Exhibit 10.5

                              EMPLOYMENT AGREEMENT

       THIS AGREEMENT by and between Interstate Energy Corporation,  a Wisconsin
corporation  (the  "Company"),  and  Erroll B.  Davis,  Jr.  (the  "Executive"),
originally  dated as of the 21st day of April,  1998, is amended and restated as
of the 29th day of March, 1999.

                          W I T N E S S E T H   T H A T

       WHEREAS,  the  Company is party to an  Agreement  and Plan of Merger,  as
amended (the "Merger  Agreement")  , dated  November 10, 1995,  by and among the
Company,  IES Industries  Inc., an Iowa  corporation  ("IES"),  Interstate Power
Company, a Delaware corporation  ("Interstate  Power"),  WPLH Acquisition Co., a
Wisconsin  corporation  and  a  wholly-owned  subsidiary  of  the  Company,  and
Interstate Power Company, a Wisconsin corporation and a wholly-owned  subsidiary
of Interstate; and

       WHEREAS,  the  parties to the Merger  Agreement  wish to provide  for the
orderly succession of management of the Company following the Effective Time (as
defined in the Merger Agreement); and

       WHEREAS,  the parties to the Merger Agreement further wish to provide for
the  employment by the Company of the  Executive,  and the  Executive  wishes to
serve the Company and its  subsidiaries,  in the capacities and on the terms and
conditions set forth in this Agreement, as amended and restated.

       NOW, THEREFORE, it is hereby agreed as follows:

       1.  Employment  Period.  The Company shall employ the Executive,  and the
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement,  for an initial  period  (the  "Initial  Period")  commencing  at the
Effective  Time  and  ending  on  the  date  immediately   preceding  the  fifth
anniversary of the Effective Time. This Agreement  thereafter will automatically
renew for successive terms of one (1) year each,  unless either party hereto has
given sixty (60) days' advance  written notice of its or his intent to allow the
term of this  Agreement  to  expire.  The term  during  which the  Executive  is
employed by the Company  hereunder  (including  without  limitation  the Initial
Period)  is  hereafter  referred  to  as  the  "Employment   Period."  Upon  the
termination  of the  Employment  Period the Executive  will have the status of a
retired senior executive  officer of the Company and shall be entitled to all of
the rights, privileges and benefits provided to such retired officers.

       2.     Position and Duties.

              (a)  During  the first two (2) years of the  Initial  Period,  the
       Executive  shall serve as President  and Chief  Executive  Officer of the
       Company  and  thereafter,  until the end of the  Employment  Period,  the
       Executive  shall serve as Chairman of the Board of  Directors,  President
       and Chief Executive Officer of the Company; in each case with such duties
       and responsibilities as are customarily  assigned to such positions,  and
       such other duties and responsibilities not inconsistent  therewith as

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       may from time to time be assigned to him by the Board of Directors of the
       Company (the  "Board").  The Executive  also shall continue to serve as a
       member of the Board  following  the Effective  Time,  and the Board shall
       propose  the  Executive  for  re-election  to the  Board  throughout  the
       Employment Period.

              (b) In addition to the  responsibilities  designated  in paragraph
       (a) of  Section 2 above,  during  the  three-year  period  following  the
       Effective  Time,  the  Executive  shall be entitled to serve as the Chief
       Executive Officer of each entity which during such period is a subsidiary
       of the Company and the Company  shall cause the Executive to be appointed
       or elected as the Chief Executive Officer of each such subsidiary. In his
       capacity  as the  Chief  Executive  Officer  of  said  subsidiaries,  the
       Executive shall have such duties and  responsibilities as are customarily
       assigned to such position, and such other duties and responsibilities not
       inconsistent therewith as may from time to time be assigned to him by the
       Board of Directors of each such subsidiary. During the Employment Period,
       the  Executive  also shall serve as a member of the Board of Directors of
       each of the  Company's  subsidiaries  and the  Company  shall  cause  the
       Executive to be appointed, elected or re-elected as such a director.

              (c) During the  Employment  Period,  and  excluding any periods of
       vacation and sick leave to which the Executive is entitled, the Executive
       shall devote  reasonable  attention and time during normal business hours
       to the business and affairs of the Company and its affiliates and, to the
       extent  necessary  to  discharge  the  responsibilities  assigned  to the
       Executive  under this  Agreement,  use the  Executive's  reasonable  best
       efforts to carry out such responsibilities faithfully and efficiently. It
       shall not be considered a violation of the foregoing for the Executive to
       serve on corporate,  industry,  civic or charitable boards or committees,
       so  long as such  activities  do not  significantly  interfere  with  the
       performance  of the  Executive's  responsibilities  as an employee of the
       Company and its affiliates in accordance with this Agreement.

