically approved, margin trading, oil and gas limited partnerships, commodities, short selling, commercial mortgage obligations and securities of the managers’ firms or affiliate firms.
WP&L estimates that funding for the qualified pension and postretirement benefit plans for 2004 will be $0 and approximately $4 million, respectively.
In December 2003, the President signed into law the Medicare Prescription Drug, Improvement and
$8.4 million, respectively,Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors ofSeptember 30, 1999.retiree health care benefit plans, that provide a benefit that is at leastactuarially equivalent to Medicare Part D. As permitted by FSP No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” WP&L has elected to defer reflecting the effect of the Act on postretirement net periodic benefit cost and the accumulated postretirement benefit obligation in the Consolidated Financial Statements, since specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require WP&L to change previously reported information. WP&L is currently evaluating the effect of the Act on its other postretirement benefits expense.
Alliant Energy sponsors several non-qualified pension plans that cover certain current and former
officers.key employees. The pension expense allocated to WP&L for these plans was$1.2$1.7 million,$0.8$1.5 million and$0.8$1.0 million in2000, 19992003, 2002 and1998,2001, respectively. WP&L has various life insurance policies that cover certain key employees and directors. At Dec. 31, 2003 and 2002, the cash surrender value of these investments was $11 million and $10 million, respectively. A significant number of WP&L employees also participate in defined contribution pension plans (401(k) plans). WP&L's&L’s contributions to the plans, which are based on theparticipants'participants’ level of contribution, were $2.1 million,$2.0$2.2 million and$2.4$2.1 million in2000, 19992003, 2002 and1998,2001, respectively.(7) COMMON AND PREFERRED STOCK
(A) COMMON STOCK--WP(a) Common Stock - WP&L has
common stockdividend payment restrictions basedonitsrespectivebond indentures, the terms of its outstanding preferred stock andarticles of incorporation, and restrictions onstate regulatory limitations. In its December 2003 rate order, thepayment ofPSCW stated WP&L may not pay annual common stock dividends,commonly found with preferred stock. WP&L's common stockincluding pass-through of subsidiary dividends,are restricted to the extent that such dividend would reduce the common stock equity ratio to less than 25 percent. Also the PSCW ordered that it must approve the paymentin excess ofdividends by WP&L$89 million to Alliant Energythat are in excess of the level forecasted in the rate order ($58.3 million),ifsuch dividends would reduceWP&L's&L’s actual average common equity ratio, on a regulatory financial basis, is or will fall below52.00 percentthe authorized level oftotal capitalization. The dividends paid by54.01%. As of Dec. 31, 2003, WP&Lto Alliant Energy since the rate orderwasissued have not exceededin compliance with all suchlevel. (B) PREFERRED STOCK--Thedividend restrictions.(b) Preferred Stock - The carrying value of WP
&L's&L’s cumulative preferred stock atDecemberboth Dec. 31,20002003 and19992002 was $60 million. The fair market value, based upon the market yield of similar securities and quoted market prices, atDecemberDec. 31,20002003 and19992002 was$44$53 million and$49$48 million, respectively.(8) DEBT
(A) SHORT-TERM DEBT--WP&L, IESU(a) Short-Term Debt - To provide short-term borrowing flexibility and
IPC participate in a utility money pool, which is funded, as needed, through the issuance ofsecurity for commercial paperby Alliant Energy. Interest expense and other fees are allocated based on borrowed amounts. The PSCW has restrictedoutstanding, WP&Lfrom lending money to non-utility affiliates and non-Wisconsin utilities. Asmaintains committed bank lines of credit, all of which require aresult, WP&L can only borrow money from the utility money pool.fee. Information regarding WP&L's&L’s short-term debt was as follows (dollars in millions):
2000 1999 1998 -------- -------- --------As of year end: Notes payable outstanding............................... $-- $-- $50.0 Interest rate on notes payable.......................... N/A N/A 5.4% Money pool borrowings................................... $29.2 $125.7 $26.8 Interest rate on money pool borrowings.................. 6.6% 5.8% 5.2% For the year ended: Average amount of short-term debt (based on daily outstanding balances)........................... $25.5 $77.1 $48.4 Average interest rate on short-term debt................ 6.2% 5.2% 5.6%A-28(8) DEBT (CONTINUED) (B) LONG-TERM DEBT--Substantially
2003 2002 At Dec. 31:
Commercial paper outstanding
$-- $60.0 Discount rates on commercial paper
N/A 1.6% For the year ended:
Average amount of short-term debt
(based on daily outstanding balances)$29.8 $57.4 Average interest rates on short-term debt
1.4% 1.8% (b) Long-Term Debt - WP&L’s First Mortgage Bonds are secured by substantially all of
WP&L'sits utilityplant is secured by its First Mortgage Bonds.plant. WP&L also maintainsunsecuredindenturesrelatingrelated to the issuance of unsecured debt securities. WP&L's&L’s debt maturities for20012004 to20052008 are $62 million, $88 million, $0,$0, $0, $62.0$105 million, and$88.0$60 million, respectively. The carrying value of WP&L's&L’s long-term debt (including current maturities and variable rate demand bonds) atDecemberDec. 31,20002003 and19992002 was$569$454 million and$472$523 million, respectively. The fair market value, based upon the market yield of similar securities and quoted market prices, atDecemberDec. 31,20002003 and19992002 was$584$494 million and$469$574 million, respectively.(9) INVESTMENTS AND ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of WP
&L's&L’s current assets and current liabilities approximates fair value because of the short maturity of such financial instruments. Since WP&L is subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of its financial instruments may not be realized byWP&L's parent.Alliant Energy. Information relating to various investments held by WP&L at Dec. 31 that aremarked to marketmarked-to-market as a result of SFAS 115"Accounting for Certain Investments in Debt and Equity Securities," werewas as follows (in millions):
DECEMBER 31, 2000 DECEMBER 31, 1999 ---------------------- ---------------------- NET CARRYING/ NET CARRYING/ UNREALIZED FAIR UNREALIZED FAIR GAINS/ VALUE GAINS VALUE (LOSSES) --------- ---------- --------- ----------Available-for-sale securities: Nuclear decommissioning trust funds: Equity securities....................................... $ 81 $26 $ 65 $29 Debt securities......................................... 115 2 101 (2) ---- --- ---- --- Total................................................. $196 $28 $166 $27 ==== === ==== ===NUCLEAR DECOMMISSIONING TRUST FUNDS--As required by SFAS 115, WP&L's debt and equity security investments in the nuclear decommissioning trust funds are classified as available-for-sale. As of December
2003 2002 Carrying/
Fair
Value
Unrealized
Gains,Net of Tax
Carrying/
Fair
Value
Unrealized
Gains,
Net of Tax
Available-for-sale securities:
Nuclear decommissioning trust funds:
Debt securities
$137 $3 $131 $5 Equity securities
97 19 93 5 Total
$234 $22 $224 $10 Nuclear Decommissioning Trust Funds - At Dec. 31,
