10-K 1 form10k123106.htm FORM 10-K 12/31/06 Form 10-K 12/31/06

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

x

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2006

 

or

 

[  ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

       For the transition period from ______ to _______

 

 

Commission

Name of Registrant, State of Incorporation,

IRS Employer

File Number

Address of Principal Executive Offices and Telephone Number

Identification Number

1-9894

ALLIANT ENERGY CORPORATION

39-1380265

 

(a Wisconsin corporation)

 

 

4902 N. Biltmore Lane

 

 

Madison, Wisconsin 53718

 

 

Telephone (608)458-3311

 

 

 

 

0-4117-1

INTERSTATE POWER AND LIGHT COMPANY

42-0331370

 

(an Iowa corporation)

 

 

Alliant Energy Tower

 

 

Cedar Rapids, Iowa 52401

 

 

Telephone (319)786-4411

 

 

 

 

0-337

WISCONSIN POWER AND LIGHT COMPANY

39-0714890

 

(a Wisconsin corporation)

 

 

4902 N. Biltmore Lane

 

 

Madison, Wisconsin 53718

 

 

Telephone (608)458-3311

 

 

This combined Form 10-K is separately filed by Alliant Energy Corporation, Interstate Power and Light Company and Wisconsin Power and Light Company. Information contained in the Form 10-K relating to Interstate Power and Light Company and Wisconsin Power and Light Company is filed by such registrant on its own behalf. Each of Interstate Power and Light Company and Wisconsin Power and Light Company makes no representation as to information relating to registrants other than itself.

 

Securities registered pursuant to Section 12 (b) of the Act:

 

 

Name of Each Exchange

 

Title of Class

on Which Registered

Alliant Energy Corporation

Common Stock, $0.01 Par Value

New York Stock Exchange

Alliant Energy Corporation

Common Stock Purchase Rights

New York Stock Exchange

Interstate Power and Light Company

8.375% Series B Cumulative Preferred Stock,

New York Stock Exchange

 

$0.01 Par Value

 

Interstate Power and Light Company

7.10% Series C Cumulative Preferred Stock,

New York Stock Exchange

 

$0.01 Par Value

 

Wisconsin Power and Light Company

4.50% Preferred Stock, No Par Value

American Stock Exchange

 

Securities registered pursuant to Section 12 (g) of the Act: Wisconsin Power and Light Company Preferred Stock

 

(Accumulation without Par Value)

 

Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.

Alliant Energy Corporation - Yes x   No [  ]

 

 

Interstate Power and Light Company - Yes [  ]  No x

 

 

Wisconsin Power and Light Company - Yes [  ]   No x

 

 

Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and

will not be contained, to the best of the registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Alliant Energy Corporation

Large accelerated filer x

Accelerated filer [   ]

Non-accelerated filer [   ]

Interstate Power and Light Company

Large accelerated filer [   ]

Accelerated filer [   ]

Non-accelerated filer x

Wisconsin Power and Light Company

Large accelerated filer [   ]

Accelerated filer [   ]

Non-accelerated filer x

 

Indicate by checkmark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2006:

Alliant Energy Corporation

$4.0 billion

Interstate Power and Light Company

$--

Wisconsin Power and Light Company

$--

 

Number of shares outstanding of each class of common stock as of Jan. 31, 2007:

 

Alliant Energy Corporation

Common stock, $0.01 par value, 116,231,264 shares outstanding

Interstate Power and Light Company

Common stock, $2.50 par value, 13,370,788 shares outstanding (all of which

 

are owned beneficially and of record by Alliant Energy Corporation)

Wisconsin Power and Light Company

Common stock, $5 par value, 13,236,601 shares outstanding (all of which are

 

owned beneficially and of record by Alliant Energy Corporation)

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statements relating to Alliant Energy Corporation’s and Wisconsin Power and Light Company’s 2007 Annual Meetings of Shareowners are, or will be upon filing with the Securities and Exchange Commission, incorporated by reference into Part III hereof.

TABLE OF CONTENTS

 

 

 

Page Number

Part I

Item 1.

Business

1

 

Item 1A.

Risk Factors

15

 

Item 1B.

Unresolved Staff Comments

18

 

Item 2.

Properties

19

 

Item 3.

Legal Proceedings

21

 

Item 4.

Submission of Matters to a Vote of Security Holders

21

 

 

Executive Officers of the Registrants

21

Part II

Item 5.

Market for Registrants’ Common Equity, Related Stockholder Matters and

 

 

 

Issuer Purchases of Equity Securities

22

 

Item 6.

Selected Financial Data

24

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and

 

 

 

Results of Operations

26

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

61

 

Item 8.

Financial Statements and Supplementary Data

61

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and

 

 

 

Financial Disclosure

148

 

Item 9A.

Controls and Procedures

148

 

Item 9B.

Other Information

148

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

148

 

Item 11.

Executive Compensation

149

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and

 

 

 

Related Stockholder Matters

149

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

150

 

Item 14.

Principal Accounting Fees and Services

150

Part IV

Item 15.

Exhibits, Financial Statement Schedules

151

 

 

FORWARD-LOOKING STATEMENTS

Refer to “Forward-Looking Statements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MDA) for information and disclaimers regarding forward-looking statements contained in this Annual Report on Form 10-K.

 

PART I

 

This Annual Report on Form 10-K includes information relating to Alliant Energy Corporation (Alliant Energy), Interstate Power and Light Company (IPL) and Wisconsin Power and Light Company (WPL) (as well as Alliant Energy Resources, Inc. (Resources) and Alliant Energy Corporate Services, Inc. (Corporate Services)). Where appropriate, information relating to a specific entity has been segregated and labeled as such. Unless otherwise noted, the information herein has been revised to exclude discontinued operations and assets and liabilities held for sale for all periods presented. Refer to Note 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information.

 

ITEM 1. BUSINESS

 

A.

GENERAL

The primary first tier subsidiaries of Alliant Energy are: IPL, WPL, Resources and Corporate Services. Alliant Energy operates as a regulated investor-owned public utility holding company. Alliant Energy was incorporated in Wisconsin in 1981. A brief description of the primary first tier subsidiaries of Alliant Energy is as follows:

 

1) IPL - incorporated in 1925 in Iowa as Iowa Railway and Light Corporation. IPL is a public utility engaged principally in the generation, transmission, distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in selective markets in Iowa and southern Minnesota. Refer to Notes 17 and 22 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of IPL’s utility operations in Illinois which were sold in February 2007 and IPL’s proposed sale of its electric transmission assets, respectively. In Iowa, IPL provides utility services to incorporated communities as directed by the Iowa Utilities Board (IUB) and utilizes non-exclusive franchises, which cover the use of public right-of-ways for utility facilities in incorporated communities for a maximum term of 25 years. At Dec. 31, 2006, IPL supplied electric and gas service to 538,409 and 239,372 retail customers, respectively. IPL also provides steam services to certain customers in Cedar Rapids, Iowa and various other energy-related products and services. In 2006, 2005 and 2004, IPL had no single customer for which electric, gas, steam and/or other sales accounted for 10% or more of IPL’s consolidated revenues.

 

2) WPL - incorporated in 1917 in Wisconsin as Eastern Wisconsin Electric Company. WPL is a public utility engaged principally in the generation, distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in selective markets in south and central Wisconsin. WPL operates in municipalities pursuant to permits of indefinite duration, which are regulated by Wisconsin law, and pursuant to state statutes authorizing utility operation in areas annexed by a municipality. At Dec. 31, 2006, WPL supplied electric and gas service to 456,425 and 182,098 retail customers, respectively. WPL also provides various other energy-related products and services. In 2006, 2005 and 2004, WPL had no single customer for which electric, gas and/or other sales accounted for 10% or more of WPL’s consolidated revenues. WPL Transco LLC is a wholly-owned subsidiary of WPL and holds WPL’s investment in American Transmission Company LLC (ATC). Refer to Note 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of WPL’s utility operations in Illinois which were sold in February 2007.

 

3) RESOURCES - incorporated in 1988 in Wisconsin. Alliant Energy’s non-regulated investments are organized under Resources. Refer to “D. Information Relating to Non-regulated Operations” for additional details.

 

4) CORPORATE SERVICES - incorporated in 1997 in Iowa. Corporate Services provides administrative services to Alliant Energy and its subsidiaries.

 

Refer to Note 14 of the “Notes to Consolidated Financial Statements” for further discussion of business segments, which information is incorporated herein by reference.

 

1

B. INFORMATION RELATING TO ALLIANT ENERGY ON A CONSOLIDATED BASIS

 

1) EMPLOYEES

At Dec. 31, 2006, Alliant Energy’s consolidated subsidiaries that are included in its continuing operations had the following full- and part-time employees:

 

Number of

 

Number of

 

Total

 

Percentage of Employees

 

Bargaining Unit

 

Other

 

Number of

 

Covered by Collective

 

Employees

 

Employees

 

Employees

 

Bargaining Agreements

IPL

1,280

 

291

 

1,571

 

81%

WPL

1,312

 

106

 

1,418

 

93%

Resources

76

 

580

 

656

 

12%

Corporate Services

--

 

1,506

 

1,506

 

--

 

2,668

 

2,483

 

5,151

 

52%

 

At Dec. 31, 2006, Alliant Energy employees covered by collective bargaining agreements were as follows (IBEW=International Brotherhood of Electrical Workers; IUOE=International Union of Operating Engineers):

 

 

Number of

 

Contract

 

Employees

 

Expiration Date

IPL:

 

 

 

IBEW Local 949

256

 

9/30/08

IBEW Local 204 (Dubuque)

120

 

9/30/08

IBEW Local 204 (Mason City)

54

 

9/30/08

IUOE Local 275

48

 

12/01/08

IBEW Local 204 (Cedar Rapids)

773

 

8/31/10

IBEW Local 1439

22

 

6/30/11

IBEW Local 1455

7

 

6/30/11

 

1,280

 

 

WPL - IBEW Local 965

1,312

 

5/31/07

Resources - Various

76

 

Various

 

2,668

 

 

 

In May 2007, WPL’s collective bargaining agreement with IBEW Local 965 expires representing approximately 49% of employees covered under bargaining agreements and 25% of total Alliant Energy employees. While negotiations to renew the contract with IBEW Local 965 are underway, Alliant Energy and WPL are currently unable to predict the outcome. Alliant Energy, IPL and WPL have not experienced any significant work stoppages in the past.

 

2) CAPITAL EXPENDITURE AND INVESTMENT PLANS

Refer to “Liquidity and Capital Resources” in MDA for discussion of anticipated construction and acquisition expenditures for 2007 and 2008.

 

3) REGULATION - Alliant Energy, IPL and WPL are subject to regulation by various federal, state and local agencies. The following includes the primary regulations impacting Alliant Energy’s, IPL’s and WPL’s businesses.

 

Federal Energy Regulatory Commission (FERC) - In 2005, the Energy Policy Act was enacted which resulted in the repeals of the Public Utility Holding Company Act of 1935 and the Public Utility Regulatory Policy Act of 1978 and additional authority being granted to FERC under the Public Utility Holding Company Act of 2005 (PUHCA 2005). Alliant Energy is registered with FERC as a public utility holding company, pursuant to PUHCA 2005, and is required to maintain certain records and to report certain transactions involving its public utilities and other entities regulated by FERC. IPL and WPL are subject to regulation by FERC under PUHCA 2005 for various issues including affiliate transactions, public utility mergers, acquisitions and dispositions, and books and records requirements. In addition, the Energy Policy Act requires creation of an Electric Reliability Organization (ERO) to be overseen by FERC. FERC designated the North American Electric Reliability Council (NERC) as the overarching ERO. IPL and WPL have joined the Midwest Reliability Organization (MRO), which is a regional member of NERC and has direct responsibility for mandatory electric reliability standards for IPL and WPL. FERC also has jurisdiction under the Federal Power Act over certain electric utility facilities and operations, electric wholesale rates and accounting practices of IPL and WPL, and in certain other respects. Lastly, FERC has jurisdiction under the Natural Gas Act over certain natural gas facilities and operations of IPL and WPL.

2

 

Environmental - The United States of America (U.S.) Environmental Protection Agency (EPA) administers certain federal regulatory programs and has delegated the administration of other environmental regulatory programs to the applicable state environmental agencies. In general, the state agencies have jurisdiction over air and water quality, hazardous substances management and transportation, and solid waste management requirements. In certain cases, the state environmental agencies have delegated the administration of environmental programs to local agencies. Alliant Energy, IPL and WPL are subject to these environmental regulations as a result of their current and past operations.

 

IUB - IPL is subject to regulation by the IUB related to its Iowa service territory for retail utility rates and standards of service, accounting requirements, approval of the location and construction of electric generating facilities having a capacity in excess of 25,000 kilowatts (KW), and in other respects. Requests for rate relief are based on historical test periods, adjusted for certain known and measurable changes occurring up to nine months from the end of the historical test year. The IUB must decide on requests for rate relief within 10 months of the date of the application for which relief is filed, or the interim rates granted become permanent. Interim rates can be placed in effect after 10 days of the rate application filing, subject to refund, and must be based on past precedent. In 2001, Iowa enacted HF 577, which provides Iowa companies with the necessary rate making principles - and resulting, increased regulatory and investment certainty - prior to making certain generation investments in Iowa.

 

Public Service Commission of Wisconsin (PSCW) - Alliant Energy is subject to regulation by the PSCW for the type and amount of Alliant Energy’s investments in non-utility businesses, other affiliated interest activities, and in other respects. WPL is also subject to regulation by the PSCW related to its Wisconsin service territory for retail utility rates and standards of service, accounting requirements, issuance and use of proceeds of securities, approval of the location and construction of electric generating facilities, certain other additions and extensions to facilities, and in other respects. WPL is required to file rate cases with the PSCW using a forward-looking test year period. There is no statutory time limit for the PSCW to decide rate cases. However, the PSCW attempts to process all base rate cases in 10 months or less and the PSCW has the ability to approve interim rate relief, subject to refund, if necessary. For fuel-only rate case increases, the PSCW attempts to provide interim rate relief within 21 days of notice to customers, subject to refund. There is no statutory time limit for final fuel-only rate relief decisions. In 2005, Wisconsin enacted Act 7, which provides Wisconsin companies with the necessary rate making principles - and resulting, increased regulatory and investment certainty - prior to making certain generation investments in Wisconsin.

 

Minnesota Public Utilities Commission (MPUC) - IPL is subject to regulation by the MPUC related to its Minnesota service territory for retail utility rates and standards of service, accounting requirements, issuance and use of proceeds of securities, annual approval of IPL’s capital structure, and in other respects. Requests for rate relief can be based on either historical or projected data and interim rates are permitted. The MPUC must reach a final decision within 10 months of filing for rate relief.

 

Refer to Notes 1(b), 1(j), 2 and 12(e) of Alliant Energy’s “Notes to Consolidated Financial Statements” and “Rates and Regulatory Matters” and “Liquidity and Capital Resources - Environmental” in MDA for additional information regarding regulation and utility rate matters.

 

4) STRATEGIC OVERVIEW

Refer to “Strategic Overview” in MDA for discussion of various strategic actions Alliant Energy has taken to strengthen its financial profile and information regarding Alliant Energy’s strategic plan.

 

C.

INFORMATION RELATING TO UTILITY OPERATIONS

 

1) ELECTRIC UTILITY OPERATIONS

General - Electric utility operations represent the largest operating segment for Alliant Energy, IPL and WPL. In 2006, electric utility operations accounted for 73%, 76% and 79% of operating revenues and 87%, 93% and 78% of operating income for Alliant Energy, IPL and WPL, respectively. Alliant Energy’s electric utility operations are located in the Midwest with IPL and WPL providing electric service in Iowa, southern and central Wisconsin and southern Minnesota. Electric utility revenues by state were as follows (dollars in millions):

3

 

2006

 

2005

 

2004

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

IPL:

 

 

 

 

 

 

 

 

 

 

 

Iowa

$1,229.0

 

50%

 

$1,152.1

 

50%

 

$983.0

 

49%

Minnesota

78.2

 

3%

 

72.9

 

3%

 

65.2

 

3%

Illinois (a)

24.4

 

1%

 

21.7

 

1%

 

21.0

 

1%

Subtotal

1,331.6

 

54%

 

1,246.7

 

54%

 

1,069.2

 

53%

WPL:

 

 

 

 

 

 

 

 

 

 

 

Wisconsin

1,098.0

 

45%

 

1,061.6

 

45%

 

927.1

 

46%

Illinois (a)

13.4

 

1%

 

12.3

 

1%

 

12.7

 

1%

Subtotal

1,111.4

 

46%

 

1,073.9

 

46%

 

939.8

 

47%

 

$2,443.0

 

100%

 

$2,320.6

 

100%

 

$2,009.0

 

100%

(a)

Refer to Note 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of IPL’s and WPL’s utility operations in Illinois which were sold in February 2007.

 

The percentage of electric utility revenues regulated by their respective state commissions and FERC were as follows:

 

 

Alliant Energy

 

IPL

 

WPL

 

2006

 

2005

 

2004

 

2006

 

2005

 

2004

 

2006

 

2005

 

2004

Respective state

commissions

91%

 

88%

 

91%

 

96%

 

94%

 

96%

 

85%

 

82%

 

85%

FERC

9%

 

12%

 

9%

 

4%

 

6%

 

4%

 

15%

 

18%

 

15%

 

100%

 

100%

 

100%

 

100%

 

100%

 

100%

 

100%

 

100%

 

100%

 

The number of electric customers and communities served at Dec. 31, 2006 was as follows:

 

 

Retail Customers

 

Wholesale Customers

 

Other Customers

 

Total Customers

 

Communities Served

IPL

538,409

 

6

 

1,293

 

539,708

 

766

WPL

456,425

 

26

 

2,066

 

458,517

 

611

 

994,834

 

32

 

3,359

 

998,225

 

1,377

 

Wholesale customers in the above table are billed under wholesale service agreements, which include standardized pricing mechanisms that are detailed in tariffs approved by FERC through wholesale rate case proceedings. In addition, IPL and WPL have bulk power customers, included in “Other customers” in the above table, that are billed according to negotiated, long-term customer-specific contracts, pursuant to FERC approved tariffs. Refer to the “Electric Operating Information” tables for additional details regarding electric utility operations.