              (d) The  Company's  headquarters  shall  be  located  in  Madison,
       Wisconsin and the Executive  shall reside in the general area of Madison,
       Wisconsin.  During the Employment  Period,  the Company also will provide
       the Executive with a furnished apartment in the Cedar Rapids, Iowa area.

       3.     Compensation.

              (a)  Base  Salary.   The  Executive's   compensation   during  the
       Employment   Period   shall  be   determined   by  the  Board   upon  the
       recommendation  of the  Compensation  and  Personnel  Committee (or other
       appropriate  committee)  of the Board,  subject to the next  sentence and
       paragraph (b) of Section 3. During the Employment  Period,  the Executive
       shall  receive an annual base salary  ("Annual  Base Salary") of not less
       than  his  aggregate   annual  base  salary  from  the  Company  and  its
       subsidiaries  as in effect  immediately  before the Effective  Time.  The
       Annual  Base Salary  shall be payable in  accordance  with the  Company's
       regular  payroll  practice for its senior  executives,  as in effect from
       time to time. During the Employment  Period, the Annual Base Salary shall
       be reviewed for possible increase




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<PAGE>

       at least annually. Any increase in the Annual Base Salary shall not limit
       or reduce any other  obligation of the Company under this Agreement.  The
       Annual Base Salary shall not be reduced after any such increase,  and the
       term  "Annual  Base  Salary"  shall  thereafter  refer to the Annual Base
       Salary as so increased.

              (b) Incentive  Compensation.  During the  Employment  Period,  the
       Executive   shall  continue  to   participate  in  short-term   incentive
       compensation plans and long-term incentive compensation plans (the latter
       to consist of plans offering stock  options,  restricted  stock and other
       long-term incentive  compensation) offered by the Company and its present
       or future  affiliates  which shall  provide him with the  opportunity  to
       earn,  on  a  year-by-year  basis,  short-term  and  long-term  incentive
       compensation (the "Incentive Compensation") at least equal to the amounts
       that he had the  opportunity  to earn  immediately  before the  Effective
       Time, and such compensation shall be payable in accordance with standards
       (i.e., performance criteria,  performance levels, etc.) which are no less
       favorable  to the  Executive  than those  applicable  with respect to the
       Incentive  Compensation  payable to the Executive  immediately before the
       Effective Time.

              (c)    Other Benefits.

                     (i) Retirement Plan;  Supplemental  Retirement Plan. During
              the  Employment  Period,  the  Executive  shall  participate  in a
              retirement plan and/or supplemental  retirement plan (the "Defined
              Benefit  Arrangement")  such  that  the  aggregate  value  of  the
              retirement benefits that he and his spouse will receive at the end
              of the  Employment  Period under all defined  benefit plans of the
              Company and its affiliates  (whether qualified or not) will be not
              less  than the  benefits  he would  have  received  (assuming  his
              employment  through the end of the  Employment  Period)  under the
              Wisconsin  Power  and  Light  Company   Retirement  Plan  and  the
              Supplemental  Retirement Plan in which the Executive participated,
              as in effect immediately prior to the Effective Time.

                     (ii)  Executive  Tenure   Compensation   Plan.  During  the
              Employment  Period, the Executive shall continue to participate in
              the   Wisconsin   Power  and  Light   Company   Executive   Tenure
              Compensation Plan.

                     (iii) Life  Insurance.  During the Employment  Period,  the
              Company shall provide the Executive with life  insurance  coverage
              (the "Life Insurance  Coverage") providing a death benefit to such
              beneficiary or beneficiaries as the Executive may designate of not
              less than three times his Annual Base Salary.

                     (iv) Additional Benefits. In addition, and without limiting
              the generality of the foregoing,  during the Employment Period and
              thereafter:  (A) the Executive shall be entitled to participate in
              all applicable incentive, savings and retirement plans, practices,
              policies  and  programs of the Company and its  affiliates  to the
              same extent as other  senior  executives  (or,


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              where applicable,  retired senior executives) of the Company,  and
              (B) the Executive and/or the Executive's  family,  as the case may
              be, shall be eligible for immediate  participation in (and without
              any limitation for preexisting conditions),  and shall receive all
              benefits under, all applicable  welfare benefit plans,  practices,
              policies and programs  provided by the Company and its affiliates,
              other than severance plans,  practices,  policies and programs but
              including,  without  limitation,  medical,  prescription,  dental,
              disability,  salary  continuance,  employee life insurance,  group
              life insurance,  accidental  death and travel  accident  insurance
              plans and programs,  to the same extent as other senior executives
              (or, where applicable,  retired senior executives) of the Company,
              provided,  however,  that the Executive's  aggregate benefits as a
              retired senior  executive under the plans described in this clause
              (B) shall not be less than the  benefits  provided  by the Company
              and its affiliates to its retired senior executive  officers as of
              the date of this Agreement.