2000, $752003, $76 million,$14$37 million and$26$24 million of the debt securities mature in2001-2010,2004-2010, 2011-2020 and2021-2035,2021-2040, respectively. The fairmarketvalue of the nuclear decommissioning trust funds,wasas reported by the trustee, was adjusted for the tax effect of unrealized gains and losses.NetIn 2003, net unrealized holding gains were recorded as part ofaccumulated provision for depreciation.regulatory liabilities or as an offset to regulatory assets related to AROs (recorded in 2002 as part of cost of removal obligations). The funds realizedgains/gains (losses) from the sales of securities of$5.2($6.2) million,($10.4)$10.3 million and$0.8$2.1 million in2000, 19992003, 2002 and1998,2001, respectively (cost of the investments based on specific identificationwere $202.1was $333.9 million,$94.6$92.2 million and$57.6$147.4 millionrespectively,and proceeds from the sales were$207.3$327.7 million,$84.2$102.5 million and$58.4$149.5 million, respectively).A-29In January 2004, WP&L liquidated all of the qualified decommissioning assets into money market funds as a result of the pending Kewaunee sale. Investment in ATC - At Dec. 31, 2003 and 2002, WP&L had ownership interests in ATC of approximately 25% and 27%, respectively, and accounts for this investment under the equity method. At Dec. 31, 2003 and 2002, the carrying value of WP&L’s investment in ATC was $121 million and $112 million, respectively. Pursuant to various agreements, WP&L receives a range of transmission services from ATC. WP&L provides operation, maintenance, and construction services to ATC. WP&L and ATC also bill each other for use of shared facilities owned by each party. ATC billed WP&L $41.3 million, $38.7 million and $36.4 million in 2003, 2002 and 2001, respectively. WP&L billed ATC $12.4 million, $18.1 million and $18.4 million in 2003, 2002 and 2001, and recorded equity earnings of $16.2 million, $14.3 million and $14.6 million in 2003, 2002 and 2001, respectively.
Unconsolidated Equity Investments- Summary financial information from the financial statements of WP&L’s unconsolidated equity investments in ATC, WRPC and Alliant Energy SPE LLC is as follows (in millions):
2003 2002 2001 Operating revenues
$ 232.3 $ 211.7 $ 180.3 Operating income
87.7 75.7 65.8 Net income
72.1 59.5 55.9 As of Dec. 31:
Current assets
41.5 44.7 Non-current assets
947.2 774.4 Current liabilities
67.9 50.8 Non-current liabilities
14.6 7.5 (10) DERIVATIVE FINANCIAL INSTRUMENTS
(A) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--WP(a) Accounting for Derivative Instruments and Hedging Activities - WP&L
adopted SFAS 133 as of July 1, 2000. SFAS 133 requires that everyrecords derivativeinstrument be recordedinstruments at fair value on the balance sheet asan assetassets orliability measured at its fair valueliabilities andthatchanges in thederivative'sderivatives’ fairvalue be recognized currentlyvalues are generally recorded as regulatory assets or liabilities. At Dec. 31, 2003 and 2002, WP&L had $1.3 million and $2.7 million of derivative assets included inearnings unless specific hedge“Other current assets” and $3.6 million and $7.1 million of derivative liabilities included in “Other current liabilities” on its Consolidated Balance Sheets, respectively.In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting
criteria are met.for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS133 requires that133. Although SFAS 149 is expected to result in more energy contracts at WP&L qualifying asof the date of initial adoption, the difference betweenderivatives, changes in the fair value ofderivative instruments recorded on the balance sheet and the previous carrying amount of thosethese derivativesbeare generally reported as changes innet income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB 20, "Accounting Changes." Transition adjustments relating to WP&L's derivative instruments had no material impact on net income or the balance sheet. A limited number of WP&L's fixed price commodity contracts are defined as derivatives under SFAS 133. The fair values of these derivative instruments have been recorded asregulatory assets and liabilities rather than being reported currently in earnings, based on thebalance sheet and in the transition adjustment in accordance with the transition provisions of SFAS 133. Changes in the fair values of these instruments subsequent to July 1, 2000, to the extent that the derivatives are designated in cash flow hedging relationships and are effective at mitigating the underlying commodity risk, are recorded in other comprehensive income. At the date the underlying transaction occurs, the amounts accumulated in other comprehensive income are reported in the Consolidated Statements of Income. To the extent that the hedges are not effective, the ineffective portion of the changes in fair value is recorded directly in earnings. As of December 31, 2000,regulatory treatment.Cash Flow Hedging Instruments - During 2003 and/or 2002, WP&L held various derivative instruments designated as cash flow hedging
instruments and other derivatives. The cash flow hedging instruments are comprised ofinstruments. WP&L utilized natural gasswaps and coal purchase and sales contracts which are used to manage the price of anticipated coal purchases and sales. WP&L utilizes gascommodity financial swap arrangements to reduce the impact of price fluctuations on natural gas purchased and injected into storage during the summer months and withdrawn and sold at current market prices during the winter months pursuant to the natural gas cost incentive sharing mechanism with customers in Wisconsin.The gas commodity swaps in place hedgeWP&L also utilized physical coal purchase contracts, some of which did not qualify for theforecasted salesnormal purchase and sale exception, to manage the price ofnatural gas withdrawn from storage during this period.anticipated coal purchases and sales.In
2000,2003 and 2002, $0 and a netgainloss ofapproximately $0.4$0.2 million,wasrespectively, were recognizedin earnings (recorded in gas revenues) representingrelating to the amount of hedgeineffectiveness.ineffectiveness in accordance with SFAS 133. In 2003 and 2002, WP&L did not exclude any components of the derivativeinstruments'instruments’ gain or loss from the assessment of hedge effectiveness and therewerewas noreclasses intoearnings impact as a result of the discontinuance of hedges.As of DecemberAt Dec. 31,2000, the maximum length of time over which2003, WP&Lisdid not have any cash flow hedgingits exposure to the variabilityinstruments outstanding.Other Derivatives Not Designated in
future cash flows for forecasted transactions is ten months andHedge Relationships - WP&L estimates that losses of $4.7 million will be reclassified from accumulated other comprehensive income into earnings within the 12 months between January 1, 2001 and December 31, 2001 as the hedged transactions affect earnings. WP&L's&L’s derivatives thathavewere notbeendesignated in hedge relationshipsinclude naturalduring 2003 and/or 2002 included coal and gasswapscontracts. Coal andelectricitygas contracts that do not qualify for the normal purchase and sale exception were used to manage the pricecollars which manage energy costs during supply/demand imbalances. AsofDecember 31, 2000, these derivatives were recorded at their fair value as derivative assetsanticipated coal andderivative liabilities on the Consolidated Balance Sheetsgas purchases andpurchased-power expense in the Consolidated Statements of Income. A-30(10) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) (B) WEATHER DERIVATIVES--WPsales.(b) Weather Derivatives - WP&L uses weather derivatives to reduce the impact of weather volatility on its natural gas sales volumes.