 

Seasonality - Electric sales are seasonal to some extent with the annual peak normally occurring in the summer months due to air conditioning requirements. In 2006, the maximum peak hour demands for Alliant Energy, IPL and WPL were 5,989 megawatts (MW), 3,070 MW and 2,941 MW, respectively, all on July 17, 2006.

 

Competition - Retail electric customers in Iowa and Wisconsin currently do not have the ability to choose their electric supplier. However, in order to increase sales, IPL and WPL attempt to attract new customers into their service territories. As a result, there is competition among utilities to keep energy rates low. Although electric service in Iowa and Wisconsin is regulated, IPL and WPL also still face competition from self generation by large industrial customers, alternative energy sources, and petitions to municipalize (Iowa) as well as service territory expansions by municipal utilities through annexations (Wisconsin).

 

Electric Supply - Alliant Energy has met historical customer demand of electricity and expects to continue meeting future demand through internally generated electric supply, purchased power contracts utilizing existing firm transmission rights, and additional power purchases from generating units located within and outside of Alliant Energy’s service territory. Refer to the “Electric Operating Information” tables for details on the sources of electric supply for Alliant Energy, IPL and WPL from 2002 to 2006. Alliant Energy’s mix of electric supply has experienced changes in the past couple of years as a result of the sales of its interests in its nuclear generating facilities and the addition of natural-gas fired generating facilities to its generation portfolio. Refer to “Strategic Overview - Utility Generation Plan” in MDA for discussion of Alliant Energy’s

utility generation plan. While Alliant Energy currently expects to meet utility customer demands in the future, unanticipated regional or local reliability issues could still arise in the event of unexpected delays in the construction of new generating and/or transmission facilities, power plant outages, transmission system outages or extended periods of extreme weather conditions.

 

4

Generation - IPL and WPL own a portfolio of electric generating facilities with a diversified fuel mix including coal, natural gas and renewable resources. Refer to Item 2. Properties for information on IPL’s and WPL’s electric generating stations.

 

Fuel Costs - The average cost of delivered fuel per million British Thermal Units used for electric generation was as follows:

 

 

IPL

 

WPL

 

2006

 

2005

 

2004

 

2006

 

2005

 

2004

Coal

$1.25

 

$1.17

 

$1.08

 

$1.52

 

$1.32

 

$1.26

Natural Gas

10.45

 

7.86

 

6.65

 

14.28

 

8.49

 

6.65

Nuclear

0.56

 

0.57

 

0.55

 

--

 

0.53

 

0.46

All Fuels

2.18

 

1.73

 

1.15

 

1.80

 

1.72

 

1.30

 

Coal - Coal is the primary fuel source for Alliant Energy’s internally generated electric supply. Electric supply from coal-fired generating facilities represented 53%, 52% and 58% of IPL’s total sources of electric energy and 51%, 49% and 55% of WPL’s total sources of electric energy during 2006, 2005 and 2004, respectively. Alliant Energy, through Corporate Services as agent for IPL and WPL, has entered into contracts with different suppliers to help ensure that a specified supply of coal is available at known prices for IPL and WPL for 2007 through 2012. As of Dec. 31, 2006, these contracts provide for a portfolio of coal supplies that cover approximately 95%, 74%, 51%, 27%, 14% and 5% of Alliant Energy’s estimated coal supply needs for 2007 through 2012, respectively. Management believes this portfolio of coal supplies represents a reasonable balance between the risks of insufficient supplies and those associated with being unable to respond to future coal market changes. Alliant Energy expects to meet remaining coal requirements from either future contracts or purchases in the spot market.

 

The majority of the coal utilized by IPL and WPL is from the Wyoming Powder River Basin. A majority of this coal is transported by rail-car directly from Wyoming to IPL’s and WPL’s generating stations, with the remainder transported from Wyoming to the Mississippi River by rail-car and then via barges to the final destination. As protection against interruptions in coal deliveries, IPL and WPL strive to maintain average coal inventory supply targets of 25 to 50 days for generating stations with year-round deliveries and 30 to 150 days (depending upon the time of year) for generating stations with seasonal deliveries. Actual inventory averages for 2006 were 49 days for generating stations with year-round deliveries and 111 days for generating stations with seasonal deliveries.

 

Average delivered fossil fuel costs are expected to continue to increase in the future due to price structures and adjustment provisions in existing coal contracts, rate structures and adjustment provisions in existing transportation contracts, expiration of existing transportation contracts, fuel-related surcharges incorporated by transportation carriers and recent coal and transportation market trends. Existing coal commodity contracts with terms of greater than one year have fixed future year prices that generally reflect recent market trends. A few of the existing coal contracts have provisions for price adjustments should specific indices change. Rate adjustment provisions in transportation contracts are primarily based on changes in the Rail Cost Adjustment Factor as published by the U.S. Surface Transportation Board. Other factors which may impact coal prices for future commitments are increasing costs for supplier mineral rights, increasing costs to mine the coal and changes in various associated laws and regulations. For example, emission restrictions related to sulfur dioxide, nitrogen oxide and mercury along with other environmental limitations on generating stations continue to increase and will likely limit the ability to obtain, and further increase the cost of, adequate coal supplies. Factors which may impact transportation rates for future commitments upon expiration of existing contracts include: the need for railroads to enhance/expand infrastructure for demand growth, corresponding investments in locomotives and crews and the desire to improve margins on coal commensurate with margins on non-coal movements. Alliant Energy believes that, given its current coal procurement process, the specific coal market in its primary purchase region, and regulatory cost-recovery mechanisms, it is reasonably insulated against the present volatile coal price environment. Alliant Energy’s coal procurement process stresses periodic purchases, staggering of contract terms, stair-stepped levels of coverage going forward for five to six years and supplier diversity. Similarly, given the term lengths of its transportation agreements, Alliant Energy believes it is reasonably insulated against future higher base coal transportation rates from the major railroads. As of Dec. 31, 2006, existing coal transportation agreements cover approximately 91% of IPL’s and WPL’s estimated needs through 2007, approximately 66% for 2008 through 2009 and approximately 46% for 2010 through 2014.

5

Natural Gas - Alliant Energy owns several natural gas-fired generating facilities including IPL’s 565 MW, natural gas-fired Emery Generating Facility (Emery) that was placed in service in May 2004 and Resources’ 300 MW, natural gas-fired Sheboygan Falls Energy Facility (SFEF) that began commercial operations in June 2005. WPL has exclusive rights to the output of SFEF under an affiliated lease agreement. These facilities help meet customer demand for electricity generally during peak hour demands. Electric supply from owned natural gas-fired generating facilities represented 5%, 6% and 2% of Alliant Energy’s total sources of electric energy during 2006, 2005 and 2004, respectively. Increased electric supply from natural gas-fired generating facilities during 2006 and 2005 was primarily due to generation from Emery and SFEF.

 

Alliant Energy has responsibility to supply natural gas to certain generating facilities under purchased power agreements (PPAs), which include the Riverside Energy Center (Riverside) and the RockGen Energy Center (RockGen), as well as the generating facilities it owns. IPL and WPL have contracts with several companies to provide fixed-price natural gas supply for these generating facilities with the longest contracts having terms through December 2008. WPL has also contracted with ANR Pipeline to provide firm pipeline transportation of 60,000 dekatherms (Dths) per day for Riverside and 52,800 Dths per day (June to September) for SFEF. In addition to entering into fixed-price supply contracts, IPL and WPL have hedging programs reviewed by the IUB and PSCW, respectively, to help protect against the impacts of volatile natural gas prices. IPL and WPL expect these hedging programs will mitigate the impact on their electric customers of volatile natural gas costs for these generating facilities through 2008.

 

Nuclear - Electric supply from owned nuclear generating facilities represented 1%, 17% and 19% of IPL’s total sources of electric energy and 0%, 2% and 11% of WPL’s total sources of electric energy during 2006, 2005 and 2004, respectively. In January 2006, IPL sold its interest in the Duane Arnold Energy Center (DAEC) to a subsidiary of FPL Group, Inc. (FPL) and upon closing of the sale entered into a PPA with FPL to purchase energy and capacity from DAEC through February 2014. In July 2005, WPL sold its interest in the Kewaunee Nuclear Power Plant (Kewaunee) to a subsidiary of Dominion Resources, Inc. (Dominion) and upon closing of the sale entered into a long-term PPA with Dominion to purchase energy and capacity from Kewaunee through December 2013. As a result of these transactions, Alliant Energy no longer has an ownership interest in any nuclear generating facilities. Alliant Energy entered into these transactions to reduce the financial and operational uncertainty associated with nuclear generating facility ownership and operations while still retaining the benefit of the output from such nuclear generating facilities. Refer to Note 18 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information regarding the DAEC sale.

 

Purchased Power - Alliant Energy enters into PPAs to meet a portion of its customer demand of electricity. Purchased power represented 38%, 21% and 20% of IPL’s total sources of electric energy and 47%, 46% and 32% of WPL’s total sources of electric energy during 2006, 2005 and 2004, respectively. IPL’s and WPL’s level of purchased power during these periods was impacted by the sale of IPL’s interest in DAEC in January 2006 and the sale of WPL’s interest in Kewaunee in July 2005, respectively. Refer to “Other Matters - Other Future Considerations - Calpine Bankruptcy” in MDA for discussion of WPL’s PPAs with Calpine Corporation subsidiaries related to RockGen and Riverside.

 

Refer to Note 1(j) for discussion of IPL’s and WPL’s rate recovery of fuel costs, Note 3(a) for details regarding purchased power commitments accounted for as operating leases and Note 12(b) for details relating to IPL’s and WPL’s coal, natural gas and other purchased power commitments in Alliant Energy’s “Notes to Consolidated Financial Statements.”

 

Electric Transmission Business -

IPL - IPL maintains and operates its own electric transmission assets, which had a book value of approximately $434 million as of Dec. 31, 2006. Refer to Note 22 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of the proposed sale of IPL’s electric transmission assets. Refer to Item 2. Properties for additional information regarding IPL’s electric transmission properties. IPL has a non-cancelable operation agreement, which will terminate on Dec. 31, 2035, with Central Iowa Power Cooperative (CIPCO) that provides for the joint use of certain transmission facilities of IPL and CIPCO. IPL has transmission interconnections at various locations with nine other transmission owning utilities in the Midwest. These interconnections, along with the interconnections of ATC, enhance the overall reliability of the Alliant Energy transmission system and provide access to multiple sources of economic and emergency energy.

6

WPL - In 2001, WPL transferred its transmission assets to ATC in exchange for an ownership interest in ATC. As of Dec. 31, 2006, WPL held an 18% ownership interest in ATC with a carrying value of $166 million. ATC is an independent for-profit, transmission-only company and is a transmission-owning member of the Midwest Independent System Operator (MISO), the MRO and Reliability First Corporation Regional Reliability Council. ATC realizes its revenues from the provision of transmission services to both participants in ATC as well as non-participants. During 2006, ATC distributed to WPL, in the form of dividends, $19 million or approximately 80% of WPL’s equity earnings from ATC. Although no assurance can be given, WPL anticipates ATC will continue this dividend payout ratio in the future. ATC is continuing its efforts to improve transmission reliability and import capabilities into Wisconsin, including construction of a 345-kilovolt transmission line, which is expected to be in service in 2008. As these facilities are constructed, Alliant Energy expects they will serve to enhance its operating flexibility and its access to lower-cost energy. ATC also has various transmission interconnections with four other transmission owning utilities in the Midwest. WPL anticipates no capital contributions to ATC in 2007 and $25 million of capital contributions

 

Regional Transmission Participation - IPL and WPL are members of the MRO, which is a regional member of NERC. Each regional member of NERC is responsible for setting policies to ensure reliability in its area through coordination of planning and operations.

 

MISO Wholesale Energy Market - IPL and WPL are also members of MISO, a FERC-approved Regional Transmission Organization, which is responsible for monitoring and ensuring equal access to the transmission system in its service territory. In April 2005, IPL and WPL began participation in the restructured wholesale energy market operated by MISO. The implementation of this restructured market marked a significant change in the way IPL and WPL buy and sell wholesale electricity, obtain transmission services and schedule generation. In the restructured market, IPL and WPL submit day-ahead and/or real-time bids and offers for energy at locations across the MISO region. MISO evaluates IPL’s, WPL’s and other market participants’ energy injections into, and withdrawals from, the system to economically dispatch the entire MISO system on an hourly basis. MISO settles these hourly offers and bids based on locational marginal prices, which are market-driven values based on the specific time and location of the purchase and/or sale of energy. The restructured market is intended to send price signals to stakeholders where generation or transmission system expansion is needed. This market-based approach is expected to result in lower overall costs in areas with abundant transmission capacity. In addition, MISO may dispatch generators that support reliability needs, but which would not have operated based on economic needs. In these cases, MISO’s settlement assures that these generators are made whole financially. In areas of constrained transmission capacity, such as Wisconsin, costs could be higher due to the congestion and its impact on locational marginal prices. As part of the MISO market restructuring, physical transmission rights of IPL and WPL were replaced with Financial Transmission Rights (FTRs). FTRs provide a hedge for congestion costs that incur in the MISO day-ahead energy market. Both IPL and WPL have been awarded FTRs by MISO that are in place through May 31, 2007. Based on the FTRs awarded to IPL and WPL to date and future expected allocations, along with the regulatory recovery treatment of MISO costs, the financial impacts associated with FTRs have not differed significantly from the financial impacts associated with physical transmission rights that existed prior to the MISO market.

 

Refer to “Rates and Regulatory Matters” in MDA for discussion of the regulatory impacts of costs related to MISO and “Other Future Considerations - MISO Wholesale Energy Market” in MDA for discussion of the ancillary services market MISO is currently developing.

 

Electric Environmental Matters - Alliant Energy is regulated in environmental matters by federal, state and local agencies. Such regulations are the result of a number of environmental laws passed by the U.S. Congress, state legislatures and local governments and enforced by federal, state and local regulatory agencies. The laws impacting Alliant Energy’s operations include, but are not limited to, the Safe Drinking Water Act; Clean Water Act; Clean Air Act (CAA), as amended by the CAA Amendments of 1990; National Environmental Policy Act of 1969; Toxic Substances Control Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act and Emergency Planning and Community Right-to-Know Act of 1986; Endangered Species Act; Occupational Safety and Health Act; National Energy Policy Act of 1992; Federal Insecticide, Fungicide and Rodenticide Act; Hazardous Materials Transportation Act; and Pollution Prevention Act. Alliant Energy regularly obtains federal, state and local permits to assure compliance with the environmental protection laws and regulations. Costs associated with such compliance have increased in recent years and are expected to continue to increase in the future. Alliant Energy anticipates these prudently incurred costs for IPL and WPL will be recoverable through future rate case proceedings. Refer to “Liquidity and Capital Resources” in MDA and Note 12(e) of Alliant Energy’s Notes to Consolidated Financial Statements for further discussion of electric environmental matters including new environmental regulations under the Clean Air Interstate Rule and Clean Air Mercury Rule.

7

Alliant Energy Corporation


Electric Operating Information 2006 2005 2004 2003 2002

Operating Revenues (in millions):  
     Residential  $857.1   $823.4   $716.7   $684.6   $626.9  
     Commercial  549.8   497.4   437.8   409.7   376.4  
     Industrial  763.7   675.2   609.9   571.6   526.8  
 
       Retail subtotal  2,170.6   1,996.0   1,764.4   1,665.9   1,530.1  
     Sales for resale: 
       Wholesale  145.2   158.7   116.8   108.4   93.2  
       Bulk power and other  68.5   114.6   69.0   87.4   67.1  
     Other  58.7   51.3   58.8   55.4   62.1  
 
          Total  $2,443.0   $2,320.6   $2,009.0   $1,917.1   $1,752.5  
 

Electric Sales (000s MWh):  
     Residential  7,670   7,881   7,354   7,565   7,616  
     Commercial  6,187   6,110   5,702   5,663   5,542  
     Industrial  12,808   12,830   12,596   12,345   12,297  
 
       Retail subtotal  26,665   26,821   25,652   25,573   25,455  
     Sales for resale: 
       Wholesale  3,064   3,161   2,943   2,835   2,636  
       Bulk power and other  2,632   2,933   2,159   2,660   2,169  
     Other  171   173   178   184   197  
 
          Total  32,532   33,088   30,932   31,252   30,457  
 

Customers (End of Period):  
     Residential  855,948   849,845   839,745   830,559   822,229  
     Commercial  135,822   134,149   131,152   129,130   128,212  
     Industrial  3,064   3,044   2,916   2,902   2,905  
     Other  3,391   3,368   3,312   3,362   3,344  
 
          Total  998,225   990,406   977,125   965,953   956,690  
 

Other Selected Electric Data:  
     Maximum peak hour demand (MW)  5,989   5,932   5,644   5,887   5,729  
     Cooling degree days (a): 
          Cedar Rapids (IPL) (normal - 379)  332   406   139   276   397  
          Madison (WPL) (normal - 248)  284   421   138   224   356  
     Sources of electric energy (000s MWh): 
          Coal  17,578   17,360   18,472   18,451   17,674  
          Purchased power: 
            Nuclear (b)  5,128   1,008   -   -   -  
            Other  8,928   9,885   8,289   9,155   8,596  
          Gas (c)  1,541   2,052   792   631   675  
          Nuclear (b)  264   3,461   5,018   4,498   5,012  
          Other  263   297   262   240   379  
 
            Total  33,702   34,063   32,833   32,975   32,336  
 
     Revenue per kilowatt-hour (KWh) sold to retail 
        customers (cents)  8.14   7.44   6.88   6.51   6.01  

(a)   Cooling degree days are calculated using a 70 degree base. Normal degree days are calculated for Cedar Rapids using a fixed 30-year average and for Madison using a rolling 20-year average.
(b)   In January 2006 and July 2005, IPL and WPL sold their respective interests in DAEC and Kewaunee and upon closing of the sales entered into long-term purchased power agreements to purchase energy and capacity from DAEC and Kewaunee, respectively.
(c)   Includes generation from SFEF that began commercial operation in June 2005, which WPL leases from Resources' Non-regulated Generation business.

