UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]      QUARTERLY  REPORT  PURSUANT  TO SECTION 13 OR 15 (d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998

                                       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      Identification
                  Telephone Number                                       Number
1-9894            INTERSTATE ENERGY CORPORATION                      39-1380265
                  (a Wisconsin corporation)
                  222 West Washington Avenue
                  Madison, Wisconsin  53703
                  Telephone (608)252-3311

0-4117-1          IES UTILITIES INC.                                 42-0331370
                  (an Iowa corporation)
                  Alliant Tower
                  Cedar Rapids, Iowa  52401
                  Telephone (319)398-4411

0-337             WISCONSIN POWER AND LIGHT COMPANY                  39-0714890
                  (a Wisconsin corporation)
                  222 West Washington Avenue
                  Madison, Wisconsin  53703
                  Telephone (608)252-3311

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 _____

This combined Form 10-Q is separately  filed by Interstate  Energy  Corporation,
IES Utilities Inc. and Wisconsin Power and Light Company.  Information contained
herein relating to any individual  registrant is filed by such registrant on its
own behalf.  Each registrant makes no representation as to information  relating
to the other registrants.

Number of shares  outstanding  of each class of common  stock as of October  31,
1998:  

Interstate Energy  Corporation      Common  stock,  $.01 par  value,  77,152,806
                                    shares outstanding

IES Utilities Inc.                  Common  stock,  $2.50 par value,  13,370,788
                                    shares  outstanding  (all of which are owned
                                    beneficially  and of  record  by  Interstate
                                    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  Interstate
                                    Energy Corporation)



<PAGE>


                                    CONTENTS

                                                                           Page
Part I.         Financial Information

     Item 1.    Consolidated Financial Statements

                Interstate Energy Corporation:
                Consolidated Statements of Income for the Three and 
                     Nine Months Ended September 30, 1998 and 1997            6
                Consolidated Balance Sheets as of September 30, 1998
                     and December 31, 1997                                    7
                Consolidated Statements of Cash Flows for the Nine 
                     Months Ended  September 30, 1998 and 1997                9
                Notes to Consolidated Financial Statements                    10

                IES Utilities Inc.:
                Consolidated Statements of Income for the Three and 
                     Nine Months Ended September 30, 1998 and 1997            14
                Consolidated Balance Sheets as of September 30, 1998
                     and December 31, 1997                                    15
                Consolidated Statements of Cash Flows for the Nine
                     Months Ended September 30, 1998 and 1997                 17
                Notes to Consolidated Financial Statements                    18

                Wisconsin Power and Light Company:
                Consolidated Statements of Income for the Three and 
                     Nine Months Ended September 30, 1998 and 1997            20
                Consolidated Balance Sheets as of September 30, 1998 
                     and December 31, 1997                                    21
                Consolidated Statements of Cash Flows for the Nine 
                     Months Ended September 30, 1998 and 1997                 23
                Notes to Consolidated Financial Statements                    24

     Item 2.    Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                      25

     Item 3.    Quantitative and Qualitative Disclosures About 
                     Market Risk                                              57

Part II.        Other Information                                             57

     Item 1.    Legal Proceedings                                             57

     Item 5.    Other Information                                             58

     Item 6.    Exhibits and Reports on Form 8-K                              59

                Signatures                                                    60

                                       2

<PAGE>


                                   DEFINITIONS

Certain  abbreviations  or acronyms  used in the text and notes of this combined
Form 10-Q are defined below:

Abbreviation or Acronym      Definition
AICPA                        American Institute of Certified Public Accountants

Alliant Industries           Alliant Industries, Inc.

Alliant Services             Alliant Services Company

DAEC                         Duane Arnold Energy Center

Diversified                  IES Diversified Inc.

DOE                          U.S. Department of Energy

Dth                          Dekatherm

EAC                          Energy Adjustment Clause

EPA                          United States Environmental Protection Agency

EWG                          Exempt Wholesale Generator

FASB                         Financial Accounting Standards Board

FERC                         Federal Energy Regulatory Commission

FUCO                         Foreign Utility Company

HDC                          Heartland Development Corporation

ICC                          Illinois Commerce Commission

IDNR                         Iowa Department of Natural Resources

IEC                          Interstate Energy Corporation

IEPC                         Iowa Environmental Protection Commission

IES                          IES Industries Inc.

IESU                         IES Utilities Inc.

IPC                          Interstate Power Company

ISO                          Independent System Operator

IUB                          Iowa Utilities Board

Kewaunee                     Kewaunee Nuclear Power Plant

                                       3

<PAGE>


Abbreviation or Acronym      Definition
LIBOR                        London Interbank Offer Rate

McLeod                       McLeodUSA Inc.

MD&A                         Management's Discussion and Analysis of Financial
                             Condition and Results of Operations

MG&E                         Madison Gas and Electric Company

MGP                          Manufactured Gas Plants

Midwest ISO                  Midwest Independent System Operator

MPUC                         Minnesota Public Utilities Commission

MW                           Megawatt

MWH                          Megawatt-Hour

NOx                          Nitrogen Oxides

OCA                          Office of Consumer Advocate

PCB                          Polychlorinated Biphenyl

PGA                          Purchased Gas Adjustment

PSCW                         Public Service Commission of Wisconsin

PSD                          Prevention of Significant Deterioration

PUHCA                        Public Utility Holding Company Act of 1935

SEC                          Securities and Exchange Commission

SFAS                         Statement of Financial Accounting Standards

SIP                          State Implementation Plan

SO2                          Sulfur Dioxide

SOP                          Statement of Position

Whiting                      Whiting Petroleum Corporation

WP&L                         Wisconsin Power and Light Company

WPLH                         WPL Holdings, Inc.

WPSC                         Wisconsin Public Service Corporation

                                       4

<PAGE>




                          INTERSTATE ENERGY CORPORATION


                         PART I - FINANCIAL INFORMATION


                    ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS




                                       5


<PAGE>

<TABLE>

                          INTERSTATE ENERGY CORPORATION
                  CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>

                                                                For the Three Months                 For the Nine Months
                                                                Ended September 30,                  Ended September 30,
                                                               1998              1997               1998             1997
                                                                              (Restated)         (Restated)       (Restated)
--------------------------------------------------------------------------------------------------------------------------------
                                                                        (in thousands, except per share amounts)

Operating revenues:
<S>                                                             <C>              <C>              <C>               <C>        
  Electric utility                                              $ 460,974        $ 433,983        $ 1,199,139       $ 1,145,377
  Gas utility                                                      29,082           33,893            204,395           269,709
  Nonregulated and other                                           65,257           88,982            199,074           299,264
                                                          ----------------  ---------------    ---------------  ----------------
                                                                  555,313          556,858          1,602,608         1,714,350
                                                          ----------------  ---------------    ---------------  ----------------
--------------------------------------------------------------------------------------------------------------------------------

Operating expenses:
  Electric and steam production fuels                              85,854           75,185            224,948           215,522
  Purchased power                                                  69,366           65,783            198,930           193,616
  Cost of utility gas sold                                         12,215           18,833            113,401           175,544
  Other operation                                                 140,082          157,953            456,113           500,349
  Maintenance                                                      29,274           28,833             87,921            89,613
  Depreciation and amortization                                    70,097           64,532            212,787           192,035
  Taxes other than income taxes                                    26,229           25,442             79,804            78,106
                                                          ----------------  ---------------    ---------------  ----------------
                                                                  433,117          436,561          1,373,904         1,444,785
                                                          ----------------  ---------------    ---------------  ----------------
--------------------------------------------------------------------------------------------------------------------------------

Operating income                                                  122,196          120,297            228,704           269,565
                                                          ----------------  ---------------    ---------------  ----------------
--------------------------------------------------------------------------------------------------------------------------------

Interest expense and other:
  Interest expense                                                 31,890           31,584             95,045            88,519
  Allowance for funds used during construction                     (1,884)          (1,468)            (5,024)           (3,832)
  Preferred dividend requirements of subsidiaries                   1,675            1,674              5,024             5,020
  Miscellaneous, net                                                1,131           (2,449)             8,289            (7,701)
                                                          ----------------  ---------------    ---------------  ----------------
                                                                   32,812           29,341            103,334            82,006
                                                          ----------------  ---------------    ---------------  ----------------
--------------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                         89,384           90,956            125,370           187,559
                                                          ----------------  ---------------    ---------------  ----------------
--------------------------------------------------------------------------------------------------------------------------------

Income taxes                                                       37,680           35,987             53,889            72,103
                                                          ----------------  ---------------    ---------------  ----------------
--------------------------------------------------------------------------------------------------------------------------------

Net income                                                       $ 51,704         $ 54,969           $ 71,481         $ 115,456
                                                          ================  ===============    ===============  ================
--------------------------------------------------------------------------------------------------------------------------------

Average number of common shares outstanding                        77,008           76,327             76,796            76,130
                                                          ================  ===============    ===============  ================
--------------------------------------------------------------------------------------------------------------------------------

Earnings per average common share (basic and diluted)              $ 0.67           $ 0.72             $ 0.93            $ 1.52
                                                          ================  ===============    ===============  ================
--------------------------------------------------------------------------------------------------------------------------------

Dividends declared per common share                                $ 0.50           $ 0.50             $ 1.50            $ 1.50
                                                          ================  ===============    ===============  ================
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       6

<PAGE>

<TABLE>

                          INTERSTATE ENERGY CORPORATION
                     CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>

                                                                    September 30,         December 31,
                                                                         1998                 1997
ASSETS                                                                                     (Restated)
---------------------------------------------------------------------------------------------------------
                                                                              (in thousands)
Property, plant and equipment:
  Utility -
    Plant in service -
<S>                                                                     <C>                  <C>        
      Electric                                                          $ 4,820,913          $ 4,733,222
      Gas                                                                   506,895              495,155
      Other                                                                 386,132              366,395
                                                                   -----------------    -----------------
                                                                          5,713,940            5,594,772
    Less - Accumulated depreciation                                       2,812,179            2,631,582
                                                                   -----------------    -----------------
                                                                          2,901,761            2,963,190
    Construction work in progress                                           118,988               86,511
    Nuclear fuel, net of amortization                                        48,204               55,777
                                                                   -----------------    -----------------
                                                                          3,068,953            3,105,478
  Other property, plant and equipment, net of accumulated
    depreciation and amortization of $173,049 and $139,920,
    respectively                                                            343,104              329,264
                                                                   -----------------    -----------------
                                                                          3,412,057            3,434,742
                                                                   -----------------    -----------------
---------------------------------------------------------------------------------------------------------

Current assets:
  Cash and temporary cash investments                                         9,467               27,329
  Accounts receivable:
    Customer, less allowance for doubtful accounts
      of $2,303 and $2,400, respectively                                     93,554              123,545
    Other, less allowance for doubtful accounts
      of $401 and $224, respectively                                         19,013               20,824
  Notes receivable                                                           13,465               23,410
  Production fuel, at average cost                                           43,141               40,656
  Materials and supplies, at average cost                                    52,600               49,845
  Gas stored underground, at average cost                                    22,627               32,364
  Regulatory assets                                                          35,488               36,330
  Prepaid gross receipts tax                                                 18,372               22,153
  Other                                                                      22,978               35,786
                                                                   -----------------    -----------------
                                                                            330,705              412,242
                                                                   -----------------    -----------------
---------------------------------------------------------------------------------------------------------

Investments:
  Investment in McLeodUSA Inc.                                              223,499              328,022
  Nuclear decommissioning trust funds                                       212,745              190,238
  Investment in foreign entities                                             57,519               57,072
  Other                                                                      50,759               49,319
                                                                   -----------------    -----------------
                                                                            544,522              624,651
                                                                   -----------------    -----------------
---------------------------------------------------------------------------------------------------------

Other assets:
  Regulatory assets                                                         321,181              352,365
  Deferred charges and other                                                101,663               99,550
                                                                   -----------------    -----------------
                                                                            422,844              451,915
                                                                   -----------------    -----------------
                                                                        $ 4,710,128          $ 4,923,550
                                                                   =================    =================
---------------------------------------------------------------------------------------------------------

</TABLE>


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       7

<PAGE>

<TABLE>

                          INTERSTATE ENERGY CORPORATION
               CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED)
<CAPTION>

                                                                                  September 30,         December 31,
                                                                                       1998                 1997
CAPITALIZATION AND LIABILITIES                                                                           (Restated)
-----------------------------------------------------------------------------------------------------------------------
                                                                                 (in thousands, except share amounts)
Capitalization:
  <S>                                                                                   <C>                  <C>      
  Common stock - $.01 par value - authorized 200,000,000 shares;
  outstanding 77,133,936 and 76,481,102 shares, respectively                              $ 771                $ 765
  Additional paid-in capital                                                              889,469              868,903
  Retained earnings                                                                       550,754              581,376
  Accumulated other comprehensive income                                                  103,982              173,512
                                                                                 -----------------    -----------------
    Total common equity                                                                 1,544,976            1,624,556
                                                                                 -----------------    -----------------

  Cumulative preferred stock of subsidiaries:
   Par/Stated      Authorized        Shares         Mandatory
     Value           Shares        Outstanding     Redemption
      $ 100             *            449,765           No                                  44,977               44,977
      $ 25              *            599,460           No                                  14,986               14,986
      $ 50           466,406         366,406           No                                  18,320               18,320
      $ 50             **            216,381           No                                  10,819               10,819
      $ 50             **            545,000          Yes ***                              27,250               27,250
                                                                                 -----------------    -----------------
                                                                                          116,352              116,352
    Less:  unamortized expenses                                                            (2,887)              (2,983)
                                                                                 -----------------    -----------------
      Total cumulative preferred stock of subsidiaries                                    113,465              113,369
                                                                                 -----------------    -----------------

  Long-term debt (excluding current portion)                                            1,485,607            1,467,903
                                                                                 -----------------    -----------------
                                                                                        3,144,048            3,205,828
                                                                                 -----------------    -----------------
-----------------------------------------------------------------------------------------------------------------------

Current liabilities:
  Current maturities and sinking funds                                                     68,764               18,329
  Variable rate demand bonds                                                               56,975               56,975
  Commercial paper                                                                         54,000              114,500
  Notes payable                                                                                74               42,000
  Capital lease obligations                                                                13,211               13,197
  Accounts payable                                                                        164,380              192,634
  Accrued taxes                                                                           101,465               78,923
  Other                                                                                   119,488              133,233
                                                                                 -----------------    -----------------
                                                                                          578,357              649,791
                                                                                 -----------------    -----------------
-----------------------------------------------------------------------------------------------------------------------

Other long-term liabilities and deferred credits:
  Accumulated deferred income taxes                                                       641,284              719,899
  Accumulated deferred investment tax credits                                              78,743               82,862
  Environmental liabilities                                                                55,643               66,455
  Customer advances                                                                        36,002               36,619
  Capital lease obligations                                                                15,745               23,634
  Other                                                                                   160,306              138,462
                                                                                 -----------------    -----------------
                                                                                          987,723            1,067,931
                                                                                 -----------------    -----------------
-----------------------------------------------------------------------------------------------------------------------
                                                                                      $ 4,710,128          $ 4,923,550
                                                                                 =================    =================
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

* 3,750,000  authorized  shares in total  between  the two classes **  2,000,000
authorized  shares  in  total  between  the two  classes  ***  $53.20  mandatory
redemption price

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       8

<PAGE>

<TABLE>
                          INTERSTATE ENERGY CORPORATION
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>

                                                                     For the Nine Months
                                                                     Ended September 30,
                                                                   1998              1997
                                                                (Restated)        (Restated)
-----------------------------------------------------------------------------------------------
                                                                       (in thousands)
Cash flows from operating activities:
<S>                                                                 <C>              <C>      
  Net income                                                        $ 71,481         $ 115,456
  Adjustments to reconcile net income to net cash flows
  from operating activities:
    Depreciation and amortization                                    212,787           192,035
    Amortization of nuclear fuel                                      13,718            12,560
    Amortization of deferred energy efficiency expenditures           20,849             8,637
    Deferred taxes and investment tax credits                        (22,731)           (6,286)
    Refueling outage provision                                        (6,707)            6,654
    Other                                                             10,788             7,121
  Other changes in assets and liabilities:
    Accounts receivable                                               31,802            44,329
    Notes receivable                                                   9,945           (13,052)
    Production fuel                                                   (2,485)           (5,385)
    Materials and supplies                                            (2,755)           (1,595)
    Gas stored underground                                             9,737            (1,175)
    Accounts payable                                                 (28,254)          (64,252)
    Accrued taxes                                                     22,542            21,563
    Benefit obligations and other                                     36,103            18,528
                                                               --------------   ---------------
       Net cash flows from operating activities                      376,820           335,138
                                                               --------------   ---------------
-----------------------------------------------------------------------------------------------

Cash flows used for financing activities:
    Common stock dividends                                          (117,556)         (109,108)
    Proceeds from issuance of common stock                            18,317            12,201
    Net change in Alliant Industries, Inc. credit facility            77,037            19,160
    Proceeds from issuance of other long-term debt                     2,594           295,000
    Reductions in other long-term debt                               (10,879)         (146,338)
    Net change in short-term borrowings                             (102,426)         (132,066)
    Principal payments under capital lease obligations                (9,655)           (9,405)
    Other                                                                (91)             (661)
                                                               --------------   ---------------
        Net cash flows used for financing activities                (142,659)          (71,217)
                                                               --------------   ---------------
-----------------------------------------------------------------------------------------------

Cash flows  used  for  investing   activities:   
 Construction   and   acquisition
    expenditures:
       Utility                                                      (167,109)         (182,905)
       Other                                                         (74,437)          (43,471)
    Deferred energy efficiency expenditures                                -           (13,254)
    Nuclear decommissioning trust funds                              (18,084)          (15,214)
    Other                                                              7,607             2,239
                                                               --------------   ---------------
       Net cash flows used for investing activities                 (252,023)         (252,605)
                                                               --------------   ---------------
-----------------------------------------------------------------------------------------------

Net increase (decrease) in cash and temporary cash investments       (17,862)           11,316
                                                               --------------   ---------------
-----------------------------------------------------------------------------------------------

Cash and temporary cash investments at beginning of period            27,329            22,817
                                                               --------------   ---------------
-----------------------------------------------------------------------------------------------

Cash and temporary cash investments at end of period                 $ 9,467          $ 34,133
                                                               ==============   ===============
-----------------------------------------------------------------------------------------------

Supplemental cash flow information: Cash paid during the period for:
       Interest                                                     $ 92,707          $ 83,489
                                                               ==============   ===============
       Income taxes                                                 $ 57,428          $ 61,133
                                                               ==============   ===============
    Noncash investing and financing activities:
       Capital lease obligations incurred                            $ 1,276          $ 13,912
                                                               ==============   ===============
-----------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
                                       9

<PAGE>


                          INTERSTATE ENERGY CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 1.  The interim  consolidated  financial  statements  included herein have been
     prepared by IEC,  without audit,  pursuant to the rules and  regulations of
     the SEC. Accordingly, certain information and footnote disclosures normally
     included in financial  statements  prepared in  accordance  with  generally
     accepted  accounting  principles  have been condensed or omitted,  although
     management   believes  that  the  disclosures  are  adequate  to  make  the
     information presented not misleading. The consolidated financial statements
     include IEC and its  consolidated  subsidiaries  (WP&L,  IESU, IPC, Alliant
     Industries  and Alliant  Services).  These  statements  are prepared on the
     basis of  accounting  for the  merger  of  WPLH,  IES and  IPC,  which  was
     effective on April 21, 1998, as a pooling of interests. Certain adjustments
     have been made to the prior period  amounts as part of the  restatement  to
     reflect the pooling of interests transaction. In addition, the prior period
     amounts have been restated for a change in accounting method implemented in
     the  third  quarter  of 1998  (see Note 7 for  further  discussion).  These
     financial  statements  should  be read in  conjunction  with the  financial
     statements  and the notes  thereto  included  in WPLH's and  WP&L's  latest
     Annual Report on Form 10-K, as amended,  and IES's, IESU's and IPC's latest
     Annual Report on Form 10-K.

     In the  opinion  of  management,  all  adjustments,  which are  normal  and
     recurring  in  nature,  necessary  for  a  fair  presentation  of  (a)  the
     consolidated  results of  operations  for the three and nine  months  ended
     September 30, 1998 and 1997,  (b) the  consolidated  financial  position at
     September  30,  1998  and  December  31,  1997,  and (c)  the  consolidated
     statement  of cash flows for the nine months ended  September  30, 1998 and
     1997, have been made. Because of the seasonal nature of IESU's,  WP&L's and
     IPC's operations, results for the three and nine months ended September 30,
     1998 are not necessarily indicative of results that may be expected for the
     year ending  December 31,  1998.  Certain  prior  period  amounts have been
     reclassified on a basis consistent with the 1998 presentation.

2.   On January 1, 1998,  IEC  adopted  SFAS No.  130,  Reporting  Comprehensive
     Income.  SFAS 130  establishes  standards  for  reporting of  comprehensive
     income  and its  components  in a full  set of  general  purpose  financial
     statements.  SFAS 130 requires  reporting a total for comprehensive  income
     which  includes:   (a)  unrealized   holding   gains/losses  on  securities
     classified  as  available-for-sale  under SFAS 115,  (b)  foreign  currency
     translation  adjustments  accounted  for  under  SFAS 52,  and (c)  minimum
     pension  liability  adjustments  made pursuant to SFAS 87. Prior years have
     been restated to conform to the SFAS 130 requirements. IESU and WP&L had no
     comprehensive income in the periods presented.

     IEC's   comprehensive   income   (loss),   and  the   components  of  other
     comprehensive income (loss), net of taxes, were as follows (in thousands):
<TABLE>
<CAPTION>

                                                            For the Three Months               For the Nine Months
                                                             Ended September 30,               Ended September 30,
                                                           1998              1997            1998              1997
                                                                          (Restated)      (Restated)        (Restated)
                                                       --------------------------------  --------------------------------
<S>                                                       <C>              <C>              <C>              <C>       
Net income                                                 $  51,704        $   54,969       $  71,481        $  115,456

   Other comprehensive income (loss), net of tax:
     Unrealized gain (loss) on securities (1)                                                              
                                                           (102,546)           218,567        (61,075)           218,567
     Foreign currency translation adjustments                                                              
                                                             (8,511)              (19)         (8,455)              (19)
                                                       --------------   ---------------  --------------   ---------------
       Other comprehensive income (loss), net of tax                                                       
                                                           (111,057)           218,548        (69,530)           218,548
                                                       --------------   ---------------  --------------   ---------------

Comprehensive income (loss)                               $ (59,353)        $  273,517       $   1,951        $  334,004
                                                       ==============   ===============  ==============   ===============
</TABLE>

                                       10

<PAGE>

     (1):  Adjustment  to  the  estimated  fair  value  each  quarter  of  IEC's
     investment in McLeod.

3.   In  accordance  with an order  from the PSCW,  effective  January  1, 1998,
     off-system gas sales for WP&L are included in the  Consolidated  Statements
     of  Income  as a  reduction  of the  cost of gas  sold  rather  than as gas
     revenue.  In 1997,  off-system gas sales were included in the  Consolidated
     Statements of Income as gas revenue.

4.   WPLH, as the surviving  corporation in the merger  involving  WPLH, IES and
     IPC, changed its name to IEC. In connection with the merger,  the number of
     authorized  shares of IEC common stock was  increased to  200,000,000.  See
     Item 2, "MD&A Merger" for additional information.

5.   The provisions for income taxes are based on the estimated annual effective
     tax rate, which differs from the federal  statutory rate of 35% principally
     due to: state income taxes, tax credits, effects of utility rate making and
     certain nondeductible expenses.

6.   On September 14, 1998, WP&L entered into an interest rate forward  contract
     related to the  anticipated  issuance  of $60  million of  debentures.  The
     securities  were issued on October 30,  1998 and the forward  contract  was
     settled,  which  resulted in a cash payment of $1.5  million by WP&L.  This
     payment will be recognized  as an  adjustment to interest  expense over the
     life of the new debt  securities to approximate  the interest rate implicit
     in the forward contract.

7.   During the third quarter of 1998,  IEC's oil and gas  subsidiary,  Whiting,
     changed its accounting method for oil and gas properties from the full cost
     method to the successful efforts method.  While both methods are acceptable
     under generally accepted accounting  principles,  successful efforts is the
     preferred method.  Management  believes that the successful  efforts method
     more accurately presents the results of Whiting's exploration,  development
     and  production  activities  and  minimizes  asset  impairments  caused  by
     temporary  declines in oil and gas prices,  which may not be representative
     of overall or  long-term  markets or  management's  estimate of fair market
     value.  As  a  result,  impairments  will  only  be  recognized  under  the
     successful  efforts  method when there has been a permanent  decline in the
     fair value of the oil and gas properties.  Had Whiting not converted to the
     successful  efforts  method,   management   estimates  in  the  results  of
     operations  for the three months ended  September 30, 1998,  IEC would have
     experienced a full cost ceiling  write-down  comparable  to the  cumulative
     impact on net income realized upon the conversion to the successful efforts
     method. As required by generally accepted accounting principles,  all prior
     period  financial  statements of IEC presented herein have been restated to
     reflect the change in accounting method.

     Under the successful efforts method of accounting,  Whiting capitalizes all
     costs related to property  acquisitions and successful  exploratory  wells,
     all  development  costs and the costs of support  equipment and facilities.
     Unproved leasehold costs are capitalized and are reviewed  periodically for
     impairment.  All  costs  related  to  unsuccessful  exploratory  wells  are
     expensed  when such wells are  determined  to be  non-productive  and other
     exploration costs, including geological and geophysical costs, are expensed
     as incurred. Depreciation, depletion and amortization of proved oil and gas
     properties   is   determined   on  a   field-by-field   basis   using   the
     unit-of-production  method over the life of the remaining  proved reserves.
     Estimated  costs  (net of  salvage  value) of site  remediation,  including
     offshore  platform  dismantlement,  are  included in the  depreciation  and
     depletion  calculation.  Proven oil and gas  properties  are  reviewed on a
     field-by-field  basis whenever  events or  circumstances  indicate that the
     carrying value of such properties may be impaired.


                                       11

<PAGE>

     The  cumulative  effect of the  restatement  at  January  1,  1997,  was an
     after-tax reduction in retained earnings of $11.8 million. The restated net
     income  amounts for the quarters ended March 31, 1997 through June 30, 1998
     are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                         For the Quarters Ended
                                                6/30/98      3/31/98     12/31/97     9/30/97      6/30/97      3/31/97
                                               ----------   ----------  -----------  -----------  -----------  -----------
<S>                                             <C>           <C>          <C>          <C>          <C>          <C>    
Previously reported net income                  $ (9,567)     $32,628      $34,544      $56,030      $20,859      $42,857
                                                 

  Adjustment for change in accounting
    method for oil and gas properties from the
    full cost method to the successful efforts
    method                                           469       (3,753)      (5,422)      (1,061)      (1,060)      (2,169)
                                                    
                                               ----------   ----------  -----------  -----------  -----------  -----------

Restated net income                             $ (9,098)     $28,875     $29,122      $54,969      $19,799      $40,688
                                               ==========   ==========  ===========  ===========  ===========  ===========


     The restated  earnings per average common share (basic and diluted) for the
     quarters ended March 31, 1997 through June 30, 1998 are as follows:

                                                                         For the Quarters Ended
                                                6/30/98      3/31/98     12/31/97     9/30/97      6/30/97      3/31/97
                                               ----------   ----------  -----------  -----------  -----------  -----------
Previously reported earnings per average
  common share (basic and diluted)              $  (0.12)     $  0.43       $ 0.45      $  0.73      $  0.27      $  0.57

  Adjustment for change in accounting
    method for oil and gas properties from the
    full cost method to the successful efforts
    method                                          ----        (0.05)       (0.07)       (0.01)       (0.01)       (0.03)
                                               ----------   ----------  -----------  -----------  -----------  -----------

Restated earnings per average common share
  (basic and diluted)                            $ (0.12)     $  0.38      $  0.38      $  0.72      $  0.26      $  0.54
                                               ==========   ==========  ===========  ===========  ===========  ===========

</TABLE>

                                       12


<PAGE>





                               IES UTILITIES INC.

                         PART I - FINANCIAL INFORMATION


                    ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                                       13


<PAGE>

<TABLE>

                               IES UTILITIES INC.
                  CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>

                                                             For the Three Months                    For the Nine Months
                                                             Ended September 30,                     Ended September 30,
                                                           1998                1997                1998                1997
----------------------------------------------------------------------------------------------------------------------------------
                                                                                    (in thousands)
Operating revenues:
<S>                                                         <C>                 <C>                  <C>                <C>      
  Electric utility                                          $ 201,336           $ 184,676            $ 489,625          $ 459,653
  Gas utility                                                  14,984              15,507               96,299            122,711
  Steam and other                                               5,870               5,528               19,277             19,369
                                                     -----------------   -----------------   ------------------  -----------------
                                                              222,190             205,711              605,201            601,733
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Operating expenses:
  Electric and steam production fuels                          35,478              27,613               87,411             84,026
  Purchased power                                              18,315              18,749               55,132             52,472
  Cost of gas sold                                              7,524               7,835               55,963             84,413
  Other operation                                              42,020              42,507              133,891            116,763
  Maintenance                                                  13,042              12,224               37,993             37,675
  Depreciation and amortization                                23,885              21,840               72,127             68,605
  Taxes other than income taxes                                11,986              10,956               36,699             34,563
                                                     -----------------   -----------------   ------------------  -----------------
                                                              152,250             141,724              479,216            478,517
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Operating income                                               69,940              63,987              125,985            123,216
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Interest expense and other:
  Interest expense                                             13,124              13,371               39,154             38,446
  Allowance for funds used during construction                   (976)               (784)              (2,543)            (1,551)
  Miscellaneous, net                                              809                 864                5,256              2,394
                                                     -----------------   -----------------   ------------------  -----------------
                                                                         
                                                               12,957              13,451               41,867             39,289
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                     56,983              50,536               84,118             83,927
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Income taxes                                                   26,346              21,900               38,861             36,550
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Net income                                                     30,637              28,636               45,257             47,377
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Preferred dividend requirements                                   229                 229                  686                686
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Earnings available for common stock                          $ 30,408            $ 28,407             $ 44,571           $ 46,691
                                                     =================   =================   ==================  =================
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       14

<PAGE>

<TABLE>

                               IES UTILITIES INC.
                           CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                            September 30,
                                                                                 1998            December 31,
ASSETS                                                                       (Unaudited)             1997
----------------------------------------------------------------------------------------------------------------
                                                                                      (in thousands)
Property, plant and equipment:
  Utility -
    Plant in service -
<S>                                                                             <C>                 <C>        
      Electric                                                                  $ 2,108,039         $ 2,072,866
      Gas                                                                           193,687             187,098
      Steam                                                                          55,391              55,374
      Common                                                                         96,172              90,342
                                                                           -----------------   -----------------
                                                                                  2,453,289           2,405,680
    Less - Accumulated depreciation                                               1,188,390           1,115,261
                                                                           -----------------   -----------------
                                                                                  1,264,899           1,290,419
    Construction work in progress                                                    61,791              38,923
    Leased nuclear fuel, net of amortization                                         28,865              36,731
                                                                           -----------------   -----------------
                                                                                  1,355,555           1,366,073
  Other property, plant and equipment, net of accumulated
    depreciation and amortization of $1,904 and $1,709, respectively                  5,567               5,762
                                                                           -----------------   -----------------
                                                                                  1,361,122           1,371,835
                                                                           -----------------   -----------------
----------------------------------------------------------------------------------------------------------------

Current assets:
  Cash and temporary cash investments                                                 1,142                 230
  Temporary cash investments with associated companies                               68,053                   -
  Accounts receivable:
    Customer, less allowance for doubtful accounts
      of $984 and $630, respectively                                                  5,692              29,259
    Associated companies                                                              1,805                 907
    Other, less allowance for doubtful accounts
      of $315 and $224, respectively                                                  7,685               9,235
  Production fuel, at average cost                                                    9,050              10,579
  Materials and supplies, at average cost                                            23,823              22,976
  Gas stored underground, at average cost                                             7,864              17,192
  Regulatory assets                                                                  32,208              36,330
  Prepayments and other                                                               5,976              11,680
                                                                           -----------------   -----------------
                                                                                    163,298             138,388
                                                                           -----------------   -----------------
----------------------------------------------------------------------------------------------------------------

Investments:
  Nuclear decommissioning trust funds                                                82,979              77,882
  Other                                                                               5,767               5,167
                                                                           -----------------   -----------------
                                                                                     88,746              83,049
                                                                           -----------------   -----------------
----------------------------------------------------------------------------------------------------------------

Other assets:
  Regulatory assets                                                                 138,058             163,264
  Deferred charges and other                                                         13,754              12,393
                                                                           -----------------   -----------------
                                                                                    151,812             175,657
                                                                           -----------------   -----------------
----------------------------------------------------------------------------------------------------------------

                                                                                $ 1,764,978         $ 1,768,929
                                                                           =================   =================
----------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       15

<PAGE>

<TABLE>

                               IES UTILITIES INC.
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
<CAPTION>

                                                                              September 30,
                                                                                  1998               December 31,
CAPITALIZATION AND LIABILITIES                                                 (Unaudited)               1997
--------------------------------------------------------------------------------------------------------------------
                                                                             (in thousands, except share amounts)
Capitalization:
  Common stock - par value $2.50 per share - authorized 24,000,000
<S>                                                                                 <C>                   <C>     
    shares; 13,370,788 shares outstanding                                            $ 33,427              $ 33,427
  Additional paid-in capital                                                          279,042               279,042
  Retained earnings                                                                   258,947               233,216
                                                                            ------------------     -----------------
    Total common equity                                                               571,416               545,685
  Cumulative preferred stock, not mandatorily redeemable - par value
    $50 per share - authorized 466,406 shares; 366,406 shares outstanding              18,320                18,320
  Long-term debt (excluding current portion)                                          601,909               651,848
                                                                            ------------------     -----------------
                                                                                    1,191,645             1,215,853
                                                                            ------------------     -----------------
--------------------------------------------------------------------------------------------------------------------

Current liabilities:
  Current maturities and sinking funds                                                 50,140                   140
  Capital lease obligations                                                            13,197                13,183
  Accounts payable                                                                     27,394                60,546
  Accounts payable to associated companies                                             12,696                 2,736
  Accrued payroll and vacations                                                         7,430                 7,615
  Accrued interest                                                                     10,035                12,230
  Accrued taxes                                                                        70,161                58,996
  Accumulated refueling outage provision                                                3,899                10,606
  Environmental liabilities                                                             5,409                 4,054
  Other                                                                                17,726                11,533
                                                                            ------------------     -----------------
                                                                                      218,087               181,639
                                                                            ------------------     -----------------
--------------------------------------------------------------------------------------------------------------------

Other long-term liabilities and deferred credits:
  Accumulated deferred income taxes                                                   225,637               238,829
  Accumulated deferred investment tax credits                                          29,892                31,838
  Environmental liabilities                                                            32,016                38,256
  Pension and other benefit obligations                                                27,370                17,334
  Capital lease obligations                                                            15,668                23,548
  Other                                                                                24,663                21,632
                                                                            ------------------     -----------------
                                                                                      355,246               371,437
                                                                            ------------------     -----------------
--------------------------------------------------------------------------------------------------------------------

                                                                                  $ 1,764,978           $ 1,768,929
                                                                            ==================     =================
--------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       16

<PAGE>

<TABLE>

                               IES UTILITIES INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>

                                                                                       For the Nine Months
                                                                                       Ended September 30,
                                                                                       1998           1997
---------------------------------------------------------------------------------------------------------------
                                                                                         (in thousands)
Cash flows from operating activities:
<S>                                                                                    <C>            <C>     
  Net income                                                                           $ 45,257       $ 47,377
  Adjustments to reconcile net income to net cash
   flows from operating activities:
     Depreciation and amortization                                                       72,127         68,605
     Amortization of leased nuclear fuel                                                  9,143         10,668
     Amortization of deferred energy efficiency expenditures                             14,339          6,003
     Deferred taxes and investment tax credits                                           (9,948)        (8,970)
     Refueling outage provision                                                          (6,707)         6,654
     Other                                                                                  621          3,188
  Other changes in assets and liabilities:
     Accounts receivable                                                                 24,219         10,680
     Production fuel                                                                      1,529          2,522
     Materials and supplies                                                                (847)        (1,043)
     Gas stored underground                                                               9,328          2,806
     Accounts payable                                                                   (23,192)       (38,974)
     Accrued taxes                                                                       11,165         25,335
     Adjustment clause balances                                                           6,307         11,534
     Benefit obligations and other                                                       15,534          6,255
                                                                                   -------------  -------------
       Net cash flows from operating activities                                         168,875        152,640
                                                                                   -------------  -------------
---------------------------------------------------------------------------------------------------------------

Cash flows used for financing activities:
    Common stock dividends                                                              (14,000)       (42,000)
    Preferred stock dividends                                                              (686)          (686)
    Proceeds from issuance of long-term debt                                                  -        190,000
    Reductions in long-term debt                                                           (140)       (63,140)
    Net change in short-term borrowings                                                       -       (135,000)
    Principal payments under capital lease obligations                                   (9,655)        (9,405)
    Other                                                                                     -           (821)
                                                                                   -------------  -------------
      Net cash flows used for financing activities                                      (24,481)       (61,052)
                                                                                   -------------  -------------
---------------------------------------------------------------------------------------------------------------

Cash flows used for investing activities:
    Construction expenditures                                                           (71,390)       (74,529)
    Deferred energy efficiency expenditures                                                   -         (8,450)
    Nuclear decommissioning trust funds                                                  (4,506)        (4,506)
    Other                                                                                   467            240
                                                                                   -------------  -------------
      Net cash flows used for investing activities                                      (75,429)       (87,245)
                                                                                   -------------  -------------
---------------------------------------------------------------------------------------------------------------

Net increase in cash and temporary cash investments                                      68,965          4,343
                                                                                   -------------  -------------
---------------------------------------------------------------------------------------------------------------

Cash and temporary cash investments at beginning of period                                  230         11,608
                                                                                   -------------  -------------
---------------------------------------------------------------------------------------------------------------

Cash and temporary cash investments at end of period                                   $ 69,195       $ 15,951
                                                                                   =============  =============
---------------------------------------------------------------------------------------------------------------

Supplemental cash flow information: Cash paid during the period for:
    Interest                                                                           $ 39,420       $ 33,215
                                                                                   =============  =============
    Income taxes                                                                       $ 46,500       $ 31,875
                                                                                   =============  =============
  Noncash investing and financing activities - Capital lease obligations incurred       $ 1,276       $ 13,912
                                                                                   =============  =============
---------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       17

<PAGE>


                               IES UTILITIES INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     Except  as  modified  below,  the  IEC  Notes  to  Consolidated   Financial
     Statements are  incorporated  by reference  insofar as they relate to IESU.
     IEC  Notes 3, 4, 6 and 7 do not  relate  to IESU  and,  therefore,  are not
     incorporated by reference.

 1.  The interim  consolidated  financial  statements  included herein have been
     prepared by IESU,  without audit,  pursuant to the rules and regulations of
     the SEC. Accordingly, certain information and footnote disclosures normally
     included in financial  statements  prepared in  accordance  with  generally
     accepted  accounting  principles  have been condensed or omitted,  although
     management   believes  that  the  disclosures  are  adequate  to  make  the
     information presented not misleading. The consolidated financial statements
     include IESU and its  consolidated  wholly-owned  subsidiary,  IES Ventures
     Inc.  IESU is a subsidiary  of IEC.  These  statements  are prepared on the
     basis of  accounting  for the  merger  of  WPLH,  IES and  IPC,  which  was
     effective on April 21, 1998, as a pooling of interests. Certain adjustments
     have been made to the prior period  amounts as part of the  restatement  to
     reflect the pooling of interests  transaction.  These financial  statements
     should be read in conjunction  with the financial  statements and the notes
     thereto included in IESU's latest Annual Report on Form 10-K.

     In the  opinion  of  management,  all  adjustments,  which are  normal  and
     recurring  in  nature,  necessary  for  a  fair  presentation  of  (a)  the
     consolidated  results of  operations  for the three and nine  months  ended
     September 30, 1998 and 1997,  (b) the  consolidated  financial  position at
     September  30,  1998  and  December  31,  1997,  and (c)  the  consolidated
     statement  of cash flows for the nine months ended  September  30, 1998 and
     1997, have been made.  Because of the seasonal nature of IESU's operations,
     results  for the three and nine  months  ended  September  30, 1998 are not
     necessarily  indicative of results that may be expected for the year ending
     December 31, 1998. Certain prior period amounts have been reclassified on a
     basis consistent with the 1998 presentation.

                                       18


<PAGE>






                        WISCONSIN POWER AND LIGHT COMPANY

                         PART I - FINANCIAL INFORMATION


                    ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



                                       19

<PAGE>

<TABLE>

                        WISCONSIN POWER AND LIGHT COMPANY
                  CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>

                                                             For the Three Months                    For the Nine Months
                                                             Ended September 30,                     Ended September 30,
                                                           1998                1997                1998                1997
----------------------------------------------------------------------------------------------------------------------------------
                                                                                    (in thousands)
Operating revenues:
<S>                                                         <C>                 <C>                  <C>                <C>      
  Electric utility                                          $ 165,345           $ 165,465            $ 470,969          $ 475,198
  Gas utility                                                   9,450              13,371               76,712            108,583
  Water                                                         1,335               1,356                3,763              3,481
                                                     -----------------   -----------------   ------------------  -----------------
                                                              176,130             180,192              551,444            587,262
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Operating expenses:
  Electric production fuels                                    33,520              31,253               91,889             89,655
  Purchased power                                              30,539              31,514               89,378             98,610
  Cost of gas sold                                              2,711               7,135               41,940             68,401
  Other operation                                              31,140              29,951              105,036             95,203
  Maintenance                                                  10,793              11,598               35,240             36,759
  Depreciation and amortization                                30,237              26,801               91,075             77,177
  Taxes other than income taxes                                 7,494               7,782               22,710             23,199
                                                     -----------------   -----------------   ------------------  -----------------
                                                              146,434             146,034              477,268            489,004
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Operating income                                               29,696              34,158               74,176             98,258
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Interest expense and other:
  Interest expense                                              9,224               9,176               26,591             23,058
  Allowance for funds used during construction                   (778)               (634)              (2,175)            (2,155)
  Miscellaneous, net                                              573                 799                1,849             (4,019)
                                                     -----------------   -----------------   ------------------  -----------------
                                                                9,019               9,341               26,265             16,884
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                     20,677              24,817               47,911             81,374
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Income taxes                                                    8,000               9,581               18,869             31,743
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Net income                                                     12,677              15,236               29,042             49,631
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Preferred dividend requirements                                   827                 827                2,483              2,483
                                                     -----------------   -----------------   ------------------  -----------------
----------------------------------------------------------------------------------------------------------------------------------

Earnings available for common stock                          $ 11,850            $ 14,409             $ 26,559           $ 47,148
                                                     =================   =================   ==================  =================
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       20

<PAGE>

<TABLE>

                        WISCONSIN POWER AND LIGHT COMPANY
                           CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                    September 30,
                                                                         1998           December 31,
ASSETS                                                               (Unaudited)            1997
-------------------------------------------------------------------------------------------------------
                                                                             (in thousands)
Property, plant and equipment:
  Utility -
    Plant in service -
<S>                                                                     <C>                <C>        
      Electric                                                          $ 1,828,813        $ 1,790,641
      Gas                                                                   242,267            237,856
      Water                                                                  25,961             24,864
      Common                                                                208,556            195,815
                                                                   -----------------   ----------------
                                                                          2,305,597          2,249,176
    Less - Accumulated depreciation                                       1,149,329          1,065,726
                                                                   -----------------   ----------------
                                                                          1,156,268          1,183,450
    Construction work in progress                                            45,681             42,312
    Nuclear fuel, net of amortization                                        19,339             19,046
                                                                   -----------------   ----------------
                                                                          1,221,288          1,244,808
  Other property, plant and equipment, net of accumulated
    depreciation and amortization of $40 and $44, respectively                  798                684
                                                                   -----------------   ----------------
                                                                          1,222,086          1,245,492
                                                                   -----------------   ----------------
-------------------------------------------------------------------------------------------------------

Current assets:
  Cash and temporary cash investments                                         1,123              2,492
  Accounts receivable:
    Customer                                                                  2,449             20,928
    Associated companies                                                      1,927              5,017
    Other                                                                     8,721             11,589
  Production fuel, at average cost                                           16,557             18,857
  Materials and supplies, at average cost                                    20,923             19,274
  Gas stored underground, at average cost                                    11,236             12,504
  Prepaid gross receipts tax                                                 18,372             22,153
  Other                                                                       1,074              4,824
                                                                   -----------------   ----------------
                                                                             82,382            117,638
                                                                   -----------------   ----------------
-------------------------------------------------------------------------------------------------------

Investments:
  Nuclear decommissioning trust funds                                       129,766            112,356
  Other                                                                      14,573             14,877
                                                                   -----------------   ----------------
                                                                            144,339            127,233
                                                                   -----------------   ----------------
-------------------------------------------------------------------------------------------------------

Other assets:
  Regulatory assets                                                         122,706            120,826
  Deferred charges and other                                                 52,230             53,415
                                                                   -----------------   ----------------
                                                                            174,936            174,241
                                                                   -----------------   ----------------
-------------------------------------------------------------------------------------------------------

                                                                        $ 1,623,743        $ 1,664,604
                                                                   =================   ================
-------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       21

<PAGE>

<TABLE>

                        WISCONSIN POWER AND LIGHT COMPANY
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
<CAPTION>

                                                                 September 30,
                                                                      1998              December 31,
CAPITALIZATION AND LIABILITIES                                    (Unaudited)               1997
-------------------------------------------------------------------------------------------------------
                                                                 (in thousands, except share amounts)
Capitalization:
  Common stock - par value $5 per share - authorized
<S>                                                                     <C>                   <C>     
    18,000,000 shares; 13,236,601 shares outstanding                    $ 66,183              $ 66,183
  Additional paid-in capital                                             199,338               199,170
  Retained earnings                                                      303,189               320,386
                                                                -----------------     -----------------
    Total common equity                                                  568,710               585,739
                                                                -----------------     -----------------

  Cumulative  preferred  stock, not mandatorily 
    redeemable  without par value -  authorized 3,750,000
    shares, maximum aggregate stated value $150,000,000:
      $100 stated value - 449,765 shares outstanding                      44,977                44,977
      $  25 stated value - 599,460 shares outstanding                     14,986                14,986
                                                                -----------------     -----------------
        Total cumulative preferred stock                                  59,963                59,963
                                                                -----------------     -----------------

  Long-term debt (excluding current portion)                             354,608               354,540
                                                                -----------------     -----------------
                                                                         983,281             1,000,242
                                                                -----------------     -----------------
-------------------------------------------------------------------------------------------------------

Current liabilities:
  Current maturities and sinking funds                                         -                 8,899
  Variable rate demand bonds                                              56,975                56,975
  Commercial paper                                                             -                81,000
  Notes payable to associated companies                                   73,347                     -
  Accounts payable                                                        71,837                85,617
  Accounts payable to associated companies                                11,646                     -
  Accrued payroll and vacations                                           12,950                12,221
  Accrued interest                                                         6,449                 6,317
  Other                                                                   22,339                25,162
                                                                -----------------     -----------------
                                                                         255,543               276,191
                                                                -----------------     -----------------
-------------------------------------------------------------------------------------------------------

Other long-term liabilities and deferred credits:
  Accumulated deferred income taxes                                      247,281               251,709
  Accumulated deferred investment tax credits                             33,637                35,039
  Customer advances                                                       33,484                34,240
  Environmental liabilities                                                8,926                 9,238
  Other                                                                   61,591                57,945
                                                                -----------------     -----------------
                                                                         384,919               388,171
                                                                -----------------     -----------------
-------------------------------------------------------------------------------------------------------

                                                                     $ 1,623,743           $ 1,664,604
                                                                =================     =================
-------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       22

<PAGE>

<TABLE>

                        WISCONSIN POWER AND LIGHT COMPANY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>

                                                                                For the Nine Months
                                                                                Ended September 30,
                                                                              1998               1997
------------------------------------------------------------------------------------------------------------
                                                                                   (in thousands)
Cash flows from operating activities:
<S>                                                                             <C>                <C>     
  Net income                                                                    $ 29,042           $ 49,631
  Adjustments to reconcile net income to net cash
   flows from operating activities:
     Depreciation and amortization                                                91,075             77,177
     Amortization of nuclear fuel                                                  4,575              1,892
     Deferred taxes and investment tax credits                                    (4,349)              (710)
     Other                                                                        (1,508)            (1,591)
  Other changes in assets and liabilities:
     Accounts receivable                                                          24,437             21,945
     Production fuel                                                               2,300             (4,598)
     Materials and supplies                                                       (1,649)               194
     Gas stored underground                                                        1,268             (3,223)
     Prepaid gross receipts tax                                                    3,781             (3,400)
     Accounts payable                                                             (2,134)            (5,001)
     Benefit obligations and other                                                12,768             (1,091)
                                                                         ----------------   ----------------
       Net cash flows from operating activities                                  159,606            131,225
                                                                         ----------------   ----------------
------------------------------------------------------------------------------------------------------------

Cash flows used for financing activities:
    Common stock dividends                                                       (43,756)           (56,377)
    Preferred stock dividends                                                     (2,483)            (2,483)
    Proceeds from issuance of long-term debt                                           -            105,000
    Reductions in long-term debt                                                  (8,899)           (55,000)
    Net change in short-term borrowings                                           (7,653)           (15,500)
    Other                                                                              -             (2,669)
                                                                         ----------------   ----------------
      Net cash flows used for financing activities                               (62,791)           (27,029)
                                                                         ----------------   ----------------
------------------------------------------------------------------------------------------------------------

Cash flows used for investing activities:
    Construction expenditures                                                    (73,587)           (89,317)
    Nuclear decommissioning trust funds                                          (13,578)           (10,708)
    Other                                                                        (11,019)            (5,217)
                                                                         ----------------   ----------------
      Net cash flows used for investing activities                               (98,184)          (105,242)
                                                                         ----------------   ----------------
------------------------------------------------------------------------------------------------------------

Net decrease in cash and temporary cash investments                               (1,369)            (1,046)
                                                                         ----------------   ----------------
------------------------------------------------------------------------------------------------------------

Cash and temporary cash investments at beginning of period                         2,492              4,167
                                                                         ----------------   ----------------
------------------------------------------------------------------------------------------------------------

Cash and temporary cash investments at end of period                             $ 1,123            $ 3,121
                                                                         ================   ================
------------------------------------------------------------------------------------------------------------

Supplemental cash flow information: Cash paid during the period for:
    Interest                                                                    $ 21,332           $ 24,395
                                                                         ================   ================
    Income taxes                                                                $ 22,524           $ 25,944
                                                                         ================   ================
------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       23

<PAGE>


                        WISCONSIN POWER AND LIGHT COMPANY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     Except  as  modified  below,  the  IEC  Notes  to  Consolidated   Financial
     Statements are  incorporated  by reference  insofar as they relate to WP&L.
     IEC  Notes  4  and  7 do  not  relate  to  WP&L  and,  therefore,  are  not
     incorporated by reference.

 1.  The interim  consolidated  financial  statements  included herein have been
     prepared by WP&L,  without audit,  pursuant to the rules and regulations of
     the SEC. Accordingly, certain information and footnote disclosures normally
     included in financial  statements  prepared in  accordance  with  generally
     accepted  accounting  principles  have been condensed or omitted,  although
     management   believes  that  the  disclosures  are  adequate  to  make  the
     information presented not misleading. The consolidated financial statements
     include WP&L and its consolidated subsidiary.  WP&L is a subsidiary of IEC.
     These financial statements should be read in conjunction with the financial
     statements and the notes thereto included in WP&L's latest Annual Report on
     Form 10-K, as amended.

     In the  opinion  of  management,  all  adjustments,  which are  normal  and
     recurring  in  nature,  necessary  for  a  fair  presentation  of  (a)  the
     consolidated  results of  operations  for the three and nine  months  ended
     September 30, 1998 and 1997,  (b) the  consolidated  financial  position at
     September  30,  1998  and  December  31,  1997,  and (c)  the  consolidated
     statement  of cash flows for the nine months ended  September  30, 1998 and
     1997, have been made.  Because of the seasonal nature of WP&L's operations,
     results  for the three and nine  months  ended  September  30, 1998 are not
     necessarily  indicative of results that may be expected for the year ending
     December 31, 1998. Certain prior period amounts have been reclassified on a
     basis consistent with the 1998 presentation. 

                                       24

<PAGE>


       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


                                     MERGER

In April 1998, IES, WPLH and IPC completed a three-way  merger (Merger)  forming
IEC. IEC is currently doing business as Alliant Energy Corporation.  As a result
of the Merger,  the first tier  subsidiaries  of IEC include:  WP&L,  IESU, IPC,
Alliant  Industries  and  Alliant  Services  (the  subsidiary  formed to provide
administrative services as required under the Public Utility Holding Company Act
of 1935).  Among various  other  regulatory  constraints,  IEC is operating as a
registered public utility holding company subject to the limitations  imposed by
the Public Utility Holding Company Act of 1935.

As part of the  approval  process  for the  Merger,  IEC agreed to various  rate
freezes and rate caps  implemented in certain  jurisdictions  for periods not to
exceed four years commencing on the effective date of the Merger (see "Liquidity
and Capital Resources - Rates and Regulatory Matters" for a further discussion).
Assuming capture of the anticipated  merger-related synergies and no significant
legislative  or  regulatory  changes  affecting  IEC,  IEC does not  expect  the
merger-related electric and natural gas price freezes to have a material adverse
effect on its financial position or results of operations.

This MD&A  includes  information  relating to IEC, IESU and WP&L (as well as IPC
and Alliant Industries).  Where appropriate,  information relating to a specific
entity has been segregated and labeled as such.

                           FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q (including MD&A) that
are not of historical fact are  forward-looking  statements  intended to qualify
for the  safe  harbor  from  liability  established  by the  Private  Securities
Litigation  Reform Act of 1995.  From time to time,  IEC,  IESU or WP&L may make
other  forward-looking  statements within the meaning of the federal  securities
laws that involve  judgments,  assumptions  and other  uncertainties  beyond the
control of such companies.  These forward-looking  statements may include, among
others,  statements  concerning  revenue and cost trends,  cost  recovery,  cost
reduction strategies and anticipated  outcomes,  pricing strategies,  changes in
the  utility  industry,  planned  capital  expenditures,   financing  needs  and
availability,  statements of expectations, beliefs, future plans and strategies,
anticipated  events or trends and similar comments  concerning  matters that are
not  historical  facts.   Investors  and  other  users  of  the  forward-looking
statements  are  cautioned  that such  statements  are not a guarantee of future
performance  and that such  forward-looking  statements are subject to risks and
uncertainties  that could cause actual results to differ  materially  from those
expressed in, or implied by, such  statements.  Some,  but not all, of the risks
and  uncertainties  include weather  effects on sales and revenues,  competitive
factors, general economic conditions in the relevant service territory,  federal
and state  regulatory  or government  actions,  unanticipated  construction  and
acquisition  expenditures,  issues  related to stranded  costs and the  recovery
thereof,  the operations of IEC's nuclear  facilities,  unanticipated  issues or
costs  associated  with  achieving Year 2000  compliance,  the ability of IEC to
successfully  integrate  the  operations  of  the  parties  to  the  Merger  and
unanticipated  costs  associated   therewith,   unanticipated   difficulties  in
achieving  expected  synergies from the Merger,  unanticipated  costs associated
with  certain  environmental   remediation  efforts  being  undertaken  by  IEC,
technological developments and changes in the rate of inflation.

                            UTILITY INDUSTRY OUTLOOK

IEC  competes  in an  ever-changing  utility  industry.  Set  forth  below is an
overview of this evolving marketplace.

Electric energy  generation,  transmission  and  distribution are in a period of
fundamental change in the manner in which customers obtain, and energy suppliers
provide, energy services. As legislative, regulatory, economic and technological
changes occur,  electric utilities are faced with increasing  pressure to become
more competitive.  Such 

                                       25

<PAGE>


competitive  pressures  could result in loss of customers  and an  incurrence of
stranded  costs  (i.e.,  assets and other costs  rendered  unrecoverable  as the
result of competitive pricing). To the extent stranded costs cannot be recovered
from customers, they would be borne by security holders.

Legislative  action which would allow  customers to choose their electric energy
supplier is not expected in Wisconsin,  Iowa or Minnesota this year. Nationwide,
however, 18 states (including Illinois and Michigan) have adopted legislative or
regulatory plans to implement  electric utility  competition.  In July 1998, the
Clinton  Administration's plan for electric utility competition,  proposing that
states implement customer choice by January 1, 2003, was introduced as a bill in
the U.S.  Senate.  The bill joined five other U.S.  Senate  bills and four U. S.
House of Representative  bills to implement  competition in the electric utility
industry.

IEC realized  56%, 39%, 3% and 2% of its electric  utility  revenues in the nine
months ended  September  30, 1998, in Iowa,  Wisconsin,  Minnesota and Illinois,
respectively.  Approximately  87% of the electric revenues were regulated by the
respective state commissions while the other 13% were regulated by the FERC. IEC
realized  58%,  36%, 3% and 3% of its gas utility  revenues in Iowa,  Wisconsin,
Minnesota and Illinois, respectively, during the same period.

IESU realized  100% of its electric and gas utility  revenues in the nine months
ended September 30, 1998, in Iowa. Approximately 93% of the electric revenues in
the first nine months of 1998 were  regulated by the IUB while the other 7% were
regulated by the FERC.

WP&L  realized  98% of its  electric  utility  revenues in the nine months ended
September  30, 1998 in Wisconsin  and 2% in Illinois.  Approximately  78% of the
electric  revenues in the first nine months of 1998 were  regulated  by the PSCW
and the ICC while the other 22% were regulated by the FERC. WP&L realized 96% of
its gas utility revenues in the first nine months of 1998 in Wisconsin and 4% in
Illinois.

Federal Regulation

WP&L,  IESU and IPC are subject to regulation by the FERC.  The National  Energy
Policy Act of 1992 addresses several matters designed to promote  competition in
the electric wholesale power generation market. In 1996, FERC issued final rules
(FERC  Orders  888  and  889)  requiring   electric   utilities  to  open  their
transmission  lines to other  wholesale  buyers and sellers of  electricity.  In
March 1997, FERC issued orders on rehearing for Orders 888 and 889 (Orders 888-A
and  889-A).  In response to FERC  Orders 888 and 888-A,  Alliant  Services,  on
behalf of WP&L, IESU and IPC, filed an Open Access  Transmission Tariff (Tariff)
that complies with the orders.  The Tariff  supersedes the transmission  tariffs
previously filed by the three utilities. Upon receiving the final merger-related
regulatory  order,  a compliance  tariff was filed by Alliant  Services with the
FERC.  This filing was made to comply with the FERC's merger order.  In response
to FERC Orders 889 and 889-A, WP&L, IESU and IPC are participating in a regional
Open Access Same-Time Information System.

FERC Order 888 permits  utilities to seek  recovery of  legitimate,  prudent and
verifiable  stranded costs  associated  with providing open access  transmission
services.  FERC  does  not  have  jurisdiction  over  retail  distribution  and,
consequently,  the final FERC rules do not provide for the  recovery of stranded
costs resulting from retail competition.  The various states retain jurisdiction
over the  question of whether to permit  retail  competition,  the terms of such
retail  competition,  and the recovery of any portion of stranded costs that are
ultimately determined to have resulted from retail competition.

The utility  subsidiaries  cannot  predict the long-term  consequences  of these
rules on their results of operations or financial condition.

On September 16, 1998,  the FERC  conditionally  approved the filing made by IEC
and twelve  other  transmission-owning  utilities  to form the Midwest  ISO. The
FERC's  approval is conditioned  upon the results of hearings to be held on rate
issues and upon the  acceptance by the member  utilities of minor changes to the
filing  required  by the  FERC.  The  Midwest  ISO  will  establish  independent
operation and control of the electric transmission system across

                                       26

<PAGE>


a thirteen state region spanning from West Virginia to Missouri.  All buyers and
sellers in this region will have open access to the  transmission  system  while
being assessed a single transmission rate.

In November 1998,  IEC and Northern  States Power Co. (NSP)  announced  plans to
develop  an  independent   transmission   company  (ITC)  to  provide   electric
transmission  services to the Upper Midwest.  The two companies are developing a
relationship by which NSP will create an independent  transmission  entity that,
in turn, will lease the transmission  assets of IEC. The independent entity will
be publicly traded,  have its own board of directors,  management and employees.
As such, it will not be affiliated with NSP or IEC.

In 1999,  the  companies  plan to seek the  necessary  approvals  from state and
federal  regulators.  The federal  filing will include an innovative  new tariff
designed to allow for open and economical  delivery of electric power throughout
the region. The tariff will be available to non-ITC  participants as well as ITC
members.  IEC and NSP believe they can have an ITC established  which is capable
of serving the Upper Midwest region by the year 2000.

As a result of this  announcement,  IEC is  reevaluating  its  membership in the
Midwest ISO.

State Regulation

Iowa

IESU and IPC are subject to regulation by the IUB. The IUB initiated a Notice of
Inquiry  (Docket  No.  NOI-95-1)  in  early  1995 on the  subject  of  "Emerging
Competition  in  the  Electric  Utility   Industry"  to  address  all  forms  of
competition  in the  electric  utility  industry and to gather  information  and
perspectives  on  electric  competition  from all  persons or  entities  with an
interest  or stake in the  issues.  The IUB  staff's  report in this  docket was
accepted by the IUB,  finding,  in part,  that there is no compelling  reason to
move quickly into  restructuring  the electric  utility  industry in Iowa, based
upon the existing level of relative prices.  However,  the IUB is continuing the
analysis and debate on restructuring and retail competition in Iowa.

On  September  10,  1997,  the IUB issued an order  adopting an "Action  Plan to
Develop a Competitive  Model for the Electric  Industry in Iowa." The IUB states
in this action plan that while "the IUB has not determined retail competition in
the  electric  industry is in the best  interests of Iowa's  consumers...",  the
State of Iowa is likely to be affected by federal or neighboring states' actions
so there is a need for the IUB to design a model that suits  Iowa's  needs.  The
priority concerns in the plan are public interest issues (an Iowa-specific pilot
project,  customer  information and assessment,  environmental  impacts,  public
benefits  and  transition   costs/benefits)  and   transmission-related   issues
(transmission  and  distribution  system  reliability  and  transmission  system
operations).  There is no timetable in the action plan. On October 2, 1997,  the
IUB staff sent to the  advisory  group (of which IESU and IPC are  members)  for
written comment a set of proposed guidelines for an Iowa-specific electric pilot
project  that would allow retail  access to a "subset of all customer  classes."
The IUB has also issued an order  covering  unbundling  of natural gas rates for
all Iowa customers to be effective in 1999.

On September 15, 1998, the IUB staff issued draft reports on (1) Reliability and
(2) Recovery of Transition  Costs/Benefits  in a Restructured  Electric  Utility
Industry  for  review  and  comment  by  the  IUB  Advisory  Group  on  electric
restructuring.  The  Recovery of  Transition  Costs/Benefits  in a  Restructured
Electric  Utility  Industry  report is  expected to be  finalized  in the fourth
quarter of 1998. This draft report  concludes that  MidAmerican  Energy Company,
IESU and IPC could realize substantial  transition benefits resulting from their
low-cost generating units. The report states,  however,  that no one can predict
with any accuracy  what  transition  costs or benefits will actually be thus, to
accommodate this uncertainty,  the costs should be determined as they occur. The
report  continues that a cap on electric rates should be established  during the
transition  period which would allow customers to share,  for a limited time, in
any transition benefits. Similarly, the report acknowledges that a stranded cost
recovery mechanism should be established, which would allow utilities to recover
from  exiting  customers  a  declining  percentage  of  lost  revenues,   should
transition costs materialize. While the final report will be important in Iowa's
restructuring debate, ultimately the approach to stranded costs and benefits can
reasonably be expected to be decided in the legislative process.

                                       27

<PAGE>


On October 8, 1998,  the IUB staff issued draft reports on (1) Market  Structure
and Power and (2)  Universal  Service for review and comment by the IUB Advisory
Group on electric  restructuring.  The Market  Structure  and Power draft report
concludes that the IUB staff is concerned about market power, but it states that
mandatory  divestiture  of  generating  assets  is not a  necessary  remedy.  It
suggests  that market  power issues can be remedied as  confronted,  rather than
creating restrictive rules up-front.  The Universal Service draft report covers:
(1) customer  access;  (2) default  provider  and  provider of last resort;  (3)
customer  protections;   and  (4)  low-income  assistance.   It  concludes  that
significant revisions to existing rules are required to introduce these concepts
into a competitive environment.

The Iowa legislature has been conducting interim legislative  meetings regarding
restructuring and expects these meetings to be completed by the end of 1998.

Wisconsin

WP&L is subject to regulation by the PSCW. The PSCW's  inquiries into the future
structure of the natural gas and electric  utility  industries are ongoing.  The
stated goal of the PSCW in the natural gas docket is "to accommodate competition
but not create it." The PSCW has followed a measured  approach to  restructuring
the natural gas industry in  Wisconsin.  The PSCW has  determined  that customer
classes  will be  deregulated  (i.e.,  the gas  utility  would no longer have an
obligation  to procure  gas  commodity  for  customers,  but would  still have a
delivery   obligation)  in  a  step-wise  manner,  after  each  class  has  been
demonstrated to have a sufficient number of gas suppliers available. A number of
working  groups have been  established  by the PSCW and these working groups are
addressing  numerous subjects which need to be resolved before  deregulation may
proceed.

The  short-term  goals  of the  electric  restructuring  process  are to  ensure
reliability of the state's electric system and development of a robust wholesale
electric market. The longer-term goal is to establish prerequisite safeguards to
protect  customers  prior  to  allowing  retail  customer  choice.  The  PSCW is
following a timetable  to make this latter  determination  on allowing  customer
choice in 1999-2000.

The PSCW has issued an order  outlining its policies and  principles  for Public
Benefits  (low-income  assistance,  energy efficiency,  renewable generation and
environmental research and development) including funding levels, administration
of the funds and how funds  should be  collected  from  customers.  The PSCW has
proposed increasing funding levels primarily through utility rates by $50 to $75
million statewide.

It is  anticipated  that there will be legislative  proposals  introduced in the
1999-2000  legislative session on issues dealing with  restructuring,  including
affiliated interest,  public benefits,  competition and others. It is impossible
to  predict  at this  time the scope or the  possibility  of  enactment  of such
proposals.

In May 1998, the PSCW reactivated  Docket No.  05-BU-101,  with the objective of
examining  the degree of  separation  which  should be  required  as a matter of
policy between  utility and non-utility  activities  involving the various state
utilities. Hearings are being held in the fourth quarter of 1998. A future phase
of the docket will  investigate  the  standards  of conduct  that should  govern
relationships and transactions between a utility and its affiliates.

It is anticipated that IEC will be required to file with the PSCW for permission
to turn operational  control of its transmission system over to the Midwest ISO.
The PSCW has established  four guiding  principles for  participating  in an ISO
under Wisconsin  Statutes.  IEC would also be required to file with the PSCW for
permission to lease its transmission assets to the ITC.

Minnesota

IPC is subject to  regulation  by the MPUC.  The MPUC  established  an  Electric
Competition  Working Group in April 1995. On October 28, 1997, the Working Group
issued a report and recommendations on retail competition. The MPUC reviewed the
report and directed its staff to develop an electric utility  restructuring plan
and timeline. The 

                                       28

<PAGE>


Minnesota legislature had established a joint legislative task force on electric
utility restructuring in 1995. It appears the earliest restructuring legislation
could be introduced is in 1999.

Illinois

IPC and WP&L are subject to regulation by the ICC. In December  1997,  the State
of Illinois passed electric  deregulation  legislation requiring customer choice
of electric suppliers for non-residential customers with loads of four megawatts
or larger and for approximately one-third of all other non-residential customers
starting  October 1,  1999.  All  remaining  non-residential  customers  will be
eligible for customer  choice  beginning  December 31, 2000 and all  residential
customers will be eligible for customer choice beginning May 1, 2002.

Summary

Each of the utilities  complies with the provisions of SFAS 71,  "Accounting for
the  Effects  of  Certain   Types  of   Regulation."   SFAS  71  provides   that
rate-regulated  public utilities record certain costs and credits allowed in the
ratemaking  process in different periods than for nonregulated  entities.  These
are deferred as regulatory  assets or regulatory  liabilities and are recognized
in the  consolidated  statements  of income at the time  they are  reflected  in
rates. If a portion of the utility  subsidiaries'  operations  becomes no longer
subject to the provisions of SFAS 71 as a result of  competitive  restructurings
or  otherwise,  a write-down  of related  regulatory  assets and possibly  other
charges  would be  required,  unless some form of  transition  cost  recovery is
established by the appropriate  regulatory body that would meet the requirements
under  generally  accepted  accounting  principles  for continued  accounting as
regulatory  assets  during such  recovery  period.  In  addition,  each  utility
subsidiary  would be required to determine  any  impairment  of other assets and
write-down  any impaired  assets to their fair value.  The utility  subsidiaries
believe they currently meet the requirements of SFAS 71.

IEC and its subsidiaries cannot currently predict the long-term  consequences of
the competitive  and  restructuring  issues  described above on their results of
operations or financial condition. The major objective is to allow the utilities
to better prepare for a competitive,  deregulated utility industry. The strategy
for dealing with these emerging  issues includes  seeking growth  opportunities,
continuing  to offer  quality  customer  service,  ongoing cost  reductions  and
productivity enhancements.


                            IEC RESULTS OF OPERATIONS

Overview

IEC  reported  net income of $51.7  million,  or $0.67 per share,  for the third
quarter of 1998 compared to net income of $55.0 million, or $0.72 per share, for
the third  quarter of 1997.  Net income for the nine months ended  September 30,
1998,  was $71.5 million,  or $0.93 per share,  compared to net income of $115.5
million,  or $1.52 per  share,  for the  first  nine  months of 1997.  Excluding
one-time  merger-related  expenses,  1998  earnings were $0.72 per share for the
quarter, equal to last year, and $1.32 year-to-date.  All prior period financial
results have been restated to reflect a change in accounting method  implemented
in the third quarter of 1998.

The 1998 third quarter  results  include  approximately  $6 million ($51 million
year-to-date  as of  September  30, 1998) of  one-time,  pre-tax  merger-related
expenses.  The merger-related  expenses were primarily for employee  retirements
and separations,  the services of the company's advisors, costs related to IEC's
name change and other miscellaneous costs.

IEC's  utility  operations  reported  net  income of $53.0  million in the third
quarter of 1998  compared to net income of $53.1  million for the same period in
1997. Excluding one-time merger expenses,  the 1998 third quarter earnings would
have been approximately $56.4 million, up 6.2% from a year ago.

                                       29

<PAGE>


The increased  utility earnings  (excluding  merger-related  expenses)  resulted
primarily from an increase in electricity  sales volumes to retail  customers of
5.1% and reduced costs resulting from merger-related operating efficiencies. The
increased  sales  volumes  were due to warmer  weather  conditions  in the third
quarter  of 1998,  compared  to the same  period in 1997,  as well as  continued
economic growth within IEC's service territory. Partially offsetting these items
were higher depreciation  expenses,  higher purchased power costs at WP&L, lower
income from off-system sales at WP&L, increased expenses for Year 2000 readiness
efforts and a higher effective income tax rate.

IEC's diversified  (nonregulated) operations reported a net loss of $1.2 million
in the third  quarter  of 1998  compared  to net  income of $2.4  million in the
comparable 1997 period.  Excluding  one-time merger expenses,  the third quarter
1998 net loss  would have been  approximately  $0.3  million.  The  decrease  in
earnings  was  largely  due to  lower  oil  and gas  prices  at  Whiting,  IEC's
Denver-based  oil and gas  subsidiary,  a  higher  effective  income  tax  rate,
expenses for new business  development in international and domestic markets and
a gain  realized in the third  quarter of 1997 from an asset  sale.  Income from
IEC's electricity trading joint venture partially offset these items.

Electric Operations

Electric  margins and MWH sales for IEC for the three months ended  September 30
were as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                            MWHs Sold
                                          (in thousands)           Change          (in thousands)           Change
                                    ----------------------------  ---------  ----------------------------  ---------
                                        1998           1997                      1998           1997
                                    -------------  -------------             -------------  -------------

<S>                                    <C>            <C>               <C>     <C>            <C>             <C>
Residential                            $ 161,978      $ 149,653         8%      1,962          1,826           7%
                                                                                   
Commercial                                94,590         89,689         5%      1,350          1,297           4%
                                         
Industrial                               136,922        130,621         5%      3,311          3,180           4%
                                    -------------  -------------             -------------  -------------
 Total from ultimate 
 customers                               393,490        369,963         6%      6,623          6,303           5%
                                                                     
Sales for resale                          56,617         53,176         6%      1,851          1,810           2%
                                                              
Other                                     10,867         10,844         -          38             38           - 
                                    ----------------------------             ------------   -------------
   Total                                                                                                       
                                         460,974        433,983         6%      8,512          8,151           4%
                                                                             =============  =============  =========
Electric production fuels                                              
                                          82,725         72,031        15%
Purchased power                                                         
                                          69,366         65,783         5%
                                    -------------  -------------
   Margin                              $ 308,883      $ 296,169         4%
                                    =============  =============  =========
</TABLE>


                                       30

<PAGE>


Electric  margins and MWH sales for IEC for the nine months  ended  September 30
were as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                            MWHs Sold
                                          (in thousands)           Change          (in thousands)           Change
                                    ----------------------------  ---------  ----------------------------  ---------
                                        1998           1997                      1998           1997
                                    -------------  -------------             -------------  -------------

<S>                                    <C>            <C>             <C>         <C>            <C>           <C>
Residential                            $ 409,757      $ 396,122       3%          5,198          5,159         1%
                                                                                 
Commercial                               241,384        232,576       4%          3,702          3,614         2%
                                                            
Industrial                               361,776        344,846       5%          9,461          9,119         4%
                                    -------------  -------------           -------------  -------------
                                    
   Total from ultimate customers       1,012,917        973,544       4%         18,361         17,892         3%
                                                         
Sales for resale                         156,657        145,523       8%          5,557          5,022        11%
                                                           
Other                                     29,565         26,310      12%            118            122        (3%)
                                    ----------------------------            =============  =============
   Total                               1,199,139      1,145,377       5%         24,036         23,036         4%
                                                         
                                                                           =============  =============  =========
Electric production fuels                214,815        204,004       5%
                                         
Purchased power                          198,930        193,616       3%
                                    -------------  -------------
   Margin                              $ 785,394      $ 747,757       5%
                                    =============  =============  =========
</TABLE>

Electric margin  increased $12.7 million,  or 4%, and $37.6 million,  or 5%, for
the three and nine months ended  September 30, 1998,  respectively,  as compared
with the same periods in 1997.  The increase for both periods was  primarily due
to  the  recovery  of  concurrent  and  previously  deferred   expenditures  for
Iowa-mandated  energy  efficiency  programs,  higher  sales  volumes and reduced
purchased  power  capacity  costs at IESU.  The recovery  for energy  efficiency
programs is in accordance with IUB orders (a portion of these recoveries is also
amortized to expense in other operation  expenses).  Electric  revenues included
increased recoveries for energy efficiency program costs in Iowa of $5.9 million
and $26.0  million  for the three  and nine  months  ended  September  30,  1998
compared with the same periods in 1997. The increased  sales volumes were due to
warmer weather  conditions in the third quarter of 1998,  compared with the same
period in 1997, as well as continued growth in the IEC service territory.

The increase in electric margin for the nine month period was also due to WP&L's
reliance on more costly  purchased  power in the first six months of 1997 due to
various  power plant  outages and the  collection  of a $3.2  million  surcharge
related to Kewaunee (a  corresponding  amount was included in  depreciation  and
amortization expense). Partially offsetting the increase in margin for the three
and  nine  month  periods  were  higher  than  forecasted  purchased  power  and
transmission  costs at WP&L and lower income from off-system sales at WP&L. Rate
reductions  implemented  at  WP&L  and  IPC in  April  1997  and  October  1997,
respectively, also partially offset the nine month increase.

IESU's and IPC's electric  tariffs  include EAC's that are designed to currently
recover the costs of fuel and the energy portion of purchased power billings.



                                       31

<PAGE>


Gas Operations

Gas margins and Dth sales for IEC for the three months  ended  September 30 were
as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                       Dekatherms Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                   <C>           <C>            <C>          <C>            <C>        <C> 
Residential                           $ 15,504      $ 16,820       (8%)         1,918          2,074      (8%)
                                                                                  
Commercial                               7,709         8,785       (12%)        1,533          1,661      (8%)
                                                               
Industrial                               3,407         3,144        8%            998            815       22%
                                                                
Transportation and other                 2,462         5,144       (52%)       11,589         13,115      (12%)
                                    ---------------------------             ============  =============
   Total                                29,082        33,893       (14%)       16,038         17,665      (9%)
                                                                            ============  ============= =========
Cost of utility gas sold                12,215        18,833       (35%)
                                    ------------- -------------
   Margin                             $ 16,867      $ 15,060        12%
                                    ============= =============  =========
</TABLE>


Gas margins and Dth sales for IEC for the nine months ended September 30 were as
follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                       Dekatherms Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                    <C>           <C>            <C>          <C>            <C>        <C>  
Residential                            $ 121,797     $ 155,602      (22%)        19,475         23,524     (17%)
                                                                                 
Commercial                               58,843        78,174       (25%)        11,998         14,267     (16%)
                                                            
Industrial                               13,564        17,163       (21%)         3,658          3,915      (7%)
                                                              
Transportation and other                 10,191        18,770       (46%)        38,333         42,321      (9%)
                                    ---------------------------             ============  =============
                                                                            
   Total                                 204,395       269,709      (24%)        73,464         84,027     (13%)
                                                                            ============  ============= =========
Cost of utility gas sold                 113,401       175,544      (35%)
                                    ------------- -------------
   Margin                               $ 90,994      $ 94,165       (3%)
                                    ============= =============  =========
</TABLE>


Gas margin  increased $1.8 million,  or 12%, and decreased $3.2 million,  or 3%,
for the three  and nine  months  ended  September  30,  1998,  respectively,  as
compared with the same periods in the prior year.  Dth sales  declined by 9% and
13% for the three and nine months ended  September  30, 1998,  respectively,  as
compared  with  the  same  periods  in 1997  due to  milder  weather.  Partially
offsetting  the decline in margin for the nine months ended  September  30, 1998
were higher  revenues from the recovery of concurrent  and  previously  deferred
energy efficiency expenditures for Iowa-mandated energy efficiency program costs
in accordance  with IUB orders (a portion of these  recoveries is also amortized
to  expense  in other  operation  expenses).  Gas  revenues  included  increased
recoveries for energy efficiency  program costs in Iowa of $0.4 million and $7.5
million for the three and nine months ended September 30, 1998, respectively, as
compared with the same periods in 1997. A rate  reduction  implemented  in April
1997 at WP&L also  contributed  to the  decrease  in margin for the nine  months
ended September 30, 1998.

The  increase in gas margin for the three months  ended  September  30, 1998 was
primarily due to gas cost  adjustments  at IPC and higher  earnings from the gas
incentive program at WP&L.

IESU's and IPC's gas tariffs  include PGA clauses that are designed to currently
recover the cost of utility gas sold.

                                       32

<PAGE>


Nonregulated and Other Revenues

Nonregulated and other revenues for the three and nine months ended September 30
were as follows (in thousands):
<TABLE>
<CAPTION>

                                                  For the three months ended        For the nine months ended
                                                      September 30,                        September 30,
                                                   1998             1997              1998             1997
                                              -------------    -------------     -------------    -------------
<S>                                                <C>              <C>             <C>              <C>    
Environmental and engineering services             $17,348          $20,450           $50,672          $59,207
Oil and gas production                              15,854           15,907            50,478           46,590
Transportation, rents and other                     13,985           12,164            34,411           35,100
Nonregulated energy                                  7,668           29,703            30,796          123,353
Steam                                                6,059            6,317            19,885           22,227
Affordable housing                                   3,008            3,085             9,069            9,307
Water                                                1,335            1,356             3,763            3,480
                                              -------------    -------------     -------------    -------------
                                                   $65,257          $88,982          $199,074         $299,264
                                              =============    =============     =============    =============
</TABLE>

The revenues for  nonregulated  energy declined  significantly  in the three and
nine months  ended  September  30, 1998  compared  with the same periods in 1997
primarily  due to a shift to higher  margin,  lower volume gas customers and the
transfer of the power  marketing  business to a joint  venture in July 1997 with
Cargill  Incorporated  to market  electricity  and risk  management  services to
wholesale   buyers.   In  addition,   revenues  declined  in  environmental  and
engineering  services due to sales force  reductions and the performance of less
subcontracting  work.  For the nine  months  ended  September  30,  1998,  these
decreases  were partially  offset by increased oil and gas  production  revenues
resulting from  increased  acquisition  and  development  activity.  The revenue
increase  from the higher oil and gas volumes  sold was largely  offset by lower
oil and gas prices, however.

Operating Expenses

Other  operation  expenses for the three and nine months ended September 30 were
as follows (in thousands):
<TABLE>
<CAPTION>

                                          For the three months ended       For the nine months ended
                                                 September 30,                   September 30,
                                              1998           1997             1998           1997
                                         --------------  --------------   ----------------------------
           <S>                                <C>             <C>              <C>           <C>     
           Utility-WP&L/IESU/IPC               $92,688         $87,775         $308,627      $255,406
           Nonregulated and other               47,394          70,178          147,486       244,943
                                         --------------  --------------   -----------------------------
                                              $140,082        $157,953         $456,113      $500,349
                                         ==============  ==============   ============================
</TABLE>

IEC's other operation expenses decreased $17.9 million and $44.2 million for the
three and nine months ended September 30, 1998,  respectively,  as compared with
the same periods in 1997. The increase in other operation expense at the utility
subsidiaries  was  primarily  due to increased  merger-related  expenses of $1.9
million  and $31.7  million for the three and nine months  ended  September  30,
1998,  an increase  in energy  efficiency  expenses in Iowa of $5.6  million and
$26.8  million for the three and nine months ended  September  30, 1998,  higher
administrative and general expenses at WP&L and increased expenses for Year 2000
readiness  efforts.  The  merger-related  expenses  were  primarily for employee
retirements  and  separations.  The  increase  was  partially  offset by reduced
pension  and  benefit  expenses,   lower  costs  resulting  from  merger-related
operating efficiencies and reduced nuclear operation expenses at IESU.

Other operation expenses at the nonregulated businesses were lower for the three
and nine months ended  September 30, 1998 compared with the same periods in 1997
due to a decrease in the cost of  nonregulated  energy sold of $21.8 million and
$92.9 million, respectively,  sales force reductions and the performance of less
subcontracting  work in the  environmental  and engineering  services  business.
These  reductions in operation  expense were partially offset by higher expenses
in the oil and gas  production  business due to increased  activity and expenses
for new business 

                                       33

<PAGE>


development  in  international  and domestic  markets.  In  addition,  under the
successful  efforts method (see Note 7 of the "Notes to  Consolidated  Financial
Statements"  for a further  discussion),  Whiting  recorded  pre-tax  impairment
charges of $1.7  million and $8.4  million  for the three and nine months  ended
September 30, 1998,  respectively,  and pre-tax charges of $0.3 million and $2.7
million for the three and nine months ended September 30, 1997, respectively.

Depreciation and amortization  expense  increased $5.6 million and $20.8 million
for the three  and nine  months  ended  September  30,  1998,  respectively,  as
compared  with  the  same  period  last  year as a result  of  utility  property
additions.  The  increase for the nine month period was also due to the Kewaunee
surcharge  (which is recorded in depreciation  and  amortization  expense with a
corresponding  increase  in revenues  resulting  in no impact on  earnings)  and
higher depletion expense at Whiting.

Interest Expense and Other

Interest expense  increased $6.5 million for the nine months ended September 30,
1998 compared with the same period in 1997 due to higher  borrowings during 1998
and unusually low interest expense in the second quarter of 1997, resulting from
an adjustment to decrease interest expense relating to a tax audit settlement.

Miscellaneous,  net expense  increased  $3.6  million and $16.0  million for the
three and nine months ended September 30, 1998,  respectively,  primarily due to
merger-related  expenses for the services of IEC's advisors and costs related to
IEC's name change.

Income Taxes

IEC's income tax expense  increased $1.7 million and decreased $18.2 million for
the three and nine months ended September 30, 1998, respectively. The change for
nine months ended September 30, 1998 was due to lower pre-tax income,  which was
partially offset by an increase in the overall effective tax rate. The effective
tax rate increase is primarily due to the  incurrence of various  non-deductible
merger-related expenses in 1998.


                           IESU RESULTS OF OPERATIONS

Overview

IESU  reported  1998  earnings  available  for common stock of $30.4 million and
$44.6  million  for  the  three  and  nine  months  ended  September  30,  1998,
respectively,  as compared  with $28.4  million  and $46.7  million for the same
periods in 1997. The increased earnings for the three months ended September 30,
1998 were primarily due to a higher electric  margin which was partially  offset
by merger-related expenses, increased depreciation and amortization expenses and
a higher  effective tax rate.  The decreased  earnings for the nine months ended
September 30, 1998 were  primarily  due to  merger-related  expenses,  increased
depreciation  and amortization  expenses,  a higher effective tax rate and lower
gas sales due to milder weather conditions. These items were partially offset by
a higher  electric  margin and the  nonrecurrence  of a $2.5 million reserve for
non-utility investments recorded in the second quarter of 1997.

Prior to August 1997,  energy  efficiency  expenditures for Iowa mandated energy
efficiency  programs  had been  recorded  as a  regulatory  asset and  recovered
through rates over a four-year  period.  In August 1997, the IUB allowed IESU to
begin  concurrent  recovery  of its  prospective  expenditures  (see  "Rates and
Regulatory Matters" for additional information).