              (d) Perquisites. During the Employment Period, the Executive shall
       be entitled to receive such perquisites as the Company may establish from
       time to time  which  are  commensurate  with  his  position  and at least
       comparable to those received by other senior executives at the Company.

              (e)  Expense  Reimbursement.   The  Company  shall  reimburse  the
       Executive for all  reasonable  and  documented  expenses  incurred by the
       Executive  in  the  performance  of the  Executive's  duties  under  this
       Agreement.

       4.     Termination of Employment.

              (a)  Death  or  Disability.   The  Executive's   employment  shall
       terminate  automatically upon the Executive's death during the Employment
       Period.  The  Company  shall be  entitled to  terminate  the  Executive's
       employment  because of the Executive's  Disability  during the Employment
       Period.  "Disability" means that (i) the Executive has been unable, for a
       period of 180  consecutive  business  days,  to perform  the  Executive's
       duties under this Agreement, as a result of physical or mental illness or
       injury, and (ii) a physician selected by the Company or its insurers, and
       acceptable to the Executive or the Executive's legal representative,  has
       determined  that the  Executive's  incapacity is total and  permanent.  A
       termination of the  Executive's  employment by the Company for Disability
       shall be communicated  to the Executive by written  notice,  and shall be
       effective on the 30th day after  receipt of such notice by the  Executive
       (the  "Disability  Effective  Date"),  unless  the  Executive  returns to
       full-time  performance  of the  Executive's  duties before the Disability
       Effective Date.

              (b) By the Company.

              (i) The Company may terminate the  Executive's  employment  during
       the Employment Period for Cause or without Cause. "Cause" means:

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                     A. the  willful  and  continued  failure  of the  Executive
              substantially  to  perform  the  Executive's   duties  under  this
              Agreement (other than as a result of physical or mental illness or
              injury),  after  the Board  delivers  to the  Executive  a written
              demand for substantial  performance that  specifically  identifies
              the manner in which the Board  believes that the Executive has not
              substantially performed the Executive's duties; or

                     B. illegal conduct or gross misconduct by the Executive, in
              either  case  that  is  willful   and  results  in  material   and
              demonstrable damage to the business or reputation of the Company.

       No act or failure to act on the part of the Executive shall be considered
       "willful"  unless it is done,  or omitted to be done, by the Executive in
       bad faith or without  reasonable  belief that the  Executive's  action or
       omission was in the best interests of the Company.  Any act or failure to
       act that is based upon  authority  given  pursuant to a  resolution  duly
       adopted by the Board, or the advice of counsel for the Company,  shall be
       conclusively presumed to be done, or omitted to be done, by the Executive
       in good faith and in the best interests of the Company.

              (ii) A termination of the  Executive's  employment for Cause shall
       be effected in  accordance  with the  following  procedures.  The Company
       shall give the  Executive  written  notice  ("Notice of  Termination  for
       Cause") of its  intention to terminate  the  Executive's  employment  for
       Cause,  setting  forth in reasonable  detail the specific  conduct of the
       Executive  that  it  considers  to  constitute  Cause  and  the  specific
       provision(s) of this Agreement on which it relies,  and stating the date,
       time and place of the Special Board Meeting for Cause. The "Special Board
       Meeting  for  Cause"  means  a  meeting  of the  Board  called  and  held
       specifically  for the purpose of considering the Executive's  termination
       for  Cause,  that  takes  place  not less than ten (10) and not more than
       twenty (20)  business  days after the  Executive  receives  the Notice of
       Termination  for  Cause.  The  Executive  shall be given an  opportunity,
       together  with  counsel,  to be heard at the  Special  Board  Meeting for
       Cause. The Executive's  termination for Cause shall be effective when and
       if a resolution is duly adopted at the Special Board Meeting for Cause by
       a  two-thirds  vote of the  entire  membership  of the  Board,  excluding
       employee directors,  stating that in the good faith opinion of the Board,
       the  Executive  is  guilty  of the  conduct  described  in the  Notice of
       Termination  for Cause,  and that  conduct  constitutes  Cause under this
       Agreement.