8

Interstate Power and Light Company


Electric Operating Information 2006 2005 2004 2003 2002

Operating Revenues (in millions):            
     Residential  $471.2   $453.9   $388.9   $367.7   $355.0  
     Commercial  337.4   300.0   257.8   239.4   229.7  
     Industrial  440.7   387.0   347.3   327.8   315.5  
 
       Retail subtotal  1,249.3   1,140.9   994.0   934.9   900.2  
     Sales for resale: 
       Wholesale  1.9   1.9   2.1   2.0   2.2  
       Bulk power and other  47.8   73.5   39.6   38.2   32.3  
     Other  32.6   30.4   33.5   31.9   30.1  
 
          Total  $1,331.6   $1,246.7   $1,069.2   $1,007.0   $964.8  
 

Electric Sales (000s MWh):  
     Residential  4,157   4,282   3,979   4,155   4,184  
     Commercial  3,910   3,836   3,487   3,496   3,392  
     Industrial  7,860   8,005   7,827   7,750   7,843  
 
       Retail subtotal  15,927   16,123   15,293   15,401   15,419  
     Sales for resale: 
       Wholesale  35   41   53   50   66  
       Bulk power and other  1,550   1,682   1,252   1,249   1,085  
     Other  99   98   98   102   103  
 
          Total  17,611   17,944   16,696   16,802   16,673  
 

Customers (End of Period):  
     Residential  455,346   454,176   450,595   448,719   446,202  
     Commercial  81,045   80,238   78,137   77,043   76,856  
     Industrial  2,018   1,996   1,915   1,888   1,898  
     Other  1,299   1,317   1,280   1,327   1,328  
 
          Total  539,708   537,727   531,927   528,977   526,284  
 

Other Selected Electric Data:  
     Maximum peak hour demand (MW)  3,070   3,077   3,017   3,123   3,097  
     Cooling degree days (a): 
          Cedar Rapids (normal - 379)  332   406   139   276   397  
     Sources of electric energy (000s MWh): 
          Coal  9,919   9,782   10,348   10,232   9,889  
          Purchased power: 
            Nuclear (b)  3,297   -   -   -   -  
            Other  3,743   3,868   3,508   4,503   4,134  
          Gas  1,426   1,686   580   227   330  
          Nuclear (b)  264   3,177   3,451   2,791   3,202  
          Other  80   121   47   63   127  
 
            Total  18,729   18,634   17,934   17,816   17,682  
 
     Revenue per KWh sold to retail customers (cents)   7.84   7.08   6.50   6.07   5.84  

(a)   Cooling degree days are calculated using a 70 degree base. Normal degree days are calculated using a fixed 30-year average.
(b)   In January 2006, IPL sold its interest in DAEC and upon closing of the sale entered into a long-term purchased power agreement to purchase energy and capacity from DAEC.

9

Wisconsin Power and Light Company


Electric Operating Information 2006 2005 2004 2003 2002

Operating Revenues (in millions):            
     Residential  $385.9   $369.5   $327.8   $316.9   $271.9  
     Commercial  212.4   197.4   180.0   170.3   146.7  
     Industrial  323.0   288.2   262.6   243.8   211.3  
 
       Retail subtotal  921.3   855.1   770.4   731.0   629.9  
     Sales for resale: 
       Wholesale  143.3   156.8   114.7   106.4   91.0  
       Bulk power and other  20.7   41.1   29.4   49.2   34.8  
     Other  26.1   20.9   25.3   23.5   32.0  
 
          Total  $1,111. 4 $1,073. 9 $939.8   $910.1   $787.7  
 

Electric Sales (000s MWh):  
     Residential  3,513   3,599   3,375   3,410   3,432  
     Commercial  2,277   2,274   2,215   2,167   2,150  
     Industrial  4,948   4,825   4,769   4,595   4,454  
 
       Retail subtotal  10,738   10,698   10,359   10,172   10,036  
     Sales for resale: 
       Wholesale  3,029   3,120   2,890   2,785   2,570  
       Bulk power and other  1,082   1,251   907   1,411   1,084  
     Other  72   75   80   82   94  
 
          Total  14,921   15,144   14,236   14,450   13,784  
 

Customers (End of Period):  
     Residential  400,602   395,669   389,150   381,840   376,027  
     Commercial  54,777   53,911   53,015   52,087   51,356  
     Industrial  1,046   1,048   1,001   1,014   1,007  
     Other  2,092   2,051   2,032   2,035   2,016  
 
          Total  458,517   452,679   445,198   436,976   430,406  
 

Other Selected Electric Data:  
     Maximum peak hour demand (MW)  2,941   2,854   2,627   2,782   2,674  
     Cooling degree days (a): 
          Madison (normal - 248)  284   421   138   224   356  
     Sources of electric energy (000s MWh): 
          Coal  7,659   7,578   8,124   8,219   7,785  
          Purchased power: 
            Nuclear (b)  1,831   1,008   -   -   -  
            Other  5,185   6,017   4,781   4,652   4,462  
          Gas (c)  115   366   212   404   345  
          Nuclear (b)  -   284   1,567   1,707   1,810  
          Other  183   176   215   177   252  
 
            Total  14,973   15,429   14,899   15,159   14,654  
 
     Revenue per KWh sold to retail customers (cents)  8.58   7.99   7.44   7.19   6.28  

(a)   Cooling degree days are calculated using a 70 degree base. Normal degree days are calculated using a rolling 20-year average.
(b)   In July 2005, WPL sold its interest in Kewaunee and upon closing of the sale entered into a long-term purchased power agreement to purchase energy and capacity from Kewaunee.
(c)   Includes generation from SFEF that began commercial operation in June 2005, which WPL leases from Resources' Non-regulated Generation business.

10

2) GAS UTILITY OPERATIONS

General - Gas utility operations represents the second largest operating segment for Alliant Energy, IPL and WPL. In 2006, gas utility operations accounted for 19%, 20% and 20% of operating revenues and 12%, 7% and 22% of operating income for Alliant Energy, IPL and WPL, respectively. Alliant Energy’s gas utility operations are located in the Midwest with IPL and WPL providing gas service in Iowa, southern and central Wisconsin and southern Minnesota. Gas utility revenues by state were as follows (dollars in millions):

 

 

2006

 

2005

 

2004

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

IPL:

 

 

 

 

 

 

 

 

 

 

 

Iowa

$335.2

 

53%

 

$337.2

 

49%

 

$293.3

 

51%

Minnesota

17.7

 

3%

 

18.4

 

3%

 

16.7

 

3%

Illinois (a)

6.5

 

1%

 

7.2

 

1%

 

6.0

 

1%

Subtotal

359.4

 

57%

 

362.8

 

53%

 

316.0

 

55%

WPL:

 

 

 

 

 

 

 

 

 

 

 

Wisconsin

265.6

 

42%

 

310.5

 

45%

 

246.9

 

44%

Illinois (a)

8.3

 

1%

 

11.8

 

2%

 

6.9

 

1%

Subtotal

273.9

 

43%

 

322.3

 

47%

 

253.8

 

45%

 

$633.3

 

100%

 

$685.1

 

100%

 

$569.8

 

100%

(a)

Refer to Note 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of IPL’s and WPL’s utility operations in Illinois which were sold in February 2007.

 

The number of gas customers and communities served at Dec. 31, 2006 were as follows:

 

 

Retail

 

Transportation and

 

Total

 

Communities

 

Customers

 

Other Customers

 

Customers

 

Served

IPL

239,372

 

240

 

239,612

 

251

WPL

182,098

 

251

 

182,349

 

246

 

421,470

 

491

 

421,961

 

497

 

In addition to sales of natural gas to retail customers, IPL and WPL provide transportation service to commercial and industrial customers by moving customer-owned gas through Alliant Energy’s distribution systems to the customers’ meters. Revenues are collected for this service pursuant to transportation tariffs. Refer to the “Gas Operating Information” tables for additional details regarding gas utility operations.

 

Seasonality - Gas sales follow a seasonal pattern with an annual base load of gas and a large heating peak occurring during the winter season. Natural gas obtained from producers, marketers and brokers, as well as gas in storage, is utilized to meet the peak heating season requirements. Storage contracts allow IPL and WPL to purchase gas in the summer, store the gas in underground storage fields and deliver it in the winter. Gas storage met approximately 30% of both IPL’s and WPL’s annual gas requirements in 2006.

 

Competition - Federal and state regulatory policies are in place to bring more competition to the gas industry. While the gas utility distribution function is expected to remain a regulated function, sales of the natural gas commodity and related services are subject to competition from third parties. It remains uncertain if and when the current economic disincentives for smaller consumption customers to choose an alternative gas commodity supplier may be removed such that the utility business begins to face competition for the sale of gas to those customers.

11

Gas Supply - IPL and WPL maintain purchase agreements with over 30 suppliers of natural gas from all gas producing regions of the U.S. and Canada. The majority of the gas supply contracts are for terms of six months or less, with the remaining supply contracts having terms through 2007. IPL’s and WPL’s gas supply commitments are primarily market-based.

 

In providing gas commodity service to retail customers, Corporate Services administers a diversified portfolio of transportation and storage contracts on behalf of IPL and WPL. Transportation contracts with Northern Natural Gas Company (NNG), Natural Gas Pipeline Co. of America (NGPL) and ANR Pipeline (ANR) allow access to gas supplies located in the U.S. and Canada. Arrangements with Firm Citygate Supplies (FCS) provide IPL and WPL with gas delivered directly to their service territories. In 2006, the maximum daily delivery capacity for IPL and WPL was as follows (in Dths):

 

 

NNG

 

NGPL

 

ANR

 

FCS

 

Total

IPL

200,891

 

89,932

 

55,680

 

21,000

 

367,503

WPL

79,986

 

--

 

157,967

 

31,000

 

268,953

 

Refer to Note 1(j) for information relating to utility natural gas cost recovery and Note 12(b) for discussion of natural gas commitments in Alliant Energy’s “Notes to Consolidated Financial Statements.”

 

Gas Environmental Matters - Refer to Note 12(e) of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of gas environmental matters.

12

Alliant Energy Corporation


Gas Operating Information 2006 2005 2004 2003 2002

Operating Revenues (in millions):            
     Residential  $342.8   $358.1   $315.6   $310.7   $218.7  
     Commercial  198.8   202.0   172.3   162.7   111.3  
     Industrial  38.7   43.8   38.4   34.2   25.2  
 
       Retail subtotal  580.3   603.9   526.3   507.6   355.2  
     Interdepartmental  19.2   55.9   22.3   48.5   25.5  
     Transportation and other  33.8   25.3   21.2   10.8   13.3  
 
       Total  $633.3   $685.1   $569.8   $566.9   $394.0  
 

Gas Sales (000s Dths):  
     Residential  26,406   28,554   29,338   31,871   30,931  
     Commercial  18,707   18,763   19,199   19,947   19,348  
     Industrial  4,498   4,406   5,127   5,093   5,373  
 
       Retail subtotal  49,611   51,723   53,664   56,911   55,652  
     Interdepartmental  2,468   6,959   3,501   7,191   6,271  
     Transportation and other  53,436   55,891   46,125   41,787   41,115  
 
       Total  105,515   114,573   103,290   105,889   103,038  
 

Retail Customers at End of Period:  
     Residential  374,494   371,443   366,493   361,835   358,384  
     Commercial  46,319   46,153   45,630   45,826   45,793  
     Industrial  657   692   730   766   799  
 
       Total  421,470   418,288   412,853   408,427   404,976  
 

Other Selected Gas Data:  
     Heating degree days (a): 
          Cedar Rapids (IPL) (normal - 6,896)  6,211   6,534   6,463   6,883   6,577  
          Madison (WPL) (normal - 7,197)  6,499   6,796   6,831   7,337   6,929  
     Revenue per Dth sold to retail customers  $11.70   $11.68   $9.81   $8.92   $6.38  
     Purchased gas costs per Dth sold to retail customers  $8.32   $8.68   $6.98   $6.11   $4.02  

(a)   Heating degree days are calculated using a 65 degree base. Normal degree days are calculated for Cedar Rapids using a fixed 30-year average and for Madison using a rolling 20-year average.

13

Interstate Power and Light Company


Gas Operating Information 2006 2005 2004 2003 2002

Operating Revenues (in millions):            
     Residential  $197.9   $201.7   $179.2   $173.6   $124.2  
     Commercial  114.4   112.7   95.5   88.1   61.2  
     Industrial  30.4   33.8   30.3   24.6   18.2  
 
       Retail subtotal  342.7   348.2   305.0   286.3   203.6  
     Interdepartmental  2.2   5.1   1.9   3.8   4.0  
     Transportation and other  14.5   9.5   9.1   4.4   7.3  
 
       Total  $359.4   $362.8   $316.0   $294.5   $214.9  
 

Gas Sales (000s Dths):  
     Residential  15,136   16,486   16,882   19,074   18,068  
     Commercial  10,552   10,576   10,614   11,408   10,774  
     Industrial  3,622   3,428   4,029   3,911   4,070  
 
       Retail subtotal  29,310   30,490   31,525   34,393   32,912  
     Interdepartmental  352   511   289   631   1,027  
     Transportation and other  32,342   30,691   28,653   28,551   27,787  
 
       Total  62,004   61,692   60,467   63,575   61,726  
 

Retail Customers at End of Period:  
     Residential  211,768   211,217   209,280   207,921   206,808  
     Commercial  27,222   27,384   27,094   27,465   27,607  
     Industrial  382   398   434   426   438  
 
       Total  239,372   238,999   236,808   235,812   234,853  
 

Other Selected Gas Data:  
     Heating degree days (a): 
          Cedar Rapids (normal - 6,896)  6,211   6,534   6,463   6,883   6,577  
     Revenue per Dth sold to retail customers  $11.69   $11.42   $9.67   $8.32   $6.19  
     Purchased gas cost per Dth sold to retail customers   $8.69   $8.78   $7.27 $5.99 $4.11  

                     
Wisconsin Power and Light Company  
                     

Gas Operating Information   2006   2005   2004   2003   2002  

Operating Revenues (in millions):  
     Residential  $144.9   $156.4   $136.4   $137.1   $94.5  
     Commercial  84.4   89.3   76.8   74.6   50.1  
     Industrial  8.3   10.0   8.1   9.6   7.0  
 
       Retail subtotal  237.6   255.7   221.3   221.3   151.6  
     Interdepartmental  17.0   50.8   20.4   44.7   21.5  
     Transportation and other  19.3   15.8   12.1   6.4   6.0  
 
       Total  $273.9   $322.3   $253.8   $272.4   $179.1  
 

Gas Sales (000s Dths):  
     Residential  11,270   12,068   12,456   12,797   12,863  
     Commercial  8,155   8,187   8,585   8,539   8,574  
     Industrial  876   978   1,098   1,182   1,303  
 
       Retail subtotal  20,301   21,233   22,139   22,518   22,740  
     Interdepartmental  2,116   6,448   3,212   6,560   5,244  
     Transportation and other  21,094   25,200   17,472   13,236   13,328  
 
       Total  43,511   52,881   42,823   42,314   41,312  
 

Retail Customers at End of Period:  
     Residential  162,726   160,226   157,213   153,914   151,576  
     Commercial  19,097   18,769   18,536   18,361   18,186  
     Industrial  275   294   296   340   361  
 
       Total  182,098   179,289   176,045   172,615   170,123  
 

Other Selected Gas Data:  
     Heating degree days (a): 
          Madison (normal - 7,197)  6,499   6,796   6,831   7,337   6,929  
     Revenue per Dth sold to retail customers  $11.70   $12.04   $10.00   $9.83   $6.67  
     Purchased gas cost per Dth sold to retail customers   $7.77    $8.53   $6.57   $6.29   $3.89  

(a)   Heating degree days are calculated using a 65 degree base. Normal degree days are calculated for Cedar Rapids using a fixed 30-year average and for Madison using a rolling 20-year average.

14

D.

INFORMATION RELATING TO NON-REGULATED OPERATIONS

 

Resources manages a relatively small portfolio of wholly-owned subsidiaries and additional investments through two distinct platforms: Non-regulated Generation and other non-regulated investments.

 

Non-regulated Generation - manages Alliant Energy’s non-regulated electric generating facilities. In June 2005, Resources completed the construction and commenced commercial operation of the 300 MW, simple-cycle, natural gas-fired SFEF near Sheboygan Falls, Wisconsin. Resources owns SFEF and leases it to WPL for an initial period of 20 years. Refer to Note 3(b) of WPL’s “Notes to Consolidated Financial Statements” for additional information regarding the SFEF lease. Resources also owns a 309 MW, simple-cycle, natural gas-fired electric generating facility in Neenah, Wisconsin. The entire power output of the facility is sold under contract to Milwaukee-based We Energies through May 2008. Also included in Non-regulated Generation is Industrial Energy Applications, Inc., which provides on-site energy services with small standby generators.