                                       34

<PAGE>




Electric Operations

Electric  margins and MWH sales for IESU for the three months ended September 30
were as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                          MWHs Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                    <C>           <C>             <C>          <C>            <C>      <C>
Residential                             $ 74,079      $ 71,521         4%           761            737      3%
                                                                                    
Commercial                                53,132        50,107         6%           676            640      6%
                                                                
Industrial                                55,883        53,675         4%         1,229          1,175      5%
                                    ------------- -------------             ------------  -------------
   Total from ultimate customers         183,094       175,303         4%         2,666          2,552      4%
                                                             
Sales for resale                          15,190         6,373       138%           520            161    223%
                                                                
Other                                      3,052         3,000         2%            11             11      -
                                     ---------------------------            -----------  -------------
    Total                                201,336       184,676         9%         3,197          2,724     17%
                                                                            ============  ============= =========
Electric production fuels                 32,349        24,458        32%
                                          
Purchased power                           18,315        18,749        (2%)
                                    ------------- -------------
   Margin                              $ 150,672     $ 141,469         7%
                                    ============= =============  =========
</TABLE>

Electric  margins and MWH sales for IESU for the nine months ended  September 30
were as follows:
<TABLE>
<CAPTION>
                                        Revenues and Costs                          MWHs Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------
<S>                                    <C>           <C>               <C>       <C>            <C>        <C> 
Residential                            $ 178,917     $ 175,047         2%        1,995          2,033       (2%)
                                                                                  
Commercial                               127,998       123,369         4%        1,823          1,777        3%
                                                             
Industrial                               140,620       135,306         4%        3,630          3,505        4%
                                    ------------- -------------             ------------  -------------
   Total from ultimate customers         447,535       433,722         3%        7,448          7,315        2%
                                                             
Sales for resale                          34,153        17,866        91%        1,241            518      140%
                                                              
Other                                      7,937         8,065        (2%)          32             33       (3%)
                                    ---------------------------             -----------  --------------
   Total                                 489,625       459,653         7%        8,721          7,866       11%
                                                                            ============  ============= =========
Electric production fuels                 77,278        72,507         7%
                                          
Purchased power                           55,132        52,472         5%
                                    ------------- -------------
   Margin                              $ 357,215     $ 334,674         7%
                                    ============= =============  =========
</TABLE>

Electric margin increased $9.2 million, or 7%, and $22.5 million, or 7%, for the
three and nine months ended September 30, 1998,  respectively,  as compared with
the same  periods  in 1997  primarily  due to the  recovery  of  concurrent  and
previously deferred  expenditures for Iowa-mandated  energy efficiency programs,
reduced  purchased power capacity costs and customer sales growth.  The recovery
for energy  efficiency  programs is in accordance  with IUB orders (a portion of
these  recoveries  is also  amortized  to expense in other  operation  expense).
Electric revenues included  increased  recoveries for energy efficiency  program
costs of  approximately $3 million and $15 million for the three and nine months
ended  September  30, 1998,  respectively,  as compared with the same periods in
1997. Sales for resale increased  significantly  for both periods as a result of
the  implementation of a merger-related  joint sales agreement during the second
quarter of 1998  (off-system  sales  revenues are passed  through  IESU's energy
adjustment clause and therefore have no impact on electric  margin).  See "Rates
and Regulatory Matters" for a further discussion.

                                       35

<PAGE>


Electric  margin also increased for the three months ended September 30, 1998 as
a result of a 3% increase in sales to higher margin  residential  customers as a
result of warmer  weather  as  compared  with the same  period  last  year.  The
increase in electric  margin for the nine months  ended  September  30, 1998 was
partially  offset  by a  decrease  of 2% in sales to higher  margin  residential
customers due to milder winter weather conditions in 1998 compared with the same
period in 1997.

IESU's electric tariffs include EAC's that are designed to currently recover the
costs of fuel and the energy portion of purchased power billings.

Gas Operations

Gas margins and Dth sales for IESU for the three months ended  September 30 were
as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                       Dekatherms Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                     <C>           <C>            <C>          <C>            <C>        <C> 
Residential                             $  8,187      $  8,802       (7%)           933          1,025      (9%)
                                                                                    
Commercial                                 3,852         4,259      (10%)           714            758      (6%)
                                                                  
Industrial                                 2,110         1,656       27%            652            440      48%
                                                                 
Transportation and other                     835           790        6%          2,537          2,287      11%
                                    ---------------------------             ------------  -------------
   Total                                  14,984        15,507       (3%)         4,836          4,510      7%
                                                                            ============  ============= =========
Cost of gas sold                                                     (4%)
                                           7,524         7,835
                                    ------------- -------------
   Margin                               $  7,460      $  7,672       (3%)
                                    ============= =============  =========
</TABLE>


Gas margins and Dth sales for IESU for the nine months  ended  September 30 were
as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                       Dekatherms Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                     <C>           <C>           <C>           <C>            <C>       <C>  
Residential                             $ 59,183      $ 75,037      (21%)          9,350         11,140    (16%)
                                                                                  
Commercial                                27,357        37,078      (26%)          5,650          6,520    (13%)
                                                              
Industrial                                 6,801         7,926      (14%)          1,997          1,874      7%
                                                              
Transportation and other                   2,958         2,670       11%           8,273          7,507     10%
                                    ---------------------------             ------------  -------------
   Total                                  96,299       122,711      (22%)         25,270         27,041     (7%)
                                                                            ============  ============= =========
Cost of gas sold                          55,963        84,413      (34%)
                                    ------------- -------------
   Margin                               $ 40,336      $ 38,298        5%
                                    ============= =============  =========
</TABLE>

Gas margin  increased $2.0 million,  or 5%, for the nine months ended  September
30, 1998 compared with the same period in 1997 primarily due to higher  revenues
from the  recovery of  concurrent  and  previously  deferred  energy  efficiency
expenditures for  Iowa-mandated  energy  efficiency  program costs in accordance
with IUB orders (a portion of these  recoveries is also  amortized to expense in
other  operation  expenses).  For the nine months ended  September  30, 1998 gas
revenues  included  an  increase  of  $5.0  million  in  recoveries  for  energy
efficiency  program  costs as compared  to the same period last year.  Partially
offsetting  the  increased  recoveries  for  energy  efficiency  programs  was a
decrease in Dth sales of 7% resulting from milder winter weather.

IESU's gas tariffs  include PGA clauses that are  designed to currently  recover
the cost of gas sold.

                                       36

<PAGE>

Operating Expenses

IESU's other  operation  expenses  decreased  $0.5 million and  increased  $17.1
million for the three and nine months ended September 30, 1998, respectively, as
compared  with the same  periods in 1997.  The decrease for the three months was
primarily  due to reduced  pension and benefit costs and lower injury and damage
expenses  which were  largely  offset by an increase  of $2.7  million in energy
efficiency  expenses.  The nine month  increase  resulted  from $17.7 million of
higher  energy  efficiency  expenses,  merger-related  expenses  and  Year  2000
compliance  costs  which  were  partially  offset  by  lower  nuclear  operation
expenses,  reduced  pension  and  benefit  costs and  lower  injury  and  damage
expenses.  The merger-related  expenses were primarily for employee  retirements
and separations.

Depreciation  and amortization  expense  increased $2.0 million and $3.5 million
for the three  and nine  months  ended  September  30,  1998,  respectively,  as
compared with the same periods in 1997 primarily due to property additions.

Interest Expense and Other

Miscellaneous,  net expense  increased  $2.9  million for the nine months  ended
September  30,  1998  compared  with the same  period in 1997  primarily  due to
merger-related   expenses  and  lower  returns  on  deferred  energy  efficiency
expenditures (which are being recovered concurrently effective August 1997). The
increase was partially offset by the nonrecurrence of a $2.5 million reserve for
non-utility investments recorded in the second quarter of 1997.

Income Taxes

IESU's income tax expense  increased $4.4 million and $2.3 million for the three
and nine months ended  September  30, 1998,  respectively,  as compared with the
same periods in 1997 due to higher pre-tax income and an increase in the overall
effective tax rate. The effective  rate  increased  primarily as a result of the
incurrence of certain merger-related expenses which are not deductible.

                           WP&L RESULTS OF OPERATIONS

Overview

WP&L reported  consolidated earnings available for common stock of $11.9 million
and $26.6  million  for the three and nine  months  ended  September  30,  1998,
respectively,  as compared  with $14.4  million  and $47.1  million for the same
periods in 1997.  The decline in earnings for the three  months ended  September
30, 1998 was primarily due to higher  depreciation  and  amortization  expenses,
lower electric margin and merger-related  expenses.  The decline in earnings for
the nine months ended  September 30, 1998 was  primarily  due to  merger-related
expenses,  higher depreciation and amortization  expenses,  lower gas margin and
higher  interest  expense  which were  partially  offset by reduced  maintenance
expenses.


                                       37

<PAGE>

Electric Operations

Electric  margins and MWH sales for WP&L for the three months ended September 30
were as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                          MWHs Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                     <C>           <C>            <C>           <C>            <C>      <C>
Residential                             $ 55,156      $ 50,194        10%           833            763      9%
                                                                                    
Commercial                                29,671        27,944         6%           522            499      5%
                                                                
Industrial                                42,504        38,812        10%         1,182          1,100      7%
                                    ------------- -------------             ------------  -------------
   Total from ultimate customers         127,331       116,950         9%         2,537          2,362      7%
                                                             
Sales for resale                          33,800        44,464       (24%)        1,072          1,591    (33%)
                                                              
Other                                      4,214         4,051         4%            13             13      -
                                    ---------------------------             ------------  -------------
   Total                                 165,345       165,465         -          3,622          3,966      (9%)
                                                                            ============  ============= =========
Electric production fuels                 33,520        31,253         7%
                                          
Purchased power                           30,539        31,514        (3%)
                                    ------------- -------------
   Margin                              $ 101,286     $ 102,698        (1%)
                                    ============= =============  =========
</TABLE>

Electric  margins and MWH sales for WP&L for the nine months ended  September 30
were as follows:
<TABLE>
<CAPTION>
                                        Revenues and Costs                          MWHs Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                    <C>           <C>              <C>        <C>           <C>        <C>
Residential                            $ 152,861     $ 150,205         2%         2,289          2,227      3%
                                                                                  
Commercial                                83,039        80,481         3%         1,453          1,403      4%
                                                             
Industrial                               121,179       113,003         7%         3,335          3,145      6%
                                    ------------- -------------             ------------  -------------
   Total from ultimate customers         357,079       343,689         4%         7,077          6,775      4%
                                                             
Sales for resale                         103,373       123,015       (16%)        3,592          4,384    (18%)
                                                            
Other                                     10,517         8,494        24%            44             46     (4%)
                                    ---------------------------             ------------  -------------
   Total                                 470,969       475,198        (1%)        10,713         11,205    (4%)
                                                                            ============  ============= =========
Electric production fuels                 91,889        89,655         2%
                                          
Purchased power                           89,378        98,610        (9%)
                                          
                                    ------------- -------------
   Margin                              $ 289,702     $ 286,933         1%
                                    ============= =============  =========
</TABLE>


Electric margin  decreased $1.4 million,  or 1%, and increased $2.8 million,  or
1%, for the three and nine months ended  September  30, 1998,  respectively,  as
compared  with the same periods in 1997.  Sales to ultimate  customers  for both
periods  increased due to economic  strength in the service territory and warmer
weather.  Sales for resale declined in both periods as a result of a less active
bulk power market, increased transmission constraints, and implementation of the
merger-related joint sales agreement. Under the agreement, the marginal revenues
resulting  from sales in the bulk power  market  are  shared  among the  utility
merger partners (WP&L, IESU and IPC).

The  increase  in  electric  margin  for the nine  month  period was also due to
reliance on more costly  purchased  power in the first six months of 1997 due to
various  power plant  outages and the  collection  of a $3.2  million  surcharge
related to Kewaunee (a  corresponding  amount was included in  depreciation  and
amortization  expense).  Higher than forecasted purchased power and transmission
costs and lower income from off-system sales negatively  impacted the 

                                       38

<PAGE>


1998  three and nine  month  margin as  compared  to the  prior  period.  A rate
reduction  implemented  in April  1997  also  partially  offset  the nine  month
increase.

Gas Operations

Gas margins and Dth sales for WP&L for the three months ended  September 30 were
as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                       Dekatherms Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                     <C>           <C>            <C>          <C>            <C>      <C> 
Residential                             $  5,112      $  5,631       (9%)           737            778     (5%)
                                                                                    
Commercial                                 2,969         3,445      (14%)           663            715     (7%)
                                                                 
Industrial                                   561           698      (20%)           152            176    (14%)
                                                                   
Transportation and other                     808         3,597      (78%)         2,715          3,436    (21%)
                                    ---------------------------             ------------  -------------
   Total                                   9,450        13,371      (29%)         4,267          5,105    (16%)
                                                                            ============  ============= =========
Cost of gas sold                           2,711         7,135      (62%)
                                    ------------- -------------
   Margin                               $  6,739      $  6,236        8%
                                    ============= =============  =========
</TABLE>


Gas margins and Dth sales for WP&L for the nine months  ended  September 30 were
as follows:
<TABLE>
<CAPTION>

                                        Revenues and Costs                       Dekatherms Sold
                                          (in thousands)          Change          (in thousands)         Change
                                    ---------------------------  ---------  --------------------------- ---------
                                        1998          1997                     1998           1997
                                    ------------- -------------             ------------  -------------

<S>                                     <C>           <C>           <C>          <C>            <C>       <C>  
Residential                             $ 45,102      $ 59,037      (24%)         7,454          8,887    (16%)
                                                                                  
Commercial                                22,712        30,061      (24%)         4,781          5,665    (16%)
                                                              
Industrial                                 4,019         5,656      (29%)           951          1,164    (18%)
                                                                
Transportation and other                   4,879        13,829      (65%)         9,190         13,439    (32%)
                                    ---------------------------             ------------  -------------
   Total                                  76,712       108,583      (29%)        22,376         29,155    (23%)
                                                                            ============  ============= =========
Cost of gas sold                          41,940        68,401      (39%)
                                          
                                    ------------- -------------
   Margin                               $ 34,772      $ 40,182      (13%)
                                    ============= =============  =========
</TABLE>


Gas margin  declined $5.4 million or 13% for the nine months ended September 30,
1998  compared  with the same  period  in 1997 due to a  reduction  in Dth sales
resulting  from milder  weather and an average  retail  rate  reduction  of 2.2%
effective April 29, 1997. The significant  decline in  transportation  and other
revenues  and sales  reflects  an  accounting  change  for  off-system  sales as
required by the PSCW effective  January 1, 1998. The accounting  change requires
that  beginning in 1998  off-system gas sales are reported as a reduction of the
cost of gas sold rather than as gas revenue.  Off-system  gas revenues were $1.8
million and $9.6 million for the three and nine months ended September 30, 1997.

The PSCW has  approved a gas cost  adjustment  mechanism  based on a  prescribed
commodity  price index which replaced the PGA clause formerly in place for WP&L.
Under the current  sharing  mechanism,  40% of all gains and losses  relative to
current  commodity  prices as well as other  benchmarks  are  recognized by WP&L
rather than refunded to or recovered  from  customers.  WP&L realized  favorable
contributions  to gas margin of $0.7  million and $0.2 million for the three and
nine  months  ended  September  30,  1998.  For the same  periods in 1997,  WP&L
realized  an   unfavorable   contribution   of  $0.2  million  and  a  favorable
contribution of $0.2 million.

                                       39

<PAGE>


Operating Expenses

Other  operation  expense  increased $1.2 million and $9.8 million for the three
and nine months ended  September  30, 1998,  respectively,  as compared with the
same  periods in 1997  primarily  due to  merger-related  expenses  for employee
retirements and separations and higher administrative and general expenses. Such
items were  partially  offset by the  reflection in the third quarter of 1998 of
updated  actuarial  estimates  for annual  benefit  costs  which were lower than
earlier  estimates.  Maintenance  expense  declined  for the nine  months  ended
September  30,  1998  due to  increased  expenses  in the  same  period  in 1997
resulting from several generating plant outages and overhauls.

Depreciation and amortization  expense  increased $3.4 million and $13.9 million
for the three  and nine  months  ended  September  30,  1998,  respectively,  as
compared  with the same  periods  in 1997 due to  property  additions.  The nine
months ended September 30, 1998,  expenses also increased due to higher Kewaunee
depreciation  (see "Capital  Requirements - Nuclear  Facilities"  for additional
information)  and $3.2 million of amortization  costs related to the recovery of
deferred charges associated with the 1997 outages at the Kewaunee nuclear plant.

Interest Expense and Other

Interest expense  increased $3.5 million for the nine months ended September 30,
1998  compared  with the same  period in 1997  primarily  due to  unusually  low
interest expense in the second quarter of 1997,  resulting from an adjustment to
decrease interest expense relating to a tax audit  settlement.  Interest expense
was also impacted by increased borrowings during 1998.

Miscellaneous,  net expense  increased  $5.9  million for the nine months  ended
September  30,  1998  compared  with  the same  period  in 1997  largely  due to
merger-related expenses.

Income Taxes

Income taxes  decreased  $1.6  million and $12.9  million for the three and nine
months ended September 30, 1998, respectively, as compared with the same periods
in 1997 due to lower taxable income.


                         LIQUIDITY AND CAPITAL RESOURCES

Historical IEC Analysis

Cash flows from  operating  activities  at IEC increased to $377 million for the
nine months ended  September  30, 1998  compared  with $335 million for the nine
months ended  September 30, 1997,  primarily  due to changes in working  capital
partially offset by lower net income.  Cash flows used for financing  activities
were  higher  for the first  nine  months of 1998  compared  with the first nine
months  of 1997  due to the net  change  in  borrowings.  Cash  flows  used  for
investing  activities  were  constant in the first nine months of 1998  compared
with the first nine months of 1997.  Times  interest  earned before income taxes
for IEC for the nine months ended September 30, 1998 was 2.37 compared with 3.18
for the same time period in 1997.

Historical IESU Analysis

Cash flows generated from operating  activities increased to $169 million during
the nine months ended September 30, 1998 compared with $153 million for the nine
months ended  September 30, 1997  primarily  due to changes in working  capital.
Cash flows used for financing  activities were lower in the first nine months of
1998  compared with the same period last year  primarily  due to reduced  common
stock  dividends  and  changes in debt  levels.  Cash  flows used for  investing
activities  were lower during the first nine months of 1998 as compared with the
first nine months of 1997 due to the  concurrent  recovery of energy  efficiency
expenditures in 1998 and lower construction expenditures.

                                       40

<PAGE>


Historical WP&L Analysis

Cash flows generated from operations were $160 million for the nine months ended
September  30,  1998  compared  with  $131  million  for the nine  months  ended
September  30,  1997.  The  increase was  primarily  due to higher  depreciation
expense and changes in working  capital,  partially  offset by lower net income.
Cash flows used for financing activities were higher in the first nine months of
1998  compared  with the same  period in 1997  primarily  due to changes in debt
levels  partially  offset by lower common stock  dividends.  Cash flows used for
investing  activities  were  lower in the third  quarter  of 1998 due to reduced
construction   expenditures  which  were  partially  offset  by  higher  nuclear
decommissioning funding levels.

Future Considerations

The  capital  requirements  of IEC are  primarily  attributable  to its  utility
subsidiaries'  construction  and acquisition  programs,  its debt maturities and
business  opportunities  of Alliant  Industries.  It is anticipated  that future
capital  requirements  of IEC will be met by cash generated from  operations and
external  financing.  The level of cash generated  from  operations is partially
dependent  upon  economic  conditions,  legislative  activities,   environmental
matters and timely  regulatory  recovery of utility costs.  IEC's  liquidity and
capital  resources will be affected by costs associated with  environmental  and
regulatory  issues.  Emerging  competition  in the utility  industry  could also
impact IEC's  liquidity and capital  resources,  as discussed  previously in the
"Utility Industry Outlook" section.

IEC has interests in the  international  arena.  At September 30, 1998,  Alliant
Industries had approximately $58 million of investments in foreign entities.  At
September 30, 1998, IESU, WP&L and IPC did not have any foreign investments.  It
is  expected  that  IEC  will  continue  to  explore  additional   international
investment opportunities. Such investments may carry a higher level of risk than
IEC's traditional  domestic utility investments or Alliant Industries'  domestic
investments.  Such risks  could  include  foreign  government  actions,  foreign
economic and currency risks and others.

IEC is expected to pursue various potential business development  opportunities,
including  international  as  well  as  domestic  investments,  and is  devoting
resources  to such  efforts.  It is  anticipated  that IEC will strive to select
investments  where the  international  and other risks are both  understood  and
manageable. Under PUHCA, IEC's investments in EWG's and FUCO's is limited to 50%
of IEC's consolidated retained earnings.

At September 30, 1998,  Alliant  Industries and IPC had investments in the stock
of McLeod,  a  telecommunications  company,  valued at $222.5  million  and $1.0
million  (based on a September  30, 1998 closing  price of $21.875 per share and
compared to a cost basis of $29.0 million and $0.1 million),  respectively.  The
McLeod stock price closed at $36.69 per share on November 10, 1998.  Pursuant to
the  applicable  accounting  rules,  the carrying value of the  investments  are
adjusted to the estimated  fair value each quarter based on the closing price at
the  end of the  quarter.  The  adjustments  do not  impact  net  income  as the
unrealized gains or losses,  net of taxes,  are recorded  directly to the common
equity section of the balance sheet.  In addition,  any such gains or losses are
reflected in current earnings only at the time they are realized through a sale.

IEC  had  certain   off-balance  sheet  financial   guarantees  and  commitments
outstanding  at  September  30,  1998.  They  generally  consist of  third-party
borrowing  arrangements  and  lending  commitments  as  well  as  guarantees  of
financial  performance  of  syndicated   affordable  housing  properties.   Such
guarantees were generally  issued to support third party borrowing  arrangements
and similar  transactions.  Management currently believes the possibility of IEC
having to make any material cash payments under these agreements is remote.

                                       41

<PAGE>


Financing and Capital Structure

Access to the long-term and short-term capital and credit markets,  and costs of
external financing,  are dependent on creditworthiness.  The debt ratings of IEC
and certain subsidiaries are as follows:
<TABLE>
<CAPTION>

                                                                                          Standard &
                                                                      Moody's               Poor's
                                                                  -----------------    -----------------

<S>                             <C>                                    <C>                   <C>
      IESU                      - Secured long-term debt                 A2                   A+
                                - Unsecured long-term debt               A3                   A

      WP&L                      - Secured long-term debt                Aa2                   AA
                                - Unsecured long-term debt              Aa3                   A+

      IPC                       - Secured long-term debt                 A1                   A+
                                - Unsecured long-term debt               A2                   A

      Alliant Industries        - Commercial paper                       P2                   A1

      IEC                       - Commercial paper (a)                   P1                   A1
</TABLE>



(a)  IESU, WP&L and IPC participate in a utility money pool which is funded,  as
     needed,  through the  issuance  of  commercial  paper by IEC.  The PSCW has
     restricted WP&L from loaning money to non-Wisconsin utilities and therefore
     WP&L is restricted from loaning money to the utility money pool.