              (iii) A termination of the  Executive's  employment  without Cause
       shall be  effected  in  accordance  with the  following  procedures.  The
       Company shall give the Executive  written notice  ("Notice of Termination
       without Cause") of its intention to terminate the Executive's  employment
       without  Cause,  stating the date,  time and place of the  Special  Board
       Meeting without Cause.  The "Special Board Meeting without Cause" means a



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       meeting of the Board  called  and held  specifically  for the  purpose of
       considering the Executive's  termination  without Cause, that takes place
       not less than ten (10) and not more than twenty (20)  business days after
       the  Executive  receives the Notice of  Termination  without  Cause.  The
       Executive  shall be given an  opportunity,  together with counsel,  to be
       heard  at the  Special  Board  Meeting  without  Cause.  The  Executive's
       termination  without Cause shall be effective when and if a resolution is
       duly adopted at the Special Board  Meeting  without Cause by a two-thirds
       vote of the entire membership of the Board, excluding employee directors,
       stating that the Executive is terminated without Cause.

       (c) Good Reason.

              (i) The  Executive  may  terminate  employment  for Good Reason or
       without Good Reason. "Good Reason" means:

                     A.  the   assignment   to  the   Executive  of  any  duties
              inconsistent in any respect with paragraphs (a) and (b) of Section
              2 of this  Agreement,  or any  other  action by the  Company  that
              results in a diminution in the  Executive's  position,  authority,
              duties or responsibilities,  other than an isolated, insubstantial
              and  inadvertent  action  that is not  taken in bad  faith  and is
              remedied by the Company  promptly  after receipt of notice thereof
              from the Executive;

                     B. any failure by the Company to comply with any  provision
              of  Section  3  of  this   Agreement,   other  than  an  isolated,
              insubstantial  and  inadvertent  failure  that is not taken in bad
              faith and is  remedied by the Company  promptly  after  receipt of
              notice thereof from the Executive;

                     C. any  requirement  by the  Company  that the  Executive's
              services be rendered  primarily at a location or  locations  other
              than  that  provided  for in  paragraph  (d) of  Section 2 of this
              Agreement;

                     D. any purported termination of the Executive's  employment
              by the Company for a reason or in a manner not expressly permitted
              by this Agreement;

                     E. any failure by the Company to comply with  paragraph (c)
              of Section 11 of this Agreement; or

                     F. any other  substantial  breach of this  Agreement by the
              Company  that either is not taken in good faith or is not remedied
              by the Company  promptly  after receipt of notice thereof from the
              Executive.

              (ii) A termination  of employment by the Executive for Good Reason
       shall be  effectuated by giving the Company  written  notice  ("Notice



                                      -6-
<PAGE>


       of Termination for Good Reason") of the termination  within six months of
       the event  constituting  Good Reason,  setting forth in reasonable detail
       the specific  conduct of the Company that constitutes Good Reason and the
       specific  provision(s) of this Agreement on which the Executive relies. A
       termination  of  employment  by the  Executive  for Good Reason  shall be
       effective on the fifth business day following the date when the Notice of
       Termination  for Good  Reason is given,  unless the  notice  sets forth a
       later date  (which  date shall in no event be later than thirty (30) days
       after the notice is given).

              (iii) A termination of the Executive's employment by the Executive
       without  Good Reason  shall be  effected  by giving the  Company  written
       notice of the termination.

       (d) Date of Termination.  The "Date of Termination" means the date of the
Executive's  death,  the  Disability  Effective  Date,  the  date on  which  the
termination  of the  Executive's  employment by the Company for Cause or without
Cause or by the Executive for Good Reason is effective, or the date on which the
Executive  gives the Company notice of a termination of employment  without Good
Reason, as the case may be.

