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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27863; 70-9375)

Interstate Power and Light Company

Supplemental Order Amending Prior Orders and Authorizing Entry Into and Performance of Interest Rate Hedging Transactions; Reservation of Jurisdiction

April 23, 2004

Interstate Power and Light Company ("IP&L"), Cedar Rapids, Iowa, a wholly-owned public-utility subsidiary of Alliant Energy Corporation ("Alliant Energy"), a registered holding company, has filed with the Securities and Exchange Commission ("Commission") a post-effective amendment to a previously filed declaration ("Declaration") under sections 6(a), 7 and 12(b) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 45 and 54 under the Act. On April 30, 2004, the Commission issued a notice of the Declaration (Holding Co. Act Release No. 27841).

I. Current Authority

By orders dated November 25, 1998 (Holding Co. Act Release No. 26945) and December 15, 2000 (Holding Co. Act Release No. 27306), as subsequently modified by order dated October 24, 2001 (Holding Co. Act Release No. 27456 and collectively, "Prior Orders"), the Commission authorized IP&L to: (1) issue and sell through June 30, 2004 ("Prior Authorization Period"), in one or more series, any combination of (a) collateral trust bonds ("Trust Bonds"), (b) senior unsecured debentures ("Senior Debentures"), and (c) unsecured subordinated debentures ("Subordinated Debentures"); and (2) enter into an agreement or agreements for the issuance and sale of one or more series of tax-exempt bonds ("Tax-Exempt Bonds") for the financing or refinancing of air and water pollution control facilities and sewage and solid waste disposal facilities ("Facilities"). As security for IP&L's obligations under any agreement relating to the Tax-Exempt Bonds, IP&L is authorized to: (1) issue its non-negotiable promissory note or notes to evidence the loan to IP&L of the proceeds of the Tax-Exempt Bonds by the issuer; (2) convey a subordinated security interest in any Facilities that are financed through the issuance of Tax-Exempt Bonds; (3) issue and pledge one or more new series of Trust Bonds ("Tax-Exempt Collateral Bonds"); (4) acquire and deliver letters of credit guaranteeing payment of the Tax-Exempt Bonds and enter into reimbursement agreements with respect to any such letters of credit; (5) acquire insurance policies guaranteeing payment of the Tax-Exempt Bonds; and (6) provide a direct guarantee of payment of the principal of and premium, if any, and interest on the Tax-Exempt Bonds.

Under the Prior Orders, the aggregate principal amount of the Trust Bonds, Senior Debentures, Subordinated Debentures, and Tax-Exempt Bonds issued during the Prior Authorization Period shall not exceed $300 million, provided that such amount excludes the principal amount of any Tax-Exempt Collateral Bonds issued as collateral security for Tax-Exempt Bond obligations and any other forms of collateral related to the Tax-Exempt Bonds. IP&L may not issue any long-term debt securities unless such securities are rated at the investment grade level as established by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the Securities Exchange Act of 1934.1

Through December 31, 2003, IP&L had issued and sold a total of $200 million principal amount of long-term debt securities in accordance with the authorization under the Prior Orders. IP&L plans to issue an additional $100 million principal amount of Trust Bonds or Senior Debentures in the second quarter of 2004, the proceeds of which will be used to repay short-term debt that was incurred principally to finance IP&L's construction program and for other corporate purposes.

The Prior Orders provide that no series of Trust Bonds will be issued at interest rates in excess of the lower of 15% per annum or those interest rates generally obtainable at the time of pricing for first mortgage bonds having reasonably similar maturities, issued by companies of the same or reasonably comparable credit quality and having reasonably similar terms, conditions and features ("Ceiling Rate"). Further, the Prior Orders provide that no series of Senior Debentures or Subordinated Debentures will be sold if their fixed interest rate or initial adjustable interest rate exceeds the Ceiling Rate.

II. Requested Authority

IP&L requests that the Commission issue a further supplemental order that: (1) extends the Prior Authorization Period under the Prior Orders from June 30, 2004 to December 31, 2004 ("New Authorization Period"); (2) increases the maximum aggregate principal amount of the Trust Bonds, Senior Debentures, Subordinated Debentures, and Tax-Exempt Bonds that IP&L may issue through the New Authorization Period from $300 million to $350 million, such that, taking into account previous issuances of such securities (totaling $300 million), IP&L will have authority to issue up to an additional $50 million of long-term debt securities during the remainder of 2004; (3) authorizes IP&L to enter into and perform interest rate hedging transactions in order to manage interest rate risk associated with outstanding long-term indebtedness and anticipated long-term debt offerings; and (4) modifies the investment grade criteria applicable to any securities issued by IP&L in reliance upon the authorization in this proceeding.