EITF 99-2, "AccountingIn 2003 and 2002, Corporate Services, as agent forWeather Derivatives," requiresWP&L, entered into non-exchange traded options based on heating degree days in which Corporate Services receives payment from theuse ofcounterparty if actual heating degree days are less than the strike price in the contract. Corporate Services paid premiums to enter into these contracts, which are amortized to expense over the contract period. WP&L has used the intrinsic value method to account fornon-exchange tradedthese weather derivatives.In August 2000,(c) Nuclear Decommissioning Trust Fund Investments - Historically, WP&L has entered into
a non-exchange traded weather floor with a contract period from November 1, 2000 to March 31, 2001 that requires the counterparty pay WP&L $11,000 per heating degree-day less than 5,600 during the contract period. The maximum payout amount by the counterparty on this floor is $7 million. WP&L paid a premium to enter into this contract, which is being amortized to expense over the contract period. In August 1999, WP&L entered into a non-exchange traded "weather collar" with a contract period from November 1, 1999 to March 31, 2000. The maximum payout amount was $5 million. (C) NUCLEAR DECOMMISSIONING TRUST FUND INVESTMENTS--WP&L previously entered into an equity collar that used writtencombinations of options to mitigate the effect of significant market fluctuations on its common stock investments in its nuclear decommissioning trust funds. Theprogram wasderivative transactions are designed to protect theportfolio'sportfolio’s value while allowing the funds to earn a total return modestly in excess of long-term expectations over thetwo-yearhedgeperiod, which was settled in December 2000. The notional amount of the options was $78 million at December 31, 1999. The options were reported at fair market value each reportingperiod.TheseIn 2003, fair value changes of these instruments did not impact net income as they were recorded as equally offsetting changes in the investment in nuclear decommissioning trust funds andaccumulated depreciation. The option liability fair value exceeded the premium received by $17.8 million at December 31, 1999,regulatory liabilities or, for AROs, asreported by the trustee.an offset to regulatory assets (in 2002 as an offset to cost of removal obligations).(11) COMMITMENTS AND CONTINGENCIES
(A) CONSTRUCTION AND ACQUISITION PROGRAM--WP&L anticipates 2001 utility(a) Construction and Acquisition Expenditures - Certain commitments have been made in connection with 2004 capital expenditures. During 2004, total construction and acquisition expenditures
willare estimated to be approximately$138 million. During 2002-2005,$228 million (unaudited).(b) Purchase Obligations - Alliant Energy, through its subsidiaries Corporate Services, WP&L
expects to spend approximately $667 million for utility constructionandacquisition expenditures. (B) PURCHASED-POWER AND TRANSMISSION, COAL AND NATURAL GAS CONTRACTS--Corporate ServicesIP&L, has entered into purchased-power,and transmission,coal and natural gas supply, transportation and storagecontracts as agent for WP&L, IESU and IPC. The gas supplycontracts. Certain purchased-power commitments areall index-based.considered operating leases and are therefore not included here, but are included in Note 3. Based on the System Coordination and Operating Agreement, Alliant Energy annually allocates purchased-power contracts tothe individual utilities.WP&L and IP&L. Such process considers factors such as resource mix, load growth and resource availability. However, for 2004, system-wide purchased-power contracts of $4.4 million (0.2 million MWh) have not yet been directly assigned to WP&L and IP&L since the specific needs of each utility are not yet known. Refer to Note1517 for additional information.In addition, Corporate Services has entered into various coal contracts as agent for WP&L, IESU and IPC. ContractCoal contract quantities areallocateddirectly assigned to specific plants atthe individual utilitiesWP&L and IP&L based on various factors including projected heat input requirements, combustion compatibility and efficiency. However, for2001, 2002 and 2003,2004 to 2008, system-wide coal contracts of$21.3$78.7 million(5.1(10.7 million tons),$1.7$55.1 million(0.5(7.6 million tons), $34.0 million (5.4 million tons), $12.5 million (2.1 million tons) and$1.7$6.4 million(0.5(1.0 million tons), respectively, have not yet beenallocateddirectly assigned to WP&L and IP&L since theindividual utilities due to the need for additional analysisspecific needs ofcombustion compatibilityeach utility are not yet known. The natural gas supply commitments are all index-based. Alliant Energy andefficiency. Corporate Services expectsWP&L expect to supplementitstheir coal and natural gas supplies with spot market purchases as needed. The table includes commitments for “take-or-pay” contracts which result in dollar commitments with no associated tons or Dths. At Dec. 31, 2003, WP&L’s minimumA-31(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)commitmentsdirectly assigned to WP&L arewere as follows (dollars and Dths in millions; MWhs and tons in thousands):
NATURAL GAS SUPPLY, PURCHASED-POWER AND COAL (INCLUDING TRANSPORTATION AND TRANSMISSION TRANSPORTATION) STORAGE CONTRACTS --------------------- --------------------- --------------------- DOLLARS MWHS DOLLARS TONS DOLLARS DTHS --------- --------- --------- --------- --------- ---------2001 $53.2 864 $14.0 4,523 $39.6 93 2002 34.3 219 9.8 3,673 26.9 88 2003 21.8 219 5.5 2,957 22.9 79 2004 14.0 219 5.5 2,957 11.2 56 2005 8.0 -- -- -- 11.1 55(C) INFORMATION TECHNOLOGY SERVICES--Corporate Services has an agreement, expiring
Purchased-power Coal Natural gas Dollars MWhs Dollars Tons Dollars Dths 2004
$ 25.1 730 $ 8.2 -- $ 33.9 2 2005
-- -- 7.6 -- 23.7 -- 2006
-- -- 7.6 -- 22.5 -- 2007
-- -- 7.6 -- 20.2 -- 2008
-- -- 5.9 -- 15.5 -- Thereafter
-- -- 35.6 -- 40.0 -- Also, at December 31, 2003, WP&L’s other purchase obligations, which represent individual commitments incurred during the normal course of business which exceeded $1 million at Dec. 31, 2003, were $6.0 million for 2004. This excludes lease obligations which are included in
2004,Note 3.(c) Legal Proceedings - WP&L is involved in legal and administrative proceedings before various courts and agencies with
EDSrespect to matters arising in the ordinary course of business. Although unable to predict the outcome of these matters, WP&L believes that appropriate reserves have been established and final disposition of these actions will not have a material adverse effect on its financial condition or results of operations.(d) Guarantees - Refer to Note 3 for
