(Release No. 35-27724; 70-10150)
Interstate Power and Light Company
Order Authorizing Amendments Of Fuel Lease
September 23, 2003
Interstate Power and Light Company ("IP&L"), Cedar Rapids, Iowa, a wholly-owned public-utility subsidiary of Alliant Energy Corporation ("Alliant"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended, ("Act"), has filed with the U.S. Securities and Exchange Commission ("Commission") an application-declaration ("Application") under sections 6(a), 7, 9(a), 10, and 32(h) of the Act and rule 54 under the Act. The Commission issued a notice of the filing on August 22, 2003 (Holding Company Act Release 27716).
IP&L requests authority to enter into an amendment to a fuel lease it has with Arnold Fuel Inc. ("Arnold"). IP&L is engaged principally in the generation, purchase, transmission, distribution and sale of electric power and the purchase, distribution, transportation and sale of natural gas in portions of Iowa, Minnesota and Illinois. IP&L also provides steam service in selected markets in Iowa. IP&L owns a 70% undivided interest in the Duane Arnold Energy Center ("DAEC"), a 580-megawatt (net capacity) boiling water nuclear reactor located near Palo, Iowa, which was placed in commercial operation in 1974.1 IP&L2 leases its 70% undivided interest in the nuclear fuel required for the DAEC according to a fuel lease, dated August 21, 1973, as amended ("Fuel Lease") with Arnold. Unless terminated by either party, the term of the Fuel Lease is automatically extended on an annual basis, provided that the term of the Lease Agreement may not be extended beyond December 31, 2023.
Under the terms of the Fuel Lease, Arnold is obligated to acquire and pay the acquisition costs relating to IP&L's 70% undivided interest in the separate nuclear fuel assemblies and components (including replacement nuclear material) which, when acquired, becomes a part of the nuclear fuel leased to IP&L ("Nuclear Fuel"). Arnold currently finances the costs relating to the Nuclear Fuel by issuing commercial paper promissory notes and/or receiving revolving credit loans under a credit agreement ("Credit Agreement") between Arnold and Bank One, NA, individually and as agent bank, and other banks that may become parties to the financing. Commercial paper notes may have maturities of up to 270 days. Revolving credit loans under the Credit Agreement mature on April 28, 2004 and bear interest at the "Alternate Base Rate," which is a fluctuating rate of interest equal to the higher of (1) the Federal Funds Effective Rate plus 0.5% or (2) the corporate base rate of Bank One from time to time. The aggregate amount of commercial paper notes and revolving credit loans under the Credit Agreement may not exceed $60 million. Arnold is currently obligated under the Credit Agreement to pay a facility fee of 10 basis points per annum on each lending bank's commitment.
IP&L is obligated under the Fuel Lease to make quarterly lease payments ("Basic Rent"), consisting of a "Quarterly Lease Charge," which, for any calendar quarter, is the sum of the aggregate of the "Daily Lease Charges," plus a "Burn-Up Charge," which is the portion of the Nuclear Fuel that is consumed in producing heat during the quarterly rent period. The Daily Lease Charge for any calendar day is equal to the sum of (1) an accrual for all interest expense and amortization of debt discount with respect to all commercial paper issued by and all revolving credit loans obtained by Arnold under the Credit Agreement which are outstanding at the close of business of each day, (2) an accrual for each day with respect to all commitment fees and other fees, costs and expenses (including issuing agent's fees) of Arnold under the Credit Agreement, and (3) a charge determined by dividing (x) 1/8th of 1% of the "Stipulated Loss Value" of the Nuclear Fuel (essentially Arnold's unrecovered cost of the Nuclear Fuel purchased and leased to IP&L) at the close of business on each day by (y) 365. The Fuel Lease and Arnold's current financing arrangements were all in place at the time Alliant became a registered holding company in 1998.
IP&L requests authorization to enter into an amendment to the Fuel Lease to reflect certain proposed changes to the financing arrangements by which Arnold will finance the cost of Nuclear Fuel. Specifically, authorization is requested for Arnold to issue from time to time during the term of the Lease Agreement up to $30 million of senior secured notes ("Notes") under one or more note purchase agreements with banks, insurance companies or other institutional lenders. Each Note will have a maturity date of between one year and seven years from the date of issuance and bear interest on the unpaid principal prior to maturity or default at a rate not to exceed 400 basis points over the yield to maturity of a U.S. Treasury security having a comparable term. Each Note may be subject to redemption at IP&L's option upon payment of a premium equal to the excess, if any, of (a) the net present value of the future stream of payments under the Note as if held to maturity, discounted at a rate determined according to the applicable note purchase agreement, over (b) the principal amount of the Note. Under the Fuel Lease, as amended, the calculation of the "Daily Lease Charge" will be modified to reflect accruals for interest on and placement fees and other expenses relating to the Notes.