IP&L requests a six-month extension in the Prior Authorization Period to make the expiration date under the Prior Orders coterminous with the expiration of its authority to issue and sell short-term indebtedness. See Holding Co. Act Release No. 27542 (June 21, 2002); Holding Co. Act Release No. 27575 (October 10, 2002); Holding Co. Act Release No. 27615 (December 13, 2002). The extension also will provide IP&L greater financing flexibility in the event that its currently planned offering of Trust Bonds or Senior Debentures and redemption of Tax-Exempt Bonds are delayed beyond the second quarter of 2004.

Through March 31, 2004, IP&L had issued and sold an aggregate principal amount of $200 million of Trust Bonds, Senior Debentures, Subordinated Debentures, and Tax-Exempt Bonds under the Prior Orders. As of March 31, 2004, IP&L's consolidated capitalization consisted of 47.2% common equity, 8.5% preferred stock, 38.7% long-term debt and 5.6% short-term debt. On May 6, 2004, IP&L issued and sold an additional principal amount of $100 million in Senior Debentures, the net proceeds of which were used to repay short-term debt that was incurred principally to finance IP&L's construction program and for other corporate purposes. Consequently, under the Prior Orders, IP&L may not issue and sell any more Trust Bonds, Senior Debentures, Subordinated Debentures, and Tax-Exempt Bonds.

The proposed $50 million increase in the limit on new long-term debt securities that IP&L may issue (from $300 million to $350 million) will allow IP&L, during the second quarter of 2004, to redeem approximately $20 million of Tax-Exempt Bonds and to refinance $25 million of short-term debt incurred to fund IP&L's construction program and for other corporate purposes.2 Taking into account the completion of the May 2004 offering of Senior Debentures, and assuming the issuance and sale of all of the proposed debt and an additional $100 million common equity investment by Alliant Energy, IP&L's pro forma capitalization as of March 31, 2004 would consist of: 49.5% common equity, 8.1% preferred stock, 42.4% long-term debt and 0% short-term debt.3

IP&L requests authority to enter into interest rate hedging transactions with respect to its outstanding long-term indebtedness ("Interest Rate Hedges") to reduce or manage interest rate cost. Interest Rate Hedges will involve the use of financial instruments commonly used in today's capital markets, such as futures, interest rate swaps, caps, collars, floors, and structured notes (i.e., a debt instrument in which the principal and/or interest payments are indirectly linked to the value of an underlying asset or index), or transactions involving the purchase or sale, including short sales, of U.S. Treasury or Agency (e.g., FNMA) obligations or London Inter-Bank Offer Rate-based swap instruments. The transactions will be for fixed periods and stated notional amounts. In no case will the notional principal amount of any Interest Rate Hedge exceed that of the face amount of the underlying debt instrument and related interest rate exposure. Therefore, IP&L will not engage in speculative transactions.

In addition, IP&L requests authorization to enter into interest rate hedging transactions with respect to anticipated debt offerings ("Anticipatory Hedges"). Anticipatory Hedges will be utilized to fix and/or limit the interest rate risk associated with any new issuance through: (1) a forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury obligations and/or a forward swap (each, "Forward Sale"); (2) the purchase of put options on U.S. Treasury obligations ("Put Options Purchase"); (3) a Put Options Purchase in combination with the sale of call options on U.S. Treasury obligations ("Collar"); (4) transactions involving the purchase or sale, including short sales, of U.S. Treasury obligations; or (5) some combination of a Forward Sale, Put Options Purchase, Collar and/or other derivative or cash transactions, including, but not limited to structured notes, caps and collars, appropriate for the Anticipatory Hedges.

Interest Rate Hedges and Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") with brokers through the opening of futures and/or options positions traded on the Chicago Board of Trade ("CBOT") or other designated contract markets, the establishment of over-the-counter positions with one or more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. IP&L will determine the optimal structure of each Interest Rate Hedge or Anticipatory Hedge transaction at the time of execution. Interest Rate Hedges and Anticipatory Hedges in the over-the-counter market will only be entered into with counterparties ("Approved Counterparties") whose senior debt ratings, or the senior debt ratings of the parent companies of the counterparties, as published by Standard and Poor's Ratings Group, are equal to or greater than BBB, or an equivalent rating from Moody's Investors Service or Fitch, Inc. Fees, commissions and other amounts payable to a counterparty or exchange (excluding, however, the swap or option payments) in connection with any Interest Rate Hedge or Anticipatory Hedge will not exceed those generally obtainable in competitive markets for parties of comparable credit quality.