       5. Obligations of the Company upon Termination.

              (a) By the Company other than for Cause,  Death or Disability;  by
       the Executive  for Good Reason.  If, during the  Employment  Period,  the
       Company  terminates  the  Executive's  employment,  other than for Cause,
       Death,  or Disability,  or the Executive  terminates  employment for Good
       Reason,  the Company  shall  continue to provide the  Executive  with the
       compensation  and  benefits set forth in  paragraphs  (a), (b) and (c) of
       Section 3 as if he had remained  employed by the Company pursuant to this
       Agreement  through the end of the Employment  Period and then retired (at
       which time he will be treated as  eligible  for and will be  entitled  to
       receive all  retiree  welfare  benefits  and other  benefits  provided to
       retired  senior  executives,  as set  forth in  Section  3(c),  with such
       benefits  being  calculated  for this purpose as though the Executive had
       retired  at age 62 with  earnings  on an annual  basis  during  the years
       between  the Date of  Termination  and age 62  equal  to the  Executive's
       earnings for the year  immediately  preceding  the Date of  Termination);
       provided,  that the Incentive Compensation for the period through the end
       of  the  Employment  Period  shall  be  equal  to the  maximum  Incentive
       Compensation that the Executive would have been eligible to earn for such
       period; provided, further that in lieu of stock options, restricted stock
       and other stock-based  awards,  the Executive shall be paid cash equal to
       the fair market value (without regard to any  restrictions)  of the stock
       options,  restricted  stock  and  other  stock-based  awards  that  would
       otherwise have been granted; and provided, further that to the extent any
       benefits  described  in  paragraph  (c) of  Section 3 cannot be  provided
       pursuant  to the  plan  or  program  maintained  by the  Company  for its
       executives,  the Company shall provide such benefits outside such plan or
       program at no additional cost (including  without limitation tax cost) to
       the Executive  and his family;  and  provided,  finally,  that during any
       period when the  Executive  is  eligible to receive  benefits of the type


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       described in clause (B) of paragraph  (c)(iv) of Section 3 under  another
       employer-provided  plan, the benefits  provided by the Company under this
       paragraph (a) of Section 5 may be made  secondary to those provided under
       such other plan. In addition to the foregoing,  any  restricted  stock or
       performance  shares or units outstanding on the Date of Termination shall
       be fully vested as of the Date of Termination and all options outstanding
       on the Date of  Termination  shall be fully  vested and  exercisable  and
       shall  remain  in  effect  and  exercisable  through  the  end  of  their
       respective  terms,  without regard to the  termination of the Executive's
       employment. The payments and benefits provided pursuant to this paragraph
       (a) of Section 5 are intended as liquidated  damages for a termination of
       the  Executive's  employment  by the  Company  other  than  for  Cause or
       Disability or for the actions of the Company  leading to a termination of
       the Executive's employment by the Executive for Good Reason, and shall be
       the sole and exclusive remedy therefor.

              (b)  Death  and  Disability.  If  the  Executive's  employment  is
       terminated by reason of the  Executive's  death or Disability  during the
       Employment Period, the Company shall pay to the Executive or, in the case
       of the Executive's  death, to the  Executive's  designated  beneficiaries
       (or, if there is no such beneficiary,  to the Executive's estate or legal
       representative),  in a lump sum in cash within thirty (30) days after the
       Date of  Termination,  the sum of the  following  amounts  (the  "Accrued
       Obligations"):  (1) any  portion of the  Executive's  Annual  Base Salary
       through the Date of Termination that has not yet been paid; (2) an amount
       representing the Incentive  Compensation for the period that includes the
       Date of  Termination,  computed by  assuming  that the amount of all such
       Incentive  Compensation  would  be equal to the  maximum  amount  of such
       Incentive  Compensation  that the  Executive  would have been eligible to
       earn for such  period,  and  multiplying  that amount by a fraction,  the
       numerator of which is the number of days in such period  through the Date
       of Termination,  and the denominator of which is the total number of days
       in the relevant period; (3) any compensation  previously  deferred by the
       Executive  (together with any accrued interest or earnings  thereon) that
       has  not  yet  been  paid;  and  (4) any  accrued  but  unpaid  Incentive
       Compensation and vacation pay. Any deferred  compensation  (together with
       any accrued interest or earnings  thereon,  if any) that has not yet been
       paid, will be paid in accordance with the terms and conditions applicable
       to such deferred compensation.

              (c) By the Company for Cause; By the Executive Other than for Good
       Reason.  If the  Executive's  employment is terminated by the Company for
       Cause during the Employment  Period,  the Company shall pay the Executive
       the Annual Base Salary through the Date of Termination  and the amount of
       any compensation  previously deferred by the Executive (together with any
       accrued interest or earnings thereon), in each case to the extent not yet
       paid,  and the  Company  shall  have no  further  obligations  under this
       Agreement,  except as  specified  in  Section 6 below.  If the  Executive
       voluntarily  terminates  employment during the Employment  Period,  other
       than for Good Reason,  the Company shall pay the Accrued  Obligations  to
       the  Executive in a lump sum in cash within  thirty (30) days of the Date
       of Termination,  and the Company shall have no further  obligations under
       this Agreement, except as specified in Section 6 below.