Alliant  Industries is a party to a 3-Year Credit Agreement with various banking
institutions.   The  agreement  extends  through  October  2000,  with  one-year
extensions   available   upon  agreement  by  the  parties.   Unused   borrowing
availability  under this agreement is also used to support  Alliant  Industries'
commercial paper program. A combined maximum of $450 million of borrowings under
this  agreement and the  commercial  paper program may be outstanding at any one
time. Interest rates and maturities are set at the time of borrowing.  The rates
are based upon quoted market prices and the  maturities  are less than one year.
At  September  30,  1998,  Alliant  Industries  had $259  million of  borrowings
outstanding  under this facility with interest  rates ranging from  5.66%-5.75%.
(Refer to the "Other Matters - Financial  Instruments"  section for a discussion
of several  interest rate swaps Alliant  Industries has entered into relative to
$200 million of borrowings under this Agreement).  Alliant Industries intends to
continue  borrowing under the renewal options of this facility and no conditions
existed at  September  30, 1998 that would  prevent the  issuance of  commercial
paper  or  direct  borrowings  on its  bank  lines.  Accordingly,  this  debt is
classified as long-term.  In addition,  Alliant  Industries  also has in place a
$150 million 364-Day Credit Agreement which is described below.

Other than periodic sinking fund requirements, which will not require additional
cash expenditures,  the following long-term debt (in millions) will mature prior
to December 31, 2002:

           IESU                                         $185.0
           IPC                                             8.1
           WP&L                                            1.9
           Alliant Industries                            287.6
                                              -----------------
           IEC                                           $482.6
                                              =================

Depending upon market conditions, it is currently anticipated that a majority of
the maturing debt will be refinanced with the issuance of long-term securities.

                                       42

<PAGE>


IESU,   WP&L  and  IPC  currently  have  no  authority  from  their   applicable
federal/state  regulatory  commissions or the SEC to issue additional  long-term
debt. The companies  continually  evaluate their future financing needs and will
make the necessary  regulatory  filings as needed. In October 1998, IESU and IPC
filed  applications with the SEC under PUHCA to issue up to $200 million and $80
million  of  debt  securities,   respectively.  It  is  anticipated  that  these
securities will be issued during the next two years.

On October 30, 1998,  WP&L issued $60 million of  debentures at a coupon rate of
5.70% maturing on October 15, 2008. The net proceeds from the debt offering were
used to pay down  short-term  debt,  including  short-term  debt  used to retire
maturing long-term debt.

The various charter  provisions of the entities  identified  below authorize and
limit the aggregate  amount of additional  shares of Cumulative  Preferred Stock
and Cumulative  Preference Stock that may be issued.  At September 30, 1998, the
companies  could  have  issued the  following  additional  shares of  Cumulative
Preferred or Preference Stock:

                                        IESU          WP&L           IPC
                                        ----          ----           ---
         Cumulative Preferred            -         2,700,775      1,238,619
                                                       
         Cumulative Preference        700,000          -          2,000,000

The capitalization ratios of IEC, IESU, WP&L and IPC were as follows:
<TABLE>
<CAPTION>

                              IEC                      IESU                      WP&L                       IPC
                       9/30/98    12/31/97       9/30/98    12/31/97       9/30/98    12/31/97       9/30/98    12/31/97
                     ---------- -----------    ---------- -----------    ---------- -----------    ---------- -----------
<S>                    <C>        <C>            <C>        <C>            <C>        <C>            <C>        <C>  
Common equity           49%        51%            48%        45%            58%        59%            53%        52%  
Preferred stock          4          3              2          1              6          6              8          8  
Long-term debt          47         46             50         54             36         35             39%        40   
                     ---------- -----------    ---------- -----------    ---------- -----------    ---------- -----------
                       100%       100%           100%       100%           100%       100%           100%       100%
</TABLE>

For interim  financing,  IESU,  WP&L and IPC were  authorized by the  applicable
federal or state  regulatory  agency to issue  short-term  debt as  follows  (in
millions) at September 30, 1998:

                               IESU        WP&L         IPC
                               ----        ----         ---
Regulatory authorization       $200        $138         $75
Short-term debt outstanding       -         $73          $7


In  addition to the  short-term  debt at its  utility  subsidiaries,  IEC had an
additional $54 million of short-term debt  outstanding at September 30, 1998. In
addition to providing for ongoing  working capital needs,  this  availability of
short-term  financing  provides  the  companies  flexibility  in the issuance of
long-term  securities.  The level of short-term  borrowing  fluctuates  based on
seasonal corporate needs, the timing of long-term financing,  and capital market
conditions.  To  maintain  flexibility  in its  capital  structure  and to  take
advantage of favorable  short-term  rates,  IESU and WP&L also use proceeds from
the sale of accounts  receivable  and unbilled  revenues to finance a portion of
their long-term cash needs.  IEC anticipates  that short-term debt will continue
to be  available  at  reasonable  costs due to current  ratings  by  independent
utility analysts and rating services.

Alliant  Industries is also a party to a 364-Day  Credit  Agreement with various
banking  institutions.  The agreement extends through October 18, 1999, with 364
day extensions  available upon agreement by the parties.  The unborrowed portion
of this agreement is also used to support Alliant  Industries'  commercial paper
program.  A combined  maximum of $150 million of borrowings under this agreement
and the commercial  paper program may be  outstanding at any one time.  Interest
rates and maturities are set at the time of borrowing.  The rates are based upon
quoted market prices and the  maturities  are less than one year.  There were no
borrowings under this facility at September 30, 1998.

                                       43

<PAGE>


In addition to the aforementioned  borrowing capability under Alliant Industries
Credit  Agreements,  IEC has $150 million of bank lines of credit, of which none
was utilized, at September 30, 1998 available for direct borrowing or to support
commercial paper. Commitment fees are paid to maintain these lines and there are
no conditions which restrict the unused lines of credit.

From time to time, IEC may borrow from banks and other financial institutions on
"as-offered"  credit lines in lieu of commercial  paper, and has agreements with
several financial institutions for such borrowings. There are no commitment fees
associated with these agreements and there were no borrowings  outstanding under
these agreements at September 30, 1998.

Given the above financing  flexibility,  including IEC's access to both the debt
and  equity  securities  markets,  management  believes  it  has  the  necessary
financing  capabilities in place to adequately finance its capital  requirements
for the foreseeable future.

Capital Requirements

General

Capital  expenditure and investment and financing plans are subject to continual
review and change.  The  capital  expenditure  and  investment  programs  may be
revised  significantly as a result of many considerations,  including changes in
economic  conditions,  variations  in actual  sales and load growth  compared to
forecasts,   requirements  of   environmental,   nuclear  and  other  regulatory
authorities,   acquisition   and   business   combination   opportunities,   the
availability  of alternate  energy and purchased  power sources,  the ability to
obtain adequate and timely rate relief,  escalations in  construction  costs and
conservation and energy efficiency programs.

Construction  and  acquisition  expenditures  for IEC for the nine months  ended
September  30, 1998 were $242  million,  compared with $226 million for the nine
months ended September 30, 1997. IEC's anticipated  construction and acquisition
expenditures  for  1998  were  forecasted  to  be  approximately  $630  million,
consisting of approximately $277 million in its utility operations, $190 million
for energy-related  international  investments and $163 million for new business
development  initiatives at Alliant  Industries.  The level of 1998 domestic and
international investments could vary significantly from the estimates noted here
depending on actual  investment  opportunities,  timing of the opportunities and
the receipt of  regulatory  approvals to exceed  limitations  in place under the
Wisconsin Utility Holding Company Act (WUHCA) on the amount of IEC's non-utility
investments.  It is expected that IEC will spend  approximately  $1.2 billion on
utility  construction  and  acquisition  expenditures  during  1999-2002.  It is
expected that Alliant  Industries will invest in energy products and services in
domestic and international  markets,  industrial services  initiatives and other
strategic initiatives.

IEC anticipates  financing utility  construction  expenditures  during 1998-2002
through  internally  generated  funds  supplemented,  when required,  by outside
financing.  Funding of a majority of the  Alliant  Industries  construction  and
acquisition expenditures is expected to be completed with external financings.

IESU's  construction  and  acquisition  expenditures  for the nine months  ended
September  30,  1998 were $71  million  compared  with $75  million for the nine
months ended September 30, 1997.  IESU's  construction  and acquisition  program
anticipates  expenditures of  approximately  $124 million for 1998, of which 46%
represents  expenditures for electric transmission and distribution  facilities,
17% represents  electric  generation  expenditures,  12% represents  information
technology  expenditures  and  7%  represents  gas  utility  expenditures.   The
remaining 18% represents miscellaneous electric, steam and general expenditures.
IESU's levels of utility construction and acquisition expenditures are projected
to be $129 million in 1999,  $103  million in 2000,  $98 million in 2001 and $99
million in 2002.  IESU  anticipates  funding  the large  majority of its utility
construction and acquisition  expenditures  during 1998-2002 through  internally
generated funds, supplemented by external financings as needed.

WP&L's  construction  and  acquisition  expenditures  for the nine months  ended
September  30,  1998 were $74  million  compared  with $89  million for the nine
months  ended   September  30,  1997.   The  decrease  was  due  to  significant

                                       44

<PAGE>


expenditures in 1997 for computer system development projects.  WP&L's levels of
utility  construction  and  acquisition  expenditures  are  projected to be $133
million in 1998,  $136 million in 1999,  $138  million in 2000,  $141 million in
2001 and $144 million in 2002.  WP&L  anticipates  funding the large majority of
its utility  construction and acquisition  expenditures during 1998-2002 through
internally generated funds, supplemented by external financings as needed.

Nuclear Facilities

IEC owns interests in two nuclear  facilities,  Kewaunee and the DAEC. Set forth
below is a discussion of certain matters impacting these facilities.

Kewaunee,  a 532-megawatt  pressurized  water reactor plant, is operated by WPSC
and is jointly  owned by WPSC  (41.2%),  WP&L  (41.0%),  and MG&E  (17.8%).  The
Kewaunee operating license expires in 2013.

On April 7, 1998, the PSCW approved  WPSC's  application  for replacement of the
two  steam  generators  at  Kewaunee.  The  total  cost of  replacing  the steam
generators would be approximately  $90.7 million,  with WP&L's share of the cost
being approximately  $37.2 million.  The replacement work is tentatively planned
for the spring of 2000 and will take approximately 60 days. On July 2, 1998, the
PSCW  approved an agreement  between the owners of Kewaunee  which  provides for
WPSC to assume the 17.8% Kewaunee  ownership  share currently held by MG&E prior
to work beginning on the replacement of steam generators. On September 29, 1998,
WPSC and MG&E  finalized an  arrangement in which WPSC will acquire MG&E's 17.8%
share of Kewaunee.  This agreement,  the closing of which is contingent upon the
steam generator  replacement,  will give WPSC 59.0% ownership in Kewaunee.  WPSC
and WP&L are discussing revisions to the joint power supply agreement which will
govern operation of the plant after the ownership change takes place.

On  October  17,  1998,  Kewaunee  was shut down for a planned  maintenance  and
refueling outage.  Inspection of the plant's two steam generators shows that the
repairs made in 1997 are holding up well and few additional  repairs are needed.
In  addition  to the  inspection  and  repairs of the steam  generator,  a major
overhaul is being performed on the main turbine  generator.  The plant should be
back in operation late in the fourth quarter of 1998. On July 2, 1998,  WPSC and
WP&L  received  approval  from the PSCW to defer the costs  associated  with the
repair of Kewaunee steam generator tubes. If the costs are significant, recovery
of the deferred  costs will be requested  in a future rate  proceeding.  Minimal
costs have been deferred to date.

Prior to the July 2, 1998 PSCW  decision,  the PSCW had  directed  the owners of
Kewaunee to develop  depreciation  and  decommissioning  cost levels based on an
expected plant  end-of-life of 2002 versus a license  end-of-life of 2013.  This
was prompted by the uncertainty  regarding the expected useful life of the plant
without steam generator replacement. The revised end-of life of 2002 resulted in
higher depreciation and  decommissioning  expense at WP&L beginning in May 1997,
in accordance with the PSCW rate order UR-110.  This level of depreciation  will
remain in effect  until the steam  generator  replacement  is completed at which
time the entire plant will be depreciated over 8.5 years. At September 30, 1998,
the net carrying amount of WP&L's investment in Kewaunee was approximately $43.3
million. The current cost of WP&L's share of the estimated costs to decommission
Kewaunee is $189.7 million and exceeds the trust assets at September 30, 1998 by
$59.9 million. WP&L's contribution to the decommissioning trust fund is based on
an annual  inflation  rate of 5.83%.  WP&L's  retail  customers in Wisconsin are
responsible for approximately 80% of WP&L's share of Kewaunee costs.

WPSC is an  intervenor  defendant  in Madison  Gas and  Electric  Co. v.  Public
Service  Commission of Wisconsin,  Dane County Circuit Court.  The case involves
MG&E's appeal of the PSCW's order  granting WPSC  authority to replace the steam
generators at Kewaunee.  MG&E opposes the steam generator  replacement  project.
WPSC and MG&E  have  entered  into a letter  of  intent  to  consummate  certain
transactions  which would result in the  settlement of MG&E's  opposition to the
steam generator replacement project and the dismissal of MG&E's appeal. WPSC and
MG&E anticipate executing a definitive settlement agreement by the end of 1998.

                                       45

<PAGE>

DAEC, a 535-megawatt  boiling water reactor plant,  is operated by IESU and IESU
has a 70% ownership interest in the plant. The DAEC operating license expires in
2014.  Pursuant to the most recent electric rate case order, the IUB allows IESU
to recover $6.0  million  annually for the cost to  decommission  the DAEC.  The
current  recovery  figures are based on an assumed cost to decommission the DAEC
of $252.8  million,  which is IESU's 70% portion in 1993  dollars,  based on the
Nuclear  Regulatory  Commission minimum formula (which exceeds the amount in the
current  site-specific study completed in 1994). At September 30, 1998, IESU had
$83.0 million invested in external  decommissioning  trust funds and also had an
internal  decommissioning  reserve  of $21.7  million  recorded  as  accumulated
depreciation.

Refer to the "Other Matters - Environmental" section for a discussion of various
issues impacting IEC's future capital requirements.

Rates and Regulatory Matters

In November  1997, as part of its Merger  approval,  FERC accepted a proposal by
IESU, WP&L, and IPC, which provides for a four-year freeze on wholesale electric
prices beginning with the effective date of the Merger.

In  association  with  the  Merger,  IESU,  WP&L and IPC  entered  into a System
Coordination and Operating Agreement (Agreement) which became effective with the
consummation of the Merger. The Agreement,  which has been approved by the FERC,
provides a contractual basis for coordinated planning,  construction,  operation
and  maintenance of the  interconnected  electric  generation  and  transmission
systems of the three utility  companies.  In addition,  the Agreement allows the
interconnected  system to be operated as a single  control area with  off-system
capacity sales and purchases made to market excess system  capability or to meet
system capability deficiencies. Such sales and purchases are allocated among the
three utility  companies  based on  procedures  included in the  Agreement,  and
approved by both the FERC and all state  regulatory  bodies having  jurisdiction
over these sales.

IESU

In  September  1997,  IESU  agreed  with the IUB to  provide  Iowa  customers  a
four-year retail electric and gas price freeze  commencing on the effective date
of the Merger. The agreement  excluded price changes due to  government-mandated
programs (such as energy efficiency cost recovery), the electric fuel adjustment
clause  and PGA  clause  and  unforeseen  dramatic  changes  in  operations.  In
addition,  the price  freeze does not preclude a review by either the IUB or OCA
into whether IESU is exceeding a reasonable return on common equity.

Pursuant to the authority  described in the prior  paragraph,  the OCA requested
certain  financial   information  related  to  both  electric  and  gas  utility
operations  within the state of Iowa for IESU. The OCA requested  information on
what pro forma  adjustments  IESU would make to its most recent  historical test
year (1997) to be in compliance  with the State of Iowa Code, IUB rules and past
rate case  precedent.  IESU  completed  the data request in a timely  manner and
based upon that  information  management  believes no change  that would  reduce
utility  rates is  warranted.  While IESU  cannot  predict  the  outcome of this
process,  management  currently  believes that the final outcome will not have a
material adverse impact on IESU's results of operations or financial position.

Under provisions of the IUB rules, IESU is currently recovering the costs it has
incurred  for its  energy  efficiency  programs.  There have been  several  cost
recovery  filings  made with and approved by the IUB over the course of the last
few years.  Generally,  the costs incurred through July 1997 are being recovered
over various four-year  periods.  The IUB commenced a rulemaking in January 1997
to implement statutory changes allowing concurrent recovery and a final order in
this  proceeding  was issued in April 1997.  The new rules allowed IESU to begin
concurrent  recovery  of its  prospective  expenditures  on August 1, 1997.  The
implementation  of these changes will gradually  eliminate the regulatory  asset
that was  created  under the prior  rate  making  mechanism  as these  costs are
recovered.

                                       46

<PAGE>


IESU has the following amounts of energy efficiency costs included in regulatory
assets on its Consolidated Balance Sheets (in thousands):

<TABLE>

                                              Four-Year
                                               Recovery
                                              Beginning         September 30, 1998        December 31, 1997
                                             ------------     ----------------------    ----------------------
<S>                                              <C>                 <C>                        <C>   
Costs incurred through 1993                      6/95                $4,240                     $7,779
Costs incurred in 1994 -1995                     8/97                24,551                     30,924  
Costs incurred from 1/96 - 7/97                  8/97                15,420                     19,847
(Over) under collection                                                                               
     of concurrent recovery                      N/A                     30                        850           
                                                               ----------------------    ----------------------

                                                                    $44,241                    $59,400
                                                               ======================    ======================
</TABLE>

WP&L

In connection with its approval of the Merger, the PSCW accepted a WP&L proposal
to freeze rates for four years following the date of the Merger. A re-opening of
an investigation  into WP&L's rates during the rate freeze period, for both cost
increases  and  decreases,  may  occur  only  for  single  events  that  are not
merger-related and have a revenue requirement impact of $4.5 million or more. In
addition, the electric fuel adjustment clause and PGA clause are not affected by
the rate freezes.

In rate order UR-110,  the PSCW approved new rates  effective April 29, 1997. On
average,  WP&L's retail electric rates under the new rate order declined by 2.4%
and retail gas rates  declined by 2.2%.  Other items  included in the rate order
were:  authorization  of a surcharge  to collect  replacement  power costs while
Kewaunee remained out of service for the period effective April 29, 1997 through
July 1, 1997; authorization of an increase in the return on equity to 11.7% from
11.5%;  reinstatement of the electric fuel adjustment clause;  continuation of a
modified gas performance based ratemaking  incentive  mechanism;  and a modified
SO2 incentive. In addition, the PSCW ordered that it must approve the payment of
dividends by WP&L to IEC that are in excess of the level  forecasted in the rate
order ($58.3  million),  if such  dividends  would reduce WP&L's  average common
equity  ratio  below  52.00% of total  capitalization.  Based on the PSCW method
approved for  calculating  return on average  common  equity,  the common equity
ratio at September 30, 1998 was 53.85%.

The retail  electric  rates are based in part on  forecasted  fuel and purchased
power costs.  Under PSCW rules,  Wisconsin  utilities  can seek  emergency  rate
increases if these costs are more than 3% higher than the  estimated  costs used
to establish  rates.  In March 1998, WP&L requested an electric rate increase to
cover  purchased  power  and  transmission  costs  that  have  increased  due to
transmission  constraints and electric  reliability  concerns in the Midwest. On
July 14,  1998,  the PSCW  granted an electric  rate  increase of $14.8  million
annually that was effective on July 16, 1998.

The gas performance incentive was modified to eliminate the maximum gain or loss
to be recognized by WP&L. Previously, this incentive was limited to a maximum of
$1.1 million to WP&L. The incentive includes a sharing mechanism, whereby 40% of
all gains and  losses  relative  to  current  commodity  prices as well as other
benchmarks  are  recognized  by WP&L rather than  refunded to or recovered  from
customers.

In April 1998, WP&L filed a request with the PSCW requesting  deferral treatment
of all non-labor Year 2000 costs. In May 1998, the PSCW approved the deferral of
certain costs  associated with the Year 2000 issue and required WP&L to submit a
request and support for the rate recovery of costs deferred as well as estimated
future Year 2000 costs in November 1998.

Refer to "Nuclear  Facilities" for a discussion of recent PSCW rulings regarding
Kewaunee.

                                       47

<PAGE>


IPC

In September 1997, IPC agreed with the IUB to provide Iowa customers a four-year
retail  electric and gas price freeze  commencing on the  effective  date of the
Merger. The agreement excluded price changes due to government-mandated programs
(such as energy  efficiency cost recovery),  the electric fuel adjustment clause
and PGA clause and unforeseen dramatic changes in operations.  In addition,  the
price  freeze does not  preclude a review by either the IUB or OCA into  whether
IPC is exceeding a reasonable return on common equity.  IPC also agreed with the
MPUC and ICC to four-year and three-year rate freezes, respectively,  commencing
on the effective date of the Merger.

Pursuant to the authority  described in the prior  paragraph,  OCA has requested
certain  financial   information  related  to  both  electric  and  gas  utility
jurisdictions within the state of Iowa for IPC. The OCA requested information on
what pro forma  adjustments IPC would make to their most recent  historical test
year (1997) to be in compliance  with the State of Iowa Code, IUB rules and past
rate case precedent. IPC completed the data request in a timely manner and based
upon that  information  management  believes no change that would reduce utility
rates is  warranted.  While IPC cannot  predict  the  outcome  of this  process,
management  currently  believes  that the final outcome will not have a material
adverse impact on IPC's results of operations or financial position.