information technology services.discussion of WP&L's anticipated operating and capital expenditures under the agreement for 2001 are estimated to total approximately $2 million. Future costs under the agreement are variable and are dependent upon WP&L's level of usage of technological services from EDS. (D) FINANCIAL COMMITMENTS--During 2000, WP&L committed to transfer all&L’s residual value guarantees of itstransmission assets to ATC. This transfer occurred on January 1, 2001, at the net book value of the assets. WPL Transco LLC, a wholly-owned subsidiary ofsynthetic leases.(e) Environmental Liabilities - WP
&L, will hold the resulting investment in ATC and follow the equity method of accounting. (E) ENVIRONMENTAL LIABILITIES--WP&L had recorded the following environmental liabilities, and regulatory assets associated with certain of these liabilities,as of Decemberat Dec. 31 (in millions):
ENVIRONMENTAL LIABILITIES 2000 1999 REGULATORY ASSETS 2000 1999 - ------------------------- ---------- ---------- ----------------- ---------- ----------MGP sites............ $4.5 $ 7.3 MGP sites...... $11.7 $14.2 NEPA................. 3.6 4.1 NEPA........... 4.4 4.9 Other................ 0.1 0.1 Other.......... 0.5 -- ---- ----- ----- ----- $8.2 $11.5 $16.6 $19.1 ==== ===== ===== =====
Environmental
LiabilitiesRegulatory
Assets2003 2002 2003 2002 MGP sites
$ 5.4 $ 6.9 $ 12.5 $ 13.0 NEPA
2.0 2.5 2.4 3.1 Other
-- -- 1.3 2.9 $ 7.4 $ 9.4 $ 16.2 $ 19.0 MGP
SITES--WPSites - WP&L has current or previous ownership interests in 14 sites, previously associated with the production of gas for which it may be liable for investigation, remediation and monitoring costs relating to the sites. WP&L has received letters from state environmental agencies requiring no further action atfoursix sites.WP&L is working pursuant to the requirements of various federal and state agencies to investigate, mitigate, prevent and remediate, where necessary, the environmental impacts to property, including natural resources, at and around the sites in order to protect public health and the environment.
WP&L records environmental liabilities based upon periodic studies, most recently updated in the third quarter of
2000,2003, related to the MGP sites. Such amounts are based on the best current estimate of the remaining amount to be incurred for investigation, remediation and monitoring costs for those sites where the investigation process has been or is substantially completed, and the minimum of the estimated cost range for those sites where the investigation is in its earlier stages. It is possible that future cost estimates will be greater than current estimates as the investigation process proceeds and as additional facts become known. The amounts recognized as liabilities are reduced for expenditures made and are adjusted as further information develops or circumstances change. Costs of futureA-32(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)expenditures for environmental remediation obligations are not discounted to their fair value. Management currently estimates the range of remaining costs to be incurred for the investigation, remediation and monitoring of all WP&L's&L’s sites to beapproximately $4$5 million to$5$7 million.Under the current rate making treatment approved by the PSCW, the MGP expenditures of WP&L, net of any insurance proceeds, are deferred and collected from gas customers over a
five-yearfour-year periodafter neweffective with ratesare implemented.set to recover such amounts. Regulatory assets have been recorded by WP&L, which reflect the probable future rate recovery, where applicable. Considering the current rate treatment, and assuming no material change therein, WP&L believes that the clean-up costs incurred for these MGP sites will not have a material adverse effect on its financial condition or results of operations. Settlement has been reached with all of WP&L's&L’s insurance carriers regarding reimbursement for its MGP-relatedcosts and all issues have been resolved. Insurance recoveries available as of both December 31, 2000 and 1999 for WP&L were $2.1 million. Pursuant to its applicable rate making treatment, WP&L has recorded its recoveries as an offset against its regulatory assets. NATIONAL ENERGY POLICY ACT OF 1992--NEPAcosts.NEPA - NEPA requires owners of nuclear power plants to pay a special assessment into a
"Uranium“Uranium Enrichment Decontamination and Decommissioning Fund."” The assessment is based upon uranium enrichment services provided in conjunction with prior nuclear fuel purchases. WP&Lrecovers theelected to pay its assessment in 15 annual installments. The costs associated with this assessmentover the period the costs are assessed.for WP&L is being recovered through fuel costs. The final installment payment is scheduled to be made in fall 2006. WP&L continues to pursue relief from this assessment through litigation.(F) DECOMMISSIONING OF KEWAUNEE--Pursuant to the most recent electric rate case order, the PSCW allows WP&L to recover $16 million annually for its share(f) Decommissioning of
the cost to decommission Kewaunee.Kewaunee - Decommissioning expense is included in"Depreciation“Depreciation andamortization"amortization” in the Consolidated Statements of Income and the cumulative amount for 2003 is included in"Accumulated depreciation"“Regulatory liabilities” or, for AROs, is netted in “Regulatory assets” on the Consolidated BalanceSheetsSheets. For 2002, the cumulative amount is included in “Cost of removal obligations.” The PSCW, in an order effective Jan. 1, 2002, eliminated WP&L’s recovery from retail customers for the cost to decommission Kewaunee, due to theextent recovered through rates.trust fund being adequately funded. Additional information relating to the decommissioning of Kewauneeincluded in the most recent electric rate orderswas as follows (dollars in millions):
Assumptions relating to current rate recovery
amounts:amounts (per
WP&L's&L’s most recent FERC settlement):WP&L’s share of estimated decommissioning
cost............ $212.5cost$263.2 Year dollars
in........................................... 2000in2002 Method to develop
estimate................................estimateSite-specific study Annual inflation
rate..................................... 5.83%rate6.50% Decommissioning
method....................................methodPrompt dismantling
and removalYear decommissioning to
commence..........................commence2013 After-tax return on external investments:
Qualified............................................... 5.62% Non-qualified........................................... 6.97%Qualified
6.12% Non-qualified
5.14% Current annual rate recovery (FERC)
$2.9 External trust fund balance at
DecemberDec. 31,2000............ $195.82003$233.7 After-tax
earningslosses on external trust funds in2000.......... $11.32003($4.7) A-33(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)WP&L is funding all rate recoveries for decommissioning into external trust funds and funding on a tax-qualified basis to the extent possible.