 

Other non-regulated investments - includes investments in environmental engineering and site remediation, transportation, construction management services for wind farms and several other modest investments, as well as a resort development in Mexico (Laguna del Mar) that Alliant Energy is divesting. Environmental engineering and site remediation includes RMT, Inc., an environmental and engineering consulting company that serves clients nationwide in a variety of industrial market segments and specializes in consulting on solid and hazardous waste management, site remediation, ground water quality monitoring and detection, and air quality control. Transportation includes a short-line railway that provides freight service between Cedar Rapids and Iowa City; barge terminal and hauling services on the Mississippi River; and other transfer and storage services. Construction management services for wind farms includes WindConnect™, a construction management service company that provides expertise in engineering, designing and constructing wind electric system projects.

 

Refer to Note 9(b) of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of the sales of Alliant Energy’s investments in New Zealand and Brazil in December 2006 and January 2006, respectively. Refer to “Strategic Overview” in MDA and Note 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for information on Alliant Energy’s focused approach to its non-regulated operations as well as various other divestitures that Alliant Energy has completed.

 

E.

DISCLOSURE CONCERNING WEBSITE ACCESS TO REPORTS

Alliant Energy makes its periodic and current reports, and amendments to those reports, available, free of charge, on its website at www.alliantenergy.com/investors on the same day as such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Alliant Energy is not including the information contained on its website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider each of the risks described below relating to Alliant Energy, IPL and WPL, together with all of the other information contained in this combined Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks develop into actual events, our business, financial condition, results of operations or cash flows could be materially and adversely affected and you may lose all or part of your investment.

 

Risks related to the regulation of our business could impact the rates we are able to charge, our costs and our profitability - We are subject to comprehensive regulation by federal and state regulatory authorities, which significantly influences our operating environment and the ability to timely recover costs from customers. In particular, our utility operations are regulated by regulatory authorities with jurisdiction over public utilities, including the IUB, the PSCW, the MPUC and FERC. These authorities regulate many aspects of our operations, including, but not limited to: rates charged to customers; costs of fuel, purchased power and natural gas that can be recovered from customers; the authorized rates of return on capital; our ability to site and construct new generating facilities; construction and maintenance of facilities; operations; safety; issuance of securities; accounting matters; and transactions between affiliates. Further, provisions of the Wisconsin Utility Holding Company Act limit our ability to invest in non-utility activities and could deter takeover attempts by a potential purchaser of our common stock that would be willing to pay a premium for our common stock. Our ability to obtain rate adjustments to maintain current rates of return depends upon regulatory action under applicable statutes and regulations, and we cannot assure that rate adjustments will be obtained or current authorized rates of return on capital will be earned. These regulatory authorities are also empowered to impose financial penalties and other sanctions on us if we are found to have violated statutes and regulations governing utility operations. IPL and WPL from time to time file rate cases with federal and state regulatory authorities. In future rate cases, if IPL and WPL do not receive an adequate amount of rate relief, rates are reduced, increased rates are not approved on a timely basis or costs are otherwise unable to be recovered through rates, we may experience an adverse impact on our financial condition, results of operations and cash flows. We are unable to predict the impact on our business and operating results from future regulatory activities of any of these agencies. Changes in regulations or the imposition of additional regulations may require us to incur additional expenses or change business operations or our business plan, which may have an adverse impact on our financial condition, results of operations and cash flows.

15

Changes in commodity prices or the availability of commodities may increase the cost of producing electric energy or decrease the amount we receive from selling electric energy, harming our financial performance - The prices that we may obtain for electric energy may not compensate for changes in coal, natural gas or energy spot-market costs, or changes in the relationship between such costs and the market prices of electric energy. As a result, we may be unable to pass on the changes in costs to our customers, which may result in an adverse effect on our financial condition, results of operations and cash flows. We are heavily exposed to changes in the price and availability of coal because the majority of the electricity generated by us is from our coal-fired generating facilities. We have contracts of varying durations for the supply and transportation of coal for most of our existing generating capability, but as these contracts end or otherwise are not honored, we may not be able to purchase coal on terms as favorable as the current contracts. Further, we rely on coal primarily from the Power River Basin in Wyoming and any disruption of coal production in, or transportation from, that region may cause us to incur additional costs and adversely affect our financial condition, results of operations and cash flows. We also have responsibility to supply natural gas to certain natural gas-fired electric generating facilities that we own and lease, which increase our exposure to the more volatile market prices of natural gas. We have natural gas supply contracts in place which are generally short term in duration. The natural gas supply commitments are either fixed price in nature or market-based. As some of the contracts are market-based, and all of the contracts are short-term, we may not be able to purchase natural gas on terms as favorable as the current contracts when the current contracts expire. Further, any disruption of production or transportation of natural gas may cause us to incur additional costs to purchase natural gas that may adversely impact our financial condition, results of operations and cash flows. The derivative instruments we use to manage our commodity risks have terms allowing our counterparties to demand cash collateral. Extensive cash collateral demands could adversely impact our cash flows.

 

We may incur additional costs or experience delays in generating facility construction and may not be able to recover our investment - Large construction projects are subject to risks over which we have limited or no control and which might adversely affect project costs or completion time. These risks include shortages of, the inability to obtain, the cost of and the consistency of labor, materials and equipment, the inability of the general contractor or subcontractors to perform under their contracts, work stoppages, adverse weather conditions, the inability to obtain necessary permits in a timely manner, changes in applicable laws or regulations, adverse interpretation or enforcement of permit conditions, governmental actions, legal action, and unforeseen engineering problems. If the construction of a generating facility is over budget, we may not be able to recover those excess costs. Inability to recover excess costs, or inability to complete construction in a timely manner, could adversely impact our financial condition, results of operations and cash flows.

 

Costs of compliance with new laws and the incurrence of liabilities, particularly related to the environment, could adversely affect our profitability - Our operations are subject to extensive regulation including environmental protection laws and regulations relating to, among other things, water discharges, management of hazardous and solid waste, and air emissions such as sulfur dioxide, nitrogen oxide, small particulates and mercury. New laws and regulations affecting our operations have been adopted by the EPA, including the Clean Air Mercury Rule and the Clean Air Interstate Rule, and possible new regulations from federal and state authorities may be adopted, requiring modifications to our utility operations. As an example, new regulations on carbon dioxide emissions may be adopted. New interpretations of existing laws and regulations could be adopted or become applicable to us or our facilities. These new regulations, possible new regulations and possible new interpretations may substantially increase compliance expenditures made by us or restrict our operations in the future. We also have current or previous ownership interests in sites associated with the production of gas and the production and delivery of electricity for which we may be liable for additional costs related to investigation, remediation and monitoring of these sites. Citizen groups or others may bring litigation over environmental issues including claims of various types, such as property damage, personal injury, and citizen enforcement of environmental requirements, such as opacity and other air quality standards which could subject us to penalties, injunctive relief and the cost of litigation. We cannot predict with certainty the amount and timing of all future expenditures (including the potential or magnitude of fines or penalties) related to environmental matters because of the difficulty of estimating clean-up and compliance costs, the uncertainty in quantifying liabilities under environmental laws that impose joint and several liabilities on all potentially responsible parties, the possibility that changes will be made to the current environmental laws and regulations, the possible inability to obtain necessary materials or skilled labor force required for certain equipment necessary to comply with environmental regulations, and the uncertainty regarding the type of compliance that will be required by final rules and regulations. Compliance with current and future federal and state environmental laws and regulations may result in increased capital, operating and other costs, including remediation and containment expenses and monitoring obligations which could adversely impact our financial condition, results of operations and cash flows.

16

Our operating results may fluctuate on a seasonal and quarterly basis and can be adversely affected by the impacts of weather - Our electric and gas utility businesses are seasonal businesses and weather patterns can have a material impact on their operating performance. Demand for electricity is greater in the summer months associated with air conditioning requirements. In addition, market prices for electricity peak in the summer. Demand for natural gas depends significantly upon weather patterns in winter months due to heavy use for residential and commercial heating. As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis. In addition we have historically generated less revenues and income when weather conditions are warmer in the winter and cooler in the summer. We expect that unusually mild winters and summers could have an adverse effect on our financial condition, results of operations and cash flows.

 

Failure to provide reliable service to our utility customers could adversely affect our operating results - We are currently obligated to supply electric energy in parts of Iowa, Wisconsin and Minnesota. From time to time and because of unforeseen circumstances, the demand for electric energy required to meet these obligations could exceed our available electric generating capability and energy commitments pursuant to long-term purchased power agreements. The North American transmission grid is highly interconnected and, in extraordinary circumstances, disruptions at particular points within the grid could cause an extensive power outage in our delivery systems. Power outages in our service territories could result from factors outside of our control or service territories. If this occurs, we would have to buy electric energy in the market. Our utilities may not always have the ability to pass all the costs of purchasing the electric energy on to their customers, and even if they are able to do so, there may be a significant delay between the time the costs are incurred and the time the costs are recovered. Since these situations most often occur during periods of peak demand, it is possible that the market price for electric energy at the time we purchase it could be very high. Even if a supply shortage was brief, we could suffer substantial losses that could diminish our financial condition, results of operations and cash flows. The transmission system in our utilities’ service territories, especially in Wisconsin, is constrained, limiting our ability to transmit electric energy within our service territories and access electric energy from outside of our service territories. The transmission constraints could result in failure to provide reliable service to our utility customers or not being able to access lower cost sources of electric energy. Failure to provide safe and reliable service, including effects of equipment failures in electric and natural gas delivery systems or market demand for energy exceeding available supply, may result in reduced revenues and increased maintenance and capital costs, which could adversely impact our financial condition, results of operations and cash flows.

 

Threats of terrorism and catastrophic events that could result from terrorism or natural disasters may impact our operations in unpredictable ways - We are subject to direct and indirect effects of terrorist threats and activities. Generation and transmission facilities, in general, have been identified as potential targets. The effects of terrorist threats and activities include, among other things, terrorist actions or responses to such actions or threats, the inability to generate, purchase or transmit electric energy, the risk of significant slowdown in growth or a decline in the U.S. economy, disruption or volatility in, or other effects on capital markets, and the increased cost and adequacy of security and insurance. Catastrophic natural disasters may also impact our operations. Terrorists threats and activities and natural disasters may adversely impact our ability to generate, purchase or transmit electric energy or obtain fuel sources and may significantly slow growth, or cause a decline, in the economy within our service territories, which could adversely impact our financial condition, results of operations and cash flows.

 

Operation of electric generating facilities or construction or capital improvement of utility facilities may involve unanticipated changes or delays in operations that could negatively impact our business - The operation of electric generating facilities involves many risks, including start-up risks, breakdown or failure of equipment, transmission lines or pipelines, use of technology, the dependence on a specific fuel source, including the supply and transportation of fuel, as well as the risk of performance below expected or contracted levels of output or efficiency. These risks could negatively impact our business through asset degradation, lost revenues or increased costs, including the cost of replacement power. Additionally, our ability to successfully and timely complete construction of utility facilities or planned capital improvements to existing facilities within established budgets is contingent upon many variables and may be subject to substantial risks. Should such efforts be unsuccessful, we could be subject to additional costs and increased risk of non-recovery of construction or improvement costs through rates, which could adversely affect our financial condition, results of operations and cash flows.

17

We are exposed to risks related to economic conditions - Our utility operations are impacted by the economic conditions in our service territories. If economic conditions decline in our service territories, we may experience reduced demand for electricity or natural gas which could result in decreased earnings and cash flows. In addition, adverse economic conditions in our service territories could negatively impact our collections of accounts receivable. Any national economic downturn or disruption of financial markets could reduce our access to capital necessary for our operations and executing our strategic plan. A decline in economic conditions in our service territories or nationally could adversely impact our financial condition, results of operations and cash flows.

 

We are subject to limitations on our ability to pay dividends - Alliant Energy is a holding company with no significant operations of its own. Accordingly, the primary sources of funds for Alliant Energy to pay dividends to its shareowners are dividends and distributions from its subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts to us, whether by dividends, loans or other payments. The ability of our subsidiaries to pay dividends or make distributions to us and, accordingly, our ability to pay dividends on Alliant Energy common stock will depend on regulatory limitations and the earnings, cash flows, capital requirements and general financial condition of our subsidiaries. Our utilities each have dividend payment restrictions based on the terms of their outstanding preferred stock and regulatory limitations applicable to them. In addition, IPL has dividend payment restrictions based on its bond indentures. If we do not receive adequate dividends and distributions from our subsidiaries, then we may not be able to make, or may have to reduce, dividend payments on Alliant Energy common stock.

 

We are engaged in sales of assets and businesses; however, market conditions and other factors may hinder this strategy - We are in the process of selling, and may continue to sell, non-core assets. Sales prices for assets and businesses could fluctuate. Asset sales under poor market conditions could result in substantial losses. Buyers may find it difficult to obtain financing to purchase these assets. As part of any asset sale, we face challenges associated with pricing the assets correctly and limiting our environmental or other retained liabilities. These transactions also may divert management attention and other resources from day-to-day operations. Several factors specific to us could make asset sales particularly challenging. We are subject to regulatory approvals for the sale of certain assets, as are potential purchasers. These approvals can impose delays and structuring complications on asset sale transactions. Potential buyers may be reluctant to enter into agreements to purchase assets from us if they believe that required consents and approvals will result in significant delays or uncertainties in the transaction process.

 

We are subject to employee workforce factors that could affect our businesses - We are subject to employee workforce factors, including loss or retirement of key personnel, availability of qualified personnel, collective bargaining agreements with employees and work stoppage that could affect our businesses and financial condition, results of operations and cash flows.

 

Inability to access financial markets - We rely on accessing the capital markets to support capital expenditure programs and other capital requirements, including expenditures to build utility infrastructure and comply with future regulatory requirements. Successful implementation of our long-term business strategies is dependent upon the ability of us to access the capital markets under competitive terms and rates. If our access to capital were to become significantly constrained or costs of capital increased significantly due to lowered credit ratings, prevailing market or industry conditions, regulatory constraints or other factors, our financial condition, results of operations and cash flows could be significantly adversely affected.

 

Energy industry changes could have a negative effect on our businesses - As a public utility company with significant utility assets, we conduct our utility operations in an ever-changing business environment. The advent of new markets has the potential to significantly impact our financial condition, results of operations and cash flows. The new MISO wholesale energy market has the potential to significantly increase costs of transmission, costs associated with inefficient generation dispatching, costs of participation in the market and costs stemming from estimated payment settlements. Competitive pressures, including advances in technology that reduce the costs of alternative methods of producing electric energy to a level that is competitive with that of current electric production methods, could result in our utilities losing market share and customers and incurring stranded costs (i.e., assets and other costs rendered unrecoverable through customer rates as a result of competitive pricing), which would be borne by our shareowners. Although the pace of restructuring in our primary retail electric service territories has been delayed (and may continue to be delayed for a long period of time) due to uncertainty and developments in the industry, we cannot predict the timing of a restructured electric industry or the impact on our financial condition, results of operations and cash flows.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

18

ITEM 2. PROPERTIES

 

IPL

IPL’s electric generating stations at Dec. 31, 2006, were as follows:

 

Name and Location

 

Primary Fuel

 

2006 Summer

of Station

 

Type

 

Capability in KWs

 

 

 

 

 

 

 

Ottumwa Generating Station, Ottumwa, IA

 

Coal

 

321,665

(a)

 

Lansing Units 1, 2, 3 and 4, Lansing, IA

 

Coal

 

314,814

 

 

M. L. Kapp Plant Units 1 and 2, Clinton, IA

 

Coal

 

238,034

 

 

Burlington Generating Station, Burlington, IA

 

Coal

 

211,950

 

 

Prairie Creek Station, Cedar Rapids, IA

 

Coal

 

201,912

 

 

George Neal Unit 4, Sioux City, IA

 

Coal

 

165,476

(b)

 

George Neal Unit 3, Sioux City, IA

 

Coal

 

144,200

(c)

 

Sutherland Station, Marshalltown, IA

 

Coal

 

139,709

 

 

Dubuque Units 2, 3 and 4, Dubuque, IA

 

Coal

 

78,307

 

 

Sixth Street Station, Cedar Rapids, IA

 

Coal

 

55,080

 

 

Louisa Unit 1, Louisa, IA

 

Coal

 

28,000

(d)

 

   Total Coal

 

 

 

 

 

1,899,147

 

 

 

 

 

 

 

Marshalltown Combustion Turbines, Marshalltown, IA

 

Oil

 

166,728

 

 

Lime Creek Plant Combustion Turbine Units 1 and 2,

 

 

 

 

 

 

   Mason City, IA

 

Oil

 

72,526

 

 

Centerville Combustion Turbines, Centerville, IA

 

Oil

 

50,235

 

 

Montgomery Combustion Turbine Unit 1, Montgomery, MN

 

Oil

 

19,959

 

 

Diesel Stations, in IA/MN

 

Oil

 

18,594

 

 

   Total Oil

 

 

 

 

 

328,042

 

 

 

 

 

 

 

Emery Generating Station, Mason City, IA

 

Gas

 

559,480

 

 

Fox Lake Plant Units 1 and 3, Sherburn, MN

 

Gas

 

97,136

 

 

Burlington Combustion Turbines, Burlington, IA

 

Gas

 

65,423

 

 

Agency Street Combustion Turbines, West Burlington, IA

 

Gas

 

64,205

 

 

Grinnell Station, Grinnell, IA

 

Gas

 

43,318

 

 

Red Cedar Combustion Turbine, Cedar Rapids, IA

 

Gas

 

17,490

 

 

   Total Gas

 

 

 

 

 

847,052

 

 

 

 

 

 

 

   Total generating capability

 

 

 

 

 

3,074,241

 

All KWs shown below represent the 2006 summer generating capability.