On  September  30, 1997,  the IUB approved a settlement  between IPC and the OCA
which  provided for an electric  rate  reduction of  approximately  $3.2 million
annually.  The reduction  applied to all bills  rendered on and after October 7,
1997.

IPC is also recovering its energy  efficiency  costs in Iowa in a similar manner
as IESU and began its  concurrent  cost  recovery in October  1997.  IPC has the
following amounts of energy efficiency costs to be recovered in Iowa included in
regulatory assets on its Balance Sheets (in thousands):

<TABLE>
 
                                               Four-Year    
                                                Recovery    
                                               Beginning         September 30, 1998         December 31, 1997
                                             -------------     ----------------------    ----------------------
<S>                                               <C>                 <C>                       <C>  
Costs incurred through 1992                       10/94                  $-                        $912 
Costs incurred in 1993 -1995                       5/97                12,937                    16,576  
Costs incurred from 1/96 - 9/97                   10/97                 7,837                     9,796 
                                                               ----------------------    ----------------------
                                                                      $20,774                   $27,284
                                                               ======================    ======================
</TABLE>

In addition,  IPC had $3.3  million and $2.7  million at September  30, 1998 and
December  31,  1997,  respectively,  included  in  regulatory  assets for energy
efficiency recoveries in Minnesota.

Assuming capture of the merger-related  synergies and no significant legislative
or regulatory  changes affecting its utility  subsidiaries,  IEC does not expect
the  merger-related  electric and gas price  freezes to have a material  adverse
effect on its financial position or results of operations.

                                  OTHER MATTERS

Year 2000

Overview  IEC  utilizes  software,  embedded  systems and  related  technologies
throughout  its  business  that will be  affected by the date change in the Year
2000. The Year 2000 problem exists because many computerized  operating systems,
applications, databases and embedded systems use a standard two digit year field
instead of four digits to reference a given year. For example,  "00" in the date
field would actually  represent  1900. As a result,  information  technology and
embedded  systems  may not  properly  recognize  the Year 2000 or  process  data
correctly,  potentially causing data inaccuracies,  operational  malfunctions or
operational failures.


                                       48

<PAGE>

Following up on earlier work, IEC formally  established a  company-wide  project
team in 1997 to assess,  remediate and  communicate its Year 2000 issues as well
as develop the necessary contingency plans. A full-time project manager heads up
a team of approximately 50 employees who are dedicated to the team full-time and
another 110 employees  working on the project on a part-time basis. In addition,
there are  approximately 60 individuals  from external  consulting firms who are
also providing various Year  2000-related  services for the project team. Status
reports are provided to senior management  monthly and at every meeting of IEC's
Board of Directors. Auditing of the Year 2000 inventory, remediation efforts and
contingency  planning is being done by the Internal  Audits  Department.  IEC is
also  seeking to retain an outside  third party to assess and  evaluate its Year
2000 project.

The various  phases of and other  matters  relating to the Year 2000 project are
described below.

Assessment A company-wide  inventory has already been completed for  information
technology (hardware,  software,  databases,  network  infrastructure  operating
systems) and embedded systems (computers or microprocessors that run specialized
software).  Inventoried  devices and systems have been assessed and  prioritized
into three  categories  based on the relative  critical nature of their business
function:     safety-related;     critical-business-continuity-related;      and
non-critical.

Remediation  and Testing IEC's approach to remediation is to repair,  replace or
retire  the   affected   devices  and  systems.   Remediation   and  testing  of
safety-related and  critical-business-continuity-related  devices and systems is
underway in all business units.

The  project  team is using  testing  standards  and  procedures  based on those
developed in the national  electric  utility industry effort led by the Electric
Power Research  Institute (EPRI). The team is also using information and testing
guidance  received from IEC's vendors.  IEC is participating in EPRI's Year 2000
collaborative  effort to share  information  about test procedures,  results and
vendor  information.  The project team is also working with equipment vendors to
ascertain Year 2000  compliance  with systems and devices.  Testing  methodology
includes  a power  on/off  test and  testing  for 13  critical  dates  including
12/31/99, 1/1/2000 and 2/29/2000.

The goal is to complete remediation work for the embedded systems by March 1999;
approximately  80% of this  remediation work has been completed as of the end of
October 1998. Excluding the financial and customer  information  systems,  there
are 434 applications in the information  technology  (I/T)  inventory;  223 have
been  remediated,  tested  and  are  in  production;  183  are  currently  being
remediated  or tested;  the remaining 28 are being  analyzed to determine  final
action  plans.  Many of these 28 items  are  expected  to be  non-critical  and,
therefore,  probably will not need to be tested for  compliance.  The goal is to
complete  the I/T  remediation  work by March 1999;  approximately  40% has been
completed as of the end of October 1998. Remediation efforts are underway on the
financial  and customer  information  systems which are also  approximately  40%
complete  as of the end of October  1998.  IEC intends  these  efforts to be 90%
complete  by the  end of the  first  quarter  of 1999  with  work  completed  by
mid-year.

In some cases IEC's ability to meet its target date for remediation is dependent
upon the  timely  provision  of  necessary  upgrades  and  modifications  by its
software vendors. Should these upgrades be delayed it would impact IEC's ability
to meet its target date.

                                       49

<PAGE>

Costs to  Address  Year 2000  Compliance  IEC's  historical  Year  2000  project
expenditures  as well as CURRENT BEST  ESTIMATES for the  remaining  costs to be
incurred on the project are as follows (incremental costs, in millions):
<TABLE>

                        Description                         Total         IESU          WP&L        Other
                        -----------                         -----         ----          ----        -----
     <S>                                                    <C>           <C>           <C>          <C> 
     Costs incurred from 1/1/98 - 9/30/98                   $4.3          $2.6          $1.2         $0.5
     Remaining modifications for financial and
     customer information systems                           $5.3          $2.3          $2.1         $0.9
     Remaining modifications for other I/T systems
     and embedded systems                                    $32           $10          $14           $8
</TABLE>


While work was done on the Year 2000  project  prior to 1998,  IEC did not begin
tracking the costs  separately  until 1998. In accordance with an order received
from the PSCW,  WP&L began  deferring  its Year 2000 project  costs,  other than
internal labor and associated overheads, in May 1998 (approximately $1.0 million
of the $1.2 million  expenditures  incurred for the nine months ended  September
30, 1998 have been deferred by WP&L).  (Refer to "Rates and Regulatory  Matters"
for a  further  discussion).  IEC  expects  to fund its Year  2000  expenditures
through internal  sources.  Other than the costs being deferred by WP&L pursuant
to the PSCW order, IEC is expensing all the Year 2000 costs noted above.

Communications  / Third  Party  Assessment  IEC is  heavily  dependent  on other
utilities (including electric, gas,  telecommunications and water utilities) and
its  suppliers.  An effort is  underway  to  communicate  with such  parties  to
increase  their  awareness  of Year 2000 issues and  monitor and assess,  to the
extent  possible,  their Year 2000 readiness.  IEC has sought written  assurance
that third  parties with  significant  relationships  with IEC will be Year 2000
ready. As part of an extensive  awareness effort, IEC is also communicating with
its utility customers,  regulatory  agencies,  elected and appointed  government
officials,  and industry  groups.  IEC executives and account  managers are also
having  discussions with IEC's largest customers to review their initiatives for
Year  2000  readiness.  IEC  co-hosted  a Year  2000  conference  with  the Iowa
Municipal  Utility  Association.  IEC is also  working  closely  with the  North
American  Reliability Council (NERC) and the Natural Gas Council to assist their
efforts to make certain all system  interconnections  across  regional areas are
Year 2000 compliant.

Risks and  Contingency  Planning The systems  which pose the greatest  Year 2000
risks for IEC if the Year 2000 project is not  successful  are the plant control
and automated  transmission and distribution systems and information  technology
systems.  The  potential  problems  related  to these  systems  include  service
interruptions,  service  order and  billing  delays and the  resulting  customer
relations  issues.  IEC is currently  unable to quantify the financial impact of
such contingencies if in fact they were to occur.

Even though IEC intends to complete  the bulk of its Year 2000  remediation  and
testing  activities  by the end of  March  1999  and  has  initiated  Year  2000
communications with significant  customers,  key vendors,  suppliers,  and other
parties  material to IEC's  operation,  failures or delay in achieving Year 2000
compliance  could  significantly  disrupt  IEC's  business.  Therefore,  IEC has
initiated  contingency  planning to address  alternatives in the event of a Year
2000 failure that occurs within IEC or where IEC is impacted by an external Year
2000  failure.  The plan will address  mission-critical  processes,  devices and
systems and will include training,  testing and rehearsal of procedures, and the
need for installation of backup equipment as necessary.  The goal is to have the
contingency  plan  completed  by  mid-year  1999.  As a  member  of  Mid-America
Interconnected  Network,  Inc.  (MAIN),  IEC is also working with the  Operating
Committee  Y2K  Task  Force  which  will  expand  existing  emergency  operating
strategies for member company  control  centers to ensure rapid responses to any
Y2K-related  electric system  disturbances  and will coordinate those strategies
with  other  reliability   organizations.   MAIN  is  one  of  the  10  regional
coordinating  councils  that make up NERC.  The  Mid-Continent  Area  Power Pool
(MAPP) is also one of the 10 NERC councils and IEC also belongs to MAPP and will
be coordinating Year 2000 contingency planning with that organization as well.

Summary Based on IEC's current  schedule for  completion of its Year 2000 tasks,
IEC believes its plan is adequate to secure Year 2000  readiness of its critical
systems.  Nevertheless,  achieving  Year 2000 readiness is

                                       50

<PAGE>


subject to many risks and  uncertainties,  as described  above. If IEC, or third
parties,  fail to achieve Year 2000 readiness  with respect to critical  systems
and, as such, there are systematic  problems,  there could be a material adverse
effect on IEC's results of operations and financial condition.

The Year 2000 cost estimates and other Year 2000 readiness  statements contained
above  constitute  "forward-looking   statements"  as  defined  in  the  Private
Securities  Litigation  Reform Act of 1995. Such estimates and other  statements
are based on numerous assumptions by management,  including assumptions relating
to the accuracy of  representations  made by third parties  regarding  Year 2000
compliance  and the continued  availability  of resources to deal with Year 2000
issues.  Investors  and  other  users  of  the  forward-looking  statements  are
cautioned that such  statements  are subject to various risks and  uncertainties
(some of which are  described  above) that could cause actual  results to differ
materially from those expressed in, or implied by, such statements. Refer to the
"Forward-Looking Statements" section of MD&A for a further discussion.

Labor Issues

The status of the collective  bargaining  agreements at each of the utilities is
as follows at September 30, 1998:


                                                   IESU       WP&L     IPC
                                                   ----       ----     ---

Number of collective bargaining agreements          6          1        3
Percentage of workforce covered by agreements      61         92       83

There  are two  agreements  at IESU  which  expired  on  July 1,  1998.  Two new
agreements were reached  effective July 1, 1998 and both will expire on June 30,
2000.  The number of employees  covered  under these  agreements  is  relatively
small. There are eight agreements scheduled to expire in 1999.

Financial Instruments

IEC has  historically  had only limited  involvement  with derivative  financial
instruments and has not used them for speculative purposes.  They have been used
to  manage   well-defined   interest  rate  and  commodity  price  risks.   WP&L
historically has entered into interest rate swap agreements to reduce the impact
of changes in interest rates on its  floating-rate  long-term  debt,  short-term
debt and the sales of its  accounts  receivable.  The total  notional  amount of
interest  rate swaps  outstanding  was $30 million at  September  30,  1998.  On
September 14, 1998 WP&L entered into an interest rate forward  contract  related
to the  anticipated  issuance of $60 million of long-term debt  securities  (see
Note 6 of IEC's "Notes to  Consolidated  Financial  Statements"  for  additional
information).  IEC has historically used swaps, futures and options to hedge the
price risks associated with the purchase and sale of stored gas at WP&L and with
the  purchases  and  sales of gas and  electric  power at its  energy  marketing
subsidiary.

On April  23,  1998,  Alliant  Industries  successfully  competitively  bid $200
million of interest rate swaps. These interest rate swap agreements were entered
into to reduce the impact of changes in variable  interest  rates by  converting
variable rate borrowings into fixed rate borrowings.  Two separate structures of
$100  million each were put in place.  The first  structure,  a straight  2-year
swap, was priced at 5.841%.  Under this  structure,  Alliant  Industries  pays a
fixed rate of 5.841% and receives 3-month LIBOR.  Payments are made and LIBOR is
reset  quarterly.  The second  structure,  a 2-year swap with a 1-year extension
option,  was  priced  at  5.6891%.  This  structure  is  identical  to the first
structure  except the bank has the option to extend the swap an additional  year
at the end of the second year.  The LIBOR set for the current  3-month period is
5.2092%.

IESU and IPC had no derivatives outstanding at September 30, 1998.

Accounting Pronouncements

In  February  1998,  the AICPA  issued  SOP 98-1,  "Accounting  for the Costs of
Computer  Software  Developed or Obtained  for Internal  Use." This SOP provides
authoritative  guidance for  determining  whether  computer  software

                                       51

<PAGE>


is in fact internal-use  software,  citing specific examples and situations that
answer that preliminary question.  Further, it provides guidelines on accounting
for the  proceeds of computer  software  originally  developed  or obtained  for
internal use and then subsequently sold to the public.

Additionally, SOP 98-1 addresses specifics of accounting by discussing expensing
versus  capitalization  of  costs,  accounting  for the  costs  incurred  in the
upgrading of the software and amortizing the capitalized cost of software.  This
statement is effective for fiscal years  beginning  after December 15, 1998. IEC
will be  adopting  the  requirements  of this  statement  in 1999  and  does not
anticipate any material impact on its financial statements upon adoption.  

In April 1998,  the AICPA issued SOP 98-5,  "Reporting  on the Costs of Start-up
Activities." This SOP provides  guidance on the financial  reporting of start-up
costs and  organization  costs.  Costs of start-up  activities and  organization
costs are required to be expensed as incurred.  The  statement is effective  for
periods beginning after December 15, 1998. IEC will be adopting the requirements
of this  statement in 1999 and does not  anticipate  any material  impact on its
financial statements upon adoption.

In  February  1998,  the FASB  issued SFAS 132,  "Employers'  Disclosures  about
Pensions and Other  Postretirement  Benefits.  The Statement revises  employers'
disclosures  about pension and other  postretirement  benefit plans. It does not
change the  measurement  or  recognition  of those plans.  It  standardizes  the
disclosure  requirements for pensions and other  postretirement  benefits to the
extent practicable,  requires  additional  information on changes in the benefit
obligations  and fair values of plan assets that will facilitate  analysis,  and
eliminates certain disclosures that are no longer useful.

In June 1998, the FASB issued SFAS 133,  "Accounting for Derivative  Instruments
and Hedging  Activities."  The Statement  establishes  accounting  and reporting
standards  requiring  that  every  derivative   instrument   (including  certain
derivative  instruments  embedded in other contracts) be recorded on the balance
sheet as either an asset or liability  measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized  currently in
earnings unless specific hedge accounting  criteria are met. Special  accounting
for qualifying  hedges allows a derivative's  gains and losses to offset related
results on the hedged item in the income statement,  and requires that a company
must formally document,  designate, and assess the effectiveness of transactions
that receive hedge accounting.

SFAS 133 is effective for fiscal years  beginning  after June 15, 1999. SFAS 133
must  be  applied  to (a)  derivative  instruments  and (b)  certain  derivative
instruments  embedded  in  hybrid  contracts  that  were  issued,  acquired,  or
substantively  modified  after December 31, 1997. IEC has not yet quantified the
impacts  of SFAS 133 on the  financial  statements  and has not  determined  the
timing of or method  of  adoption  of SFAS 133.  However,  the  Statement  could
increase volatility in earnings and other comprehensive income.

Accounting for Obligations Associated with the Retirement of Long-Lived Assets

The staff of the SEC has questioned certain of the current accounting  practices
of the  electric  utility  industry,  including  IESU and  WP&L,  regarding  the
recognition, measurement and classification of decommissioning costs for nuclear
generating stations in financial  statements of electric utilities.  In response
to these questions, the FASB is reviewing the accounting for closure and removal
costs,  including  decommissioning  of nuclear power plants. If current electric
utility industry  accounting  practices for nuclear power plant  decommissioning
are changed, the annual provision for decommissioning could increase relative to
1997,  and the  estimated  cost  for  decommissioning  could  be  recorded  as a
liability  (rather than as  accumulated  depreciation),  with  recognition of an
increase in the cost of the related nuclear power plant. Assuming no significant
change in regulatory treatment,  IESU and WP&L do not believe that such changes,
if required, would have an adverse effect on their financial position or results
of  operations  due to their  ability to recover  decommissioning  costs through
rates.

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<PAGE>


Inflation

IEC,  IESU and WP&L do not expect the effects of inflation at current  levels to
have a significant effect on their financial position or results of operations.

Environmental

The pollution  abatement  programs of IESU, WP&L, IPC and Alliant Industries are
subject to continuing review and are revised from time to time due to changes in
environmental  regulations,  changes in  construction  plans and  escalation  of
construction  costs.  While management  cannot precisely  forecast the effect of
future  environmental  regulations  on IEC's  operations,  it has taken steps to
anticipate   the  future  while  also  meeting  the   requirements   of  current
environmental regulations.

IESU,  WP&L  and IPC  all  have  current  or  previous  ownership  interests  in
properties  previously  associated  with the  production of gas at MGP sites for
which they may be liable for  investigation,  remediation  and monitoring  costs
relating  to the sites.  A summary of  information  relating  to the sites is as
follows:
<TABLE>

                                                                    IESU         WP&L         IPC
                                                                    ----         ----         ---
<S>                                                                <C>          <C>          <C>
Number of known sites for which liability may exist                   34           14           9
Liability recorded at September 30, 1998 (millions)                $28.6         $8.9        $5.8
Regulatory asset recorded at September 30, 1998 (millions)         $28.5        $15.3        $5.9
</TABLE>

The companies are working  pursuant to the  requirements  of various federal and
state agencies to investigate, mitigate, prevent and remediate, where necessary,
the  environmental  impacts to property,  including  natural  resources,  at and
around the sites in order to protect  public  health  and the  environment.  The
companies  each  believe that they have  completed  the  remediation  at various
sites,  although they are still in the process of obtaining  final approval from
the applicable environmental agencies for some of these sites.

Each company has recorded  environmental  liabilities  related to the MGP sites;
such amounts are based on the best current  estimate of the remaining  amount to
be incurred for investigation,  remediation and monitoring costs for those sites
where the investigation process has been or is substantially  completed, and the
minimum of the estimated cost range for those sites where the  investigation  is
in its earlier  stages.  Management  currently  estimates the range of remaining
costs to be incurred for the  investigation,  remediation  and monitoring of all
IEC  sites  to be  approximately  $34  million  to $81  million.  IESU  and WP&L
currently  estimate  their  share of the  remaining  costs to be  incurred to be
approximately  $21  million  to $49  million  and  $7  million  to $12  million,
respectively.  An extensive  study is currently  underway to review all of IEC's
MGP sites and the  liability  for each site will be updated based on the results
of such study.  The company  expects the study will be  completed  in the fourth
quarter of 1998. It is possible that future cost  estimates will be greater than
the current  estimates as the  investigation  process proceeds and as additional
facts become known.

Under  the  current  rate  making  treatment  approved  by  the  PSCW,  the  MGP
expenditures of WP&L, net of any insurance proceeds,  are deferred and collected
from gas customers over a five-year period after new rates are implemented.  The
MPUC also allows the deferral of MGP-related  costs  applicable to the Minnesota
sites and IPC has been successful in obtaining approval to recover such costs in
rates in Minnesota. While the IUB does not allow for the deferral of MGP-related
costs,  it has permitted  utilities to recover  prudently  incurred  costs. As a
result,  regulatory  assets have been recorded by each company which reflect the
probable future rate recovery,  where  applicable.  Considering the current rate
treatment,  and assuming no material change therein,  each of IESU, WP&L and IPC
believes  that the clean-up  costs  incurred for these MGP sites will not have a
material  adverse effect on their respective  financial  positions or results of
operations.

In April 1996, IESU filed a lawsuit  against  certain of its insurance  carriers
seeking  reimbursement  for its MGP-related  costs.  Settlement has been reached
with all twenty-one carriers. As a result, IESU will dismiss its lawsuit, as all
issues will have been resolved.  In 1994, IPC filed a lawsuit against certain of
its insurance carriers to recover

                                       53

<PAGE>


its MGP-related costs. Settlements have been reached with eight carriers. IPC is
continuing its pursuit of additional recoveries. Amounts received from insurance
carriers  are being  deferred  by IESU and IPC  pending a  determination  of the
regulatory  treatment of such recoveries.  WP&L has settled with twelve carriers
and is also continuing to pursue additional recoveries from other carriers.  IPC
and WP&L are unable to predict the amount of any additional insurance recoveries
they may realize.

The Clean Air Act Amendments of 1990 (Act) require  emission  reductions of SO2,
NOx and other air  pollutants  to achieve  reductions of  atmospheric  chemicals
believed to cause acid rain. IESU, WP&L and IPC have met the provisions of Phase
I of the Act and are in the process of meeting the  requirements  of Phase II of
the Act (effective in the year 2000). The Act also governs SO2 allowances, which
are  defined  as an  authorization  for an owner to emit one ton of SO2 into the
atmosphere.  The companies are reviewing  their options to ensure they will have
sufficient  allowances  to offset their  emissions in the future.  The companies
believe that the potential costs of complying with these  provisions of Title IV
of the Act will not have a material  adverse impact on their financial  position
or results of operations.