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       6. Non-exclusivity of Rights.  Nothing in this Agreement shall prevent or
limit the Executive's  continuing or future  participation in any plan, program,
policy or practice  provided by the Company or any of its  affiliates  for which
the  Executive  may  qualify,  nor shall  anything  in this  Agreement  limit or
otherwise  affect such rights as the  Executive  may have under any  contract or
agreement with the Company or any of its  affiliates  relating to subject matter
other than that specifically addressed herein. Vested benefits and other amounts
that the  Executive  is  otherwise  entitled  to  receive  under  the  Incentive
Compensation  program,  the  Defined  Benefit  Arrangement,  the Life  Insurance
Coverage,  the Executive  Tenure  Compensation  Plan, the  Executive's  Deferred
Compensation Plan(s), or any other plan, policy,  practice or program of, or any
contract or agreement with, the Company or any of its affiliates on or after the
Date of Termination  shall be payable in accordance  with the terms of each such
plan,  policy,  practice,  program,  contract or agreement,  as the case may be,
except as explicitly modified by this Agreement.

       7.  Full  Settlement.  The  Company's  obligation  to make  the  payments
provided for in, and otherwise to perform its obligations  under, this Agreement
shall not be affected by any set-off, counterclaim, recoupment, defense or other
claim,  right or action  that the  Company may have  against  the  Executive  or
others. In no event shall the Executive be obligated to seek other employment or
take any  other  action  by way of  mitigation  of the  amounts  payable  to the
Executive under any of the provisions of this Agreement.  The amounts payable by
the Company under this  Agreement  shall not be offset or reduced by any amounts
otherwise  receivable  or received by the Executive  from any source,  except as
specifically  provided in  paragraph  (a) of Section 5 with  respect to benefits
described in clause (B) of paragraph (c)(iv) of Section 3.

       8.  Confidential  Information.  The  Executive  shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential  information,
knowledge or data relating to the Company or any of its affiliated companies and
their  respective  businesses that the Executive  obtains during the Executive's
employment  by the Company or any of its  affiliated  companies  and that is not
public  knowledge  (other than as a result of the Executive's  violation of this
Section 8)  ("Confidential  Information").  The Executive shall not communicate,
divulge or disseminate  Confidential Information at any time during or after the
Executive's  employment with the Company,  except with the prior written consent
of the Company or as  otherwise  required by law or legal  process.  In no event
shall any asserted  violation of the  provisions  of this Section 8 constitute a
basis  for  deferring  or  withholding  any  amounts  otherwise  payable  to the
Executive under this Agreement.

       9. Total Payments.

              (a) Notwithstanding any other provision of this Agreement,  if any
       portion of any payment under this Agreement, or under any other agreement
       with or plan of the Company (in the aggregate  "Total  Payments"),  would
       constitute an "excess parachute payment," the Company shall pay Executive
       an additional  amount (the  "Gross-Up  Payment") such that the net amount
       retained by Executive  after  deduction  of any excise tax imposed  under
       Section  4999 of the  Internal  Revenue  Code of 1986,  as  amended  (the
       "Code"),  any interest  charges or penalties in respect of the imposition
       of such excise tax (but not any  federal,  state or local  income tax, or
       employment tax) on the Total Payments,  and any federal,  state and local
       income tax,  employment tax, and excise tax upon the payment provided for
       by this paragraph (a) of Section 9, shall be equal to the Total Payments.
       For  purposes 


                                      -9-
<PAGE>

       of determining the amount of the Gross-Up Payment, the Executive shall be
       deemed to pay  federal  income tax and  employment  taxes at the  highest
       marginal rate of federal income and  employment  taxation in the calendar
       year in which  the  Gross-Up  Payment  is to be made and  state and local
       income  taxes at the highest  marginal  rate of taxation in the state and
       locality of the Executive's  domicile for income tax purposes on the date
       the  Gross-Up  Payment is made,  net of the maximum  reduction in federal
       income  taxes that may be obtained  from the  deduction of such state and
       local taxes. For purposes of this Agreement,  the terms "excess parachute
       payment" and  "parachute  payments"  shall have the meanings  assigned to
       them in Section 280G of the Code and such  "parachute  payments" shall be
       valued as provided therein.  Present value for purposes of this Agreement
       shall be calculated in accordance with Section 1274(b)(2) of the Code (or
       any successor  provision).  Promptly following the Date of Termination or
       notice by the  Company to the  Executive  of its  belief  that there is a
       payment  or benefit  due the  Executive  which  will  result in an excess
       parachute  payment as defined in Section 280G of the Code,  the Executive
       and the  Company,  at the  Company's  expense,  shall  obtain the opinion
       (which need not be  unqualified)  of  nationally  recognized  tax counsel
       ("National Tax Counsel") selected by the Company's  independent  auditors
       and reasonably  acceptable to the Executive (which may be regular outside
       counsel to the  Company),  which opinion sets forth (i) the amount of the
       Base Period Income,  (ii) the amount and present value of Total Payments,
       (iii) the amount and present value of any excess parachute payments,  and
       (iv) the amount of any Gross-Up Payment.  As used in this Agreement,  the
       term  "Base  Period  Income"  means an  amount  equal to the  Executive's
       "annualized  includible  compensation  for the base period" as defined in
       Section  280G(d)(1) of the Code. For purposes of such opinion,  the value
       of any  noncash  benefits  or any  deferred  payment or benefit  shall be
       determined by the Company's  independent  auditors in accordance with the
       principles  of Section  280G(d)(3)  and (4) of the Code (or any successor
       provisions),  which  determination shall be evidenced in a certificate of
       such auditors addressed to the Company and the Executive.  The opinion of
       National Tax Counsel  shall be addressed to the Company and the Executive
       and shall be binding upon the Company and the Executive. If such National
       Tax Counsel so requests in connection  with the opinion  required by this
       paragraph  (a) of Section 9, the  Executive and the Company shall obtain,
       at the Company's  expense,  and the National Tax Counsel may rely on, the
       advice of a firm of recognized executive  compensation  consultants as to
       the  reasonableness  of any item of  compensation  to be  received by the
       Executive  solely with  respect to its status  under  Section 280G of the
       Code and the  regulations  thereunder.  Within  five (5) days  after  the
       National  Tax  Counsel's  opinion  is  received  by the  Company  and the
       Executive,  the Company shall pay (or cause to be paid) or distribute (or
       cause to be  distributed) to or for the benefit of Executive such amounts
       as are then due to Executive under this Agreement.

              (b) In the  event  that  upon any  audit by the  Internal  Revenue
       Service,  or by a state or local taxing authority,  of the Total Payments
       or Gross-Up Payment, a change is finally determined to be required in the
       amount of taxes paid by the Executive,  appropriate  adjustments shall be
       made under this  Agreement  such that the net amount  which is payable to
       the Executive after taking into account the 


                                      -10-
<PAGE>

       provisions  of Section  4999 of the Code shall  reflect the intent of the
       parties as expressed in paragraph (a) above, in the manner  determined by
       the National Tax Counsel. The Company agrees to bear all costs associated
       with, and to indemnify and hold harmless, the National Tax Counsel of and
       from any and all claims, damages, and expenses resulting from or relating
       to its  determinations  pursuant  to this  Section 9,  except for claims,
       damages  or  expenses  resulting  from the gross  negligence  or  willful
       misconduct of such firm.

       10.  Attorneys'  Fees.  The Company  agrees to pay, as  incurred,  to the
fullest extent  permitted by law, all legal fees and expenses that the Executive
may reasonably  incur as a result of any contest  (regardless of the outcome) by
the Company,  the  Executive or others of the validity or  enforceability  of or
liability  under,  or otherwise  involving,  any  provision  of this  Agreement,
together with  interest on any delayed  payment at the  applicable  federal rate
provided for in Section 7872(f)(2)(A) of the Code.

       11. Successors.

              (a) This Agreement is personal to the Executive  and,  without the
       prior  written  consent of the Company,  shall not be  assignable  by the
       Executive.   This  Agreement  shall  inure  to  the  benefit  of  and  be
       enforceable by the Executive's legal representatives.

              (b) This  Agreement  shall  inure to the benefit of and be binding
       upon the Company and its successors and assigns.

              (c) The Company  shall require any  successor  (whether  direct or
       indirect,  by purchase,  merger,  consolidation  or  otherwise) to all or
       substantially  all of the business and/or assets of the Company expressly
       to assume and agree to perform  this  Agreement in the same manner and to
       the same extent that the Company  would have been  required to perform it
       if no such  succession  had  taken  place.  As  used  in this  Agreement,
       "Company"  shall  mean both the  Company  as  defined  above and any such
       successor that assumes and agrees to perform this Agreement, by operation
       of law or otherwise.

       12. Miscellaneous.

              (a)  This  Agreement  shall  be  governed  by,  and  construed  in
       accordance with, the laws of the State of Wisconsin, without reference to
       principles  of conflict of laws.  The captions of this  Agreement are not
       part of the  provisions  hereof and shall  have no force or effect.  This
       Agreement  may not be amended or modified  except by a written  agreement
       executed by the parties hereto or their  respective  successors and legal
       representatives.