All ofIn 2003, therate recovery assumptions are subject to change in future regulatory proceedings. In accordance with its regulatory requirements, WP&L records the earnings on the external trust funds as interest income with a corresponding entry to depreciation expense. Theearnings accumulate in the external trust fund balances and as an offset to regulatory assets for ARO related earnings or regulatory liabilities for non-ARO related earnings. Refer to Note 15 for information regarding the pending sale of WP&L’s interest inaccumulated depreciation on utility plant. (G) LEGAL PROCEEDINGS--WP&L is involved in legalKewaunee andadministrative proceedings before various courts and agencies with respectNote 16 for information related tomatters arising intheordinary courseimpact ofbusiness. Although unable to predict the outcome of these matters,SFAS 143.(g) Credit Risk - WP&L has limited credit exposure from electric and natural gas sales and non-performance of contractual obligations by its counterparties. WP&L maintains credit risk oversight and sets limits and policies with regards to its counterparties, which management believes minimizes its overall credit risk exposure. However, there is no assurance that
appropriate reserves have been established and final disposition of these actionssuch policies willnot have a material adverse effect on its financial condition or results of operations.protect WP&L against all losses from non-performance by counterparties.(12) JOINTLY-OWNED ELECTRIC UTILITY PLANT
Under joint ownership agreements with other Wisconsin utilities, WP&L has undivided ownership interests in jointly-owned electric generating
stations and related transmission facilities.stations. Each of the respective owners is responsible for the financing of its portion of the construction costs.Kilowatt-hourKWh generation and operating expenses are divided on the same basis as ownership with each owner reflecting its respective costs in its Consolidated Statements of Income. Information relative to WP&L's&L’s ownership interest in these facilities atDecemberDec. 31,2000 is2003 was as follows (dollars in millions):
ACCUMULATED CONSTRUCTION OWNERSHIP PLANT IN PROVISION FOR WORK-IN- FUEL TYPE INTEREST % SERVICE DEPRECIATION PROGRESS ----------- ----------- ------------- ------------- ------------Columbia Energy Center............... Coal 46.2 $175.4 $103.6 $ 0.5 Edgewater Unit 4..................... Coal 68.2 53.0 33.6 1.6 Edgewater Unit 5..................... Coal 75.0 230.2 98.6 0.3 Kewaunee............................. Nuclear 41.0 136.8 108.1 21.4 ------ ------ ----- $595.4 $343.9 $23.8 ====== ====== =====A-34
Fuel
Type
Ownership
Interest %
Plant in
Service
Accumulated
Provision for
Depreciation
Construction
Work In
Progress
Edgewater Unit 5
Coal 75.0 $ 237.0 $ 120.7 $0.8 Columbia Energy Center
Coal 46.2 192.5 118.5 2.5 Kewaunee
Nuclear 41.0 175.8 127.6 7.7 Edgewater Unit 4
Coal 68.2 66.8 39.5 1.7 $ 672.1 $ 406.3 $ 12.7 Refer to Note 15 for information regarding the pending sale of WP&L’s interest in Kewaunee.
(13) SEGMENTS OF BUSINESS
WP&L is a
regulateddomestic utility, serving customers in Wisconsin and Illinois, andis broken down intoincludes three segments: a) electric operations; b) gas operations; and c) other, which includes the water business, various other energy-related products and services including construction management services for wind farms and the unallocated portions of the utility business. Various line items in the following tables are not allocated to the electric and gas segments for management reporting purposes and therefore are included in"Other." Intersegment“Total.” In 2003, 2002 and 2001, gas revenues included $45 million, $22 million and $21 million, respectively, for sales to the electric segment. All other intersegment revenues were not material to WP&L's&L’s operations and there was no single customer whose revenuesexceeded 10 percentwere 10% or more of WP&L's&L’s consolidated revenues. Certain financial information relating to WP&L's&L’s significant business segmentsis presented below:
ELECTRIC GAS OTHER TOTAL -------- -------- -------- -------- (IN MILLIONS)2000 Operating revenue........................................... $ 692.2 $165.2 $ 5.0 $ 862.4 Depreciation and amortization expense....................... 122.9 15.9 1.1 139.9 Operating income............................................ 123.2 12.2 1.7 137.1 Interest expense, net of AFUDC.............................. 39.3 39.3 Net income from equity method subsidiaries.................. (0.5) (0.5) Miscellaneous, net (other than equity income)............... (16.0) (16.0) Income tax expense.......................................... 42.9 42.9 Net income.................................................. 71.4 71.4 Preferred dividends......................................... 3.3 3.3 Earnings available for common stock......................... 68.1 68.1 Total assets................................................ 1,344.9 226.1 286.0 1,857.0 Investments in equity method subsidiaries................... 4.8 4.8 Construction and acquisition expenditures................... 114.2 15.1 2.3 131.6 1999 Operating revenue........................................... $ 626.6 $120.8 $ 5.1 $ 752.5 Depreciation and amortization expense....................... 97.5 14.5 1.0 113.0 Operating income............................................ 139.3 13.8 1.8 154.9 Interest expense, net of AFUDC.............................. 36.5 36.5 Net income from equity method subsidiaries.................. (0.7) (0.7) Miscellaneous, net (other than equity income)............... 2.5 2.5 Income tax expense.......................................... 45.8 45.8 Net income.................................................. 70.8 70.8 Preferred dividends......................................... 3.3 3.3 Earnings available for common stock......................... 67.5 67.5 Total assets................................................ 1,310.5 200.3 255.3 1,766.1 Investments in equity method subsidiaries................... 5.2 5.2 Construction and acquisition expenditures................... 111.2 18.2 2.5 131.9A-35(13) SEGMENTS OF BUSINESS (CONTINUED)was as follows (in millions):
ELECTRIC GAS OTHER TOTAL -------- -------- -------- -------- (IN MILLIONS)1998 Operating revenue........................................... $ 614.7 $111.7 $ 5.0 $ 731.4 Depreciation and amortization expense....................... 104.7 13.6 0.9 119.2 Operating income............................................ 87.4 3.6 1.7 92.7 Interest expense, net of AFUDC.............................. 33.5 33.5 Net income from equity method subsidiaries.................. (0.8) (0.8) Miscellaneous, net (other than equity income)............... (0.3) (0.3) Income tax expense.......................................... 24.7 24.7 Net income.................................................. 35.6 35.6 Preferred dividends......................................... 3.3 3.3 Earnings available for common stock......................... 32.3 32.3 Total assets................................................ 1,276.4 195.9 212.9 1,685.2 Investments in equity method subsidiaries................... 5.2 5.2 Construction and acquisition expenditures................... 99.6 16.0 1.5 117.1