IP&L will comply with Statement of Financial Accounting Standard ("SFAS") 133 (Accounting for Derivative Instruments and Hedging Activities) and SFAS 138 (Accounting for Certain Derivative Instruments and Certain Hedging Activities) or other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board ("FASB"). IP&L represents that each Interest Rate Hedge and each Anticipatory Hedge will qualify for hedge accounting treatment under the current FASB standards in effect and as determined as of the date such Interest Rate Hedge or Anticipatory Hedge is entered into. IP&L will also comply with any future FASB financial disclosure requirements associated with hedging transactions.

Lastly, IP&L requests that the Commission modify the investment grade criteria applicable to any securities issued by IP&L. IP&L represents that, except for securities issued for the purpose of funding money pool operations, no securities may be issued in reliance upon this order, unless: (1) the security to be issued, if rated, is rated investment grade; (2) all outstanding securities of IP&L that are rated are rated investment grade; and (3) all outstanding securities of Alliant Energy that are rated are rated investment grade (collectively, "Investment Grade Conditions"). For purposes of the Investment Grade Conditions, a security will be deemed to be rated "investment grade" if it is rated investment grade by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the Securities Exchange Act of 1934, as amended. IP&L requests that the Commission reserve jurisdiction over the issuance at any time of securities if one or more of the Investment Grade Conditions is not satisfied.

The proposed transaction is subject to 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.

Currently, Alliant Energy does not meet all of the conditions of rule 53(a). As of March 31, 2004, Alliant Energy's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $518.3 million, or approximately 63.8% of Alliant Energy's average "consolidated retained earnings," also as defined in rule 53(a)(1), for the four quarters ended March 31, 2004 ($812.6 million). Although this exceeds the 50% "safe harbor" limitation contained in rule 53(a), it is within the investment limit previously authorized by the Commission. See Holding Company Act Release No. 27448 (October 3, 2001) ("EWG/FUCO Order") (authorizing Alliant Energy to increase its aggregate investment in EWGs and FUCOs to an amount equal to 100% of its average consolidated retained earnings). Alliant Energy 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) exist.

Since September 30, 2001, the end of the quarterly period immediately preceding the issuance of the EWG/FUCO Order, Alliant Energy has experienced an increase in consolidated common stock equity.4 Alliant Energy states that the proposed transactions will have no material impact on its consolidated capitalization.

With regard to earnings attributable to its investments in EWGs and FUCOs, Alliant has experienced losses from its portfolio of FUCOs in calendar years 2000, 2001 2002, and 2003 ($17.7 million, $25.3 million, and $26.7 million, respectively). The company'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. Since then, energy demand has increased and several rate increases have been approved. In fiscal year 2003, Alliant Energy's FUCO investments generated approximately $3.8 million in income (not including gain from sale of Australian FUCO investments).

The fees, commissions and expenses, paid or incurred in connection with filing the Declaration are estimated to not exceed $5,000. Fees, commissions and expenses paid or incurred by IP&L in connection with any offering of long-term debt securities authorized in this proceeding will be within the limitations specified in the Prior Orders. The issuance and sale of long-term debt securities by IP&L is subject to approval by the Minnesota Public Utilities Commission ("MPUC") and the Illinois Commerce Commission ("ICC").5 In accordance with Minnesota law, IP&L has obtained approval for its capital structure for the fiscal year ending March 31, 2005. The ICC has authorized IP&L to issue and sell up to $125 million principal amount of long-term debt securities during the period ending June 30, 2004. The company has filed or will file additional applications with the ICC to extend the authorization period of its current ICC order to December 31, 2004. IP&L states that it will not issue any additional long-term debt securities after June 30, 2004 until it obtains an order from the ICC and, if it obtains such an order, it will file a copy of it with the Commission by a post-effective amendment. Except as mentioned above, no other state commission, and no federal commission other than this Commission, has jurisdiction over the proposed transactions.

Due notice of the filing of the Declaration 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. On the basis of the facts in the record, it is found that, except as to that matter over which jurisdiction is reserved, the applicable standards of the Act and the rules under the Act are satisfied, and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, except as to that matter over which jurisdiction is reserved, that the Declaration is permitted to become effective immediately, subject to the terms and conditions contained in rule 24, and in particular, rule 24(c)(2), under the Act.

IT IS FURTHER ORDERED that, pending completion of the record, jurisdiction is reserved over issuances of securities pursuant to this order where one or more of the Investment Grade Conditions is not satisfied.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.


Margaret H. McFarland
Deputy Secretary


Endnotes


http://www.sec.gov/divisions/investment/opur/filing/35-27863.htm

Modified: 06/28/2004