              (b) All  notices  and other  communications  under this  Agreement
       shall be in  writing  and  shall be given by hand  delivery  to the other
       party or by  registered  or certified  mail,  return  receipt  requested,
       postage prepaid, addressed as follows:



                                      -11-
<PAGE>

                                    If to the Executive:

                                    Erroll B. Davis, Jr.
                                    7829 Noll Valley Road
                                    Verona, Wisconsin  53593

                                    If to the Company:

                                    Interstate Energy Corporation
                                    222 West Washington Avenue
                                    P.O. Box 2568
                                    Madison, Wisconsin  53701-2568
                                    Attention:  General Counsel

                                    With a copy to:

                                    Benjamin F. Garmer, III
                                    c/o Foley & Lardner
                                    777 East Wisconsin Avenue
                                    Milwaukee, WI  53202-5367

or to such other  address as either  party  furnishes to the other in writing in
accordance  with this  paragraph (b) of Section 12.  Notices and  communications
shall be effective when actually received by the addressee.

              (c) The  invalidity or  unenforceability  of any provision of this
       Agreement  shall not affect the validity or  enforceability  of any other
       provision of this Agreement.  If any provision of this Agreement shall be
       held invalid or  unenforceable  in part,  the  remaining  portion of such
       provision,  together with all other  provisions of this Agreement,  shall
       remain valid and enforceable and continue in full force and effect to the
       fullest extent consistent with law.

              (d)  Notwithstanding  any other provisions of this Agreement,  the
       Company may  withhold  from  amounts  payable  under this  Agreement  all
       federal,  state, local and foreign taxes that are required to be withheld
       by applicable laws or regulations.

              (e) The Executive's or the Company's failure to insist upon strict
       compliance  with any  provisions  of, or to assert any right under,  this
       Agreement  (including,  without  limitation,  the right of  Executive  to
       terminate employment for Good Reason pursuant to paragraph (c) of Section
       4 of this Agreement) shall not be deemed to be a waiver of such provision
       or right or of any other provision of or right under this Agreement.

              (f) The Executive and the Company  acknowledge that this Agreement
       supersedes any other agreement between them concerning the subject matter
       hereof,  excluding the Key Executive  Employment and Severance  Agreement
       between the  Executive and the Company dated March 29, 1999, as in effect
       on the  date  hereof 


                                      -12-
<PAGE>

       or as hereafter  amended from time to time (the  "Severance  Agreement");
       provided,  however,  that to the  extent  that a payment or benefit to be
       provided  under this  Agreement  is  similarly  to be provided  under the
       Severance  Agreement,  the  Company  agrees  to  pay  or  provide  to the
       Executive that payment or benefit which provides the highest value to the
       Executive,  and the Executive  agrees,  in order to avoid  duplication of
       payments or  benefits,  that upon the receipt of any such  highest  value
       payment  or  benefit  under  either  this   Agreement  or  the  Severance
       Agreement,  as the case may be,  he  shall  have no right to any  similar
       payment or benefit of lesser value under the other agreement.

              (g) The rights and benefits of the Executive  under this Agreement
       may not be  anticipated,  assigned,  alienated or subject to  attachment,
       garnishment,  levy,  execution or other legal or equitable process except
       as required by law. Any attempt by the Executive to anticipate, alienate,
       assign,  sell,  transfer,  pledge,  encumber  or charge the same shall be
       void.  Payments hereunder shall not be considered assets of the Executive
       in the event of insolvency or bankruptcy.

              (h) This Agreement may be executed in several  counterparts,  each
       of which  shall be  deemed  an  original,  and  said  counterparts  shall
       constitute but one and the same instrument.

       13.  Effectiveness  of  Agreement.  The  effectiveness  of  the  original
Agreement  was  subject to the  consummation  of the  Merger (as  defined in the
Merger  Agreement),  which was consummated  April 21, 1998. The effectiveness of
this amended and restated  Agreement is subject to the mutual written  agreement
of the parties set forth below.

       IN WITNESS  WHEREOF,  the Executive has hereunto set the Executive's hand
and,  pursuant to the  authorization of its Board of Directors,  the Company has
caused this  Agreement  to be executed in its name and on its behalf,  all as of
the day and year first above written.

                                     /s/Erroll B. Davis, Jr.            
                                     Erroll B. Davis, Jr.


                                     INTERSTATE ENERGY CORPORATION

                                     By______________________________________
                                         Name:
                                         Title:

                                      -13-