In connection with the foregoing, IP&L and Bank One, NA, will enter into an amended Credit Agreement under which the aggregate commitments of the lending banks will be reduced from $60 million to $30 million. Under the amended Credit Agreement, the facility fee will be increased from 10 basis points per year to 15 basis points per year on each lending bank's commitment. The interest rate options applicable to borrowings under the Credit Agreement will remain unchanged.
The fees, commissions and expenses incurred or to be incurred by IP&L in connection with the proposed transaction, other than those fees, commissions and expenses that are accrued and paid by IP&L as components of Basic Rent under the Fuel Lease, are estimated not to exceed $75,000.
No state commission, and no federal commission, other than this Commission, has jurisdiction over the proposed transaction.
The proposed transaction is subject to section 32(h) of the Act and rule 54 under the Act. Rule 54 provides that, in determining whether to approve any transaction that does not relate to an "exempt wholesale generator" ("EWG") or "foreign utility company" ("FUCO"), as defined in sections 32 and 33, respectively, the Commission shall not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or FUCO upon the registered holding company system if paragraphs (a), (b) and (c) of rule 53 are satisfied.
Alliant currently does not meet all of the conditions of rule 53(a). As of June 30, 2003, Alliant's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $466.1 million, or approximately 62.3% of Alliant's average "consolidated retained earnings," as defined in rule 53(a)(1), for the four quarters ended June 30, 2003. Although this exceeds the 50% "safe harbor" limitation contained in rule 53(a), the Commission has authorized Alliant in an order dated October 3, 2001 (Holding Company Act Release No. 27448) to increase its "aggregate investment" in EWGs and FUCOs to an amount equal to 100% of Alliant's average "consolidated retained earnings."
With regard to capitalization, Alliant has experienced a modest decline in consolidated common stock equity since September 30, 2001, the end of the quarterly period immediately preceding the issuance of the October 3, 2001 order, due in part to the sale of certain non-regulated businesses (including Alliant's FUCO investments in Australia, which was completed in late April 2003, and the sale of Alliant's affordable housing business, which was completed in mid-2003) and the application of the proceeds to retire debt; halving the targeted dividend on common stock from $2.00 per share to $1.00 per share; reducing anticipated capital expenditures in 2002 and 2003 (including no new investments in Brazil through 2003); completion of a public offering of 17,250,000 shares of common stock in July 2003, the net proceeds of which were used to make capital contributions to IP&L and Wisconsin Power and Light Company, Alliant's other principal public-utility subsidiary; and implementation of other cost control measures.3 As a result of these and other proposed and completed asset sales, Alliant expects to achieve aggregate debt reduction in excess of $800 million with a significant majority, if not all, expected to occur in 2003 and the remainder in 2004. In addition, the proposed transaction will have no impact on Alliant's consolidated capitalization since the amount of total debt of Arnold for which IP&L will be responsible under the Fuel Lease will not change.
With regard to earnings attributable to investments in EWGs and FUCOs, Alliant has experienced losses from its portfolio of FUCOs in calendar years 2000, 2001 and 2002. Alliant's losses on its Brazil investments were unexpectedly large in 2002, resulting primarily from the impact of a decline in currency translation rates, as well as from charges related to recovery of the impacts of electricity rationing in Brazil and other prior costs. The record shows that the investments in and income/losses from FUCOs since 2000 were as follows:
For 2000: net loss, $18.2 million; loss from continuing operations, $17.7 million; investments in FUCOs, $254.5 million.
For 2001: net loss, $27.3 million; loss from continuing operations, $25.7 million; investments in FUCOs, $509 million.
For 2002: net loss $27.1 million; loss from continuing operations, $37.6 million; investments in FUCOs, $501.5 million.
For six months through June 30, 2003: net income, $38.3 million; loss from continuing operations, $6.3 million; investments in FUCOs, $403.1 million.
Alliant also owns one EWG, Alliant Energy Neenah LLC ("Neenah"), which it acquired in the first quarter of 2003. For the six months ended June 30, 2003, it had revenues of approximately $6.3 million and net income of approximately $2 million. Alliant's aggregate investment in Neenah at June 30, 2003, was approximately $58.7 million.
Alliant satisfies all of the other conditions of paragraphs (a) and (b) of rule 53, and none of the adverse conditions specified in rule 53(b) exists.4
Due notice of the filing of this Application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that, except as to those matters over which jurisdiction has been reserved, the applicable standards of the Act and rules are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that, except as to those matters over which jurisdiction has been reserved, the Application, as amended, be granted and permitted to become effective immediately, subject, to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland