SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 2, 1994
IES UTILITIES INC.
(Exact name of issuer as specified in its charter)
Iowa 0-4117-1 42-0331370
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File No.) Identification No.)
IE: Tower, Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 398-4411
<PAGE>
The purpose of this Current Report is to file certain
financial information regarding the Registrant (IES Utilities
Inc.). IES Utilities was formed as the result of the merger of
Iowa Electric Light and Power Company (IE) and Iowa Southern
Utilities Company (IS), effective December 31, 1993. Such
financial information supplements the Company's Current Report on
Form 8-K, dated January 7, 1994.
Item 7. Financial Statements and Exhibits.
Page
(a)Financial Statements
Management's Responsibility for Financial Statements 5 - 6
Report of Independent Public Accountants 7
Statements of Income for the years ended
December 31, 1993, 1992 and 1991 8
Balance Sheets as of December 31, 1993 and 1992 9 - 10
Statements of Capitalization as of
December 31, 1993 and 1992 11
Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991 12
Statements of Retained Earnings for the years ended
December 31, 1993, 1992 and 1991 13
Notes to Financial Statements 14 - 41
Management's Discussion and Analysis of the
Results of Operations and Financial Condition 42 - 53
Selected Quarterly Financial Data (Unaudited) 54
(c) Exhibits
*2(a) Agreement and Plan of Merger
between IE and IS dated as of June 4, 1993
("Agreement and Plan of Merger") (Filed as
Exhibit 2 to the IE Current Report on Form
8-K, dated June 4, 1993 (File No. 0-4117-1)).
*2(b) Amendment 1 dated June 16, 1993, to
the Agreement and Plan of Merger (Filed as
Exhibit 2(b) to the IE Registration Statement
on Form S-3, dated September 14, 1993 (File
No. 33-68796)).
*2(c) Amendment 2 dated September 8, 1993, to the Agreement
and Plan of Merger (Filed as Exhibit 2(c) to the IE
Registration Statement on Form S-3, dated
September 14, 1993 (File No. 33-68796)).
*2(d) Amendment 3 dated September 27, 1993, to the Agreement
and Plan of Merger (Filed as Exhibit 2(d) to the IE
Current Report on Form 8-K, dated December 9, 1993
(File No. 0-4117-1)).
*4(a) Articles of Merger of Iowa Southern Utilities Company
into Iowa Electric Light and Power Company (renamed
IES Utilities Inc.), dated December 27, 1993 (Filed as
Exhibit 4(a) to the Company's Current Report
on Form 8-K, dated January 7, 1994 (File No.
0-4117-1)).
*4(b) Amended and Restated Articles of
Incorporation of IES Utilities Inc. (formerly
Iowa Electric Light and Power Company), dated
January 6, 1994 (Filed as Exhibit 4(b) to the
Company's Current Report on Form 8-K, dated
January 7, 1994 (File No. 0-4117-1)).
23 Consent of Independent Public Accountants.
*99 IES Industries Inc. Press Release dated
December 30, 1993 (Filed as Exhibit 99 of the Company's
Current Report on Form 8-K, dated January 7, 1994
(File No. 0-4117-1)).
*This exhibit was previously filed as an exhibit to a
registration statement or report previously filed with
the Commission under the file and exhibit numbers shown
after each such exhibit and is hereby incorporated by reference
herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
IES UTILITIES INC.
(Registrant)
By: /s/ Richard A. Gabbianelli
(Signature)
Richard A. Gabbianelli
Controller and Chief
Accounting Officer
Date: March 2, 1994
<PAGE>
ITEM 7. Financial Statements and Exhibits.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Company's management has prepared and is responsible for
the presentation, integrity and objectivity of the financial
statements and related information included in this report. The
financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent
basis and, in some cases, include estimates that are based upon
management's judgment and the best available information, giving
due consideration to materiality. Financial information
contained elsewhere in this report is consistent with that in the
financial statements.
The Company maintains a system of internal accounting controls
which it believes is adequate to provide reasonable assurance
that assets are safeguarded, transactions are executed in
accordance with management authorization and the financial
records are reliable for preparing the financial statements. The
system of internal accounting controls is supported by written
policies and procedures, by a staff of internal auditors and by
the selection and training of qualified personnel. The internal
audit staff conducts comprehensive audits of the Company's system
of internal accounting controls. Management strives to maintain
an adequate system of internal controls, recognizing that the
cost of such a system should not exceed the benefits derived. In
accordance with generally accepted auditing standards, the
independent public accountants (Arthur Andersen & Co.), obtained
a sufficient understanding of the Company's internal controls to
plan their audit and determine the nature, timing and extent of
other tests to be performed. No material internal control
weaknesses have been reported to management, nor is management
aware of any such weaknesses.
The Board of Directors, through its Audit Committee comprised
entirely of outside directors, meets periodically with
management, the internal auditor and Arthur Andersen & Co. to
discuss financial reporting matters, internal control and
auditing. To ensure their independence, both the internal
auditor and Arthur Andersen & Co. have full and free access to
the Audit Committee.
/s/ Lee Liu
(Signature)
Lee Liu
President and Chief
Executive Officer
/s/ Blake O. Fisher, Jr.
(Signature)
Blake O. Fisher, Jr.
Executive Vice President and
Chief Financial Officer
/s/ Richard A. Gabbianelli
(Signature)
Richard A. Gabbianelli
Controller and Chief
Accounting Officer
<PAGE>
ARTHUR ANDERSEN & CO.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
IES Utilities Inc.:
We have audited the accompanying balance sheets and statements of
capitalization of IES Utilities Inc. (an Iowa corporation) as of
December 31, 1993 and 1992, and the related statements of income,
retained earnings and cash flows for each of the three years in
the period ended December 31, 1993. These financial statements
referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of IES Utilities Inc. as of December 31, 1993 and 1992, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, effective
January 1, 1993, IES Utilities Inc. changed its method of
accounting for postretirement benefits other than pensions.
/s/ Arthur Andersen & Co.
(Signature)
ARTHUR ANDERSEN & CO.
Chicago, Illinois,
January 28, 1994
<PAGE>
IES UTILITIES INC.
STATEMENTS OF INCOME
Year Ended December 31
1993 1992 1991
(in thousands)
Operating revenues:
Electric $550,521 $462,999 $482,578
Gas 154,318 139,455 131,019
Steam 8,911 7,808 8,396
713,750 610,262 621,993
Operating expenses:
Fuel for production 87,702 73,368 91,182
Purchased power 93,449 74,794 70,245
Gas purchased for resale 109,122 101,605 96,504
Other operating expenses 123,210 119,607 124,855
Maintenance 46,219 39,573 39,571
Depreciation and amortization 69,407 64,107 61,466
Property taxes 36,426 31,586 31,770
Federal and state income taxes 39,411 21,422 23,307
Miscellaneous taxes 4,885 5,261 4,800
609,831 531,323 543,700
Operating income 103,919 78,939 78,293
Other income and deductions:
Allowance for equity funds used
during construction 824 1,831 820
Miscellaneous, net 2,248 2,803 3,950
3,072 4,634 4,770
Interest:
Long-term debt 34,926 35,689 31,171
Other 5,243 3,939 5,595
Allowance for debt funds used
during construction (1,148) (1,346) (1,266)
39,021 38,282 35,500
Net income 67,970 45,291 47,563
Preferred and preference dividend
requirements 914 1,729 2,170
Net income available for
common stock $ 67,056 $ 43,562 $ 45,393
The accompanying Notes to Financial Statements are an integral part of these
statements.
<PAGE>
IES UTILITIES INC.
BALANCE SHEETS
December 31
1993 1992
(in thousands)
ASSETS -
Utility plant, at original cost:
Plant in service -
Electric $1,707,278 $1,641,536
Gas 147,956 137,227
Other 75,845 73,970
1,931,079 1,852,733
Less - Accumulated depreciation 813,312 759,754
1,117,767 1,092,979
Leased nuclear fuel, net of amortization 51,681 48,505
Construction work in progress 41,937 30,324
1,211,385 1,171,808
Current assets:
Cash and temporary cash investments 18,313 1,743
Accounts receivable -
Customer, less reserve 22,679 24,517
Other 10,330 10,429
Income tax refunds receivable 8,767 -
Production fuel, at average cost 14,338 19,418
Materials and supplies, at average cost 26,861 28,765
Adjustment clause balances - 1,217
Regulatory assets 6,421 3,636
Prepayments and other 31,502 26,085
139,211 115,810
Other assets:
Regulatory assets 149,978 118,215
Nuclear decommissioning trust funds 28,059 21,327
Deferred charges and other 18,345 13,731
196,382 153,273
$1,546,978 $1,440,891
CAPITALIZATION AND LIABILITIES
Capitalization (See Statements of Capitalization):
Common stock $ 33,427 $ 33,427
Paid-in surplus 279,042 229,042
Retained earnings 188,862 153,106
Total common equity 501,331 415,575
Cumulative preferred stock 18,320 18,320
Long-term debt 480,074 441,522
999,725 875,417
Current liabilities:
Short-term borrowings 24,000 92,000
Notes payable - associated companies - 560
Capital lease obligations 15,345 13,211
Sinking funds and maturities 224 224
Accounts payable 47,179 45,384
Dividends payable 5,229 229
Accrued interest 9,438 9,247
Accrued taxes 39,763 41,987
Accumulated refueling outage provision 2,660 7,549
Adjustment clause balances 5,149 -
Provision for rate refund liability 8,670 9,020
Other 27,038 17,848
184,695 237,259
Long-term liabilities:
Capital lease obligations 36,336 35,294
Liability under National Energy Policy Act of 1992 11,984 12,054
Environmental liabilities 9,130 9,815
Other 25,197 17,645
82,647 74,808
Deferred credits:
Accumulated deferred income taxes 237,464 206,099
Accumulated deferred investment tax credits 42,447 47,308
279,911 253,407
Commitments and contingencies (Note 12)
$1,546,978 $1,440,891
The accompanying Notes to Financial Statements are an integral part of these
statements.
<PAGE>
IES UTILITIES INC.
STATEMENTS OF CAPITALIZATION
December 31
1993 1992
(in thousands)
Common equity:
Common stock - par value $2.50 per share -
authorized 24,000,000 shares; outstanding
13,370,788 shares $ 33,427 $ 33,427
Paid-in surplus 279,042 229,042
Retained earnings 188,862 153,106
501,331 415,575
Cumulative preferred stock - par value $50 per
share - authorized 466,406 shares; outstanding
366,406 shares -
6.10% - Outstanding 100,000 shares 5,000 5,000
4.80% - Outstanding 146,406 shares 7,320 7,320
4.30% - Outstanding 120,000 shares 6,000 6,000
18,320 18,320
Long-term debt:
Collateral trust bonds -
6% series, due 2008 50,000 -
7% series, due 2023 50,000 -
5.5% series, due 2023 19,400 -
119,400 -
First mortgage bonds -
Series J, 6-1/4%, due 1996 15,000 15,000
Series K, 8-5/8%, retired in 1993 - 20,000
Series L, 7-7/8%, due 2000 15,000 15,000
Series M, 7-5/8%, due 2002 30,000 30,000
Series P & Q, 6.70%, retired in 1993 - 9,200
Series R, 8-1/4%, retired in 1993 - 25,000
Series W, 9-3/4%, due 1995 50,000 50,000
Series X, 9.42%, due 1995 50,000 50,000
Series Y, 8-5/8%, due 2001 60,000 60,000
Series Z, 7.60%, due 1999 50,000 50,000
6-1/8% series, due 1997 8,000 8,000
9-1/8% series, due 2001 21,000 21,000
7-3/8% series, due 2003 10,000 10,000
7-1/4% series, due 2007 30,000 30,000
8-3/4% series, retired in 1993 - 15,000
339,000 408,200
Pollution control obligations -
5.75%, retired in 1993 - 10,200
4.90% to 5.75%, due serially 1994 to 2003 3,920 4,144
5.95%, due 2007, secured by First mortgage bonds 10,000 10,000
Variable rate (3.15% at December 31, 1993),
due 2000 to 2010 11,100 11,100
25,020 35,444
Unamortized debt premium and (discount), net (3,122) (1,898)
480,298 441,746
Less - Amount due within one year 224 224
480,074 441,522
$ 999,725 $ 875,417
The accompanying Notes to Financial Statements are an integral part of these
statements.
<PAGE>
IES UTILITIES INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31
1993 1992 1991
(in thousands)
Cash flows from operating activities:
Net income $67,970 $45,291 $47,563
Adjustments to reconcile net income to
net cash flows from operating activities -
Depreciation and amortization 69,407 64,107 61,466
Principal payments under capital
lease obligations 11,429 11,725 15,471
Deferred taxes and investment tax credits 10,531 (2,406) (13,068)
Amortization of deferred charges 860 961 7,778
Refueling outage provision (4,889) (5,503) 11,553
Allowance for equity funds used during
construction (824) (1,831) (820)
(Gain) loss on disposition of assets, net (655) - 30
Other (1,321) (4,742) (4,026)
Other changes in assets and liabilities -
Accounts receivable (8,553) (571) (3)
Sale of utility accounts receivable 10,490 7,710 (5,000)
Accounts payable 5,620 345 569
Accrued taxes (10,991) 6,118 3,375
Production fuel 5,080 2,579 1,234
Adjustment clause balances 6,366 (4,122) 184
Deferred energy efficiency costs (9,747) (6,877) (1,905)
Provision for rate refunds (350) 7,528 (197)
Other (1,281) (4,519) 2,307
Net cash flows from operating activities 149,142 115,793 126,511
Cash flows from financing activities:
Dividends declared on common stock (31,300) (24,721) (45,321)
Dividends on preferred and preference stock (914) (1,729) (2,170)
Proceeds from issuance of long-term debt 119,400 83,400 88,700
Equity infusion from parent company 50,000 - 40,000
Net change in short-term borrowings (68,560) 51,660 (55,750)
Sinking fund requirements and reductions in
long-term debt and preferred and
preference stock (79,624) (39,429) (31,589)
Principal payments under capital lease
obligations (11,276) (12,337) (14,738)
Dividends payable 5,000 - -
Other (1,295) 476 (500)
Net cash flows from financing activities (18,569) 57,320 (21,368)
Cash flows from investing activities:
Construction and acquisition expenditures (113,212) (171,013) (105,009)
Nuclear decommissioning trust funds (5,532) (5,532) (5,505)
Proceeds from disposition of assets 837 - 203
Other 3,904 (246) (620)
Net cash flows from investing activities (114,003) (176,791) (110,931)
Net increase (decrease) in cash and
temporary cash investments 16,570 (3,678) (5,788)
Cash and temporary cash investments
at beginning of year 1,743 5,421 11,209
Cash and temporary cash investments
at end of year $ 18,313 $ 1,743 $ 5,421
Supplemental cash flow information:
Cash paid during the year for -
Interest $ 39,747 $ 36,503 $ 36,932
Income taxes $ 40,130 $ 23,640 $ 32,925
Noncash investing and financing activities -
Capital lease obligations incurred $ 14,605 $ 1,973 $ 11,874
The accompanying Notes to Financial Statements are an integral part of these
statements.
<PAGE>
IES UTILITIES INC.
STATEMENTS OF RETAINED EARNINGS
Year Ended December 31
1993 1992 1991
(in thousands)
Balance at beginning of year $153,106 $134,822 $134,750
Add:
Net income 67,970 45,291 47,563
221,076 180,113 182,313
Deduct:
Cash dividends declared -
Common stock 31,300 24,721 45,321
Preferred stock, at stated rates 914 1,665 1,956
Preference stock, at stated rates - 64 214
Preferred stock redemption premiums - 557 -
32,214 27,007 47,491
Balance at end of year
($18,209,000 restricted as to payment
of cash dividends) $188,862 $153,106 $134,822
The accompanying Notes to Financial Statements are an integral part of these
statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL:
IES Utilities Inc. (the Company) is a wholly-owned subsidiary of IES
Industries Inc. (Industries) and is subject to regulation by the Iowa
Utilities Board (IUB) and the Federal Energy Regulatory Commission (FERC).
On June 4, 1993, Industries announced that its wholly-owned utility
subsidiaries, Iowa Electric Light and Power Company (IE) and Iowa Southern
Utilities Company (IS), filed applications for regulatory authority to merge.
The merger became effective December 31, 1993, following receipt of all
necessary Boards of Directors, shareholder and regulatory approvals.
IE is the surviving corporation and has been renamed IES Utilities Inc.
The separate existence of IS has ceased. The Company serves a total of
325,000 electric and 170,000 natural gas retail customers as well as 32 resale
customers in more than 550 Iowa communities.
The merger was accounted for under a method of accounting similar to
pooling of interests, which combined the ownership interests of IE and IS.
The assets and liabilities of IE and IS were combined at their recorded
amounts as of the merger date.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Regulatory Assets -
The Company is subject to the provisions of Statement of Financial
Accounting Standards No. 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). The regulatory assets represent probable future
revenue associated with certain incurred costs as these costs are recovered
through the ratemaking process. At December 31, 1993, regulatory assets
were comprised of the following items, and were reflected in the Balance
Sheets as follows:
Regulatory Assets
(in millions)
Deferred income taxes (Note 2(b)) $ 88.6
Energy efficiency programs 18.5
Employee pension and benefit costs (Note 8) 14.1
Environmental liabilities (Note 12(f)) 12.9
National Energy Policy Act of 1992 (Note 12(h)) 12.5
FERC Order No. 636 transition costs (Note 12(i)) 5.0
Cancelled plant costs 3.3
Regulatory study costs 1.5
156.4
Less current amounts 6.4
$150.0
Refer to the individual footnotes referenced above for a discussion of
the specific items reflected in regulatory assets. The amounts reflected
for energy efficiency programs are a result of an IUB mandate whereby 2% of
electric and 1.5% of gas gross retail operating revenues are to be expended
annually for energy efficiency programs. Under this mandate, the Company will
make its initial filing for recovery of the costs in 1994.
(b) Income Taxes -
The Company follows the liability method of accounting for deferred
income taxes, which requires the establishment of deferred tax liabilities and
assets, as appropriate, for all temporary differences between the tax basis
of assets and liabilities and the amounts reported in the financial
statements. Deferred taxes are recorded using currently enacted tax rates.
Except as noted below, income tax expense includes provisions for
deferred taxes to reflect the tax effects of temporary differences between
the time when certain costs are recorded in the accounts and when they are
deducted for tax return purposes. As temporary differences reverse, the
related accumulated deferred income taxes are reversed to income. Investment
tax credits have been deferred and are subsequently credited to income over
the average lives of the related property.
Consistent with ratemaking practices, deferred tax expense is not
recorded for certain temporary differences (primarily related to utility
property, plant and equipment). Accordingly, the Company has recorded
deferred tax liabilities and regulatory assets, as discussed in Note 2(a).
(c) Temporary Cash Investments -
Temporary cash investments are stated at cost which approximates market
value and are considered cash equivalents for the Statements of Cash Flows.
These investments consist of short-term liquid investments which have
maturities of less than 90 days from the date of acquisition and at
December 31, 1993, include $15 million invested with affiliated companies.
(d) Depreciation of Utility Property, Plant and Equipment -
The average rates of depreciation for electric and gas properties,
including the Company's nuclear generating station, the Duane Arnold Energy
Center (DAEC), which is being depreciated over a 36 year life using a
remaining life method, were as follows:
1993 1992 1991
Electric 3.5% 3.5% 3.5%
Gas 3.5% 3.0% 3.0%
Based on the most recent site specific study, completed in 1992, the
Company's 70% share of the estimated cost to decommission the DAEC and return
the underlying property to its original state approximated $223 million
in 1992 dollars. The study is based on the prompt removal and dismantling
decommissioning alternative and is assumed to begin at the end of the DAEC's
operating license in 2014. The level of annual recovery through rates of
decommissioning costs is $5.5 million, which is deposited in external trust
funds, and is based on a remaining life recovery method. The annual recovery
level is reviewed and, if necessary, adjusted in each rate case.
Decommissioning costs, at the level collected through rates, are included in
"Depreciation and amortization" expense in the Statements of Income.
In addition to the $28.1 million invested in the external trust funds
as indicated in the Balance Sheets, the Company has an internal
decommissioning reserve of $21.7 million recorded as accumulated depreciation.
Earnings on the external funds are recognized as income and a corresponding
amount of interest expense is recorded for the reinvestment of the earnings.
(e) Allowance for Funds Used During Construction -
The allowance for funds used during construction (AFC), which represents
the cost during the construction period of funds used for construction
purposes, is capitalized as a component of the cost of utility plant.
The amount of AFC applicable to debt funds and to other (equity) funds,
a non-cash item, is computed in accordance with the prescribed FERC formula.
The aggregate gross rates used for 1993-1991 were 5.7%, 9.2% and 8.5%,
respectively.
(f) Operating Revenues -
The Company accrues revenues for services rendered but unbilled at
month-end in order to more properly match revenues with expenses.
(g) Adjustment Clauses -
The Company's tariffs provide for subsequent adjustments to its electric
and natural gas rates for changes in the cost of fuel and purchased energy and
in the cost of natural gas purchased for resale. Changes in the under/over
collection of these costs are reflected in "Fuel for production" and "Gas
purchased for resale" in the Statements of Income. The cumulative effects
are reflected in the Balance Sheets as a current asset or current
liability, pending automatic reflection in future billings to customers.
(h) Accumulated Refueling Outage Provision -
The IUB allows the Company to collect, as part of its base revenues,
funds to offset other operating and maintenance expenditures incurred
during refueling outages at the DAEC. As these revenues are collected, an
equivalent amount is charged to other operating and maintenance expenses
with a corresponding credit to a reserve. During a refueling outage, the
reserve is reversed to offset the refueling outage expenditures.
(i) Reclassifications -
Certain prior period amounts have been reclassified on a basis consistent
with the 1993 presentation.
(3) ACQUISITION OF IOWA SERVICE TERRITORY OF UNION ELECTRIC COMPANY:
Effective December 31, 1992, the Company acquired the Iowa distribution
system and a portion of the Iowa transmission facilities of Union Electric
Company (UE) for $65.0 million in cash. The acquisition was accounted for as
a purchase. The net book value of the acquired assets was approximately
$34.4 million and the amount of the purchase price in excess of the
book value ($30.6 million) has been recorded as an acquisition adjustment.
The acquisition adjustment is being amortized over the life of the property
and is included in "Other income and deductions - Miscellaneous, net" in the
Statements of Income. Recovery of the acquisition adjustment through rates
will be addressed in future rate proceedings. See Note 12(b) for a
discussion of the purchase power contracts with UE associated with this
acquisition.
(4) RATE MATTERS:
(a) Gas Rate Cases -
Former IE Service Territory
In July 1992, IE applied to the IUB for an increase in gas rates of
$6.3 million annually, or 5.9%. Effective September 30, 1992, the
IUB authorized an interim increase of $5.4 million, subject to refund. On
April 30, 1993, the IUB issued its "Final Decision and Order," which
approved stipulations between IE and certain intervenors providing for an
annual increase in revenues of $5.5 million. IE did not have any refund
liability as a result of the Order.
Former IS Service Territory
In July 1992, IS applied to the IUB for an increase in gas rates of
$2.3 million annually, or 6.2%. Effective September 30, 1992, the IUB
authorized an interim increase of $1.9 million, subject to refund. In
February 1993, the IUB approved stipulations between IS and certain
intervenors in the proceeding that provided for an annual increase in revenues
of $1.6 million. As a result of the Order, IS refunded approximately
$0.2 million, including interest, in the second quarter of 1993.
(b) 1991 Electric Rate Case -
In October 1991, IE applied to the IUB for an increase in interim and
final retail electric rates of $18.9 million annually, or 6.0%. The IUB
approved an interim rate increase of $15.6 million, annually, which became
effective in December 1991, subject to refund.
In July 1992, the IUB issued its "Final Decision and Order" approving an
annual electric rate increase of $7.9 million. The application of double
leverage ratemaking theory to IE's capital structure accounted for
approximately $4 million of the difference between the interim rate level
and the amount allowed in the Order. After a limited rehearing of
the double leverage issue, the IUB issued its "Order On Rehearing" in
December 1992, which affirmed the original decision.
IE appealed the IUB's Order to the Iowa District Court (Court). In
December 1993, the Court issued its decision, which upholds the IUB's Order.
The Company did not appeal the Court's decision to the Iowa Supreme Court.
In the second quarter of 1993, IE refunded approximately $4.1 million,
including interest, which represented a refund down to the level of revenues
that would have resulted had it won the appeal. An additional refund,
including interest, of $8.7 million is required at December 31, 1993, as a
result of the Court's decision. The refund is expected to be completed in
the second quarter of 1994. There will be no effect on electric revenues
and net income when the additional refund is made because the Company has
been reserving for the effect of the additional refund.
(5) LEASES:
The Company has a capital lease covering its 70% undivided interest in
nuclear fuel purchased for the DAEC. Future purchases of fuel may also be
added to the fuel lease. This lease provides for annual one year extensions
and the Company intends to exercise such extensions through the DAEC's
operating life. Interest costs under the lease are based on commercial paper
costs incurred by the lessor. The Company is responsible for the payment of
taxes, maintenance, operating cost, risk of loss and insurance relating
to the leased fuel.
The lessor has an $80 million credit agreement with a bank supporting the
nuclear fuel lease. The agreement continues on a year to year basis, unless
either party provides at least a three year notice of termination; no such
notice of termination has been provided by either party.
Annual nuclear fuel lease expenses include the cost of fuel, based on the
quantity of heat produced for the generation of electric energy, plus the
lessor's interest costs related to fuel in the reactor and administrative
expenses. These expenses (included in "Fuel for production" in the Statements
of Income) for 1993-1991 were $12.4 million, $12.9 million and $17.5 million,
respectively.
The Company's operating lease rental expenses for 1993-1991 were
$8.4 million, $6.8 million and $7.0 million, respectively.
The Company's future minimum lease payments by year are as follows:
Capital Operating
Year Lease Leases
(in thousands)
1994 $ 16,994 $ 6,511
1995 11,970 6,353
1996 10,784 4,865
1997 9,940 3,420
1998 4,145 3,549
1999-2003 4,111 12,130
57,944 $ 36,828
Less: Amount
representing interest 6,263
Present value of net
minimum capital
lease payments $ 51,681
(6) UTILITY ACCOUNTS RECEIVABLE:
Customer accounts receivable, including unbilled revenues, arise
primarily from the sale of electricity and natural gas. At
December 31, 1993, the Company was serving a diversified base of residential,
commercial and industrial customers consisting of approximately
325,000 electric and 170,000 gas customers.
The Company has entered into two agreements, one with limited recourse, to
sell undivided fractional interests of an aggregate of $65 million in its pool
of utility accounts receivable. At December 31, 1993, $53.2 million was sold
under the agreements. The agreements expire in June and December 1994. The
Company intends to consolidate the agreements into one new agreement in 1994.
(7) INCOME TAXES:
The components of federal and state income taxes for the years ended
December 31, were as follows:
1993 1992 1991
(in millions)
Classified as Federal and
State Income Taxes:
Current tax expense $ 28.4 $ 24.0 $ 36.3
Deferred tax expense 15.9 0.2 (10.1)
Amortization and adjustment
of investment tax credits (4.9) (2.8) (2.9)
39.4 21.4 23.3
Included in Miscellaneous, net:
Current tax expense (0.9) (0.8) 0.4
Deferred tax expense (0.5) 0.1 (0.2)
(1.4) (0.7) 0.2
Total income tax expense $ 38.0 $ 20.7 $ 23.5
The overall effective income tax rates shown below were computed by
dividing total income tax expense by income before income taxes.
Year Ended December 31
1993 1992 1991
Statutory Federal income tax rate 35.0% 34.0% 34.0%
Add (deduct):
Amortization of investment tax credits (2.5) (4.2) (4.0)
State income taxes, net of Federal
benefits 5.8 5.6 6.4
Property basis and other temporary
differences for which deferred taxes are
not provided under ratemaking principles 1.5 0.5 2.1
Reversal through tariffs of deferred
taxes provided at rates in excess
of the current statutory Federal
income tax rate (1.7) (2.7) (3.7)
Adjustment of prior period taxes (2.0) (2.0) (1.3)
Other items, net (0.3) 0.2 (0.4)
Overall effective income tax rate 35.8% 31.4% 33.1%
The accumulated deferred income taxes as set forth below and in the
Balance Sheets arise from the following temporary differences:
December 31
1993 1992
(in millions)
Property related $ 272 $ 256
Decommissioning related (12) (11)
Investment tax credit related (30) (32)
Other 7 (7)
$ 237 $ 206
(8) BENEFIT PLANS:
The Company has one contributory and two non-contributory retirement plans
which, collectively, cover substantially all of its employees. Plan benefits
are generally based on years of service and compensation during the employees'
latter years of employment. Payments made from the pension funds to
retired employees and beneficiaries during 1993 totaled $10.4 million. In
addition to these payments, the Company purchased annuities totaling
$6.3 million for all previous employees who had retired as of January 1993,
under one of the plans. The cost of the annuities and the reduction
in the projected benefit obligation were substantially equivalent.
The Company's policy is to fund the pension cost at an amount which is at
least equal to the minimum funding requirements mandated by the Employee
Retirement Income Security Act (ERISA) and which does not exceed the maximum
tax deductible amount for the year.
Pursuant to the provisions of SFAS 71, certain adjustments to the Company's
pension provision are necessary to reflect the accounting for pension costs
allowed in the most recent rate cases.
The components of the pension provision are as follows:
Year Ended December 31
1993 1992 1991
(in thousands)
Service cost $ 4,275 $ 4,439 $ 4,517
Interest cost on projected
benefit obligation 11,131 9,999 8,959
Assumed return on plans' assets (12,177) (11,640) (10,026)
Amortization of unrecognized gain (763) (135) (19)
Amortization of prior service cost 1,195 938 775
Amortization of unrecognized plans'
assets as of January 1, 1987 (384) (382) (392)
Pension cost 3,277 3,219 3,814
Adjustment to funding level (2,867) 301 (228)
Total pension costs paid to the
Trustees $ 410 $ 3,520 $ 3,586
Actual return on plans' assets $ 12,718 $ 8,861 $ 37,085
A reconciliation of the funded status of the plans to the amounts
recognized in the Balance Sheets is presented below:
December 31
1993 1992
(in thousands)
Fair market value of plans' assets $ 174,133 $ 177,514
Actuarial present value of benefits
rendered to date -
Accumulated benefits based on
compensation to date, including
vested benefits of $100,905,000
and $91,303,000, respectively 110,676 100,288
Additional benefits based on estimated
future salary levels 42,938 31,324
Projected benefit obligation 153,614 131,612
Plans' assets in excess of projected
benefit obligation 20,519 45,902
Remaining unrecognized net asset existing
at January 1, 1987, being amortized over
20 years (4,109) (5,256)
Unrecognized prior service cost 16,708 14,961
Unrecognized net gain (28,830) (52,709)
Prepaid pension cost recognized in the
Balance Sheets $ 4,288 $ 2,898
Assumed rate of return, all plans 8.00% 8.00%
Weighted average discount rate of
projected benefit obligation, all plans 7.50% 8.25%
Range of assumed rates of increase in
future compensation levels for
the plans 4.00-5.75% 4.00-5.75%
The decrease in the discount rate used to compute the projected benefit
obligation, from 8.25% at December 31, 1992 to 7.50% at December 31, 1993,
accounted for a significant portion of the reduction in the unrecognized net
gain between periods and, similarly, contributed to the increase in the
projected benefit obligation at December 31, 1993.
The Company provides certain benefits to retirees (primarily health care
benefits). Through 1992, the Company expensed such costs as benefits were
paid, which was consistent with ratemaking practices. Such costs totaled
$2.2 million for 1992 and $1.9 million for 1991.
Effective January 1, 1993, the Company adopted SFAS 106, which requires
the accrual of the expected cost of postretirement benefits other than
pensions during the employees' years of service. The IUB has adopted rules
stating that postretirement benefits other than pensions will be included in
rates pursuant to the provisions of SFAS 106. The rules permit the Company
to amortize the transition obligation as of January 1, 1993 over 20 years
and require that all amounts collected are to be funded into an external
trust to pay benefits as they become due. Beginning in 1993, the gas
portion of these costs is being recovered in the Company's gas rates, and are
funded in external trust funds; recovery of the electric portion will be
addressed in future electric proceedings. The IUB has adopted a rule that
permits a deferral of the incremental electric SFAS 106 costs until the
earlier of: 1) an order in an electric rate case, or 2) December 31, 1995.
Accordingly, pursuant to the provisions of SFAS 71, the Company had deferred
$2.9 million of such costs at December 31, 1993, and it expects to file
electric rate cases seeking recovery of the deferred costs before
December 31, 1995.
The components of postretirement benefit costs for the year ended
December 31, 1993, are as follows:
1993
(in thousands)
Service cost $ 1,685
Interest cost on accumulated postretirement
benefit obligation 3,247
Amortization of transition obligation existing
at January 1, 1993 2,024
Postretirement benefit costs 6,956
Less: Deferred postretirement benefit costs 2,858
Net postretirement benefit costs $ 4,098
A reconciliation of the funded status of the plans to the amounts
recognized in the Balance Sheets is presented below:
December 31, January 1,
1993 1993
(in thousands)
Fair market value of plans' assets $ 1,171 $ -
Accumulated postretirement benefit obligation -
Active employees not yet eligible 18,325 18,232
Active employees eligible 4,130 3,698
Retirees 20,140 18,558
Total accumulated postretirement benefit obligation 42,595 40,488
Accumulated postretirement benefit obligation
in excess of plans' assets (41,424) (40,488)
Unrecognized transition obligation 38,463 40,488
Unrecognized net gain (1,167) -
Accrued postretirement benefit cost in the
Balance Sheets $ (4,128) $ -
Assumed rate of return 8.0% -
Weighted average discount rate of
accumulated postretirement benefit obligation 7.5% 8.25%
Medical trend on paid charges:
Initial trend rate 12.0% 13.0%
Ultimate trend rate 6.5% 8.0%
The assumed medical trend rates are critical assumptions in determining
the service cost and accumulated postretirement benefit obligation related to
postretirement benefit costs. A 1% change in the medical trend rates, holding
all other assumptions constant, would have changed the 1993 service cost by
$1.1 million (22%) and the accumulated postretirement benefit obligation at
December 31, 1993 by $6.7 million (16%).
The Company will adopt the provisions of SFAS 112 "Employers' Accounting
for Postemployment Benefits" as of January 1, 1994 and its adoption will not
have a material effect on the Company's financial position or results of
operations. This statement requires that benefits offered to former or
inactive employees after termination of employment, but before retirement, be
accrued over the service lives of the employees if all of the following
conditions are met: 1) the obligation relates to services already performed,
2) the employees' rights vest, 3) the payments are probable, and 4) the
amounts are reasonably determinable. Otherwise, such obligations are to be
recognized at the time they become probable and reasonably determinable.
The Company has generally accounted for these obligations as they were paid.
(9) PREFERRED AND PREFERENCE STOCK:
The Company has 466,406 shares of Cumulative Preferred Stock, $50 par
value, authorized for issuance at December 31, 1993, of which the 6.10%,
4.80% and 4.30% Series had 100,000, 146,406 and 120,000 shares, respectively,
outstanding at both December 31, 1993 and 1992. These shares are redeemable
at the Company's option upon 30 days notice at $51.00, $50.25 and $51.00 per
share, respectively, plus accrued dividends.
The Company also has 700,000 shares of Cumulative Preference Stock
($100 par value) authorized for issuance, of which none were outstanding at
December 31, 1993.
(10) DEBT:
(a) Long-Term Debt -
In November 1993, the Company entered into arrangements with various
cities in the State of Iowa (Cities), whereby the Cities issued an aggregate
of $19.4 million of pollution control revenue refunding bonds (PCRRBs), all
at 5.5%, due 2023. Each series of the PCRRBs is secured, in part, by
payments on a corresponding principal amount of Collateral Trust Bonds,
at 5.5%, due 2023. The proceeds received by the Company in the transaction
were used to redeem $10.2 million of Pollution Control Obligations, 5.75%, due
serially 1995-2003 and an aggregate of $9.2 million of First Mortgage Bonds,
Series P & Q, 6.7%, due 2006.
In October 1993, the Company sold $100 million aggregate principal amount
of Collateral Trust Bonds, 6% Series, due 2008, and 7% Series, due 2023. A
portion of the proceeds from the Collateral Trust Bonds was used to retire
short-term debt, with the balance used for general corporate purposes,
including support of its construction program.
In May 1993, the Company redeemed First Mortgage Bonds Series K, 8-5/8%,
principal amount of $20 million, and Series R, 8-1/4%, principal amount of
$25 million and First Mortgage Bonds Series 8-3/4%, principal amount of
$15 million. The redemptions were completed with proceeds from short-term
borrowings and, as discussed above, long-term debt was ultimately issued to
replace the short-term borrowings.
The Company's Indentures and Deeds of Trust securing its First Mortgage
Bonds constitute direct first mortgage liens upon substantially all tangible
public utility property. The Company's Indenture and Deed of Trust securing
its Collateral Trust Bonds constitutes a second lien on substantially all
tangible public utility property while First Mortgage Bonds remain
outstanding.
Total sinking fund requirements, which the Company intends to meet by
pledging additional property under the terms of the Company's Indentures and
Deeds of Trust, and debt maturities for 1994-1998 are as follows:
Debt maturities
(in thousands)
Debt Issue 1994 1995 1996 1997 1998
Sinking Fund
Requirements $ 780 $ 780 $ 630 $ 550 $ 550
Pollution
Control 224 140 140 140 140
Series W - 50,000 - - -
Series X - 50,000 - - -
Series J - - 15,000 - -
6 1/8% Series - - - 8,000 -
$1,004 $100,920 $ 15,770 $ 8,690 $ 690
The Company intends to refinance the majority of the debt maturities with
long-term debt.
(b) Short-Term Debt -
At December 31, 1993, the Company had bank lines of credit aggregating
$67.7 million and was using $19.0 million to support commercial paper and
$7.7 million to support certain pollution control obligations. Commitment
fees are paid to maintain these lines and there are no conditions which
restrict the unused lines of credit. In addition to the above, the Company
has an uncommitted credit facility with a financial institution whereby it
can borrow up to $50 million. Rates are set at the time of borrowing and no
fees are paid to maintain this facility. At December 31, 1993, $5.0 million
was borrowed at 3.4% under this facility. The Company also has a letter
of credit in the amount of $3.4 million supporting two of its variable
rate pollution control obligations.
(11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of financial instruments at December 31, 1993,
and the basis upon which they were estimated are as follows:
Current assets and current liabilities -
The carrying amount approximates fair value because of the short
maturity of such financial instruments.
Nuclear decommissioning trust funds -
The estimated fair value of these trust funds, as reported by the
trustee based upon current market values, is $29.5 million.
Cumulative preferred stock -
The estimated fair value of this stock of $12.8 million is based
upon quoted market prices.
Long-term debt -
The carrying amount of long-term debt was $480 million compared to
estimated fair value of $507 million. The estimated fair value of
long-term debt is based upon quoted market prices.
Since the Company is subject to regulation, any gains or losses related
to the difference between the carrying amount and the fair value of financial
instruments may not be realized by the Company's parent.
(12) COMMITMENTS AND CONTINGENCIES:
(a) Construction Program -
The Company's construction and acquisition program anticipates
expenditures of approximately $150 million, for which substantial commitments
have been made.
(b) Purchase Power Contracts -
The Company has a purchase power contract with Terra Comfort Company
(Terra Comfort), a wholly-owned subsidiary of Industries, for annual capacity
purchases of 114 Mw that expires on December 31, 1994.
In connection with the acquisition of the UE properties discussed in
Note 3, the Company is purchasing power from UE under a five-year firm
capacity contract with a 1994 requirement of 120 Mw of delivered capacity
declining to 60 Mw in 1997. The Company will also purchase an additional
maximum interruptible capacity of up to 54 Mw of 25 Hz power. This 25 Hz
power purchase will extend through 1998 and will continue thereafter unless
either party gives a three-year notice of cancellation.
The costs of capacity purchases for these contracts are reflected in
"Purchased power" in the Statements of Income.
Total capacity charges under all existing contracts will approximate
$21.0 million, $14.7 million, $11.4 million, $8.7 million and $0.3 million
for the years 1994-1998, respectively.
(c) Coal Contract Commitments -
The Company has entered into coal supply contracts which expire between
1994 and 2001 for its fossil-fueled generating stations. At December 31,
1993, the contracts cover approximately $147 million of coal over the life
of the contracts, which includes $34 million expected to be incurred in
1994. The Company expects to supplement these coal contracts with spot
market purchases to fulfill its future fossil fuel needs.
(d) Information Technology Services -
In 1992, the Company entered into an agreement with Electronic Data
Systems Corporation (EDS) for information technology services. The term of
the contract is twelve years and the contract is subject to declining
termination fees. The Company's anticipated expenditures under the agreement
for 1994 are estimated to be approximately $8.9 million. Future costs under
the agreement are variable and are dependent upon the Company's level of
usage of technological services from EDS, as well as inflation.
(e) Nuclear Insurance Programs -
The Price-Anderson Amendments Act of 1988 (1988 Act) provides the Company
with the benefit of $9.4 billion of public liability coverage consisting of
$200 million of insurance and $9.2 billion of potential retroactive
assessments from the owners of nuclear power plants. Under the 1988 Act,
the Company could be assessed a maximum of $79 million per nuclear incident,
with a maximum of $10 million per year (of which the Company's 70% ownership
portion would be $55 million and $7 million, respectively) if losses
relating to the incidents exceeded $200 million. These limits are subject to
adjustments for inflation in future years.
Pursuant to provisions in various nuclear insurance policies, the Company
could be assessed retroactive premiums in connection with future accidents at
a nuclear facility owned by a utility participating in the particular
insurance plan. With respect to excess property damage and replacement
power coverages, the Company could be assessed annually a maximum of
$8.5 million and $1 million, respectively, if the insurer's losses relating
to accidents exceeded its reserves. While assessments may also be made for
losses in certain prior years, the Company is not aware of any losses in such
years that it believes are likely to result in an assessment.
(f) Environmental Liabilities -
At December 31, 1993, the Company's Balance Sheet reflects $13.1 million
(including $4.0 million as current) of environmental liabilities, which,
pursuant to generally accepted accounting principles, represents the minimum
amount of the estimated range of such costs that the Company expects to
incur. The minimum amount of the range is used because no amount within
the range represents a better estimate. These estimates are subject to
continuing review.
The Company has been named as a Potentially Responsible Party (PRP) for
certain former manufactured gas plant (FMGP) sites by either the Iowa
Department of Natural Resources (IDNR) or the Environmental Protection
Agency (EPA). The Company is working with the IDNR and EPA to investigate
its 27 sites and to determine the appropriate remediation activities that may
be needed to mitigate health and environmental concerns. Such investigations
are expected to be completed by 1999 and site-specific remediations are
anticipated to be completed within 3 years after the completion of the
investigations of each site. The Company may be required to monitor these
sites for a number of years upon completion of remediation.
The Company is investigating the possibility of insurance and third party
cost sharing for FMGP clean-up costs. The amount of shared costs, if any, can
not be reasonably determined and, accordingly, no potential sharing has been
recorded. Regulatory assets of $12.9 million have been recorded in the
Balance Sheets, which reflects the future recovery that is being provided
through the Company's rates (See Note 2(a)). Considering the recorded
reserves for environmental liabilities and the past rate treatment
allowed by the IUB, management believes that the clean-up costs incurred
by the Company for these FMGP sites will not have a material adverse effect on
its financial position or results of operations.
(g) Clean Air Act -
The Clean Air Act Amendments of 1990 (Act) requires emission reductions
of sulfur dioxide and nitrogen oxides to achieve reductions of atmospheric
chemicals believed to cause acid rain. The provisions of the Act will be
implemented in two phases with Phase I affecting two of the Company's units
beginning in 1995 and Phase II affecting all units beginning in the
year 2000.
The Company expects to meet the requirements of the Act by switching to
lower sulfur fuels and through capital expenditures primarily related to fuel
burning equipment and boiler modifications. The Company estimates capital
expenditures at approximately $28 million, including $4 million in 1994, in
order to meet these requirements of the Act.
(h) National Energy Policy Act of 1992 -
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 and, for the DAEC, averages $1.3 million annually through 2007,
of which the Company's 70% share is $0.9 million. The Company is recovering
the costs associated with this assessment through its electric fuel adjustment
clauses over the period the costs are assessed. The Company's 70% share of
the future assessment, $12.7 million payable through 2007, has been recorded
as a liability in the Balance Sheets, including $0.7 million included
in "Current liabilities - other," with a related regulatory asset for the
unrecovered amount (See Note 2(a)).
(i) FERC Order No. 636 -
The FERC issued Order No. 636 (Order 636) in 1992. Order 636 as modified
on rehearing, (1) requires the Company's pipeline suppliers to unbundle their
services so that gas supplies are obtained separately from transportation
service, and transportation and storage services are operated and billed as
separate and distinct services, (2) requires the pipeline suppliers to offer
"no notice" transportation service under which firm transporters (such as the
Company) can receive delivery of gas up to their contractual capacity level on
any day without prior scheduling, (3) allows pipelines to abandon long-term
(one year or more) transportation service to a customer whenever the customer
fails to match the highest rate and longest term (up to 20 years) offered to
the pipeline by other customers for the particular capacity, and (4) provides
for a mechanism under which pipelines can recover prudently incurred
transition costs associated with the restructuring process. The Company may
benefit from enhanced access to competitively priced gas supply and more
flexible transportation services as a result of Order 636. However, the
Company will be required to pay certain transition costs passed on from its
pipeline suppliers as they implement Order 636.
The Company's three pipeline suppliers have filed new tariffs with the
FERC implementing Order 636 and the pipelines have also made filings with the
FERC to begin collecting their respective transition costs. The Company
began paying the transition costs in November 1993, and has recorded a
liability of $5.0 million for such transition costs that have been
incurred by the pipelines to date, including $1.7 million expected to be
billed in 1994. While the magnitude of the total transition costs to be
charged to the Company cannot yet be determined, the Company believes any
transition costs the FERC would allow the pipelines to collect would be
recovered from its customers, based upon past regulatory treatment of
similar costs by the IUB. Accordingly, regulatory assets, in amounts
corresponding to the liabilities, have been recorded to reflect the
anticipated recovery.
(13) JOINTLY-OWNED ELECTRIC UTILITY PLANT:
Under joint ownership agreements with other Iowa utilities, the Company
has undivided ownership interests in jointly-owned electric generating
stations and related transmission facilities. Each of the respective owners
is responsible for the financing of its portion of the construction
costs. Kilowatt-hour generation and operating expenses are divided on the
same basis as ownership with each owner reflecting its respective
costs in its Statements of Income. Information relative to the Company's
ownership interest in these facilities at December 31, 1993 is as follows:
Ottumwa Neal
DAEC Unit 1 Unit 3
($ in millions)
Utility plant in service $ 484 $ 179 $ 43
Accumulated depreciation $ 221 $ 69 $ 22
Construction work in progress $ 7 $ - $ -
Plant capacity - Mw 530 708 515
Percent ownership 70% 48% 28%
In-service date 1974 1981 1975
(14) SEGMENTS OF BUSINESS:
The principal business segments of the Company are the generation,
transmission, distribution and sale of electric energy and the purchase,
distribution and sale of natural gas. Certain financial information relating to
the Company's significant segments of business is presented below:
Year Ended December 31
1993 1992 1991
(in thousands)
Operating results:
Revenues -
Electric $ 550,521 $ 462,999 $ 482,578
Gas 154,318 139,455 131,019
Operating income (pre-tax) -
Electric 128,994 90,891 100,402
Gas 13,750 8,367 (360)*
Other information:
Depreciation and amortization -
Electric 63,832 59,707 57,612
Gas 5,186 4,024 3,480
Construction and acquisition
expenditures -
Electric 84,720 154,902 77,646
Gas 12,582 17,308 21,100
Assets -
Identifiable assets -
Electric 1,288,505 1,226,614 1,115,310
Gas 164,773 141,801 108,851
1,453,278 1,368,415 1,224,161
Other corporate assets 93,700 72,476 79,949
Total assets $1,546,978 $1,440,891 $1,304,110
* Includes a $3.9 million pre-tax write-off of previously deferred
FMGP clean-up costs pursuant to disallowance of recovery in an
IUB order.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion analyzes significant changes in the components
of net income and financial condition during the years 1993 and 1992. See
Note 1 of the Notes to Financial Statements for a discussion of the merger
of Iowa Electric Light and Power Company (IE) and Iowa Southern Utilities
Company (IS), effective December 31, 1993, that formed the Company.
RESULTS OF OPERATIONS
The Company's net income increased $23.5 million during 1993 and
decreased $1.8 million during 1992. The 1993 results reflect the acquisition
of the Iowa service territory of Union Electric Company (UE) (as discussed in
Note 3 of the Notes to Financial Statements) and a return to more normal
weather conditions in the Company's service territory. The floods in Iowa
in 1993 did not significantly affect the Company's results of operations.
The 1992 results were adversely affected by extremely cool summer weather and
a mild winter in the Company's service territory.
The Company's operating income increased $25.0 million and $0.6 million
during 1993 and 1992, respectively, as compared to prior years. Reasons for
the changes in the results of operations are explained in the following
discussion.
ELECTRIC REVENUES
Electric revenues and Kwh sales (excluding off-system sales) increased
$87.5 million and 25%, respectively, during 1993. In 1992, electric revenues
and Kwh sales decreased $19.6 million and 1.5%, respectively. The 1993 sales
increase is attributable to the acquisition of the UE territory and a return
to more normal weather conditions. After adjusting for these items,
underlying electric sales increased 6% in 1993, which reflects the economic
growth in the industrial and commercial customer base.
The 1992 Kwh sales decrease reflects unusually mild weather conditions in
the Company's service territory. Residential sales, which are the most
weather sensitive, decreased 9.5%. However, industrial sales, which are less
sensitive to weather, increased approximately 5.5%. Adjusting for the
effects of weather, Kwh sales increased 2.7%, reflecting economic growth in
the Company's service territory.
The Company's electric tariffs include energy adjustment clauses (EAC)
that are designed to currently recover the costs of fuel and the energy
portion of purchased power billings to customers. See Note 2(g) of the Notes
to Financial Statements for discussion of the EAC. The increase in electric
revenues for 1993 is primarily because of the sales increase and increased
recovery of fuel costs through the EAC.
The revenue decrease in 1992 was primarily related to the lower Kwh sales
discussed above and lower off-system sales to other utilities. A rate decrease
in the former IS service territory that became effective in September 1991
contributed to the revenue decrease to a lesser extent. These items were
partially offset by the effect of the rate increase in the former IE service
territory that became effective in December 1991. See Note 4(b) of the
Notes to Financial Statements for a discussion of the electric rate case
in the former IE service territory.
GAS REVENUES
Gas revenues increased $14.9 million and $8.4 million during 1993 and
1992, respectively. Gas sales in therms (including transported volumes)
increased 5.3% in 1993 and were flat in 1992. Gas sales also reflect the
effects of weather. Adjusting for the effects of weather, gas sales decreased
1.5% in 1993 and increased 1.5% in 1992.
The Company's tariffs include purchased gas adjustment clauses (PGA) that
are designed to currently recover the cost of gas sold. See Note 2(g) of the
Notes to Financial Statements for discussion of the PGA.
Gas revenues increased in 1993 and 1992 substantially because of
increased costs of gas recovered through the PGA and the effect of gas rate
increases in the former service territory of both IE and IS, that became
effective in September 1992. The 1993 sales increase also contributed
to the revenue increase for that year. See Note 4(a) of the Notes to
Financial Statements for a discussion of the gas rate increases.
STEAM REVENUES
Steam revenues increased $1.1 million during 1993 and decreased $0.6
million during 1992, primarily related to fluctuations in sales volumes among
large industrial customers.
OPERATING EXPENSES
Fuel for production increased $14.3 million in 1993 because of increased
availability of the Company's fossil-fueled generating stations, which
experienced extended maintenance outages in 1992, and because of increased
sales. Fuel for production decreased $17.8 million during 1992 primarily
because of a nuclear refueling outage at the Duane Arnold Energy Center
(DAEC), maintenance outages at the fossil-fueled generating stations and
the lower electric sales. There were refueling outages in 1993 and 1992, but
no such outage in 1991. The decrease in Kwh generation during the refueling
and maintenance outages was substantially replaced by purchased power.
Purchased power increased $18.7 million in 1993, of which approximately
$14.7 million represents increased energy purchases and approximately $4.0
million is a net increase in capacity charges. The increase in energy
purchases is because of the increased Kwh sales. The increased capacity
costs reflect the contracts associated with the acquisition of the UE service
territory, partially offset by the expiration, in April 1993, of the purchase
power agreement with the City of Muscatine. (See Note 12(b) of the Notes
to Financial Statements). Purchased power increased $4.5 million in 1992
because of increased purchases during the refueling and maintenance outages,
partially offset by lower purchases related to lower off-system sales.
Gas purchased for resale increased $7.5 million and $5.1 million during
1993 and 1992, respectively. The increases are primarily because of increased
per unit gas costs, and in 1993, increased sales.
Other operating expenses increased $3.6 million in 1993 and decreased
$5.2 million during 1992. The 1993 increase is primarily because of
increased labor and benefit costs and higher electric and gas transmission
and distribution costs, partially offset by lower non-labor costs at the
DAEC. The 1992 decrease was substantially related to a regulatory
disallowance of $3.9 million recorded in April 1991, after the Iowa Utilities
Board (IUB) denied recovery of previously deferred former manufactured gas
plant (FMGP) clean-up costs. Lower non-labor costs at the DAEC and lower
Nuclear Regulatory Commission fees, partially offset by increased labor and
benefit costs, also affected 1992.
Maintenance expenses increased $6.6 million during 1993 and were flat in
1992. The 1993 increase is primarily because of increased maintenance at the
Company's fossil-fueled generating stations and the DAEC. The 1992 maintenance
expenses reflect increased maintenance at fossil-fueled generating stations,
substantially offset by lower maintenance costs at the DAEC.
Depreciation and amortization increased during both years primarily
because of increases in utility plant in service, including the
acquisition of the UE territory on December 31, 1992. An increase in the
average gas utility property depreciation rate, resulting from an updated
depreciation study, also contributed to the 1993 increase. Depreciation and
amortization expenses for both years include $5.5 million for the DAEC
decommissioning provision, which is collected through rates.
Property taxes increased $4.8 million during 1993, primarily because of
the acquisition of the UE service territory and increases in assessed values.
Federal and state income taxes included in operating expenses increased
$18.0 million in 1993 primarily because of increases in taxable income and an
increase of 1% in the Federal statutory income tax rate. Such income taxes
decreased $1.9 million in 1992 primarily because of adjustments of
$1.5 million recorded in the second quarter of 1992 to previously recorded
tax reserves and a reduction in taxable income.
INTEREST EXPENSE
Interest expense (long-term debt and other combined) increased in 1993
and 1992 primarily because of an increase in the average amount of debt
outstanding. A reduction in the average interest rate in 1993 substantially
offset the effect of the higher average outstanding debt. The lower average
interest rate reflects the refinancing of certain long-term debt issues at
lower rates and lower-cost short-term borrowings outstanding for interim
periods between the redemption of certain long-term debt series and the
issuance of their long-term replacements. Interest expense related to the
Company's reserves for rate refunds also contributed to the increase in 1992.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily attributable to its
construction programs and debt maturities. Cash and temporary cash investments
increased $16.6 million during 1993. In 1993, cash flows from operating
activities were $149 million. These funds were primarily used for construction
and acquisition expenditures and to pay dividends.
It is anticipated that the Company's future capital requirements 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 rate relief. (See
Notes 4 and 12 of the Notes to Financial Statements). Access to the long-term
and short-term capital and credit markets is necessary for obtaining funds
externally.