 

(a)

Represents IPL’s 48% ownership interest in this 670,136 KW generating station, which is operated by IPL.

(b)

Represents IPL’s 25.695% ownership interest in this 644,000 KW generating station, which is operated by MidAmerican Energy Company (MidAmerican).

(c)

Represents IPL’s 28% ownership interest in this 515,000 KW generating station, which is operated by MidAmerican.

(d)

Represents IPL’s 4% ownership interest in this 700,000 KW generating station, which is operated by MidAmerican.

 

At Dec. 31, 2006, IPL owned approximately 20,037 miles of overhead electric distribution line and 2,391 miles of underground electric distribution cable, as well as 7,163 miles of electric transmission line and 795 distribution and transmission substations substantially all located in Iowa, Minnesota and Illinois. IPL’s gas properties consist primarily of mains and services, meters, regulating and gate stations and other related distribution equipment. At Dec. 31, 2006, IPL’s gas distribution facilities included approximately 4,923 miles, 230 miles and 256 miles of gas mains located in Iowa, Minnesota and Illinois, respectively. IPL’s other property included in “Other plant in service” on its Consolidated Balance Sheets consists primarily of operating and storeroom facilities, vehicles, computer hardware and software, communication equipment and other miscellaneous tools and equipment. IPL’s properties are suitable for their intended use and substantially all are held subject to the liens of indentures relating to IPL’s Collateral Trust Bonds and First Mortgage Bonds. Refer to Notes 17, 18 and 22 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of IPL’s utility operations in Illinois which were sold in February 2007, IPL’s interest in DAEC which was sold in January 2006 and IPL’s proposed sale of its electric transmission assets, respectively. Refer to “Strategic Overview” in MDA for discussion of Alliant Energy’s utility generation plan.

19

WPL

WPL’s electric generating stations at Dec. 31, 2006, were as follows:

 

Name and Location

 

Primary Fuel

 

2006 Summer

of Station

 

Type

 

Capability in KWs

 

 

 

 

 

 

 

 

Columbia Energy Center, Portage, WI

 

Coal

 

512,709

(a)

 

 

Edgewater Generating Station #5, Sheboygan, WI

 

Coal

 

308,552

(b)

 

 

Nelson Dewey Generating Station, Cassville, WI

 

Coal

 

220,518

 

 

 

Edgewater Generating Station #4, Sheboygan, WI

 

Coal

 

218,004

(c)

 

 

Edgewater Generating Station #3, Sheboygan, WI

 

Coal

 

75,270

 

 

 

  Total Coal

 

 

 

 

 

1,335,053

 

 

 

 

 

 

 

 

 

South Fond du Lac Combustion Turbine

 

 

 

 

 

 

 

Units 2 and 3, Fond du Lac, WI

 

Gas

 

162,807

 

 

 

Rock River Generating Station, Beloit, WI

 

Gas

 

155,049

 

 

 

Rock River Combustion Turbine, Beloit, WI

 

Gas

 

146,169

 

 

 

Blackhawk Generating Station, Beloit, WI

 

Gas

 

51,623

 

 

 

Sheepskin Combustion Turbine, Edgerton, WI

 

Gas

 

36,835

 

 

 

   Total Gas

 

 

 

 

 

552,483

 

 

 

 

 

 

 

 

 

Prairie du Sac Hydro Plant, Prairie du Sac, WI

 

Hydro

 

16,000

 

 

 

Kilbourn Hydro Plant, Wisconsin Dells, WI

 

Hydro

 

8,000

 

 

 

   Total Hydro

 

 

 

 

 

24,000

 

 

 

 

 

 

 

 

 

   Total generating capability

 

 

 

 

 

1,911,536

 

 

All KWs shown below represent the 2006 summer generating capability.

 

(a)

Represents WPL’s 46.2% ownership interest in this 1,109,759 KW generating station, which is operated by WPL.

(b)

Represents WPL’s 75% ownership interest in this 411,402 KW generating station, which is operated by WPL.

(c)

Represents WPL’s 68.2% ownership interest in this 319,654 KW generating station, which is operated by WPL.

 

At Dec. 31, 2006, WPL owned approximately 16,914 miles of overhead electric distribution line and 4,005 miles of underground electric distribution cable, as well as 219 distribution substations, all located in Wisconsin and Illinois. In 2001, WPL’s transmission assets were transferred to ATC. WPL’s gas properties consist primarily of mains and services, meters, regulating and gate stations and other related distribution equipment. At Dec. 31, 2006, WPL’s gas distribution facilities included approximately 3,833 miles and 163 miles of gas mains located in Wisconsin and Illinois, respectively. WPL’s other property included in “Other plant in service” on its Consolidated Balance Sheets consists primarily of operating and storeroom facilities, vehicles, computer hardware and software, communication equipment and other miscellaneous tools and equipment. WPL’s properties are suitable for their intended use and substantially all are held subject to the lien of WPL’s First Mortgage Bond indenture. Refer to Note 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for discussion of WPL’s utility operations in Illinois which were sold in February 2007. Refer to “Strategic Overview” in MDA for further discussion of Alliant Energy’s utility generation plan. Refer to Note 3(b) of WPL’s “Notes to Consolidated Financial Statements” for information regarding WPL’s lease of SFEF from Resources’ Non-regulated Generation business.

20

Resources

Resources’ principal properties included in “Property, plant and equipment - Non-regulated and other” on Alliant Energy’s Consolidated Balance Sheet at Dec. 31, 2006 were as follows:

 

Non-regulated Generation - includes two principal electric generating facilities: 1) a 309 MW, simple cycle, natural gas-fired facility in Neenah, Wisconsin, which is tolled through May 2008; and 2) a 300 MW, simple cycle, natural gas-fired facility near Sheboygan Falls, Wisconsin, which is leased to WPL. In addition, Industrial Energy Applications, Inc. owns standby generation and steam production systems substantially all located in Iowa.

 

Other non-regulated investments - Transportation owns a short-line railway in Iowa with 112 railroad track miles, 11 active locomotives and 150 railcars; and a barge terminal on the Mississippi River. In addition, other non-regulated investments include two corporate airplanes and modest real estate investments.

 

Corporate Services

Corporate Services’ property included in “Property, plant and equipment - Non-regulated and other” on Alliant Energy’s Consolidated Balance Sheet at Dec. 31, 2006 consisted primarily of computer software.

 

ITEM 3. LEGAL PROCEEDINGS

 

Alliant Energy - None.

 

IPL - None.

 

WPL - None.

 

In addition to any legal proceedings discussed in Alliant Energy’s, IPL’s and WPL’s reports to the SEC, Alliant Energy, IPL and WPL are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material adverse effect on Alliant Energy’s, IPL’s or WPL’s financial condition, results of operations or cash flows.

 

Environmental Matters

Additional information required by Item 3 with regards to environmental matters is included in “C. Information Relating to Utility Operations - Electric Utility Operations” in “Business,” “Liquidity and Capital Resources” in MDA and Note 12(e) of Alliant Energy’s “Notes to Consolidated Financial Statements,” which information is incorporated herein by reference.

 

Rate Matters

The information required by Item 3 with regards to rate matters is included in “B. Information Relating to Alliant Energy on a Consolidated Basis - Regulation” and “C. Information Relating to Utility Operations” in “Business,” Notes 1(b) and 2 of Alliant Energy’s “Notes to Consolidated Financial Statements” and “Rates and Regulatory Matters” in MDA, which information is incorporated herein by reference.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

EXECUTIVE OFFICERS OF THE REGISTRANTS

None of the executive officers for Alliant Energy, IPL or WPL listed below are related to any member of the Board of Directors or nominee for director or any other executive officer. All of the executive officers have no definite terms of office and serve at the pleasure of the Board of Directors. The executive officers of Alliant Energy, IPL and WPL as of the date of this filing are as follows (numbers following the names represent the officer’s age as of Dec. 31, 2006):

 

Executive Officers of Alliant Energy

William D. Harvey, 57, was elected Chairman of the Board effective February 2006 and President and Chief Executive Officer (CEO) effective July 2005 and has been a board member since January 2005. He previously served as President and Chief Operating Officer (COO) since 2004 and Executive Vice President (EVP)-Generation from 1998 to 2003.

21

Eliot G. Protsch, 53, was elected Senior EVP and Chief Financial Officer (CFO) effective January 2004. He previously served as EVP and CFO since September 2003 and as EVP-Energy Delivery from 1998 to September 2003.

Barbara J. Swan, 55, was elected EVP and General Counsel effective October 1998.

Thomas L. Aller, 57, was elected Senior Vice President-Energy Delivery effective January 2004. He previously served as interim EVP-Energy Delivery since September 2003 and as Vice President (VP)-Investments at Resources from 1998 to 2003.

Dundeana K. Doyle, 48, was elected VP-Strategy and Regulatory Affairs effective January 2007. She previously served as VP-Strategy and Risk since May 2003 and VP-Infrastructure Security from 2002 to May 2003.

Thomas L. Hanson, 53, was elected VP-Controller and Chief Accounting Officer (CAO) effective January 2007. He previously served as VP and Treasurer since April 2002 and Managing Director-Generation Services from 2001 to April 2002.

Patricia L. Kampling, 47, was elected VP and Treasurer effective January 2007. She previously served as VP-Finance since August 2005 and as Treasurer of IPSCO Inc. from September 2004 to August 2005 and Senior VP and CFO of Exelon Enterprises Company, LLC (a subsidiary of Exelon Corporation) from 2000 to 2002.

Peggy Howard Moore, 56, was elected VP-Finance effective January 2007. She previously served as VP-Customer Service and Operations Support since 2004 and as Managing Director-Customer Information and Services from 2002 to 2004.

 

Executive Officers of IPL

William D. Harvey, 57, was elected Chairman of the Board effective February 2006 and CEO effective July 2005 and has been a board member since January 2005. He previously served as COO since 2004 and EVP-Generation from 1998 to 2003.

Thomas L. Aller, 57, was elected President effective January 2004.

Eliot G. Protsch, 53, was elected CFO effective January 2004. He previously served as EVP and CFO since September 2003 and also as President from 1998 through 2003.

Barbara J. Swan, 55, was elected EVP and General Counsel effective October 1998.

Dundeana K. Doyle, 48, was elected VP-Strategy and Regulatory Affairs effective January 2007.

Thomas L. Hanson, 53, was elected VP-Controller and CAO effective January 2007.

Patricia L. Kampling, 47, was elected VP and Treasurer effective January 2007.

Peggy Howard Moore, 56, was elected VP-Finance effective January 2007.

 

Executive Officers of WPL

William D. Harvey, 57, was elected Chairman of the Board effective February 2006 and CEO effective July 2005 and has been a board member since January 2005. He previously served as COO since 2004 and President from 1998 to 2003.

Barbara J. Swan, 55, was elected President effective January 2004. She previously served as EVP and General Counsel since 1998.

Eliot G. Protsch, 53, was elected CFO effective January 2004. He previously served as EVP and CFO since September 2003 and EVP-Energy Delivery from 1998 to September 2003.

Thomas L. Aller, 57, was elected Senior VP-Energy Delivery effective January 2004.

Dundeana K. Doyle, 48, was elected VP-Strategy and Regulatory Affairs effective January 2007.

Thomas L. Hanson, 53, was elected VP-Controller and CAO effective January 2007.

Patricia L. Kampling, 47, was elected VP and Treasurer effective January 2007.

Peggy Howard Moore, 56, was elected VP-Finance effective January 2007.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

Alliant Energy’s common stock trades on the New York Stock Exchange under the symbol “LNT.” Quarterly sales price ranges and dividends with respect to Alliant Energy’s common stock were as follows:

 

 

2006

 

2005

Quarter

High

 

Low

 

Dividend

 

High

 

Low

 

Dividend

First

$33.62

 

$27.79

 

$0.2875

 

$28.59

 

$25.80

 

$0.2625

Second

35.17

 

30.94

 

0.2875

 

28.26

 

25.56

 

0.2625

Third

37.16

 

33.91

 

0.2875

 

30.58

 

27.85

 

0.2625

Fourth

39.96

 

35.69

 

0.2875

 

30.38

 

25.79

 

0.2625

Year

39.96

 

27.79

 

1.15

 

30.58

 

25.56

 

1.05

22

Stock closing price at Dec. 31, 2006: $37.77

 

Although Alliant Energy’s practice has been to pay cash dividends on its common stock quarterly, the timing of payment and amount of future dividends are necessarily dependent upon future earnings, capital requirements, general financial condition, general business conditions, the ability of Alliant Energy’s subsidiaries to pay dividends, approval from its Board of Directors and other factors. In December 2006, Alliant Energy announced an increase in its 2007 annual common stock dividend from $1.15 per share to $1.27 per share, which is equivalent to a quarterly rate of $0.3175 per share, beginning with the Feb. 15, 2007 dividend payment. Payment of future 2007 quarterly dividends is subject to the actual dividend declaration by Alliant Energy’s Board of Directors.

 

At Dec. 31, 2006, there were approximately 43,826 holders of record of Alliant Energy’s stock, including holders through Alliant Energy’s Shareowner Direct Plan.

 

Alliant Energy is the sole common shareowner of all 13,370,788 shares of IPL common stock currently outstanding. During 2006 and 2005, IPL paid dividends on its common stock of $220 million and $110 million, respectively, to Alliant Energy. The 2006 dividend amount includes a $110 million dividend to Alliant Energy pursuant to the IUB order approving the sale of DAEC. In accordance with the IUB order authorizing the IPL merger, IPL must inform the IUB if its common equity ratio falls below 42% of total capitalization. Alliant Energy is the sole common shareowner of all 13,236,601 shares of WPL common stock currently outstanding. During 2006 and 2005, WPL paid dividends on its common stock of $92 million and $90 million, respectively, to Alliant Energy. In its July 2005 rate order, the PSCW stated WPL may not pay annual common stock dividends, including pass-through of subsidiary dividends, in excess of $92 million to Alliant Energy if WPL’s actual average common equity ratio, on a financial basis, is or will fall below the test year authorized level of 53.14%. WPL’s dividends are also restricted to the extent that such dividend would reduce the common stock equity ratio to less than 25%. IPL and WPL each have common stock dividend payment restrictions based on the terms of their outstanding preferred stock. In addition, IPL has dividend payment restrictions based on its bond indentures. At Dec. 31, 2006, IPL and WPL were in compliance with all such dividend restrictions. In its January 2007 rate order, the PSCW stated WPL may not pay annual common stock dividends, including pass-through of subsidiary dividends, in excess of $91 million to Alliant Energy if WPL’s actual average common equity ratio, on a financial basis, is or will fall below the test year authorized level of 51.0%.

 

A summary of Alliant Energy common stock repurchases for the quarter ended Dec. 31, 2006 was as follows:

 

 

 

 

 

 

 

 

 

Maximum Number (or

 

 

 

 

 

 

Total Number of

 

Approximate Dollar

 

 

Total Number

 

Average Price

 

Shares Purchased as

 

Value) of Shares That

 

 

of Shares

 

Paid Per

 

Part of Publicly

 

May Yet Be Purchased

Period

 

Purchased (a)

 

Share

 

Announced Plan (b)

 

Under the Plan (a) (b)

Oct. 1 to Oct. 31

 

1,007

 

$37.29

 

--

 

         $95 million

Nov. 1 to Nov. 30

 

2,256

 

39.29

 

--

 

           95 million

Dec. 1 to Dec. 31

 

380

 

38.55

 

--

 

          95 million

Total

 

3,643

 

38.66

 

--

 

 

 

(a)

Represents shares of Alliant Energy common stock purchased on the open market and held in a rabbi trust under the Alliant Energy Key Employee Deferred Compensation Plan (KEDCP) and the Alliant Energy Deferred Compensation Plan for Directors (DDCP). There is no limit on the number of shares of Alliant Energy common stock that may be held under the KEDCP or the DDCP, which currently do not have expiration dates.

(b)

On Aug. 3, 2006, Alliant Energy announced its Board of Directors approved a plan to repurchase up to $200 million of its common stock. In the third quarter of 2006, Alliant Energy repurchased 2.9 million shares of its common stock on the open market for $105 million. On Feb. 8, 2007, Alliant Energy announced its Board of Directors approved a plan to repurchase an additional $200 million of its common stock, for a total of $400 million. These authorizations expire on Dec. 31, 2007.

23

ITEM 6. SELECTED FINANCIAL DATA

Alliant Energy


Financial Information 2006 (a) 2005 (a) 2004 (a) 2003 2002

  (dollars in millions, except per share data)
Income Statement Data:  
     Operating revenues   $3,359 .4 $3,279 .6 $2,804 .8 $2,726 .0 $2,330 .0
     Income from continuing operations  338 .3 56 .4 218 .4 151 .7 85 .0
     Income (loss) from discontinued operations, net of tax  (22 .6) (64 .1) (72 .9) 37 .8 21 .9
     Income (loss) before cumulative effect of changes in 
        accounting principles  315 .7 (7 .7) 145 .5 189 .5 106 .9
     Cumulative effect of changes in accounting 
        principles, net of tax  --   --   --   (6 .0) --  
     Net income (loss)  315 .7 (7 .7) 145 .5 183 .5 106 .9

Common Stock Data:  
     Earnings per average common share (basic): 
          Income from continuing operations  $2 .90 $0 .48 $1 .93 $1 .50 $0 .94
          Income (loss) from discontinued operations  ($0 .20) ($0 .55) ($0 .65) $0 .37 $0 .24
          Cumulative effect of changes in accounting principles  $--   $--   $--   ($0 .06) $--  
          Net income (loss)  $2 .70 ($0 .07) $1 .28 $1 .81 $1 .18
     Earnings per average common share (diluted): 
          Income from continuing operations  $2 .89 $0 .48 $1 .92 $1 .50 $0 .94
          Income (loss) from discontinued operations  ($0 .20) ($0 .55) ($0 .64) $0 .37 $0 .24
          Cumulative effect of changes in accounting principles  $--   $--   $--   ($0 .06) $--  
          Net income (loss)  $2 .69 ($0 .07) $1 .28 $1 .81 $1 .18
     Common shares outstanding at year-end (000s)  116, 127 117, 036 115, 742 110, 963 92, 304
     Dividends declared per common share  $1 .15 $1 .05 $1 .0125 $1 .00 $2 .00
     Market value per share at year-end  $37 .77 $28 .04 $28 .60 $24 .90 $16 .55
     Book value per share at year-end  $22 .83 $20 .85 $22 .13 $21 .37 $19 .89
     Market capitalization at year-end  $4,386 .1 $3,281 .7 $3,310 .2 $2,763 .0 $1,527 .6

Other Selected Financial Data:  
     Cash flows from operating activities (continuing operations)  $420 .7 $600 .2 $498 .2 $438 .6 $481 .1
     Construction and acquisition expenditures (continuing operations)  $397 .4 $527 .6 $633 .4 $815 .6 $624 .0
     Total assets at year-end  $7,084 .1 $7,733 .1 $8,275 .2 $7,797 .5 $7,848 .2
     Long-term obligations, net  $1,520 .7 $2,147 .0 $2,502 .0 $2,307 .8 $2,770 .3
     Times interest earned before income taxes (b)  4.84X   1.13X   2.86X   2.19X   1.78X  
     Capitalization ratios: 
          Common equity  58 % 48 % 48 % 48 % 37 %
          Preferred stock  5 % 5 % 5 % 5 % 4 %
          Long- and short-term debt  37 % 47 % 47 % 47 % 59 %
 
               Total  100 % 100 % 100 % 100 % 100 %
 

(a)   Refer to "Alliant Energy Results of Operations" in MDA for discussion of the 2006, 2005 and 2004 results of operations.
(b)   Represents the sum of income from continuing operations before income taxes plus preferred dividend requirements of subsidiaries plus interest expense divided by interest expense. The calculation does not consider the "Loss on early extinguishment of debt" that Alliant Energy has incurred as part of interest expense.

24

IPL

2006 (a)

 

2005 (a)

 

2004 (a)

 

2003

 

2002

 

(in millions)

 

 

 

 

 

 

 

 

 

 

Operating revenues

$1,754.8

 

$1,681.7

 

$1,459.6

 

$1,371.2

 

$1,242.4

Earnings available for common stock

157.0

 

149.7

 

110.3

 

87.1

 

88.0

Cash dividends declared on common stock

219.8

 

109.9

 

102.0

 

89.1

 

81.8

Cash flows from operating activities

272.2

 

332.0

 

347.6

 

322.4

 

250.0

Total assets

3,628.6

 

3,976.6

 

3,869.1

 

3,621.0

 

3,192.8

Long-term obligations, net

895.0

 

993.4

 

1,038.9

 

910.5

 

902.2

 

(a) Refer to “IPL Results of Operations” in MDA for a discussion of the 2006, 2005 and 2004 results of operations.

 

Alliant Energy is the sole common shareowner of all 13,370,788 shares of IPL’s common stock outstanding. As such, earnings per share data is not disclosed herein.

 

WPL

2006 (a)

 

2005 (a)

 

2004 (a)

 

2003

 

2002

 

(in millions)

 

 

 

 

 

 

 

 

 

 

Operating revenues

$1,401.3

 

$1,409.6

 

$1,209.8

 

$1,217.0

 

$989.5

Earnings available for common stock

102.0

 

101.8

 

110.4

 

111.6

 

77.6

Cash dividends declared on common stock

92.2

 

89.8

 

89.0

 

70.6

 

59.6

Cash flows from operating activities

162.6

 

176.6

 

199.3

 

138.5

 

223.9

Total assets

2,699.1

 

2,667.6

 

2,656.1

 

2,469.3

 

2,335.1

Long-term obligations, net

403.8

 

403.7

 

491.3

 

453.5

 

523.3

 

(a) Refer to “WPL Results of Operations” in MDA for a discussion of the 2006, 2005 and 2004 results of operations.

 

Alliant Energy is the sole common shareowner of all 13,236,601 shares of WPL’s common stock outstanding. As such, earnings per share data is not disclosed herein.

25

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

 

RESULTS OF OPERATIONS (MDA)

 

 

This MDA includes information relating to Alliant Energy Corporation (Alliant Energy), Interstate Power and Light Company (IPL) and Wisconsin Power and Light Company (WPL), as well as Alliant Energy Resources, Inc. (Resources) and Alliant Energy Corporate Services, Inc. (Corporate Services). Where appropriate, information relating to a specific entity has been segregated and labeled as such. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report. Unless otherwise noted, all “per share” references in MDA refer to earnings per diluted share.

 

FORWARD-LOOKING STATEMENTS

 

Statements contained in this report that are not of historical fact are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include: federal and state regulatory or governmental actions, including the impact of energy-related legislation in Congress, federal tax legislation and regulatory agency orders; the ability to obtain adequate and timely rate relief to allow for, among other things, the recovery of operating costs and deferred expenditures, the earning of reasonable rates of return and the payment of expected levels of dividends; current or future litigation, regulatory investigations, proceedings or inquiries; economic and political conditions in Alliant Energy’s service territories; issues related to the availability of Alliant Energy’s generating facilities and the supply and delivery of fuel and purchased electricity and price thereof, including the ability to recover purchased power, fuel and fuel-related costs through rates in a timely manner; the impact higher fuel and fuel-related prices and other economic conditions may have on customer demand for utility services, customers’ ability to pay utility bills and Alliant Energy’s ability to collect unpaid utility bills; unanticipated issues in connection with Alliant Energy’s construction of new generating facilities; unanticipated construction and acquisition expenditures; costs associated with Alliant Energy’s environmental remediation efforts and with environmental compliance generally; weather effects on results of operations; financial impacts of Alliant Energy’s hedging strategies, including the impact of weather hedges on Alliant Energy’s utility earnings; issues related to electric transmission, including operating in the Midwest Independent System Operator (MISO) energy market, the impact of potential future billing adjustments from MISO, recovery of costs incurred, and legislative and regulatory issues affecting such transmission; unanticipated issues related to the Calpine Corporation (Calpine) bankruptcy that could adversely impact Alliant Energy’s purchased power agreements (PPAs); the direct or indirect effects resulting from terrorist incidents or responses to such incidents; unplanned outages at Alliant Energy’s generating facilities and risks related to recovery of incremental costs through rates; continued access to the capital markets; material declines in the fair market value of, or expected cash flows from, Alliant Energy’s investments; inflation and interest rates; Alliant Energy’s ability to achieve its dividend payout ratio goal; developments that adversely impact Alliant Energy’s ability to implement its strategic plan, including Alliant Energy’s ability to complete its proposed or potential divestitures of various businesses and investments, including IPL’s electric transmission assets and Alliant Energy’s investment in Mexico, on a timely basis, for anticipated proceeds and with the requested regulatory treatment of any gains resulting from the sale of IPL’s electric transmission assets; the incurrence of any material post-closing adjustments related to any of Alliant Energy’s past asset divestitures; employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages; access to technological developments; the impact of necessary accruals or adjustments for the terms of Alliant Energy’s short- and long-term incentive compensation plans; the effect of accounting pronouncements issued periodically by standard-setting bodies; Alliant Energy’s ability to continue cost controls and operational efficiencies; Alliant Energy’s ability to identify and successfully complete potential development projects; the ability to utilize any tax capital losses and net operating losses generated to-date and those that may be generated in the future, before they expire; the ability to successfully complete ongoing tax audits and appeals with no material impact on Alliant Energy’s earnings and cash flows; and factors listed in “Risk Factors” in Item 1A and “Other Matters - Other Future Considerations.” Alliant Energy assumes no obligation, and disclaims any duty, to update the forward-looking statements in this report.

 

EXECUTIVE SUMMARY

 

Description of Business - Alliant Energy is an investor-owned public utility holding company, whose primary subsidiaries are IPL, WPL, Resources and Corporate Services. IPL is a public utility engaged principally in the generation, transmission, distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in selective markets in Iowa and Minnesota. WPL is a public utility engaged principally in the generation, distribution and sale of electric energy; and the purchase, distribution, transportation and sale of natural gas in selective markets in Wisconsin. Resources is the parent company for Alliant Energy’s non-regulated businesses. Corporate Services provides administrative services to Alliant Energy and its subsidiaries.

26

Alliant Energy manages three primary businesses as defined below: 1) utility business (IPL and WPL); 2) non-regulated businesses (Resources and subsidiaries); and 3) Alliant Energy parent and other.

 

Utility Business - IPL and WPL own a portfolio of electric generating facilities with a diversified fuel mix including coal, natural gas and renewable resources. The output from these generating facilities, supplemented with purchased power, is used to provide electric service to approximately 1 million electric customers in the upper Midwest. The utility business also procures natural gas from various suppliers to provide service to approximately 420,000 retail gas customers in the upper Midwest. Alliant Energy’s utility business is its primary source of earnings and cash flows. The earnings and cash flows from the utility business are sensitive to various external factors including, but not limited to, the impact of weather on electric and gas sales volumes, the amount and timing of rate relief approved by regulatory authorities and other factors listed in “Forward-Looking Statements.”

 

Non-regulated Businesses - Resources manages a relatively small portfolio of businesses through two distinct platforms: Non-regulated Generation (manages electric generating facilities) and other non-regulated investments (includes investments in environmental engineering and site remediation, transportation, construction management services for wind farms and several other modest investments, as well as a resort development in Mexico that Alliant Energy is divesting).

 

Alliant Energy Parent and Other - includes the operations of Alliant Energy (the parent holding company) as well as Corporate Services.

 

Summary of Historical Results of Operations - Alliant Energy’s earnings per average common share (EPS) were as follows:

 

2006

 

2005

 

2004

Income from continuing operations

$2.89

 

$0.48

 

$1.92

Loss from discontinued operations

(0.20)

 

(0.55)

 

(0.64)

Net income (loss)

$2.69

 

($0.07)

 

$1.28

 

Additional details regarding Alliant Energy’s net income (loss) were as follows (in millions):

 

 

2006

 

2005

 

2004

Continuing operations:

 

 

 

 

 

Utility

$259.0

 

$251.7

 

$221.4

Non-regulated (Resources)

69.0

 

(197.7)

 

4.0

Alliant Energy parent and other (taxes, interest

 

 

 

 

 

and administrative and general)

10.3

 

2.4

 

(7.0)

Income from continuing operations

338.3

 

56.4

 

218.4

Loss from discontinued operations

(22.6)

 

(64.1)

 

(72.9)

Net income (loss)

$315.7

 

($7.7)

 

$145.5

 

2006 vs. 2005 Summary - Increased earnings from Alliant Energy’s utility business in 2006 were primarily due to lower nuclear-related operating expenses resulting from the sales of its interests in its two nuclear facilities, the Duane Arnold Energy Center (DAEC) and the Kewaunee Nuclear Power Plant (Kewaunee), in January 2006 and July 2005, respectively, an under-recovery of retail fuel-related costs at WPL in 2005, impacts of an updated depreciation study implemented at IPL on Jan. 1, 2006 and higher weather-normalized retail electric and gas sales. These increases were substantially offset by higher nuclear-related capacity costs from purchased power agreements entered into with the new owners of DAEC and Kewaunee upon the sales of these facilities, higher incentive compensation-related expenses and the net impacts of weather and weather hedging activities on Alliant Energy’s electric margins. The improved results from continuing operations for Alliant Energy’s non-regulated businesses were largely due to after-tax, asset valuation charges of $202 million ($1.73 per share) recorded in 2005 related to Alliant Energy’s Brazil investments, which Alliant Energy sold in the first quarter of 2006, and an after-tax gain on the sale of Alliant Energy New Zealand Ltd. (AENZ) stock of $150 million ($1.28 per share) in 2006. These increases were partially offset by increased after-tax charges related to further debt reductions at Resources of $57 million ($0.48 per share) in 2006 compared to $34 million ($0.29 per share) in 2005. The increased earnings were also partially offset by after-tax foreign currency transaction losses of $13 million ($0.11 per share) incurred in 2006 associated with Alliant Energy’s New Zealand investments, $13 million ($0.11 per share) of income realized in 2005 related to adjustments of deferred income tax valuation allowances resulting from changes in Alliant Energy’s anticipated ability to utilize capital losses prior to their expiration, a $9 million after-tax loss ($0.08 per share) from the sale of steam turbine equipment in 2006 and tax adjustments recorded in 2006.

27

2005 vs. 2004 Summary - Higher earnings from Alliant Energy’s utility business in 2005 compared to 2004 were largely due to higher electric margins and $0.08 per share of earnings from the impact of issues resolved in a federal income tax audit. These items were partially offset by higher generation-related, depreciation and regulatory-related costs. Earnings from continuing operations at Alliant Energy’s non-regulated businesses were lower in 2005 compared to 2004 largely due to the asset valuation charges recorded in 2005 related to Alliant Energy’s Brazil investments and charges recorded in 2005 related to further debt reductions at Resources. These items were partially offset by improved operating results from Alliant Energy’s International and other businesses and the reversal of deferred income tax asset valuation allowances in 2005 resulting from a change in Alliant Energy’s anticipated ability to utilize capital losses prior to their expiration. The 2004 non-regulated results included an after-tax gain of $9 million ($0.08 per share) realized from the sale of Alliant Energy’s remaining interest in Whiting Petroleum Corporation (WPC) and after-tax charges of $5 million ($0.05 per share) related to early debt reductions at Resources.

 

Refer to “Alliant Energy Results of Operations,” “IPL Results of Operations” and “WPL Results of Operations” for additional details regarding the various factors impacting their respective earnings during 2006, 2005 and 2004.

 

STRATEGIC OVERVIEW

 

Summary - Alliant Energy is committed to maintaining sustained, long-term strong financial performance with a strong balance sheet and credit ratings. This strong financial performance will help ensure access to capital markets at reasonable costs as Alliant Energy embarks on a substantial infrastructure investment program described in “Utility Generation Plan” below. Alliant Energy believes it is well positioned to implement its strategic plan following the divestiture of numerous non-regulated and utility businesses discussed in “Business Divestitures” below.

 

Alliant Energy’s utility business is expected to provide the majority of Alliant Energy’s earnings and cash flows in the future and the larger share of its long-term earnings growth through investments in new utility generation, by earning returns authorized by regulators and by continuing its focus on controlling costs. Alliant Energy is utilizing a comprehensive Lean Six Sigma program to assist it in generating cost savings and operational efficiencies in both its utility and non-regulated businesses.

 

Utilities as Primary Business Platform - Alliant Energy’s utility business is the growth platform within its strategic plan, and is where Alliant Energy expects to invest substantially all of its capital in 2007 and 2008. Refer to “Liquidity and Capital Resources - Cash Flows From (Used For) Continuing Investing Activities - Construction and Acquisition Expenditures” for additional information regarding capital expenditure forecasts. The strategic plan for Alliant Energy’s utility operations is concentrated on: 1) building and maintaining the generation and infrastructure necessary to provide Alliant Energy’s utility customers with safe, reliable and environmentally sound energy service; 2) earning returns authorized by its regulators; 3) controlling costs to mitigate potential rate increases; and 4) completing the proposed sale of IPL’s electric transmission assets discussed in “Utility Business Divestitures” below.

 

Alliant Energy believes legislation passed in Iowa and Wisconsin provides utility companies in those states with the necessary rate making principles - and resulting increased regulatory and investment certainty - prior to making certain generation investments. These changes have enabled Alliant Energy to pursue additional generation investments in its utility business to serve its customers and to provide shareowners with greater certainty regarding the returns on these investments. Refer to “Rates and Regulatory Matters” for additional information regarding the progressive legislation.

 

Focused Approach to Non-regulated Operations - The strategic plan for Alliant Energy’s non-regulated operations involves maintaining a relatively small portfolio of lower-risk, mature businesses, which are accretive to earnings but not significant users of capital. Consistent with this strategic focus, Alliant Energy completed the divestiture of numerous non-regulated businesses in the past four years and expects to complete the divestiture of its remaining international investment in Mexico in 2007. Refer to “Non-regulated Business Divestitures” below for details of non-regulated asset divestiture activity in 2006 and to-date in 2007.

 

Utility Generation Plan - Alliant Energy’s current utility generation plan for the 2007 to 2013 time period reflects the need to increase base-load generation in both Iowa and Wisconsin. The proposed new generation is expected to meet increasing customer demand, reduce reliance on purchased power agreements and mitigate the impacts of potential future plant retirements. Alliant Energy will continue to purchase energy and capacity in the market and intends to remain a net

28

purchaser of both, but at a reduced level assuming the successful completion of these generation projects. The plan also reflects continued commitments to Alliant Energy’s energy efficiency and environmental protection programs. Alliant Energy continues to monitor developments related to state and federal renewable portfolio standards, environmental requirements for new generation and federal and state tax incentives. Alliant Energy reviews and updates, as deemed necessary and in accordance with regulatory requirements, its utility generation plan and expects to adjust its plan as needed to meet any of these standards or to react to any market factors increasing or decreasing the availability or cost effectiveness of the various renewable energy technologies and other alternatives to its utility generation plan. Alliant Energy’s current utility generation plan for the 2007 to 2013 time period is as follows (megawatts (MW)):

 

Owner or

 

 

 

 

 

 

 

Expected

 

 

Counterparty

 

 

 

Owned

 

Capacity

 

Commercial

 

 

to PPA

 

Generation Type

 

or PPA

 

(MW)

 

Operation Date

 

Notes

IPL and/or WPL

 

Wind

 

PPA

 

20-100

 

2007 - 2009

 

 

WPL

 

Wind

 

Owned

 

60-100

 

2008

 

(a)

IPL

 

Wind

 

Owned

 

100

 

2009

 

(b)

WPL

 

Wind

 

Owned

 

200

 

2009

 

(b)

WPL

 

Clean-coal technology (Base-load)

 

Owned

 

300

 

2012

 

(c)

IPL and/or WPL

 

Anaerobic digesters

 

PPA

 

3

 

2013

 

 

IPL

 

Clean-coal technology (Base-load)

 

Owned

 

250

 

2013 or 2014

 

(d)

 

(a)

In July 2006, WPL purchased the development rights for a 60 to 100 MW wind farm project located in Fond du Lac County, Wisconsin. In September 2006, WPL filed for approval from the Public Service Commission of Wisconsin (PSCW) to construct the wind farm and to specify in advance fixed financial parameters and rate making principles. In its regulatory application, WPL requested a return on common equity of 12.90% along with a capital structure which includes a 53% common equity ratio. WPL expects a decision from the PSCW in the first half of 2007. The expected commercial operation date is subject to the timing of pending regulatory approval and availability of wind turbines. Depending on the final model and size of wind turbines selected, WPL estimates the cost of the project will be between $160 million and $180 million.