The Act and other  federal laws also require the EPA to study and  regulate,  if
necessary,  additional  issues  that  potentially  affect the  electric  utility
industry,   including  emissions  relating  to  ozone  transport,   mercury  and
particulate control as well as modifications to the PCB rules. In July 1997, the
EPA issued  final  rules that would  tighten  the  National  Ambient Air Quality
Standards for ozone and particulate matter emissions. The company cannot predict
the  long-term  consequences  of these  rules on its  results of  operations  or
financial  condition as the potential impact is too speculative at this point in
time.

In October  1998,  the EPA issued a final rule  requiring  22 states,  including
Wisconsin,  to modify  their  SIPs to address  the ozone  transport  issue.  The
implementation  of the rule will likely require WP&L to reduce its NOx emissions
at all of its plants to .15  lbs/mmbtu  by 2003.  WP&L is  currently  evaluating
various  options  to meet  the  emission  levels.  These  options  include  fuel
switching,  operational modifications and capital investments. Based on existing
technology, the preliminary estimates indicate that capital investments could be
as high  as $150  million.  Such  costs  are  not  included  in the  anticipated
construction and acquisition expenditures for WP&L in the "Capital Requirements"
section of MD&A.

Revisions to the  Wisconsin  Administrative  Code have been  proposed that could
have a  significant  impact on WP&L's  operation  of the Rock  River  Generating
Station in Beloit,  Wisconsin.  The proposed revisions will affect the amount of
heat that the Generating  Station can discharge into the Rock River. WP&L cannot
presently  predict the final outcome of the rule, but believes that, as the rule
is currently proposed,  the capital investments and/or modifications required to
meet the proposed discharge limits could be significant.

In 1995,  the EPA published the Sulfur  Dioxide  Network Design Review for Cedar
Rapids,  Iowa,  which,  based on the EPA's  assumptions and worst-case  modeling
method,   suggested   that  the  Cedar  Rapids  area  could  be   classified  as
"nonattainment"  for the National Ambient Air Quality Standards  established for
SO2. The worst-case modeling suggested that two of IESU's generating  facilities
contributed to the modeled exceedences.  As a result of exceedences at a monitor
near one of IESU's  generating  facilities,  the EPA issued a letter to the Iowa
Governor's  office  directing  the state to  develop a plan of  action.  In this
regard,  IESU entered into a consent order with the IDNR in the third quarter of
1997 on this issue.  IESU agreed to limit the SO2  emissions  from the two noted
generating facilities and to install a new stack (the stack will be completed in
1999 at a capital  cost of up to $2.5  million)  at one of the  facilities.  The
consent order is one piece of a revision to the SIP being  proposed by the IDNR.
The public  comment period on the SIP revision was May 28 through June 26, 1998.
IEPC  approved the SIP revision on July 20, 1998.  The SIP revision  transmittal
letter  from Iowa to the EPA was signed by the  Governor of Iowa and sent to the
EPA Region VII for review and approval.

Pursuant to a routine internal review of documents, IESU determined that certain
changes undertaken during previous years at one of its generating facilities may
have  required  a  federal  PSD  permit.  IESU  initiated  discussions  with its
regulators on the matter, resulting in the submittal of a PSD permit application
in February 1997.  IESU received the permit in the second quarter of 1998.  IESU
may be  subject  to a penalty  for not having  obtained  the

                                       54

<PAGE>

permit previously; however, IESU believes that any likely actions resulting from
this matter will not have a material adverse effect on its financial position or
results of operation.

Pursuant  to a  separate  routine  internal  review  of plant  operations,  IESU
determined  that  certain  permit  limits  were  exceeded  in 1997 at one of its
generating facilities in Cedar Rapids, Iowa. IESU has initiated discussions with
its  regulators on the matter and has proposed a compliance  plan which includes
equipment modifications and contemplates  operational changes. In addition, IESU
may be  required  to obtain a PSD  permit.  On May 13,  1998,  IESU  received  a
citation  from the Linn County  Health  Department  alleging  violations  at the
facility. IESU has negotiated a settlement agreement with the Linn County Health
Department,  resolving the matter for $30,000.  The  settlement was reviewed and
approved by a local court with appropriate jurisdiction during the third quarter
of 1998.  Depending on the outcome of communications  with the IDNR, IESU may be
subject to a penalty  for not having a PSD  permit for this  facility;  however,
management  believes that any likely actions resulting from this matter will not
have a  material  adverse  effect on IESU's  financial  position  or  results of
operations.

In March  1998,  IPC  received  a Notice of Intent to Sue from an  environmental
group alleging certain  violations of effluent limits,  established  pursuant to
the Clean Water Act, at IPC's generating  facility in Clinton,  Iowa. On May 14,
1998,  IPC received from the IDNR an  inspection  report and notice of violation
addressing  the same and other  concerns  as were  raised  by the  environmental
group. IPC responded to the  environmental  group on May 19, 1998,  providing an
evaluation of the alleged violations. IPC responded to the IDNR on June 26, 1998
with a plan of action addressing the IDNR's concerns. While IPC believes that it
has satisfied IDNR's concerns, IPC notes that it may be subject to a penalty for
exceeding  permit limits  established  for this  facility,  however,  management
believes  that any likely  actions  resulting  from this  matter will not have a
material adverse effect on IPC's financial position or results of operations.

Pursuant to an internal review of operations,  IPC discovered that Unit No. 6 at
its generating facility in Dubuque,  Iowa, may require a Clean Air Act Acid Rain
permit and continuous  emissions  monitoring  system  (CEMS).  IPC has initiated
discussions with its regulators, has discontinued operation of the unit, pending
resolution of the issues,  and will be installing a CEMS on the unit and will be
applying for an Acid Rain  permit.  Pursuant to its  internal  review,  IPC also
identified  and disclosed to its regulators a potentially  similar  situation at
its Lansing, Iowa generating facility,  and will be installing CEMS and applying
for Acid Rain  permits for these units as well.  IPC may be subject to a penalty
for not  having  installed  the  CEMS and for not  having  obtained  the  permit
previously.  However,  IPC believes that any likely actions  resulting from this
matter  will not have a material  adverse  effect on its  financial  position or
results of operations.

A global treaty has been negotiated that could require  reductions of greenhouse
gas emissions from utility plants.  Negotiators left significant  implementation
and  compliance  questions open to resolution at meetings to be held starting in
November 1998. At this time,  management is unable to predict whether the United
States  Congress  will ratify the treaty.  Given the  uncertainty  of the treaty
ratification and the ultimate terms of the final regulations,  management cannot
currently  estimate  the impact the  implementation  of the treaty would have on
IEC's operations.

The  Nuclear  Waste  Policy Act of 1982  assigned  responsibility  to the DOE to
establish a facility for the ultimate  disposition of high level waste and spent
nuclear fuel and authorized the DOE to enter into contracts with parties for the
disposal of such material  beginning in January 1998. IESU and WP&L entered into
such contracts and have made the agreed  payments to the Nuclear Waste Fund held
by the U.S. Treasury.  The companies were subsequently  notified by the DOE that
it was not able to begin  acceptance  of spent  nuclear  fuel by the January 31,
1998  deadline.  Furthermore,  DOE has  experienced  significant  delays  in its
efforts and  material  acceptance  is now expected to occur no earlier than 2010
with the  possibility  of further  delay being likely.  Several  other  electric
utilities  with  nuclear  operations  have filed  lawsuits in the U.S.  Court of
Federal Claims alleging that the DOE was financially responsible for its failure
to take the  utilities'  high level waste and spent nuclear fuel.  The court has
issued rulings of summary judgment in favor of three utilities to-date. IESU and
WP&L are  evaluating and pursuing  multiple  options,  including  litigation and
legislation to protect the contractual and statutory rights of the companies and
their customers.

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<PAGE>


The Nuclear Waste Policy Act of 1982 assigns  responsibility for interim storage
of spent nuclear fuel to generators of such spent nuclear fuel, such as IESU and
WP&L. In accordance  with this  responsibility,  IESU and WP&L have been storing
spent  nuclear  fuel on site at DAEC and  Kewaunee,  respectively,  since  plant
operations  began. IESU will have to increase its spent fuel storage capacity at
DAEC to store all of the spent fuel that will be  produced  before  the  current
license expires in 2014.  There are several options  available that will satisfy
DAEC's storage needs. IESU is currently  reviewing its options to expand on-site
storage   capability.   To  provide   assurance  that  both  the  operating  and
post-shutdown  storage  needs are  satisfied,  a  combination  of expanding  the
capacity  of the  existing  fuel  pool and  construction  of a dry cask  modular
facility are being contemplated.  With minor modifications,  Kewaunee would have
sufficient  fuel  storage  capacity to store all of the fuel they will  generate
through the end of the license life in 2013.  Legislation is being considered on
the  federal  level to  provide  for the  establishment  of an  interim  storage
facility as early as 2002.

The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates that each
state must take  responsibility  for the storage of low-level  radioactive waste
produced within its borders. The States of Iowa and Wisconsin are members of the
six-state Midwest Interstate Low-Level Radioactive Waste Compact (Compact) which
is responsible for development of any new disposal capability within the Compact
member states. In June 1997, the Compact commissioners voted to discontinue work
on a proposed waste disposal  facility in the State of Ohio because the expected
cost of such a facility  was  comparably  higher  than other  options  currently
available.  Dwindling  waste volumes and continued  access to existing  disposal
facilities were also reasons cited for the decision. A disposal facility located
near Barnwell,  South Carolina  continues to accept the low-level waste and IESU
and WP&L currently ship the waste each produces to such site, thereby minimizing
the amount of low-level waste stored on-site.  In addition,  given technological
advances,  waste  compaction and the reduction in the amount of waste generated,
DAEC and  Kewaunee  each have on-site  storage  capability  sufficient  to store
low-level waste expected to be generated over at least the next ten years,  with
continuing  access to the  Barnwell  disposal  facility  extending  that on-site
storage capability indefinitely.

The National  Energy Policy Act of 1992 requires  owners of nuclear power plants
to pay a special  assessment  into a  "Uranium  Enrichment  Decontamination  and
Decommissioning   Fund."  The  assessment  is  based  upon  prior  nuclear  fuel
purchases.  IESU is recovering the costs associated with this assessment through
its electric  fuel  adjustment  clauses over the period the costs are  assessed.
IESU's 70% share of the future assessment at September 30, 1998 was $8.9 million
and has been  recorded as a liability  with a related  regulatory  asset for the
unrecovered  amount.  WP&L is also recovering these costs from its customers and
at September 30, 1998 had a regulatory asset and a liability of $5.8 million and
$5.1 million recorded, respectively.

Whiting,  a wholly-owned  subsidiary of Alliant  Industries,  is responsible for
certain dismantlement and abandonment costs related to various off-shore oil and
gas platforms (and related on-shore plants and equipment),  the most significant
of which is located off the coast of  California.  Whiting  estimates  the total
costs for these properties to be approximately  $13 million and the expenditures
are not expected to be incurred for approximately five years. In accordance with
applicable accounting requirements, Whiting has accrued these costs resulting in
a recorded liability of $13 million at September 30, 1998.

The estimates of  environmental  remediation  costs and statements of other than
historical  fact  relating  to   environmental   matters  are   "forward-looking
statements" as defined in the Private Securities  Litigation Reform Act of 1995.
Refer  to  the  "Forward-Looking  Statements"  section  of  MD&A  for a  further
discussion.

Power Supply

The power supply  concerns of 1997 have raised  awareness of the electric system
reliability  challenges facing Wisconsin and the Midwest region.  WP&L was among
an  11-member  group of Wisconsin  energy  suppliers  that,  on October 1, 1997,
recommended  to the Governor of Wisconsin a series of steps to improve  electric
reliability in the state. Wisconsin enacted electric reliability  legislation in
April 1998 (Wisconsin Reliability Act). The legislation has the goal of assuring
reliable  electric  energy for Wisconsin.  The new law,  effective May 12, 1998,
requires Wisconsin utilities to join a regional  independent system operator for
transmission by the year 2000,  allows the

                                       56

<PAGE>


construction  of  merchant  power  plants  in  the  state  and  streamlines  the
regulatory  approval  process  for  building  new  generation  and  transmission
facilities.  As a requirement of the legislation,  the PSCW completed a regional
transmission  constraint study. The PSCW is authorized to order  construction of
new  transmission  facilities,  based on the findings of its  constraint  study,
through December 31, 2004.

On September 24, 1997, the PSCW ordered WP&L and two other  Wisconsin  utilities
to arrange for additional  electric  capacity to help maintain  reliable service
for their  customers.  In  response  to this  order,  WP&L  issued a Request for
Proposal for  contracts to provide  WP&L with an  additional  150 MW of electric
capacity beginning as early as June 1, 1999. WP&L evaluated  applications on the
basis  of  per-megawatt  cost,  transmission  capacity,  environmental  factors,
experience  in building and  operating  similar  generating  facilities  and the
ability to meet a June 2000 in-service date. In July 1998, IEC and Polsky Energy
Corp.  (Polsky)  announced an  agreement  whereby  Polsky  would build,  own and
operate a power plant in southeastern  Wisconsin  capable of producing up to 525
MW of electricity.  Under the agreement,  IEC will purchase the capacity to meet
the  electric  needs of its utility  customers,  as  outlined  by the  Wisconsin
Reliability  Act. It is expected that this new generation will be operational in
June of 2000.  This is the first plant to be  announced  by the three  Wisconsin
utilities  under the  Wisconsin  Reliability  Act. In September  1998,  the PSCW
declared the Polsky  application  complete.  Public hearings are scheduled to be
held in  November  1998.  The PSCW has  until  December  21,  1998 to act on the
application,  or it is automatically  approved.  Polsky will also be seeking the
necessary approvals from the Wisconsin Department of Natural Resources.

Utility  officials noted that it will take time for new  transmission  and power
plant projects to be approved and built. While utility officials fully expect to
meet customer demands in 1998 and 1999,  problems still could arise if there are
unexpected power plant outages,  transmission system outages or extended periods
of extremely hot weather.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.


PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

IEC
On April 29, 1998, a lawsuit,  Aliant  Communications  Inc. v. Interstate Energy
Corporation,  was  filed  in  federal  district  court  against  IEC  by  Aliant
Communications  Inc.  alleging  trademark  infringement,   dilution  and  unfair
competition  in connection  with the use by IEC of the name  "Alliant." A mutual
settlement  agreement between the parties was reached effective October 1, 1998.
The agreement  calls for IEC to begin  operating as Alliant  Energy  Corporation
within the next six months.  Aliant Communications Inc. will continue to operate
as Aliant  Communications.  As part of the agreement,  IEC also agreed to modify
the names of several of its  subsidiaries  and business  units.  IEC shareowners
will be  asked to  change  the  legal  name of the  company  to  Alliant  Energy
Corporation  at the annual  meeting  scheduled to be held on May 19,  1999.  IEC
recognized the costs associated with the settlement in the third quarter of 1998
as part of its merger-related expenses as discussed earlier in MD&A.

On April 17, 1998, MG&E and Citizens  Utility Board appealed the decision of the
SEC approving the Merger,  Madison Gas and Electric Company and Citizens Utility
Board v.  Securities  and Exchange  Commission.  On May 15,  1998,  IEC moved to
intervene in this appeal and the United States Court of Appeals for the District
of Columbia  District granted the motion.  Briefs have been filed with the court
and oral arguments are scheduled for January 13, 1999.

IESU
On April 30, 1996, IESU filed suit, IES Utilities Inc. v. Home Ins. Co., et al.,
No.  4-96-CV-10343 (S.D. Iowa filed Apr. 30, 1996), against various insurers who
had sold  comprehensive  general liability  policies to Iowa Southern  Utilities

                                       57

<PAGE>

Company (ISU) and Iowa Electric Light and Power Company (IE) (IESU was formed as
the result of a merger of ISU and IE). The suit seeks judicial  determination of
the  respective  rights  of the  parties,  a  judgment  that each  defendant  is
obligated under its respective  insurance  policies to pay in full all sums that
IESU has become or may become  obligated to pay in  connection  with its defense
against  allegations  of liability for property  damage at and around MGP sites,
and  indemnification for all sums that it has or may become obligated to pay for
the  investigation,   mitigation,  prevention,  remediation  and  monitoring  of
environmental impacts to property, including natural resources like groundwater,
at and around the MGP sites.  Settlement  has been reached  with all  twenty-one
carriers.  As a result,  IESU will dismiss its lawsuit,  as all issues will have
been resolved.  Any amounts received from insurance  carriers are being deferred
pending a determination of the regulatory treatment of such recoveries.

IESU is in  discussions  with the  regulators  regarding  certain  environmental
permit  issues.  For a  discussion  of  these  matters,  see MD&A  above,  which
information is incorporated herein by reference.

IPC
---
IPC is in discussions with its regulators regarding various issues at generating
facilities in Clinton,  Iowa, Dubuque, Iowa and Lansing,  Iowa. For a discussion
of these matters,  see "Other  Matters -  Environmental",  which  information is
incorporated herein by reference.

ITEM 5.  OTHER INFORMATION

On October 21,  1998,  the Board of  Directors  of IEC adopted a new  shareowner
rights plan to replace IEC's existing  shareowner  rights plan, which expires on
February 22, 1999.  The  issuance of new rights  pursuant to the new  shareowner
rights plan is subject to approval by the SEC under the Public  Utility  Holding
Company  Act of 1935.  A draft copy of the new  shareowner  rights plan has been
submitted to the SEC in connection  with an  application  filed by IEC under the
Public Utility Holding Company Act.

The new  shareowner  rights plan is designed  to provide  additional  protection
against  abusive  takeover  tactics  such as partial  tender  offers,  selective
open-market  purchases  and  offers  for all the shares of IEC at less than full
value or at an inappropriate time. The new shareowner rights plan is intended to
assure that IEC's Board of Directors has the ability to protect  shareowners and
IEC if efforts  are made to gain  control of IEC in a manner  that is not in the
best interests of IEC and all of its shareowners. The new shareowner rights plan
was not adopted in response to any  specific  effort to acquire  control of IEC,
and IEC is not aware of any such effort.

Assuming  approval by the SEC, it is expected that the new rights will be issued
on February 22, 1999 to coincide with the expiration of the existing  shareowner
rights  plan.  The new  rights  will be  exercisable  only if a person  or group
acquires  15% or more of  IEC's  common  stock  or  announces  a  tender  offer,
consummation  of which would  result in ownership by a person or group of 15% or
more of the common stock. Each right will initially  entitle  shareowners to buy
one-half of one share of IEC's common stock. The rights will only be exercisable
in integral multiples of two at an initial exercise price of $95 per full share,
subject to adjustment.  If any person  becomes a 15% or more  shareowner of IEC,
the rights  (subject to certain  limitations)  will entitle  holders  thereof to
purchase,  at the then-current exercise price per full share, a number of common
shares of IEC or of the acquiror  having a market value at the time of twice the
rights'  per full  share  exercise  price.  The IEC Board of  Directors  is also
authorized  under the new  shareowner  rights plan to reduce the 15%  thresholds
referred to above to not less than 10%.

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<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

     The following exhibits are filed herewith.

     4.1    Officers'  Certificate,  dated as of October 27, 1998,  creating the
            5.70%  debentures  due  October 15,  2008 of WP&L  (incorporated  by
            reference to Exhibit 4 to WP&L's  Current  Report on Form 8-K, dated
            October 27, 1998)

     10.1   Early  Retirement  Agreement,  dated as of October  7, 1998,  by and
            between Interstate Energy Corporation et al. and Michael R. Chase

     27.1   Financial Data Schedule for Interstate Energy Corporation at and for
            the period ended September 30, 1998

     27.2   Restated  Financial Data Schedule for Interstate Energy  Corporation
            at and for the period ended September 30, 1997

     27.3   Restated  Financial Data Schedule for Interstate Energy  Corporation
            at and for the period ended December 31, 1997

     27.4   Financial Data Schedule for IES Utilities Inc. at and for the period
            ended September 30, 1998

     27.5   Restated  Financial  Data Schedule for IES Utilities Inc. at and for
            the period ended September 30, 1997

     27.6   Financial Data Schedule for Wisconsin Power and Light Company at and
            for the period ended September 30, 1998

(b)  Reports on Form 8-K:

Wisconsin  Power and Light  Company  filed a Current  Report on Form 8-K,  dated
October 27, 1998,  reporting (under Item 5) that on October 27, 1998,  Wisconsin
Power and Light Company agreed to sell $60,000,000 principal amount of its 5.70%
Debentures  due October 15, 2008 in a public  offering  through  Merrill  Lynch,
Pierce, Fenner & Smith Incorporated, Robert W. Baird & Co.
Incorporated and Legg Mason Wood Walker, Incorporated.

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<PAGE>


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,  Interstate
Energy  Corporation,  IES Utilities  Inc. and Wisconsin  Power and Light Company
have each duly caused this report to be signed on its behalf by the  undersigned
thereunto duly authorized on the 13th day of November 1998.


INTERSTATE ENERGY CORPORATION
Registrant

By: /s/ Thomas M. Walker            Executive Vice President and Chief Financial
Thomas M. Walker                                  Officer         
                                        (Principal Financial Officer)

By: /s/ John E. Ebright                    Vice President-Controller  
John E. Ebright                         (Principal Accounting Officer)


IES UTILITIES INC.
Registrant

By: /s/ Thomas M. Walker            Executive Vice President and Chief Financial
Thomas M. Walker                                    Officer       
                                        (Principal Financial Officer)

By: /s/ John E. Ebright                  Vice President-Controller 
John E. Ebright                         (Principal Accounting Officer)


WISCONSIN POWER AND LIGHT COMPANY
Registrant

By: /s/ Thomas M. Walker            Executive Vice President and Chief Financial
Thomas M. Walker                                    Officer
                                        (Principal Financial Officer)

By: /s/ John E. Ebright                    Vice President-Controller 
John E. Ebright
                                        (Principal Accounting Officer)


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