The Company's liquidity and capital resources will be affected by
environmental and legislative issues, including the ultimate disposition of
remediation issues surrounding the FMGP issue, the Clean Air Act as amended,
the National Energy Policy Act of 1992, and Federal Energy Regulatory
Commission (FERC) Order 636, as discussed in Note 12 of the Notes to
Financial Statements. Consistent with rate making principles of the IUB,
management believes that the costs incurred for the above matters will
not have a material adverse effect on the financial position or results of
operations of the Company.
The IUB has adopted rules which require the Company to spend 2% of
electric and 1.5% of gas gross retail operating revenues annually for energy
efficiency programs. Energy efficiency costs in excess of the amount in the
most recent electric and gas rate cases are being recorded as regulatory
assets. At December 31, 1993, the Company had $18.5 million of such costs
recorded as regulatory assets. The Company will make its initial filing for
recovery of the costs in 1994.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program anticipates
expenditures of $150 million for 1994, of which approximately 44% represents
expenditures for electric transmission and distribution facilities, 18%
represents fossil-fueled generation expenditures and 10% represents
nuclear generation expenditures. Substantial commitments have been made in
connection with such expenditures.
The Company's levels of construction and acquisition expenditures are
projected to be $149 million in 1995, $144 million in 1996, $149 million in
1997 and $160 million in 1998. It is estimated that approximately 80% of
construction expenditures will be provided by cash from operating activities
(after payment of dividends) for the five year period 1994-1998.
Capital expenditure and investment and financing plans are subject to
continual review and change. The capital expenditure and investment program
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 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.
LONG-TERM FINANCING
Other than periodic sinking fund requirements which the Company intends to
meet by pledging additional property, $124 million of long-term debt, including
four series of First Mortgage Bonds aggregating $123 million, will mature prior
to December 31, 1998. The Company intends to refinance the majority of the
debt maturities with long-term debt.
In order to provide an up-to-date instrument for the issuance of bonds,
notes or other evidence of indebtedness, the Company has entered into an
Indenture of Mortgage and Deed of Trust dated September 1, 1993 (New Mortgage).
The lien of the New Mortgage is subordinate to the lien of the Company's first
mortgages until such time as all bonds issued under the first mortgages have
been retired and such mortgages satisfied. The New Mortgage provides for,
among other things, the issuance of Collateral Trust Bonds upon the basis of
First Mortgage Bonds being issued. Accordingly, to the extent that the
Company issues Collateral Trust Bonds on the basis of First Mortgage Bonds,
it must comply with the requirements for the issuance of First Mortgage
Bonds under the Company's first mortgages. Under the terms of the New
Mortgage, the Company has covenanted not to issue any additional First
Mortgage Bonds under its first mortgages except to provide the basis for
issuance of Collateral Trust Bonds.
In November 1993, the Company entered into arrangements with various
cities in the State of Iowa (Cities), whereby the Cities issued an aggregate
of $19.4 million of pollution control revenue refunding bonds (PCRRBs),
all at 5.5%, due 2023. Each series of the PCRRBs is secured, in part, by
payments on a corresponding principal amount of Collateral Trust Bonds, at
5.5%, due 2023. The proceeds received by the Company in the transaction were
used to redeem $10.2 million of Pollution Control Obligations, 5.75%, due
serially 1995-2003 and an aggregate of $9.2 million of First Mortgage Bonds,
Series P & Q, 6.7%, due 2006.
In October 1993, the Company sold $100 million aggregate principal amount
of Collateral Trust Bonds, 6% Series, due 2008, and 7% Series, due 2023. A
portion of the proceeds from the Collateral Trust Bonds was used to retire
short-term debt, with the balance used for general corporate purposes,
including support of the Company's construction program.
In May 1993, the Company redeemed First Mortgage Bonds Series K, 8-5/8%,
principal amount of $20 million, and Series R, 8-1/4%, principal amount of
$25 million and First Mortgage Bonds Series 8-3/4%, principal amount of $15
million. The redemptions were completed with proceeds from short-term
borrowings and, as discussed above, long-term debt was ultimately issued to
replace the short-term borrowings.
The Indentures pursuant to which the Company issues First Mortgage Bonds
constitute direct first mortgage liens upon substantially all tangible public
utility property and contain covenants which restrict the amount of additional
bonds which may be issued. At December 31, 1993, such restrictions would have
allowed the Company to issue $258 million of additional First Mortgage Bonds.
The Company intends to file in the first quarter of 1994 with the FERC for
authority to issue $250 million of long-term debt. The Company is currently
authorized by the SEC to issue $50 million of long-term debt under an existing
registration statement. The Company expects to issue up to $150 million in
1994. The proceeds are expected to be used for the early redemption of three
series of First Mortgage Bonds aggregating $55 million, which have not yet
been called, and for general corporate purposes, including support of its
construction program.
The Articles of Incorporation of the Company authorize and limit the
aggregate amount of additional shares of Cumulative Preferred Stock and
Cumulative Preference Stock which may be issued. At December 31, 1993, the
Company could have issued an additional 700,000 shares of Cumulative Preference
Stock and 100,000 additional shares of Cumulative Preferred Stock.
The Company's capitalization ratios at year-end were as follows:
1993 1992
Long-term debt 48% 50%
Preferred stock 2 2
Common equity 50 48
100% 100%
SHORT-TERM FINANCING
For interim financing, the Company is authorized by the FERC to issue,
through 1994, up to $125 million of short-term notes. This availability of
short-term financing provides the Company flexibility in the issuance of
long-term securities. At December 31, 1993, the Company had outstanding
short-term borrowings of $24 million.
The Company has two agreements, both of which expire in 1994, with
separate financial institutions to sell up to $65 million of its utility
accounts receivable. The Company intends to consolidate the agreements
into one new agreement in 1994. At December 31, 1993, the Company had sold
$53.2 million under the agreements.
At December 31, 1993, the Company had bank lines of credit aggregating
$67.7 million and was using $19.0 million of its lines to support commercial
paper and $7.7 million to support certain pollution control obligations.
Commitment fees are paid to maintain these lines and there are no conditions
which restrict the unused lines of credit. In addition to the above, the
Company has an uncommitted credit facility with a financial institution
whereby it can borrow up to $50 million. Rates are set at the time of
borrowing and no fees are paid to maintain this facility. At December 31,
1993, $5.0 million was borrowed at 3.4% under this facility. The Company
also has a letter of credit in the amount of $3.4 million supporting two
of its variable rate pollution control obligations.
EFFECTS OF INFLATION
Under the rate making principles prescribed by the regulatory commissions
to which the Company is subject, only the historical cost of plant is
recoverable in revenues as depreciation. As a result, the Company has
experienced economic losses equivalent to the current year's impact of
inflation on utility plant.
In addition, the regulatory process imposes a substantial time lag between
the time when operating and capital costs are incurred and when they are
recovered. The Company does not expect the effects of inflation at current
levels to have a significant effect on its results of operations.
<PAGE>
Selected Quarterly Financial Data (unaudited)
The following unaudited quarterly data, in the opinion of the Company,
includes adjustments, which are normal and recurring in nature, necessary for
the fair presentation of the results of operations and financial position.
Quarter Ended
March June September December
31 30 30 31
(in thousands)
1993
Operating revenues $193,784 $148,919 $187,392 $183,655
Operating income 24,100 18,095 36,095 25,629
Net income 14,422 10,491 26,213 16,844
Net income available
for common stock 14,193 10,262 25,985 16,616
1992
Operating revenues $166,494 $132,843 $145,003 $165,922
Operating income 17,721 15,755 26,034 19,429
Net income 9,522 7,501 17,561 10,707
Net income available
for common stock 9,022 7,002 17,059 10,479
The above amounts were affected by seasonal weather conditions and the
timing of utility rate changes. Rate activities are discussed in Note 4 of
the Notes to Financial Statements.
The 1993 results are affected by the acquisition of the Iowa service
territory from Union Electric Company, as discussed in Note 3 of the Notes
to Financial Statements. Refer to Management's Discussion and Analysis for
discussion of the adverse effect of weather upon 1992 results, primarily
in the third quarter.
EXHIBIT 23
ARTHUR ANDERSEN & CO.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K/A into IES
Utilities Inc.'s previously filed Form S-3 Registration Statement
(File No. 33-68796).
/s/ Arthur Andersen & Co.
(Signature)
ARTHUR ANDERSEN & CO.
Chicago, Illinois,
March 1, 1994