2003 Electric Gas Other Total Operating revenues
$910.1 $272.4 $34.5 $1,217.0 Depreciation and amortization
89.2 14.6 1.1 104.9 Operating income
163.8 25.5 2.3 191.6 Interest expense, net of AFUDC
33.8 Equity income from unconsolidated investments
(20.7 ) Miscellaneous, net
(2.2 ) Income tax expense
65.8 Net income
114.9 Preferred dividends
3.3 Earnings available for common stock
111.6 Total assets
1,950.5 306.2 212.6 2,469.3 Investments in equity method subsidiaries
133.3 -- -- 133.3 Construction and acquisition expenditures
133.0 17.4 1.2 151.6 2002
Operating revenues
787.7 179.1 22.7 989.5 Depreciation and amortization
91.7 15.9 1.1 108.7 Operating income (loss)
135.1 12.0 (1.5 ) 145.6 Interest expense, net of AFUDC
37.6 Equity income from unconsolidated investments
(17.0 ) Miscellaneous, net
(0.6 ) Income tax expense
44.7 Net income
80.9 Preferred dividends
3.3 Earnings available for common stock
77.6 Total assets
1,834.7 298.5 201.9 2,335.1 Investments in equity method subsidiaries
121.7 -- -- 121.7 Construction and acquisition expenditures
144.6 10.6 1.7 156.9 2001
Operating revenues
753.5 206.9 33.3 993.7 Depreciation and amortization
104.0 15.8 1.3 121.1 Operating income
129.1 2.5 5.7 137.3 Interest expense, net of AFUDC
38.7 Equity income from unconsolidated investments
(15.5 ) Miscellaneous, net
(0.6 ) Income tax expense
41.2 Net income
73.5 Preferred dividends
3.3 Earnings available for common stock
70.2 Total assets
1,638.8 249.4 329.3 2,217.5 Investments in equity method subsidiaries
117.3 -- -- 117.3 Construction and acquisition expenditures
127.9 16.8 2.3 147.0 (14) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- (IN MILLIONS)2000 Operating revenues...................................... $218.8 $193.9 $199.6 $250.1 Operating income........................................ 40.5 25.1 36.9 34.6 Net income.............................................. 21.9 11.3 17.6 20.6 Earnings available for common stock..................... 21.0 10.5 16.8 19.8 1999 Operating revenues...................................... $203.0 $167.1 $186.8 $195.6 Operating income........................................ 46.4 21.9 32.5 54.1 Net income.............................................. 26.3 6.9 14.2 23.4 Earnings available for common stock..................... 25.4 6.1 13.4 22.6Summation of the individual quarters may not equal annual totals due to rounding.
2003 2002 March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 (in millions) Operating revenues
$ 346.9 $ 254.8 $ 318.9 $ 296.3 $ 235.5 $ 220.6 $ 254.0 $ 279.4 Operating income
18.1 35.7 77.8 60.1 30.1 25.7 34.9 54.9 Net income
10.1 19.9 47.4 37.5 15.7 12.8 19.2 33.2 Earnings available for common stock
9.3 19.0 46.6 36.7 14.9 12.0 18.3 32.4 (15) PENDING SALE OF WP&L’S INTEREST IN KEWAUNEE
WP&L has signed a definitive agreement to sell its 41% ownership interest in Kewaunee to Richmond, Va.-based Dominion Energy Kewaunee, Inc. (Dominion), a subsidiary of Dominion Resources, Inc. Joint owner of Kewaunee, WPSC, also agreed to sell its 59% ownership interest in Kewaunee to Dominion. Pending various regulatory approvals, including the PSCW and NRC, the transaction is expected to be completed by fall 2004. WP&L anticipates that, based on an expected Nov. 1, 2004 closing date, it will receive approximately $90 million in cash and retain ownership of the trust assets contained in one of the two decommissioning funds it has established to cover the eventual decommissioning of Kewaunee. The fund that will be retained had an after-tax value of $67.3 million on Dec. 31, 2003. The gross cash proceeds from the sale are expected to slightly exceed WP&L’s carrying value of the assets being sold. WP&L has requested deferral of any gain and related costs from the PSCW. Because any gain realized and the retained decommissioning fund will likely be returned to customers in future rate filings, WP&L does not expect this transaction will have a significant impact on its operating results. Dominion will assume responsibility for the eventual decommissioning of Kewaunee and WP&L is required to provide qualified decommissioning trust assets of at least $160.7 million on an after-tax basis. The after-tax value of the qualified fund was $166.3 million on Dec. 31, 2003. In January 2004, WP&L liquidated all of the qualified decommissioning assets into money market funds as a result of the pending Kewaunee sale. At the closing of the sale, WP&L will enter into a long-term purchased-power agreement with Dominion to purchase energy and capacity equivalent to the amounts received had current ownership continued. The purchased-power agreement, which also will require regulatory approval, will extend through 2013 when the plant’s current operating license will expire.
(16) ASSET RETIREMENT OBLIGATIONS
WP&L adopted SFAS 143 on Jan. 1, 2003, which provides accounting and disclosure requirements for AROs associated with long-lived assets. SFAS 143 requires that when an asset is placed in service the present value of retirement costs for which WP&L has a legal obligation must be recorded as liabilities with an equivalent amount added to the asset cost. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity settles the obligation for its recorded amount or incurs a gain or loss.
The scope of SFAS 143 as it relates to WP&L primarily includes decommissioning costs for Kewaunee. The differences between the estimated decommissioning costs disclosed in Note 11(f) and the recorded SFAS 143 liability are primarily related to fuel management costs, non-nuclear demolition costs and the timing of future cash flows. It also applies to a smaller extent to several other assets including, but not limited to, active ash landfills, water intake facilities, underground storage tanks, groundwater wells, distribution equipment, easements, leases and the dismantlement of certain hydro facilities. Other than Kewaunee, WP&L’s current AROs are not significant. A reconciliation of the changes in WP&L’s AROs is depicted below (in millions):
Balance at Jan. 1, 2003
$ 175 Accretion expense
13 Balance at Dec. 31, 2003
$ 188 If SFAS 143 had been adopted as of Jan. 1, 2001, WP&L would have recorded ARO SFAS 143 liabilities of $175 million at Dec. 31, 2002 and $161 million at Dec. 31, 2001. Refer to Note 15 for information regarding the pending sale of WP&L’s interest in Kewaunee.
At Dec. 31, 2002, prior to the adoption of SFAS 143, WP&L recorded $163.2 million of legal AROs in “Cost of removal obligations” on the Consolidated Balance Sheet.