(b)

Alliant Energy currently estimates the cost of these wind projects to be approximately $2.0 million per MW in current year dollars, excluding allowance for funds used during construction (AFUDC). WPL expects this additional wind generation will allow it to meet the initial phase of renewable energy standards in Wisconsin which were enacted in March 2006. IPL expects this additional wind generation, along with an additional 15 to 20 MW of renewable energy not yet planned, will be needed to meet the initial phase of renewable energy standards in Minnesota which were enacted in February 2007. Refer to “Rates and Regulatory Matters” for additional information regarding new laws in Wisconsin and Minnesota regarding renewable energy standards.

(c)

The preferred site of the new facility is adjacent to the Nelson Dewey Generating Station (Nelson Dewey) in Cassville, Wisconsin. In February 2007, WPL filed for approval from the PSCW to proceed with construction of the new facility and to specify in advance fixed financial parameters and rate making principles. In its regulatory application, WPL requested a return on common equity of 12.95% along with a capital structure which includes a 50% common equity ratio. WPL expects a decision from the PSCW in the first half of 2008. The current cost estimate for the new facility is $717 million in current year dollars and excludes AFUDC, if applicable. In addition, WPL anticipates expenditures of approximately $60 million primarily for the expansion of existing barge transportation facilities and the addition of rail transportation facilities that will also be utilized by the existing units. These cost estimates are also in current year dollars and exclude AFUDC, if applicable. Refer to “Liquidity and Capital Resources” for discussion of future environmental cost estimates for Nelson Dewey and other generating facilities.

(d)

The preferred site of the new facility is adjacent to the Sutherland Generating Station in Marshalltown, Iowa. IPL currently plans to own at least 250 MW of a proposed 600 MW facility and make the remaining capacity available to other utility partners. The facility is anticipated to cost IPL and its partners approximately $1 billion, in current year dollars. This estimate excludes expenditures for utility interconnections, certain project development costs and AFUDC. IPL expects to file for approval from the Iowa Utilities Board (IUB) to proceed with construction of the new facility and to specify in advance fixed financial parameters and rate making principles in mid-2007 and anticipates a decision from the IUB in 2008.

 

Alliant Energy currently has PPAs with Calpine subsidiaries related to the purchase of energy and capacity from the 460 MW RockGen Energy Center (RockGen), in Christiana, Wisconsin and the 603 MW (Alliant Energy leases 481 MW of this total capacity under its current PPA) Riverside Energy Center (Riverside) in Beloit, Wisconsin and has the option to purchase these two facilities in 2009 and 2013, respectively. For contingency planning purposes, Alliant Energy has requested proposals for WPL’s summer peaking power supply needs for the years 2007 through 2009 if RockGen becomes unavailable as a result of the Calpine bankruptcy proceeding. In addition, Alliant Energy has also requested longer-term proposals for either a PPA or the purchase of a facility to meet the peaking power supply needs of IPL and WPL beginning in 2008.

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Alliant Energy is pursuing responses from interested parties. Refer to Note 20 of Alliant Energy’s “Notes to Consolidated Financial Statements” and “Other Matters - Other Future Considerations - Calpine Bankruptcy” for additional information.

 

Business Divestitures - Alliant Energy completed the divestiture of numerous non-regulated and utility businesses during the last four years in order to strengthen its financial profile and narrow its strategic and risk profile. Proceeds from these divestitures have been and will be used primarily for debt reduction, common share repurchases, funding capital expenditures and general corporate purposes. The following includes various divestitures completed in 2006 and 2007 and certain planned divestitures for 2007.

 

Non-regulated Business Divestitures - In February 2007, Alliant Energy announced it entered into a definitive agreement to sell its investment in Mexico to an undisclosed buyer. The purchase price is subject to certain adjustments at closing. Pending satisfaction of the closing conditions, the transaction is expected to be completed at the end of the first quarter of 2007. At Dec. 31, 2006, the carrying value of Alliant Energy’s investment in Mexico was approximately $60 million.

 

In December 2006, Alliant Energy completed the sale of its interest in AENZ, which held Alliant Energy’s investments in New Zealand. After closing costs, the repayment of an intercompany loan with AENZ and post-closing adjustments, Alliant Energy realized net proceeds of $186 million from the sale of AENZ. During 2006, Alliant Energy completed the sale of its remaining seven generating facilities in China and received net proceeds of $82 million. In April 2006, Alliant Energy completed the sale of its two gas gathering pipeline systems and received net proceeds of $23 million. In January 2006, Alliant Energy completed the sale of its Brazil investments and received net proceeds of $150 million. Refer to Note 9(b) of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information regarding the sales of Alliant Energy’s investments in New Zealand and Brazil.

 

All of these non-regulated businesses (except for the New Zealand and Brazil investments) were reported as discontinued operations at Dec. 31, 2006. Alliant Energy’s New Zealand and Brazil investments were accounted for under the equity method of accounting therefore their results are not eligible to be reclassified as discontinued operations. The 2006 results from the Brazil and New Zealand investments were ($0.02) and $1.22 per share, respectively, and are reflected in Alliant Energy’s consolidated EPS from continuing operations. Refer to Note 17 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information regarding Alliant Energy’s discontinued operations.

 

Utility Business Divestitures - In January 2007, IPL announced it signed a definitive agreement to sell its electric transmission assets located in Iowa, Minnesota and Illinois to ITC Midwest LLC (ITC) for approximately $750 million in cash, subject to various satisfactory regulatory approvals. The purchase price is subject to adjustments at closing based on the value of the net assets transferred as of the closing date and the assumption by ITC of certain liabilities of IPL. IPL anticipates the estimated net proceeds from the sale, after taxes, transaction-related costs and regulatory outcomes, of $475 million to $525 million will be used for funding infrastructure development plans, debt reduction and general corporate purposes. IPL expects the transaction to be concluded late in the fourth quarter of 2007. Refer to Note 22 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information on this proposed sale.

 

In February 2007, IPL and WPL completed the sale of their respective electric distribution and gas properties in Illinois and received total net proceeds of $51 million. In July 2006, WPL completed the sale of the water utility in South Beloit, Illinois and received net proceeds of $4 million. In January 2006, IPL completed the sale of its 70% ownership interest in DAEC and certain related assets for $331 million in net proceeds. Refer to Note 18 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information on the DAEC sale.

 

As of Dec. 31, 2006, none of these divested utility businesses have been reported as discontinued operations.

 

RATES AND REGULATORY MATTERS

 

Overview - Alliant Energy has two utility subsidiaries, IPL and WPL. Alliant Energy’s utility subsidiaries are currently subject to federal regulation by the Federal Energy Regulatory Commission (FERC), which has jurisdiction over wholesale electric rates, electric transmission and certain natural gas facilities, and state regulation in Iowa, Wisconsin and Minnesota for retail utility rates and standards of service. Such regulatory oversight also covers IPL’s and WPL’s plans for construction and financing of new generation facilities and related activities.

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Recent Utility Rate Cases - Details of Alliant Energy’s rate cases impacting its historical and future results of operations are as follows (dollars in millions; Electric (E); Gas (G); Water (W); To Be Determined (TBD); Not Applicable (N/A); Fuel-related (F-R); fourth quarter (Q4)):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected

 

Return

 

 

 

 

 

 

 

 

 

 

Interim

 

Interim

 

Final

 

Final

 

Final

 

on

 

 

 

 

Utility

 

Filing

 

Increase

 

Increase

 

Effective

 

Increase

 

Effective

 

Effective

 

Common

 

 

Case

 

Type

 

Date

 

Requested

 

Granted (a)

 

Date

 

Granted (a)

 

Date

 

Date

 

Equity

 

Notes

WPL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

E

 

9/06

 

$9

 

$9

 

6/07

 

TBD

 

TBD

 

9/07

 

N/A

 

(b)

2007 retail

 

E/G

 

3/06

 

96

 

N/A

 

N/A

 

$34

 

1/07

 

N/A

 

10.80%

 

(c)

2005 retail (F-R)

 

E

 

8/05

 

96

 

96

 

Q4 ‘05

 

54

 

9/06

 

N/A

 

N/A

 

(d)

2005 retail (F-R)

 

E

 

3/05

 

26

 

26

 

4/05

 

26

 

7/05

 

N/A

 

N/A

 

 

2005/2006 retail

 

E/G

 

9/04

 

63

 

N/A

 

N/A

 

21

 

7/05

 

N/A

 

11.50%

 

 

Wholesale

 

E

 

8/04

 

12

 

12

 

1/05

 

8

 

1/05

 

N/A

 

N/A

 

(e)

2004 retail (F-R)

 

E

 

2/04

 

16

 

16

 

3/04

 

10

 

10/04

 

N/A

 

N/A

 

 

2004 retail

 

E/G/W

 

3/03

 

87

 

--

 

N/A

 

14

 

1/04

 

N/A

 

12.00%

 

 

Wholesale

 

E

 

3/03

 

5

 

5

 

7/03

 

5

 

2/04

 

N/A

 

N/A

 

 

IPL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MN retail

 

E

 

5/05

 

5

 

3

 

7/05

 

1

 

5/06

 

N/A

 

10.39%

 

(f)

IA retail

 

G

 

4/05

 

19

 

13

 

4/05

 

14

 

11/05

 

N/A

 

10.40%

 

 

IA retail

 

E

 

3/04

 

149

 

98

 

6/04

 

107

 

2/05

 

N/A

 

(i)

 

 

MN retail

 

E

 

5/03

 

5

 

2

 

7/03

 

1

 

9/04

 

N/A

 

11.25%

 

 

(i) Emery Generating Station (Emery) - 12.23% and Other - 10.7%

 

(a)

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.

(b)

In December 2006, WPL received an order from FERC authorizing a $9 million interim increase effective in June 2007 related to WPL’s request to implement a formula rate structure for its wholesale electric customers. The proposed rate structure uses formulas based on historical data for capacity costs and non-fuel operations and maintenance costs, which adjust annually, and for variable fuel costs, which adjust monthly with a fuel adjustment clause, to determine applicable wholesale rates. Final rates approved by FERC may result from a settlement process or fully litigated process.

(c)

The final increase granted was lower than the increase requested largely due to a decrease in forecasted fuel and purchased energy costs for the 2007 test period. In addition, the PSCW approved a regulatory capital structure with 54% equity (compared to 59% requested), a return on common equity of 10.80% (compared to 11.20% requested) and lengthened certain regulatory asset amortization periods. The regulatory capital structure approved by the PSCW was determined by adjusting WPL’s financial capital structure by approximately $200 million (compared to $330 million requested) of imputed debt largely from the Kewaunee and Riverside PPAs. The lower imputed debt adjustment was primarily the result of the PSCW denying WPL’s request to include the Sheboygan Falls Energy Facility (SFEF) lease in the regulatory capital structure calculation. Lastly, the PSCW adjusted WPL's AFUDC recovery rate for future retail jurisdiction construction projects from 15.1% to 9.0%.

(d)

In September 2006, the PSCW approved a settlement agreement submitted by WPL and interveners that established final fuel-related rates at a level reflective of actual fuel costs incurred from July 1, 2005 through June 30, 2006. The approval also allowed previously deferred, incremental purchased power energy costs associated with coal conservation efforts at WPL due to coal delivery disruptions to be included in the actual fuel costs and resolved all issues in the rate case regarding risk management activities and forecasting methodologies. WPL refunded $36 million to customers in October 2006 related to amounts collected in excess of final rates through June 2006. As part of the settlement, WPL also agreed to refund any over-collection of fuel costs in the second half of 2006 which WPL has estimated at $2 million. WPL fully reserved estimated refunds to customers at Dec. 31, 2006.

(e)

In April 2006, FERC issued the final written order approving the $8 million annual rate increase included in WPL’s settlement agreement with its wholesale customers. Final rates were applied to all service rendered on and after Jan. 1, 2005. Amounts collected in excess of the final rates were refunded to customers, with interest, in June 2006.

(f)

Amounts collected in excess of the final rates were refunded to customers, with interest, in July 2006.

 

With the exception of recovering a return on Emery, which was a large component of IPL’s 2004 retail Iowa electric rate case, and on other additions to IPL’s and WPL’s infrastructure, a significant portion of the rate increases included in the above table reflect the recovery of increased costs incurred or expected to be incurred by IPL and WPL. Thus, these increases in revenues are not expected to result in a significant increase in net income.

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Rate-making Principles for New Electric Generating Facilities - Iowa and Wisconsin each have laws (HF 577 in Iowa and Act 7 in Wisconsin) that allow a public utility that proposes to purchase or construct an electric generating facility in its respective state to apply to its state regulatory commission for an order that specifies in advance the rate making principles that the state regulatory commission will apply to the electric generating facility costs in future rate making proceedings. These laws are designed to give utilities in these states more regulatory certainty, including providing utilities with a fixed rate of return and recovery period for these investments, when financing electric generation projects. IPL and WPL plan to utilize the rate making principles included in HF 577 and Act 7, respectively, for the electric generation facilities included in Alliant Energy’s Utility Generation Plan. Refer to “Strategic Overview - Utility Generation Plan” for additional details of Alliant Energy’s Utility Generation Plan including discussion of WPL’s recent filings requesting approval to construct its wind generating facility in Fond du Lac County, Wisconsin and coal-fired generating facility in Cassville, Wisconsin.

 

New electric generating facilities require large outlays of capital and long periods of time to construct resulting in significant financing costs. Financing costs incurred by utilities during construction are generally included as part of the construction work in process (CWIP) cost of the new generating facility through accruals of AFUDC. Rate-making principles in Iowa provide IPL the ability to recover these financing costs after the asset is placed in service. In recent base rate cases, the PSCW has authorized WPL to recover 50% of these financing costs during construction by including that portion of the construction costs in net investment rate base and to recover the other 50% of these financing costs after the asset is placed in service. In its 2007 retail rate case, WPL requested the PSCW to authorize that 100% of CWIP costs related to new electric generating facilities be included in net investment rate base allowing recovery of these costs during construction of these facilities as opposed to after they are placed in service. In January 2007, the PSCW denied WPL’s request because the new electric generating facilities had not yet received the required PSCW approval. WPL will continue to seek recovery of financing costs by inclusion of 100% of CWIP costs in net investment rate base in future rate proceedings.

 

Lastly, new electric generating facilities require material expenditures for planning and siting these facilities prior to receiving approval from regulatory commissions to begin construction. These expenditures are commonly referred to as pre-certification costs and pre-construction costs. WPL has received approval from the PSCW to defer pre-certification costs and pre-construction costs related to its wind generating facility in Fond du Lac County, Wisconsin and coal-fired generating facility in Cassville, Wisconsin.

 

Utility Fuel Cost Recovery - IPL’s retail electric and gas tariffs and WPL’s wholesale electric tariffs provide for subsequent adjustments to its rates for changes in commodity costs thereby eliminating price risk for prudently incurred commodity costs. WPL’s retail gas tariffs provide for subsequent adjustments to its natural gas rates for changes in the current monthly natural gas commodity price index. Also, WPL currently has a gas performance incentive which includes a sharing mechanism whereby starting in January 2007, 35% of all gains and losses relative to current commodity prices, as well as other benchmarks, are retained by WPL, with 65% refunded to or recovered from customers. Such rate mechanisms, significantly reduce commodity price risk associated with IPL’s retail electric and retail gas margins and WPL’s wholesale electric and retail gas margins. WPL’s retail electric margins, however, are more exposed to the impact of changes in commodity prices due largely to the current retail recovery mechanisms in place in Wisconsin for fuel-related costs as discussed below.

 

WPL’s Retail Electric Fuel-related Cost Recovery - WPL’s retail electric rates are based on forecasts of forward-looking test year periods and include estimates of future monthly fuel-related costs (includes fuel and purchased energy costs) anticipated during the test year. During each electric retail rate proceeding, the PSCW sets fuel monitoring ranges based on the forecasted fuel-related costs used to determine rates in such proceeding. If WPL’s actual fuel-related costs fall outside these fuel monitoring ranges, the PSCW can authorize an adjustment to future retail electric rates.

 

The fuel monitoring ranges set by the PSCW include three different ranges based on monthly costs, annual costs and cumulative costs during the test period. In order for WPL to be authorized to file for a proceeding to change rates related to fuel-related costs during the test period, WPL must demonstrate first that (1) any actual monthly costs during the test period exceeded the monthly ranges or (2) the actual cumulative costs to date during the test period exceeded the cumulative ranges. In addition, the annual projected costs (that include cumulative actual costs) for the test period must also exceed the annual ranges. Any affected party, including WPL or the PSCW, may initiate a proceeding to change rates due to changes in fuel-related costs during the monitoring period based on the above criteria. In January 2007, the PSCW approved an order changing WPL’s fuel cost monitoring ranges to plus or minus 8% for the monthly range; plus or minus 2% for the annual range; and for the cumulative range, plus or minus 8% for the first month, plus or minus 5% for the second month, and plus or minus 2% for the remaining months of the monitoring period.