(17) RELATED
PARTY ISSUES In association with the 1998 merger that resulted in the formation of Alliant Energy, IESU,PARTIESWP&L and
IPCIP&L have entered into a System Coordination and OperatingAgreement which became effective with the merger.Agreement. The agreement, which has been approved by FERC, provides a contractual basis for coordinated planning, construction, operation and maintenance of the interconnected electric generation and transmission (IP&L only) systems ofthe three utility companies.WP&L and IP&L. In addition, the agreement allows the interconnected system to be operated as a single entity with off-system capacity sales and purchases made to market excess system capability or to meet system capability deficiencies. Such sales and purchases are allocated amongthe three utility companiesWP&L and IP&L based on procedures included in the agreement. The sales amounts allocated to WP&L were$28.6$42.1 million,$23.8$26.9 million and$23.6$32.1 million for2000, 19992003, 2002 and1998,2001, respectively. The purchases allocated to WP&L were$130.7$229.4 million,$101.0$205.8 million and$70.0$209.2 million for2000, 19992003, 2002 and1998,2001, respectively. The procedures were approved by boththeFERC and all state regulatory bodies having jurisdiction over these sales. Under the agreement,IESU, A-36(15) RELATED PARTY ISSUES (CONTINUED)WP&L andIPCIP&L are fully reimbursed for any generation expense incurred to supportathe sale to an affiliate or to a non-affiliate. Any margins on sales to non-affiliates are distributed tothe three utilitiesWP&L and IP&L in proportion to eachutility'sutility’s share of electric production at the time of the sale.Pursuant to a service agreement approved by the SEC under PUHCA, WP&L
receivedreceives various administrative and general services from an affiliate, Corporate Services. These services are billed to WP&L at cost based on payroll and other expenses incurred by Corporate Services for the benefit of WP&L. These costs totaled$103.4$125.1 million,$96.5$117.7 million and$53.9$107.0 million for2000, 19992003, 2002 and1998,2001, respectively, and consisted primarily of employee compensation, benefits and fees associated with various professional services.Corporate Services began operations in May 1998 upon the consummation of the merger.AtDecemberDec. 31,20002003 and1999,2002, WP&L hadana net intercompany payable to Corporate Services of$30.6$36.4 million and$24.7$31.1 million, respectively.A-37SHAREOWNER INFORMATION
MARKET INFORMATION--TheMarket Information - The 4.50% series of preferred stock is listed on the American Stock Exchange, with the trading symbol of
WIS_P.WIS_PR. All other series of preferred stock are traded on the over-the-counter market.Seventy-two percent72% of WP&L's&L’s individual preferred shareowners are Wisconsin residents.DIVIDEND INFORMATION--PreferredDividend Information - Preferred stock dividends paid per share for each quarter during
20002003 were as follows:
SERIES DIVIDEND - ------ ---------4.40%.......................... $1.10 4.50%.......................... $1.125 4.76%.......................... $1.19 4.80%.......................... $1.20 4.96%.......................... $1.24 6.20%.......................... $1.55 6.50%.......................... $0.40625
Series
Dividend 4.40%
$1.10 4.50%
$1.125 4.76%
$1.19 4.80%
$1.20 4.96%
$1.24 6.20%
$1.55 6.50%
$0.40625 As authorized by the WP&L Board of Directors, preferred stock dividend record and payment dates
normallyfor 2004 are as follows:
RECORD DATE PAYMENT DATE - ----------- --------------Record Date
Payment Date February
28..................27March 15 May
31.......................28June 15 August
31....................31September 15 November
30..................30December 15 STOCK TRANSFER AGENT AND REGISTRARStock Transfer Agent and Registrar
Alliant Energy Corporation
Shareowner Services
P.O. Box 2568
Madison, WI 53701-2568
FORMForm 10-K
INFORMATION--AInformation - A copy of Form 10-K as filed with the SEC will be provided without charge upon request. Requests may be directed to Shareowner Services at the above address.Erroll B.
DAVIS, JR.Davis, Jr.,56,59, was elected Chairman of the Board effective April 2000 and Chief Executive Officer(CEO)effective April 1998.William D. Harvey, 54, was elected Chief Operating Officer effective January 2004. He previously served as President
and CEOsince1988 and has been a board member since 1984. WILLIAM D. HARVEY, 51,April 1998.Barbara J. Swan, 52, was elected President effective
April 1998. HeJanuary 2004. She previously served asSenior Vice President since 1993. A-38ELIOT G. PROTSCH, 47, was elected Executive Vice President-Energy Delivery effective October 1998. He previously served as Senior Vice President from 1993 to 1998. BARBARA J. SWAN, 49, was electedExecutive Vice President and General Counseleffectivesince October 1998.SheEliot G. Protsch, 50, was elected Chief Financial Officer effective January 2004. He previously served as
Vice President-General Counsel from 1994 to 1998. THOMAS M. WALKER, 53, was electedExecutive Vice President and Chief Financial Officer(CFO) effective October 1998. Prior thereto, he served assince September 2003 and Executive VicePresident and CFO since 1996 at IES and IESU. PAMELA J. WEGNER, 53,President-Energy Delivery from October 1998 to September 2003.Thomas L. Aller, 54, was elected
ExecutiveSenior VicePresident-Corporate ServicesPresident-Energy Delivery effectiveOctober 1998. She previously served as Vice President-Information Services and Administration from 1994 to 1998. EDWARD M. GLEASON, 60, was elected Vice President-Treasurer and Corporate Secretary effective April 1998.January 2004. He previously served asController, Treasurer,interim Executive Vice President-Energy Delivery since September 2003 andCorporate Secretary since 1996. DUNDEANA K. LANGER, 42,Vice President-Investments from 1998 to 2003 at Resources.Thomas L. Hanson, 50, was elected Vice
President-Customer Operations effective December 2000. She previously served as Vice President-Customer ServicesPresident andOperations since September 1999, Vice President-Customer Services from 1998 to 1999, Assistant Vice President-Field Operations from 1997 to 1998 at IESU and General Manager-Operations & Director Process Redesign Implementation from 1996 to 1997 at IESU. DANIEL L. MINECK, 52, was elected Vice President-Performance Engineering and EnvironmentalTreasurer effective April1998.2002. He previously served asAssistant Vice President-Corporate EngineeringManaging Director-Generation Services since19962001 atIESU. KIM K. ZUHLKE, 47,Alliant Energy and General Manager-Business and Financial Performance, Generation from 1998 to 2001 at Alliant Energy.John E. Kratchmer, 41, was elected Vice
President-Engineering, Sales & MarketingPresident-Controller and Chief Accounting Officer effectiveSeptember 1999.October 2002. He previously served asVice President-Customer Operations since April 1998 and as Vice President-Customer Services and Sales from 1993 to 1998. JOHN E. KRATCHMER, 38, was electedCorporate Controller and Chief Accounting Officereffectivesince October2000. He previously served as2000 and Assistant Controllersince Aprilfrom 1998 to 2000 at AlliantEnergy and as Manager of Financial Reporting and Property from 1996 to 1998 at IES. NOTE: None of the executive officers listed above is related to any member of the Board of Directors or nominee for director or any other executive officer. Mr. Davis has an employment agreement with Alliant Energy pursuant to which his term of office is established. All other executive officers have no definite terms of office and serve at the pleasure of the Board of Directors. ADDITIONAL OFFICERS LINDA J. WENTZEL, 52, was elected Assistant Corporate Secretary effective May 1998. She previously served as Executive Administrative Assistant since 1995 at AlliantEnergy.ENRIQUE BACALAO, 51, was elected Assistant Treasurer effective November 1998. Prior to joining Alliant Energy, he was Vice President, Corporate Banking from 1995 to 1998 at the Chicago Branch of The Industrial Bank of Japan, Limited. STEVEN F. PRICE, 48, was elected Assistant Treasurer effective April 1998. He previously served as Assistant Corporate Secretary since 1992. A-39Wisconsin Power & Light Company
Shareowner Services
P.O.PO Box 2568
[WISCONSIN POWER & LIGHT LOGO]Madison, WI 53701-2568
SHAREOWNER INFORMATION
NUMBERS:NUMBERSLocal Madison,
WI: 1-608-252-2110WI 1-608-458-3110All Other
Areas:Areas 1-800-356-5343Indicate your vote by an (X) in the appropriate boxes.
ELECTION OF DIRECTORS
Nominee for term For All Withhold For All For All Except(*)
ending in 2006:
(01) Ann K. Newhall
Nominees for terms ending in 2007:
(02) Michael L. Bennett
(03) Jack B. Evans
(04) David A. Perdue
(05) Judith D. Pyle
Please date and sign your name(s) exactly as shown above and mail promptly in the enclosed envelope.
*TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE’S NAME IN THE LIST ABOVE AND MARK AN (X) IN THE “For All Except” BOX.
Signature Date Signature Date
IMPORTANT: When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. In case of JOINT HOLDERS, all should sign.
Please fold and detach Proxy Card at perforation if appointing a proxy by mail.
To all Wisconsin Power and Light Company
shareowners:Shareowners:Please take a moment
nowto vote your shares for the upcoming Annual Meeting of Shareowners.BelowAbove is your
20012004 Wisconsin Power and Light Company proxy card. Please read both sides of theproxyProxy card, note your election, sign and date it. Detach and returnitpromptly in the enclosed self-addressed envelope. Whether or not you are attending, we encourage you to vote your shares.You are invited to attend the Annual Meeting of Shareowners on Wednesday,
May 30, 2001June 2, 2004, at1:3:00 p.m. at the Alliant EnergyCorporationCorporate Headquarters in the Nile Meeting Room1Aat222 West Washington Ave.,4902 N. Biltmore Lane, Madison, Wisconsin.Please Fold and Detach Proxy Card at Perforation. - -------------------------------------------------------------------------------- Indicate your vote by an (X) in the appropriate boxes. FOR ALL WITHHOLD FOR ALL ELECTION OF DIRECTORS: FOR ALL EXCEPT(*) / / / / / / Nominees for terms ending in 2004: (*) TO WITHHOLD AUTHORITY TO VOTE 01 Jack B. Evans FOR ANY INDIVIDUAL NOMINEE, STRIKE 02 Joyce L. Hanes A LINE THROUGH THE NOMINEE'S NAME 03 David A. Perdue IN THE LIST TO THE LEFT AND MARK 04 Judith D. Pyle AN (X) IN THE "For All Except" BOX. P R O X Y PLEASE DATE AND SIGN YOUR NAME(S) EXACTLY AS SHOWN ABOVE AND MAIL PROMPTLY IN THE ENCLOSED ENVELOPE. - ----------------------------------------- Important: When signing as attorney, Signature Date executor, administrator, trustee or guardian, please give your full title as such. In the case of - ----------------------------------------- JOINT HOLDERS, all should sign. Signature DateTo access the Alliant Energy Annual Report on the Internet, please open our site at www.alliant-energy.com. We encourage you to check out our site to see how easy and convenient it is. Click on the Annual Report button. You may print or just view this material. Your internet provider may have usage charges associated with electronic access. (continued and to be signed and dated on the other side.) - --------------------------------------------------------------------------------WISCONSIN POWER
&AND LIGHTP.O.COMPANYPO BOX 2568
[LOGO]MADISON WI 53701-2568
WISCONSIN POWER
&AND LIGHTP.O.COMPANYPO BOX 2568
MADISON WI 53701-2568
- --------------------------------------------------------------------------------ANNUAL MEETING OF SHAREOWNERS
- MAY 30, 2001 - --------------------------------------------------------------------------------— JUNE 2, 2004The undersigned appoints
William D. Harvey,Barbara Swan andEdward M. Gleason,F. J. Buri, or either of them, attorneys and proxies with the power of substitution to vote all shares of stock of Wisconsin Power and Light Company (the “Company”), held of record in the name of the undersigned at the close of business on April3, 2001,13, 2004, at the Annual Meeting of Shareowners of the Company to be heldin Room IAatthe Alliant Energy Corporation headquarters, 222 West Washington Ave.,4902 N. Biltmore Lane, Madison, Wisconsin onMay 30, 2001June 2, 2004 at1:3:00 p.m., and at all adjournments thereof, upon all matters that properly come before the meeting, including the matters described in theCompany'sCompany’s Notice ofAnnual-MeetingAnnual Meeting of Shareowners dated April10, 200116, 2004 and accompanying Proxy Statement, subject to any directions indicated on the reverse side of this card.This proxy is solicited on behalf of the Board of Directors of Wisconsin Power and Light Company. This proxy when properly executed will be voted in the manner directed herein by the shareowner. If no direction is made, the
proxyproxies will vote"FOR"“FOR” the election of all listed director nominees.
To access the Alliant Energy Corporation Annual Report and Proxy Statement on the Internet please open our site at www.alliantenergy.com/annualreports. We encourage you to check out our site to see how easy and convenient it is. Click on the Annual Report button for the Annual Report/Proxy Statement. You may print or just view these materials. Your Internet provider may have usage charges associated with electronic access.