32

The PSCW attempts to authorize, after a required hearing, interim fuel-related rate increases within 21 days of notice to customers. Any such change in rates would be effective prospectively and would require a refund with interest at the overall

authorized return on common equity if final rates are determined to be lower than interim rates approved. Rate decreases due to decreases in fuel-related costs can be implemented without a hearing. The rules also include a process whereby Wisconsin utilities can seek deferral treatment of emergency changes in fuel-related costs between fuel-related or base rate cases. Such deferrals would be subject to review, approval and recovery in future fuel-related or base rate cases.

 

Potential Changes to WPL's Fuel Cost Recovery Mechanisms - In February 2007, WPL and certain other investor-owned utilities jointly filed with the PSCW proposed changes to the current retail electric fuel-related cost recovery rules in Wisconsin. The proposal recommends each utility annually file a forecast of total fuel-related costs and sales for the upcoming 12-month period, which will be used to determine fuel-related rates for such period. Any under- or over-collection of actual fuel-related costs, in excess of plus or minus 1%, for a utility during such 12-month period would be reflected in an escrow account, with interest for that utility. The balance of the escrow account at the end of each year would be included in the forecast of total fuel-related costs for the following 12-month period allowing recovery of under-collected costs or refund of over-collected costs in each subsequent year. The proposal also provides the PSCW an opportunity to review the actual fuel-related costs for each 12-month period to ensure the fuel-related costs were prudent. The definition of fuel-related costs would also be expanded to specifically include MISO energy market costs and revenues, emission allowance and trading costs and revenues, renewable resource credit costs and revenues and other variable operation and maintenance costs. This proposal and other alternatives remain under discussion with the PSCW and other interested parties, including WPL.

 

In January 2007, the PSCW directed WPL to work with the PSCW staff over the following three months to help the PSCW determine if it may be necessary to reevaluate the current benchmarks for WPL’s gas cost recovery mechanism or explore a modified one-for-one pass through of gas costs to retail customers.

 

WPL is currently unable to predict the final outcome of these initiatives.

 

Recent Regulatory-related Legislative Developments - In February 2007, a new law (SF 004) governing renewable energy was enacted in Minnesota. SF 004 commits certain utilities operating in Minnesota, including IPL, to a Renewable Energy Standard (RES) based on retail electric sales from renewable energy sources as a percentage of total retail electric sales in Minnesota. IPL must meet an RES of 12% by 2012; 17% by 2016; 20% by 2020; and 25% by 2025. Utilities in Minnesota may meet the requirements of the RES with renewable energy generated by the utility, renewable energy acquired under PPAs or the use of renewable resource credits. Refer to “Strategic Overview - Utility Generation Plan” for discussion of Alliant Energy’s utility generation plan which includes additional supply from wind generation that will contribute towards IPL meeting this new RES in Minnesota and WPL meeting the new RPS in Wisconsin discussed below.

 

In December 2006, legislation was enacted that extended certain tax provisions contained in the Energy Policy Act of 2005 including extension of the renewable energy production tax credit for generating facilities placed into service prior to Jan. 1, 2009.

 

In August 2006, the Pension Protection Act of 2006 was enacted. This legislation includes changes to the minimum funding level requirements for postretirement benefit plans beginning in 2008. Alliant Energy does not expect this legislation will have a significant impact on its financial condition or results of operations based on the current funded status of its postretirement benefits plans.

 

In March 2006, a new law (Act 141) governing renewable energy and energy efficiency was enacted in Wisconsin. Act 141 commits Wisconsin utilities to a Renewable Portfolio Standard (RPS) using a benchmark of average retail sales of renewable electricity in 2001, 2002 and 2003 which was approximately 3% to 4% for WPL. WPL must increase renewable retail electric sales as a percentage of total retail electric sales by two percentage points above this benchmark by 2010, and by six percentage points above this benchmark by 2015. Wisconsin utilities may meet the renewable energy requirements of the RPS with renewable energy generated by the utility, renewable energy acquired under PPAs or the use of renewable resource credits. In addition, the new law requires Wisconsin utilities to allocate 1.2% of annual operating revenues to a statewide energy efficiency and renewable resource fund to be jointly administered by public utilities beginning in 2007. WPL’s contributions to the energy efficiency and renewable resource fund will be recovered from ratepayers and therefore is not expected to impact its financial condition or results of operations.

33

In October 2004, the American Jobs Creation Act of 2004 was enacted which allows taxpayers to elect to recognize gains on the sales of qualifying electric transmission assets, which close before Jan. 1, 2007, over an eight-year period for tax purposes beginning in the year the sale closes. In August 2005, the Energy Policy Act of 2005 was enacted which extends this provision to qualifying electric transmission assets, which close before Jan. 1, 2008. Alliant Energy currently expects to elect this provision for any gain realized from the proposed sale of IPL’s electric transmission assets. Refer to Note 22 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information on the proposed sale.

 

Other Recent Regulatory Developments -

Kewaunee Outage - In January 2007, the PSCW approved recovery of previously deferred costs associated with the extension of the unplanned outage at Kewaunee prior to the sale by WPL of its interest in Kewaunee in July 2005. The PSCW approval included recovery of $20 million of these deferred costs through increased retail electric rates charged by WPL over a two-year recovery period.

 

Kewaunee Sale - In January 2007, the PSCW approved recovery of a portion of the previously deferred loss associated with the sale of Kewaunee. The PSCW approval included recovery of $3 million of these deferred costs through increased retail rates charged by WPL over a two-year recovery period.

 

Coal Delivery Disruption - In September 2006, the PSCW approved recovery of previously deferred costs associated with coal conservation efforts at WPL due to coal delivery disruptions. The coal delivery disruptions were caused by railroad train derailments in Wyoming in 2005 that caused heavy damage to heavily-used joint railroad lines that supply coal to numerous generating facilities in the United States of America (U.S.), including facilities owned by WPL. The PSCW approved recovery of $20 million ($8 million deferred in 2006 and $12 million deferred in 2005) of these deferred costs by including them as a component of the fuel-related costs used to determine final rates in WPL’s fuel-related rate case.

 

MISO Wholesale Energy Market - In March 2005, the PSCW approved the deferral of certain incremental costs incurred by WPL to participate in the MISO wholesale energy market. In June 2006, the PSCW provided further clarification of which incremental costs incurred by WPL to participate in the MISO market are eligible to be deferred. Such deferred amounts are the subject of a generic docket currently before the PSCW. Hearings were held in early February 2007 and WPL anticipates an order in the third quarter of 2007. In May 2006, the IUB issued an order extending a temporary waiver until June 30, 2007. This waiver allows the costs and credits incurred by IPL to participate in the MISO market that relate to its Iowa retail customers to be included in IPL’s Iowa energy adjustment clause. IPL and WPL are currently working through the regulatory process to establish long-term recovery mechanisms for these costs.

 

Kewaunee Decommissioning Trust Assets - In April 2006, WPL received approval from the FERC to refund the wholesale portion of the Kewaunee-related non-qualified decommissioning trust assets to WPL’s wholesale customers. In May 2006, WPL liquidated its remaining nuclear decommissioning trust funds and refunded $21.5 million to its wholesale customers.

 

DAEC Sale - In January 2006, IPL completed the sale of its 70% ownership interest in DAEC and recognized a gain based on the terms of the sale agreement. Pursuant to the IUB order approving the DAEC sale, the gain resulting from the sale was used to establish a regulatory liability. The regulatory liability, including interest, will be used to offset AFUDC for future investments in new electric generating facilities sited in Iowa and accretes interest at the monthly average U.S. Treasury rate for three year maturities.

 

Mixed Service Costs - In 2002, IPL filed with the Internal Revenue Service for a change in method of accounting for tax purposes for 1987 through 2001 that would allow a current deduction related to mixed service costs. Refer to Note 12(g) of Alliant Energy’s “Notes to Consolidated Financial Statements” for updated information regarding this issue.

 

ALLIANT ENERGY RESULTS OF OPERATIONS

 

Overview - Refer to “Executive Summary” for an overview of Alliant Energy’s 2006, 2005 and 2004 earnings and the various components of Alliant Energy’s business.

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Utility Electric Margins - Electric margins and megawatt-hour (MWh) sales for Alliant Energy were as follows:

 

 

Revenues and Costs (in millions)

 

MWhs Sold (in thousands)

 

2006

 

2005

 

(a)

 

2004

 

(b)

 

2006

 

2005

 

(a)

 

2004

 

(b)

Residential

$857.1

 

$823.4

 

4%

 

$716.7

 

15%

 

7,670

 

7,881

 

(3%)

 

7,354

 

7%

Commercial

549.8

 

497.4

 

11%

 

437.8

 

14%

 

6,187

 

6,110

 

1%

 

5,702

 

7%

Industrial

763.7

 

675.2

 

13%

 

609.9

 

11%

 

12,808

 

12,830

 

--

 

12,596

 

2%

Retail subtotal

2,170.6

 

1,996.0

 

9%

 

1,764.4

 

13%

 

26,665

 

26,821

 

(1%)

 

25,652

 

5%

Sales for resale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

145.2

 

158.7

 

(9%)

 

116.8

 

36%

 

3,064

 

3,161

 

(3%)

 

2,943

 

7%

Bulk power and other

68.5

 

114.6

 

(40%)

 

69.0

 

66%

 

2,632

 

2,933

 

(10%)

 

2,159

 

36%

Other

58.7

 

51.3

 

14%

 

58.8

 

(13%)

 

171

 

173

 

(1%)

 

178

 

(3%)

Total revenues/sales

2,443.0

 

2,320.6

 

5%

 

2,009.0

 

16%

 

32,532

 

33,088

 

(2%)

 

30,932

 

7%

Electric production fuel and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

purchased power expense

1,257.4

 

1,009.3

 

25%

 

747.4

 

35%

 

 

 

 

 

 

 

 

 

 

Margins

$1,185.6

 

$1,311.3

 

(10%)

 

$1,261.6

 

4%

 

 

 

 

 

 

 

 

 

 

(a) Reflects the % change from 2005 to 2006. (b) Reflects the % change from 2004 to 2005.

 

2006 vs. 2005 Summary - Electric margins decreased $126 million, or 10%, in 2006 primarily due to $160 million of higher purchased power capacity costs related to the DAEC and Kewaunee PPAs and the net impacts of weather conditions and Alliant Energy’s weather hedging activities. These decreases were partially offset by approximately $40 million of under-recoveries of retail fuel and purchased power energy costs at WPL in 2005, a 1% increase in weather-normalized retail sales in 2006 and $7 million of higher energy conservation revenues at IPL. Changes in energy conservation revenues are largely offset by changes in energy conservation expenses.

 

2005 vs. 2004 Summary - Electric margins increased $50 million, or 4%, in 2005 primarily due to the impact of various rate increases implemented in 2005 and 2004, the net impacts of weather conditions and Alliant Energy’s weather hedging activities, a 2% increase in weather-normalized retail sales and $5 million of higher energy conservation revenues at IPL. These items were partially offset by the impacts of higher purchased power capacity costs at WPL and a higher under-recovery of fuel and purchased power energy costs in 2005 compared to 2004 at WPL.

 

Purchased Power Capacity Costs - Alliant Energy sold its interests in its two nuclear facilities, DAEC and Kewaunee, in January 2006 and July 2005, respectively. Prior to the sale of these facilities, the operating expenses related to the facilities consisted primarily of other operation and maintenance and depreciation and amortization expenses. Upon the sale of the facilities, Alliant Energy entered into PPAs with the new owners of the facilities and its share of the costs associated with these facilities is now recorded as purchased power expense. As a result, there are large nuclear-related variances between periods for these income statement line items, which are somewhat offsetting in nature and also do not capture other benefits from the sales including, among others, the impact of the application of the sales proceeds. Purchased power capacity costs included in “Electric production fuel and purchased power expense” in the above table related to the DAEC and Kewaunee PPAs as well as the Riverside PPA which began in June 2004 were as follows (in millions):

 

 

2006

 

2005

 

2004

DAEC PPA (IPL)

$122

 

$--

 

$--

Kewaunee PPA (WPL)

68

 

30

 

--

Riverside PPA (WPL)

53

 

52

 

35

 

Refer to Note 20 of Alliant Energy’s “Notes to Consolidated Financial Statements” for additional information regarding the Riverside PPA.

 

Fuel and Purchased Power Energy (Fuel-related) Cost Recoveries - Alliant Energy’s fuel-related costs increased in 2006 and 2005 compared to prior years primarily due to increased commodity prices. The increase in commodity prices relative to historic averages was largely due to natural gas disruption caused by hurricane activity in the Gulf of Mexico in the third quarter of 2005. Due to IPL’s rate recovery mechanisms for fuel-related costs, these increases in fuel-related costs resulted in

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a comparable increase in electric revenues and therefore did not have a significant impact on IPL’s electric margins. However, WPL’s electric margins are subject to volatility with changes in fuel-related costs due largely to the current retail recovery mechanisms in place in Wisconsin for fuel-related costs. As a result of its retail rate recovery mechanism in Wisconsin, WPL estimates it under-recovered approximately $40 million and $10 million of retail fuel-related costs in 2005 and 2004, respectively. WPL’s under-recovery of retail fuel-related costs in 2006 was not significant. The under-recovery of retail fuel-related costs in 2005 was largely due to the impact of incremental purchased power energy costs resulting from an unplanned outage at Kewaunee in 2005 and the impact of coal supply constraints from the Power River Basin in 2005. Refer to “Other Matters - Market Risk Sensitive Instruments and Positions - Commodity Price Risk” for discussion of risks associated with increased fuel and purchased power costs on WPL’s electric margins. Refer to “Rates and Regulatory Matters - Utility Fuel Cost Recovery” for proposed changes to the retail rate recovery mechanisms in place in Wisconsin for fuel-related costs.

 

Impacts of Weather Conditions - Estimated increases (decreases) to Alliant Energy’s electric margins from the net impacts of weather and Alliant Energy’s weather hedging activities were as follows (in millions):

 

 

2006

 

2005

 

2004

Weather impacts on demand compared to normal weather

($9)

 

$12

 

($34)

Losses from weather derivatives (a)

(5)

 

(9)

 

--

Net weather impact

($14)

 

$3

 

($34)

(a) Recorded in “Other” revenues in the above table.

 

Alliant Energy’s electric sales demand is seasonal to some extent with the annual peak normally occurring in the summer months due to air conditioning usage by its residential and commercial customers. Cooling degree days (CDD) data is used to measure the variability of temperatures during summer months and is correlated with electric sales demand. CDD in Alliant Energy’s service territories were as follows:

 

 

Actual

 

 

CDD (a):

2006

 

2005

 

2004

 

Normal (a)

Cedar Rapids, Iowa (IPL)

332

 

406

 

139

 

379

Madison, Wisconsin (WPL)

284

 

421

 

138

 

248

(a) CDD are calculated using a 70 degree base. Normal degree days are calculated for Cedar Rapids using a fixed 30-year average and for Madison using a rolling 20-year average.

 

In 2005, Alliant Energy began utilizing weather derivatives based on CDD in Chicago to reduce the potential volatility on its electric margins during the summer months of June through August. The weather derivatives utilized for June 1, 2005 through Aug. 31, 2005 were effective in reducing volatility on its electric margins. However, the weather derivatives utilized for June 1, 2006 through Aug. 31, 2006 did not produce the results expected by Alliant Energy. While CDD have historically been highly correlated between Chicago and Alliant Energy’s service territories, this was not the case in 2006 as CDD were 16% above normal in Chicago during June 1 through Aug. 31, compared to 15% above normal and (12%) below normal in Madison and Cedar Rapids, respectively. Alliant Energy estimates this lack of correlation resulted in it incurring losses from the weather derivatives that exceeded by $6 million the positive impact on its demand from the warmer than normal weather conditions during June 1, 2006 through Aug. 31, 2006. In addition, Alliant Energy estimates the impact on demand compared to normal weather during September 2006, 2005 and 2004 (such periods were not covered by weather derivatives) was ($6) million (($4) million at IPL and ($2) million at WPL), $5 million ($3 million at IPL and $2 million at WPL) and $0, respectively.

 

Wholesale Sales - Wholesale sales volumes were higher in 2005 compared to 2006 and 2004 largely due to the impacts of weather conditions on wholesale sales demand at WPL. In addition, wholesale revenues were higher in 2005 compared to 2006 and 2004 due to the impacts of higher fuel-related cost recovery revenues from wholesale customers at WPL in 2005. The changes in revenues caused by changes in fuel-related costs were largely offset by changes in electric production fuel and purchased power expense and therefore did not have a significant impact on electric margins.

 

Bulk Power and Other Sales - Bulk power and other revenues were higher in 2005 compared to 2006 and 2004 largely due to higher sales in the restructured wholesale energy market operated by MISO, which began on April 1, 2005. These changes in revenues were largely offset by changes in electric production fuel and purchased power expense and therefore did not have a significant impact on electric margins.

 

Refer to “Other Matters - Other Future Considerations - Ethanol Industry Growth” for discussion of new ethanol production facilities in Alliant Energy’s service territory, which is expected to increase Alliant Energy’s future electric sales volumes.

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Utility Gas Margins - Gas margins and dekatherm (Dth) sales for Alliant Energy were as follows:

 

 

Revenues and Costs (in millions)

 

Dths Sold (in thousands)

 

2006

 

2005

 

(a)